Cooperation in SEC Probes: How It Affects Settlement Terms
Contents
Cooperation in SEC Probes: How It Affects Settlement Terms
When companies or individuals are being investigated by the SEC for potential violations of securities laws, their level of cooperation with the investigation can have a significant impact on the settlement terms they are offered. Cooperation allows the SEC to build stronger cases more efficiently and provides insight into complex transactions and events. In return, cooperators may face reduced charges, lower monetary penalties, or even avoid enforcement action altogether.
The SEC formalized its cooperation program in 2010, providing a framework for companies and individuals to receive credit for cooperating through the use of formal cooperation agreements and deferred prosecution agreements. Under this program, the SEC considers four factors when evaluating cooperation:
- The assistance provided by the cooperating party in the investigation
- The importance of the case
- The societal interest in ensuring the cooperating party is held accountable for misconduct
- The appropriateness of cooperation credit based on the profile of the cooperating party
Companies or individuals who enter into cooperation agreements may be required to admit wrongdoing, but can receive significant benefits in return. For example, in a 2015 case, PBSJ Corp. self-reported violations of the Foreign Corrupt Practices Act, thoroughly cooperated with the investigation, and agreed to pay $3.4 million in disgorgement and interest. But due to its cooperation, the SEC only imposed a civil penalty of $375,000 rather than the much larger penalty it could have sought[1].
Some key areas where cooperation can benefit companies and individuals in SEC probes include:
Reduced Charges
The SEC often brings lighter charges against cooperators. For example, in a securities fraud case from 2001, the SEC only charged a cooperating former executive with causing books and records violations. The SEC noted it could have brought more severe charges for the underlying fraud, but gave cooperation credit by limiting charges[5].
Lower Monetary Penalties
Cooperators frequently see significantly reduced civil penalties. In 2010, IBM resolved an FCPA investigation by paying $10 million in disgorgement but avoided any civil penalty through its substantial cooperation[2]. And in a 2015 case, the SEC imposed only a $1 million penalty against PBSJ Corp. despite requiring $7.5 million in disgorgement[1].
Avoidance of Enforcement Action
In some cases, the SEC declines to take enforcement action at all against cooperators. This occurred in over 15% of cooperation agreements from 2010-2016[2]. For example, the SEC entered into a non-prosecution agreement with an anonymous company in 2016 after it self-reported violations and cooperated extensively[4]. Avoiding enforcement action is typically reserved for extraordinary cooperation involving self-reporting, remediation, and continuing cooperation.
Deferred Prosecution Agreements
The SEC may agree to defer prosecution for a period of time to allow cooperators to demonstrate good behavior, after which charges are dropped if cooperation continues. For example, in 2001 the SEC used a deferred prosecution agreement for an anonymous company that self-reported misconduct and cooperated fully, requiring enhanced compliance policies and allowing charges to be dropped after one year[5].
Reduced Industry Bars
For cooperating individuals, the SEC often agrees to shorter industry bars rather than permanent bars. In a 2018 case, a cooperating executive received a five-year industry bar rather than a permanent bar[4]. This allows cooperators to eventually resume working in their field.
While the benefits of cooperation can be significant, the SEC weighs many factors in determining settlement terms. The egregiousness of the underlying misconduct, prior offenses, self-reporting, and remediation efforts all play a role. And the SEC remains focused on accountability – cooperation is not a guarantee of leniency, particularly for egregious or recurring violations.
Overall, the SEC cooperation program has provided benefits to companies, investors, and the markets by enabling efficient and effective enforcement. The program continues to evolve as the SEC focuses on encouraging self-reporting and ongoing cooperation. For companies and individuals facing SEC probes, cooperation remains an essential element in mitigating settlement terms and avoiding the harshest enforcement outcomes.
References
[1] The Impact of SEC Enforcement on Public Finance
[2] Enforcement Cooperation Program – SEC.gov
[3] The SEC’s Cooperation Program: Reflections on Five Years of Experience
[4] The Salutary Effects of International Cooperation on SEC Enforcement