On January 13, 2010, the Securities and Exchange Commission (“SEC”) formally announced a new initiative to encourage individuals, as well as corporations, to assist the SEC in investigations.1 Director Khuzami describes this new policy as a “potential game-changer.”2 For the first time, the SEC has issued a policy statement stating how it intends to evaluate whether, how much, and in what manner to credit cooperation by individuals.3 It is similar to the 2001 so-called “Seaboard Report,” which detailed the factors the SEC considers when evaluating cooperation by companies.4 The SEC historically has had no similar, formal policy for individuals under investigation, although the staff on an ad hoc basis might take cooperation into account.5 The SEC’s new policy statement identifies four general considerations:
- The assistance provided by the cooperating individual, including whether the cooperator came to the SEC before anyone else and whether the SEC likely would have discovered or been able to prove a securities violation without using much greater resources.
- The importance of the underlying matter in which the individual cooperated. Priority matters or serious, ongoing, or widespread violations will be viewed most favorably.
- The societal interest in ensuring the individual is held accountable for his or her misconduct, including the degree of culpability, the severity of the misconduct, and any remedial actions taken.
- The appropriateness of cooperation credit based upon the risk profile of the cooperating individual. Gatekeepers, such as accountants, attorneys, brokers, directors, as well as senior management, are less likely to receive benefits as significant as others.
Moreover, the SEC announced new cooperation tools for individuals and companies, patterned after tools used by criminal prosecutors, including three primary ones:6
- Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive a specified credit to settle on a neither admit nor deny basis for cooperating in investigations or related enforcement actions if the cooperator waives the statute of limitations and provides substantial assistance such as full and truthful information and testimony. However, the Commission is not bound by this agreement.
- Deferred Prosecution Agreements — Formal written agreements, which are generally available to the public, in which the Commission itself agrees to forego an enforcement action against a cooperator. This may occur if the individual or company agrees, among other things, to cooperate fully and truthfully, to a long-term tolling of the statute of limitations, to comply with express prohibitions and undertakings during a period of deferred prosecution of up to five years, to pay disgorgement and civil penalties, and, in some cases, especially for accountants, attorneys, brokers, directors, officers, and individuals with prior violations, to admit or not to contest specific facts showing a violation of the securities laws.
- Non-prosecution Agreements — Formal written agreements, which will virtually never be available to individuals with past securities violations, entered into under limited and appropriate circumstances, in which the Commission itself agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings which may include the admission of certain facts, the payment of disgorgement, civil penalties and additional measures to protect the investing public.
In most cases, a proffer of proposed testimony will be required before any of these agreements will be entered. These policies, cooperation tools, and related matters are discussed in detail in a new section to the SEC’s Enforcement Manuel entitled “Fostering Cooperation.”7
There remain serious questions as to how these new standards will be applied and how companies and individuals should balance the potential benefits and detriments. There are obvious potential problems for any would-be cooperator. For example, while information provided in a proffer in an attempt to qualify for any of these cooperation tools is not itself affirmatively admissible evidence against the provider, the information may be used as leads to obtain new evidence that the staff might not otherwise have discovered.8 Moreover, there is no guarantee that any of these agreements will protect a cooperator from criminal prosecution, so, if there is a concern in this regard, negotiations with the Department of Justice may be in order. To help in this respect, the SEC has streamlined the process for submitting witness immunity requests from the SEC to the Justice Department. No longer must the Commission itself do this; the authority to issue such requests has been delegated to the Director of Enforcement.9 Also, since some of these tools may require the admission of facts proving a securities violation, they may have collateral effects such as revocation of licenses or use by others in lawsuits against the cooperator. Indeed, there may be little reason for anyone in the securities industry to cooperate for, even were they not to be prosecuted, they may be required to admit wrongdoing, which may end their careers.
These cooperation tools have been largely copied from those long used by criminal prosecutors, a common experience shared by Director Khuzami, his Deputy Director and his recently appointed head of the SEC’s New York office, each of whom served together as Assistant U.S. Attorneys in the Southern District of New York. But what works in a criminal context where an individual’s freedom is at stake and a corporation’s very existence may be threatened does not necessarily translate directly into a civil context. Moreover, federal criminal prosecutors draw on decades of practical applications to assure consistency of treatment, while SEC Enforcement attorneys draw on decades of quite different civil practice history. At the very least, consistent application may require extensive training, and some education, of Enforcement attorneys. There may be some natural resistance and philosophical differences to be overcome, but Director Khuzami and his top managers appear fully committed to this new regimen, which increases its chances of success. Thus, if Director Khuzami is successful in getting the SEC staff to fully implement his changes and individuals and corporations see real benefits awarded for cooperating, this may be a “game changer.” But if the staff is not fully won over or would be cooperators do not see real rewards, then when the Director moves on to another phase of his distinguished career, it still may be the same old ball game at the SEC.