Whether or not to self-report misconduct to government regulators, such as the U.S. Securities and Exchange Commission (SEC), is a question regulated entities and individuals must increasingly consider. In certain situations, it is in a company's or an individual's best interest to self-report misconduct and cooperate with the regulator's investigation, with the hope that the company or individual will be rewarded. The SEC offers real benefits—such as reduced charges or penalties, deferred prosecution agreements or non-prosecution agreements—to those who self-report and cooperate.1 The SEC has also warned companies that they may face enhanced penalties if the SEC learns that a company knew of violations and decided not to report them.2 Andrew Ceresney (Ceresney), Director of the SEC's Division of Enforcement, recently touted self-reporting as "critical to the success of the SEC's cooperation program."3 The SEC will measure a company’s cooperation efforts at the end of an investigation, rather than at the time of a self-report. In short, self-reporting opens the door to many of the tangible benefits of cooperation. However, a favorable result is by no means guaranteed
The SEC has a variety of ways to reward cooperation. For example, it may decline to bring an enforcement action, reduce or waive penalties or be flexible in its disgorgement analysis, offer the company or individual the opportunity to negotiate more favorable language in the settlement order or publicly acknowledge the company's or individual's cooperation in a settlement order and related announcements. In certain cases, those who self-report securities law violations and provide substantial assistance to the SEC are able to enter into written cooperation agreements with the agency to receive credit in the form of reduced charges and penalties.
In January 2010, the SEC's Division of Enforcement launched its formal cooperation program, which identified self-policing, self-reporting, remediation and cooperation as the primary factors to be considered in determining appropriate charges and remedies.4 This guidance stems from what is known as the Seaboard Report, which was released by the SEC in 2001 and remains the primary playbook for companies and their counsel to consider when seeking cooperation credit from the SEC. As set forth in the Seaboard Report, when considering what, if any, cooperation credit to award a company, the SEC will assess how promptly the self-report was made, the completeness of the information provided and the company's willingness to voluntarily disclose information.5 Additionally, the SEC takes into account any remediation efforts by the company, including whether any culpable employees were fired and whether victims of the wrongdoing were appropriately compensated.6 Lastly, the SEC will consider the amount and quality of cooperation by the company in the SEC's investigation and/or enforcement action.7 The weight the SEC places on each cooperation factor may vary based on the circumstances of each case. In order to receive maximum credit, companies should be prepared to proactively provide the SEC with meaningful information, such as key documents, summaries of their internal findings and supporting evidence, as well as access to witnesses.
At the "SEC Speaks in 2016" conference, Sharon Binger, Regional Director of the SEC's Philadelphia office, announced that since the beginning of its formal cooperation program, the SEC has signed over 103 cooperation agreements, six non-prosecution agreements and nine deferred prosecution agreements in a wide variety of enforcement matters.
The SEC has highlighted the importance of cooperation in cases involving violations of the Foreign Corrupt Practices Act (FCPA), in which the SEC has historically offered reduced civil penalties based on the level of cooperation received.8 In its first disgorgement-only settlement, In the Matter of The Goodyear Tire & Rubber Company, the SEC rewarded the company for self-reporting bribes made in violation of the FCPA and engaging in prompt remedial acts and significant cooperation with the SEC.9 Instead of having to pay a penalty equal to the amount of the disgorgement ($14,122,525)—as is typical—Goodyear avoided paying a penalty altogether.
Recently, on July 12, 2016, the SEC announced a settlement with Johnson Controls Inc. (Johnson), in which the company agreed to pay $14 million to settle SEC charges that it violated the books and records and internal accounting controls provisions of the FCPA. The SEC order included language recognizing Johnson's self-report of the FCPA violation, its retention of outside counsel to conduct an internal investigation and its "thorough, complete, and timely cooperation throughout the investigation."10 The order noted that Johnson's cooperation involved providing the results of its investigation and related documentation to the SEC in real time, including factual chronologies, interview summaries and English translations of numerous documents and e-mails.
