SEC'S REWARD FOR INDIVIDUAL COOPERATION: JURY IS STILL OUT

Posted by: David Chase
February 01, 2011
Topic: SEC'S REWARD

SEC'S REWARD FOR INDIVIDUAL COOPERATION: JURY IS STILL OUT

    While historically the Securities and Exchange Commission has formally recognized and rewarded corporations for their cooperation in its investigations, that has not been true for individuals -- until recently.

    Early last year (January 2010), the SEC announced a series of measures designed to further strengthen its enforcement program by encouraging greater cooperation from individuals. Robert Khuzami, Director of the SEC's Division of Enforcement, was quoted as follows about the new initiatives: "This is a potential game-changer for the Division of Enforcement. There is no substitute for the insiders' view into fraud and misconduct that only cooperating witnesses can provide."

    As part of its new arsenal, the Division of Enforcement has authorized its staff to use various tools - historically successfully used by the Justice Department -- to encourage an individual's cooperation. These include:

-Cooperation Agreements - formal written agreements in which the Enforcement Division agrees to  recommend to the Commission that a cooperator receive credit if substantial assistance is provided in the course of an investigation or filed enforcement actions.

-Deferred Prosecution Agreements - formal written agreements to forego an enforcement action against a cooperator if the individual fully and truthfully cooperates and complies with express prohibitions and undertakings during a period of deferred prosecution.

-Non-Prosecution Agreements - formal written agreements, usually entered into under limited circumstances, in which the Commission agrees not to take action against the individual cooperator assuming full and complete cooperation and compliance with express undertakings.

    In addition to these new tools, the SEC has streamlined the process for submitting
witness immunity requests to the Justice Department for those individuals who may have the ability to assist the SEC. 

    The SEC has also articulated criteria for assessing how it evaluates whether, how much, and in what manner, to credit an individual's cooperation. The following four general considerations are to be taken into account:

• the assistance provided by the cooperating individual,
• the importance of the underlying matter in which the individual cooperated,
• the societal interest in ensuring the individual is held accountable for his or her misconduct, and
• the appropriateness of cooperation credit based upon the risk profile of the cooperating individual.

    As with all well-intentioned initiatives by securities regulators, the effectiveness
and impact of the new rules will only be as good as its application by the Enforcement Division's staff members, many of whom do not have prior Justice Department or criminal prosecutorial experience. While the SEC's recent formalization of its process by which it rewards an individual's cooperation is long overdue and will no doubt materially assist the Commission in its efforts to proactively regulate the financial markets and aggressively enforce the federal securities laws, the Enforcement Division will need time to become familiar with its new tools and how to fairly and effectively utilize them. In turn, defense counsel will also need to be proactive in "cooperating" those clients that can benefit the SEC (and more importantly themselves), and aggressive in seeking the maximum credit for their cooperation. While the SEC's initiatives are certainly a good start, the true test will be in their application by the SEC's Enforcement Division -- how consistent and fair will the Staff be from office to office in rewarding those who truly cooperate and provide substantial assistance. As to that answer, the jury is still out.

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