On January 19, 2017, the Division of Enforcement of the Commodity Futures Trading Commission ("CFTC") issued two advisories outlining cooperation factors that the Division will consider in resolving agency investigations and enforcement actions concerning companies and individuals. The guidance as to companies is intended to update and replace the CFTC's prior guidance that was last updated 10 years ago. The guidance as to individuals is new. Fulsome cooperation can potentially lead to a recommendation of reduction in charges or proposed sanctions, or in some cases to a recommendation of no charge at all. As the Enforcement Division has made clear, however, the decision is entirely discretionary and can vary from case to case. This advisory will examine the revised guidance that applies to cooperation efforts by companies.
THE ENFORCEMENT GUIDANCE
The CFTC's new guidance states that in determining the value of cooperation, the Division will look to the efforts of the company and then weigh the value of that cooperation both to the Division's investigation as well as to the Commission's broader law enforcement interests. It will also consider the level of the company's culpability, any history of prior misconduct as well as any acceptance of responsibility, mitigation and remediation.
Positive Cooperation Factors
In connection with its weighing process, the Division identified a number of positive and negative factors it will consider. For the positive factors, the Division expressed that it places a premium on cooperation that is undertaken voluntarily, including a willingness to accept responsibility for misconduct, where appropriate. Among other things, the Division will consider (1) whether the company's cooperation provided "material assistance"; (2) the timeliness of the cooperation, in particular, whether the company was the first to report the misconduct and whether the company self-reported the information before it was aware of a pending investigation or enforcement action; and (3) the nature of the cooperation, including whether the company conducted an independent investigation of the conduct either before or during the Division's investigation, and whether the company encouraged "high-quality" cooperation by its directors, officers, and employees. In judging the quality of the assistance provided, the Division will look at whether the company (a) promptly met with the Division to review and explain known facts about the misconduct, including all relevant facts relating to all individuals responsible for the misconduct; (b) used all available means to preserve relevant documents and electronically stored information ("ESI"); (c) made employee testimony or other documents and data available in a timely manner; (d) helped to explain transactions and interpret key information; (e) provided a financial analysis of its gain from unlawful activities; and (f) responded quickly to requests and subpoenas for information.
Although the Division reiterated its previous guidance that it is not asking companies to waive any privilege, it also said it would consider whether the company produced full and complete reports of any internal investigation to the Division. It noted that cooperation should include providing information about findings and relevant evidence, the scope of the wrongdoing, and the identities of individual wrongdoers, including culpable senior executives, both inside and outside of the organization. In addition to identifying all wrongdoers, companies are expected to provide all relevant facts about the wrongdoers including relevant communications and documents, and data evidencing the misconduct.
In addition to the value of a company's assistance, the Division stated that it will also consider (a) the circumstances of the misconduct, including (i) the duration of the misconduct, (ii) whether it was isolated, repetitive or ongoing, (iii) the level within the organization at which the misconduct occurred, and (iv) the level of intent involved in the misconduct; (b) whether the company has a history of prior misconduct; (c) what the company did to mitigate any losses caused by the misconduct; (d) whether the company engaged in meaningful remediation of the misconduct to prevent future wrongdoing; and (e) whether the company has admitted or otherwise demonstrated an acceptance of responsibility for the misconduct.
Negative Cooperation Factors
The Division also identified a number of negative factors that it would view as "uncooperative conduct" that could limit or offset the credit a company might otherwise receive for its cooperation. Among the negative factors identified by the Division are: (a) failing to respond to the Division requests in a timely manner; (b) misrepresenting or minimizing the nature or extent of the company's misconduct; (c) claiming that information is not available when it actually is available; (d) failing to preserve and provide relevant information, including ESI; (e) directing company counsel or others to limit the Division's access to employees; (f) inappropriately telling employees and their counsel not to cooperate fully with the investigation; (g) engaging in evasive or obstructive conduct or otherwise interfering with the investigation; (h) providing "specious explanations" for instances of misconduct; (i) offering suggestive responses to employees either through interviews or through questionnaires; (j) providing employees and former employees with access to documents or data beyond what they would have been privy to in the course of their employment; (k) failing to search properly for ESI; and (I) failing to comply with CFTC data delivery standards for productions. In addition, failing to self-report indications of employee wrongdoing can also reduce the credit a company otherwise would have received for cooperating.