In a limited number of cases, the SEC will offer cooperators a deferred prosecution agreement or non-prosecution agreement in exchange for self-reporting violations and cooperating with the SEC's investigation.11 These agreements allow a company or an individual to defer or eliminate an SEC enforcement action in exchange for full cooperation and compliance with certain undertakings imposed by the SEC, such as retention of a corporate monitor or compliance consultant to strengthen the organization's compliance program. In the FCPA context, Ceresney recently stated that a company is required to self-report potential violations in order to even be eligible for a deferred prosecution agreement or a non-prosecution agreement.12 In practice, self-reporting has become a prerequisite to eligibility for a deferred prosecution agreement or non-prosecution agreement in all SEC investigations.
There are several recent examples of companies and individuals receiving deferred prosecution or non-prosecution agreements because they fully embraced the SEC's cooperation guidelines. In March 2016, the SEC entered into a deferred prosecution agreement with a former chairman of Uni-Pixel Inc. after he agreed to fully cooperate with an investigation regarding misrepresentations the company made to investors in violation of the Securities Act of 1933.13
Furthermore, on June 7, 2016, the SEC announced that it had entered into non-prosecution agreements with two unrelated companies after those companies agreed to forfeit ill-gotten gains made as a result of bribes paid to Chinese officials by foreign subsidiaries.14 This was only the second time the SEC used a non-prosecution agreement in connection with FCPA violations, after the agency reached a similar agreement in 2013 with Ralph Lauren. In announcing these non-prosecution agreements, the SEC highlighted the companies' prompt decisions to self-report misconduct, along with the companies' extensive cooperation in the resulting SEC investigations, which included translating documents from Chinese to English, providing summaries of witness interviews, making witnesses from China available for interviews and sharing detailed findings of their internal investigations with the government.
Specifically, Akamai Technologies Inc. (Akamai) agreed to pay nearly $670,000 in disgorgement and interest as a result of its foreign subsidiary arranging for $40,000 in payments to induce government-owned entities to purchase more services than those entities needed. Nortek Inc. (Nortek) agreed to pay $320,000 in disgorgement and interest as a consequence of $290,000 in improper payments and gifts being made to Chinese officials by Nortek's subsidiary in order to receive preferential treatment, relaxed regulatory oversight and reduced customs duties, taxes and fees. The non-prosecution agreements with these companies stipulate that the companies are not charged with violations of the FCPA and that the companies will not pay additional monetary penalties.
Notably, the U.S. Department of Justice (DOJ) issued declination letters to Akamai and Nortek relating to the same conduct—the first declination letters issued by the DOJ since the DOJ launched its pilot program this past April.15 The DOJ issued a similar declination letter in the Johnson case because of the company's cooperation. In rare instances, typically when individuals provide extraordinary cooperation that results in charges against others, cooperation may lead to the closing of an investigation against the cooperator.16
It is critical that companies invest the resources necessary to develop a compliance program with controls capable of detecting and mitigating risks in their businesses in an effort to effectively self-police and identify potential violations. It is equally important that registrants set an appropriate "tone at the top" that values compliance throughout the organization. With this framework in place, when a registrant identifies a potential federal securities law violation, it is able to conduct its own internal investigation into the misconduct, with the assistance of in-house or outside counsel and/or other advisors, to determine the best course of action.
Self-reporting and cooperation with regulators is not a "check the box" strategy. It is critical that companies and individuals engage experienced and sophisticated counsel to navigate the often-murky waters of potential cooperation with the SEC. While self-reporting and cooperating do not guarantee that a positive outcome will be achieved with the SEC, Ceresney recently noted that, "companies are gambling if they fail to self-report."17 In many cases, self-reporting and cooperation will yield substantial benefits to a company or individual who can resolve an SEC enforcement action on better terms than would be available to a company or individual who did not self-report or cooperate. However, once a company decides to self-report and cooperate, it should be prepared to present the SEC with evidence of a thorough internal investigation, remedial efforts taken in response to the issues identified by the company, and improvements to internal processes implemented as a result of the misconduct. If the SEC discovers the misconduct through other channels—such as through its whistleblower program or through a self-report made by an individual—the company could potentially lose the opportunity to earn cooperation credit for self-reporting and could risk facing steeper charges and/or penalties.