SEC's Cooperation Initiative: Should You Go Along to Get Along?
It has been three and a half years since the Securities and Exchange Commission (SEC) announced on Jan. 13, 2010, that it would begin using several types of cooperation agreements to resolve investigations under the then-newly implemented Cooperation Initiative. Since that time, information about these agreements has been scarce. The SEC has publicly released only three non-prosecution and two deferred prosecution agreements, all of which involve companies, not individuals.
While the SEC has issued press releases that highlight instances of cooperation, it is often difficult to ascertain lessons for potential cooperators from limited information in the releases. In some instances, the benefits of cooperation are relatively obvious. But for companies and individuals facing an SEC investigation and the critical decision of whether or not to cooperate, many important questions persist.
Benefits for the SEC
By the SEC's account, the cooperation initiative has had a successful start. To promote cooperation, the SEC maintains a website for its Enforcement Cooperation Program where it posts what it considers to be illustrative examples of cooperation by companies and individuals.1 In the last three and a half years, the commission has highlighted on this site cooperation by nine companies and 16 individuals, touching on 18 different investigations. Cooperation agreements have been used in cases involving securities fraud, insider trading, and violations of the Foreign Corrupt Practices Act. With respect to companies, the SEC has entered two deferred prosecution agreements and three non-prosecution agreements, while settling two cases and declining to bring charges in two others. With respect to individuals, the company has settled with 15 cooperators—resulting in eight instances of disgorgement, five instances of civil penalties, and four industry bars—and declined to institute enforcement action with respect to one cooperator.
When the SEC announced its cooperation program, the commission hoped that it would allow for the swift investigation, charging, and resolution of cases.2 Thus far, the program appears to have had its intended effects, at least as to the relatively few matters in which cooperation has featured. Of the 18 case studies in cooperation on the SEC's website, 11 have been fully resolved against all defendants, two have been partially resolved against some of the defendants, and the remaining five are still pending. In addition, the program seems to have given the SEC the "insider's view" into wrongdoing that was one of the chief benefits of the program touted by the SEC.
Three instances of cooperation highlight these benefits. In the first case, an AXA Rosenberg executive provided substantial assistance to the SEC's investigation of the executive's employer and its founder, Barr M. Rosenberg, who were alleged to have engaged in a securities fraud resulting in approximately $217 million in client losses. Based on the executive's cooperation, the SEC was able to investigate, initiate administrative proceedings, and ultimately settle with AXA for $240 million and Rosenberg for $2.5 million and a lifetime ban from the securities industry, while declining to take enforcement action against the executive.
Similarly, in the second case, the SEC declined to charge Credit Suisse after the company provided substantial assistance to the commission's investigation of four investment bankers and traders at the company who were alleged to have fraudulently overstated the price of subprime bonds. With the help of Credit Suisse's cooperation, the SEC was able to settle with three of the defendants (who in turn also cooperated) while its case against a fourth defendant remains pending.
In the third case, the SEC recently resolved its investigation of FCPA violations by a Ralph Lauren Corporation subsidiary. There, Ralph Lauren self-reported the illegal conduct and provided extensive assistance to the SEC, including voluntarily producing documents with English-language translations, summarizing witness interviews conducted abroad, and making overseas witnesses available for interviews in the United States. The SEC and Ralph Lauren entered a non-prosecution agreement, the first such agreement involving FCPA misconduct, under which the company was required to disgorge $734,000 in illicit profits and interest.
What It Means for Defendants
Whether or not to cooperate with the SEC is a delicate calculation that depends heavily on the facts and circumstances of a particular case. Unlike in criminal cases, where the value of cooperating for individuals (and to a lesser extent companies) is relatively clear from years of precedent and the use of sentencing guidelines, the full value of cooperating in an SEC case has not been clearly established.
For starters, while the SEC values a "prompt" decision to cooperate, it may be difficult to gauge just what "prompt" means. Authorities frequently begin investigating before it is apparent to the individual or company that they are under investigation. But a decision to cooperate later in the SEC's investigation may be just as valuable to the commission (and, based on cases to date, the cooperator) depending on the nature of the information that the cooperator can provide. For example, three defendants in the SEC's investigation of misconduct at Credit Suisse all cooperated after the company provided substantial assistance to the commission; yet, these three individuals have to date been able to avoid paying a civil penalty.
In addition, cooperation can be a costly endeavor, particularly for corporations, but the reward is less certain.3 Typically, a company will be required to do the legwork for the SEC's investigators, conducting an extensive internal investigation, reviewing documents, interviewing witnesses, and providing the SEC with a comprehensive picture of the conduct in question. The result for the cooperator, however, is not always the same. Consider Credit Suisse and Ralph Lauren, both of which cooperated with an SEC investigation and were credited with providing the SEC with timely access to evidence and witnesses. Yet, while Credit Suisse avoided any civil enforcement action, Ralph Lauren paid over $700,000 as part of a non-prosecution agreement with the SEC.
Complicating matters further, cooperating with the SEC does not always result in a cooperator completely avoiding enforcement action, which may be a top priority for someone facing an SEC investigation. According to the SEC's website, the commission has declined to charge only two companies and one individual, while the majority of cooperators end up settling with the SEC. As part of these settlements, some cooperators have paid disgorgement and/or civil penalties, received an industry bar, or been enjoined from further violations of the securities laws. They likely would have obtained similar results in settling without cooperation, at least as to the types of penalties that would have been imposed; as to the extent of any reduction in monetary penalty and/or severity of collateral consequences that resulted from cooperation, that of course is unknown without more transparency into individual cases and without the volume of cooperation cases necessary to draw highly predictive inferences.
To be sure, there are some noticeable benefits to cooperating with the SEC based on those cases that have been reported, primarily the effect on civil penalties for individuals. In some cases, the final judgment specifically provides that the cooperator would not be subject to a penalty as a result of his cooperation. In others, while the judgment provides for a penalty upon a motion by the SEC, the commission never sought to impose one. Cooperation has also resulted in reduced penalties for some individuals. While there have been fewer cooperation cases involving companies, the early signs are similar: No civil penalties have been assessed against any of the companies reported on the SEC's cooperator website, and only two companies have had to agree to disgorge ill-gotten gains.