APPLICATION OF THE COOPERATION GUIDELINES
On the same day that the new guidance was issued, Aitan Goelman, the current CFTC Director of Enforcement (who will be leaving the CFTC as of February 3, 2017), spoke about the guidance at the American Bar Association, Business Law Section, 2017 Derivatives and Futures Law Committee Winter Meeting. He explained that the Division decided to issue the advisory guidance now because the guidance as to companies had not been updated in the past 10 years, and there was no prior formal guidance for individuals. Mr. Goelman added that over the last few years the Division has tried to message the importance it places on cooperation, but that was done on an ad hoc basis through the Commission's orders. He said that none of the guidance should be particularly surprising, and he emphasized that a main point is that parties involved in an investigation or action can hurt themselves by being evasive or lying.
A few of the recent larger CFTC settlements demonstrate where the CFTC has been frustrated and where it has been satisfied with the level of a company's cooperation. On the frustration end, one bank in 2015 paid a much higher penalty on charges of Libor manipulation than other similarly situated banks because the CFTC concluded that the bank had continued to engage in wrongful conduct even after the Division had requested that the bank conduct an internal investigation. The CFTC noted that the bank's lack of cooperation from the outset affected a timely resolution of the matter. In 2016, a different bank paid an inflated penalty for charges of attempted manipulation of the lsdafix benchmark because the CFTC found that the bank's cooperation from the outset was not sufficient. That bank had failed to respond to a subpoena and other requests expeditiously and had reported that certain misconduct had not occurred when it later turned out that the misconduct had occurred. On the other end of the spectrum, one bank paid a comparatively low sanction in 2013 for Libor manipulation because the bank was found to have provided significant cooperation that helped the Division efficiently and effectively undertake its investigation.
The Division's guidance on cooperation shares many similarities with the memorandum issued in August 2008 by then-Deputy Attorney General Mark Filip for the Department of Justice ("DOJ") outlining the Principles of Federal Prosecution for Business Organizations ("Filip factors memo). But it stands in stark contrast to the binary process announced more recently by the DOJ where zero credit will be provided for cooperation by a company unless the DOJ determines that the company provided all relevant facts about all individuals involved in corporate misconduct. See Memorandum Issued by Deputy Attorney General Sally Quillian Yates for the Department of Justice on September 9, 2015, Individual Accountability for Corporate Wrongdoing ("Yates Memo"). The Division has stressed that all of the factors outlined in its notice will be weighed when it considers whether and how to credit cooperation in any given case.
While many of the factors outlined in the Division's guidance are hardly surprising, others raise questions. It is concerning that the Division appears to be suggesting that companies should be penalized for not self reporting all instances of misconduct. It is one thing to say that a company will get more credit for self reporting. It is another to suggest that quality cooperation may not be credited because the conduct was not self-reported from the beginning or because the company was not the first to self-report the conduct. It is also disturbing that companies may be penalized for defending themselves. Even where a company otherwise cooperates fully, the guidance suggests that a company may not get full credit if the Division feels the company minimized the misconduct or should have admitted or otherwise demonstrated an acceptance of responsibility for the misconduct. The Division also appears to be suggesting that companies should limit employees' and former employees' access to documents. The guidance states that companies should not share documents or data with employees if they would not have been privy to them in the course of their employment. This may make it difficult in the midst of an investigation to ask employees to help explain documents they were not copied on, or to help explain communications between others in which a non-copied employee was mentioned or discussed. Moreover, companies and their counsel should also be wary about the Division's warning to avoid suggestive questions and answers in connection with interviews and witness preparation meetings.
Although the Division states at the end of the guidance notice that it is not asking companies to waive privilege, as a practical matter it will be very difficult for companies to turn over the types of internal investigation reports that the Division is asking for, including not only facts but also findings as to the misconduct identified by the investigation, without affecting a privilege waiver. The guidance suggests the Division may also be threatening privilege waivers by asking more questions about documents shown to, and questions asked of, witnesses in connection with preparation meetings for interviews and depositions.
It remains to be seen how the cooperation guidance will be applied in Division decisions going forward. It may be that the guidance is truly meant to memorialize the process that has already been applied by the Division in prior cases, or it may be that the Division is trying to insinuate itself into the investigation process by demanding to know about documents shown to witnesses, interview questions asked, and the ultimate findings reached by companies.