Seaboard Factors and the SEC’s Cooperation Initiative
In October 2001, the SEC issued a Report of Investigation and Statement (the “Seaboard Report”) explaining its decision not to take enforcement action against a public company following an investigation for fi nancial statement irregularities.1 As the February 8, 2011 SEC Enforcement Manual (the “SEC Manual”) provides, the Seaboard Report identifi ed four broad measures of a company’s cooperation (collectively, the “Seaboard factors”):
- self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and an appropriate tone at the top; (2) self-reporting of misconduct when it is discovered, including conducting a thorough review of the nature, extent, origins and consequences of the misconduct, and promptly, completely and effectively disclosing the misconduct to the public, to regulatory agencies and to selfregulatory organizations; (3) remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected; and (4) cooperation with law enforcement authorities, including providing the Commission staff with all information relevant to the underlying violations and the company’s remedial efforts.2
In January 2010, the SEC unveiled a program to extend leniency to companies and individuals who report securities law violations and cooperate with regulatory investigations and enforcement actions. To encourage cooperation, the program authorized the SEC’s enforcement staff (the “Staff”) to use various tools that federal criminal prosecutors long had used but that had not been employed in connection with SEC inquiries. One of these tools is the non-prosecution agreement (“NPA”)—an agreement in which the Staff declines to charge a company or individual where, among other things, the company or individual agrees to fully cooperate with the SEC’s efforts and to comply with other obligations set out in the agreement. Another tool the Staff may use is the deferred prosecution agreement (“DPA”)—a similar agreement in which the Staff agrees to defer an enforcement action against a company or individual. Under the guidelines provided within the SEC Manual, the Staff is encouraged to consider entering into an NPA or a DPA when the appropriate cooperation exists, and the Staff is directed to employ the “standard cooperation analysis” (i.e., the Seaboard factors) to determine whether to enter into an NPA or a DPA.3
Carter’s NPA and Tenaris DPA
In December 2010, the SEC applied the Seaboard factors in order to enter into its fi rst NPA with a company (or any party): Carter’s, Inc. The SEC charged a former Carter’s executive with fi nancial fraud and insider trading but entered into an NPA with Carter’s. In deciding not to charge Carter’s, the SEC considered: (1) the “relatively isolated nature” of the unlawful conduct; (2) Carter’s prompt and complete self-reporting of its executive’s misconduct; (3) Carter’s “exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation”; and (4) Carter’s extensive and substantial remedial actions.4
Similarly, in May 2010, the SEC again applied the Seaboard factors in entering into its fi rst-ever DPA with a company: Tenaris, S.A. According to the DPA agreement with Tenaris, Tenaris violated the Foreign Corrupt Practices Act (“FCPA”) from 2006 through 2008 by bribing government offi cials in Uzbekistan in connection with a bidding process for oil and gas pipeline contracts. In announcing the agreement with Tenaris, the SEC’s director of enforcement cited “[t]he company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training.”5 In addition, the DPA itself recites Tenaris’s cooperation, including (i) voluntary and complete disclosure of the complaint that started the investigation and (ii) the undertaking of a broader investigation into the complaint as well as other matters, and the reporting of the facts and transactions discovered in the investigation. Notably, in the event of a breach, the DPA, as in the Carter’s NPA, permits the SEC to use any information that Tenaris (or Carter’s) provided while cooperating as well as any evidence derived from that information.
With the Carter’s NPA and the Tenaris DPA as only two data points, it is premature to draw fi rm conclusions about when the SEC will decide whether to enter into such agreements, rather than bringing an enforcement action. Certainly, however, the agreements are yet another reminder of how companies can position themselves for leniency by conducting thorough internal investigations in response to early signs of wrongdoing and self-reporting any identifi ed misconduct to, and fully cooperating with, applicable government authorities.