At times, the SEC staff is confronted with investigations in which an individual seems likely to have quite a bit of information about the investigation’s core matters but little or no responsibility for any misconduct. Not so long ago, when trying to collect information from those people, the staff really had only one option: subpoena their testimony. While the staff might have wanted to explain that a particular witness had nothing to fear, that an investigation was quite unlikely to result in any liability, they had no authority to do so. What if new information came in – however remote the chances – and cast a new light on the witness’s conduct? In that case, the staff would be left holding the bag, and held responsible for any promises not to bring action against the witness. No Commission policy existed to protect the staff’s decision to hold back against certain witnesses, and gather information and cooperation with the promise of preferential treatment as compared to more culpable actors.
This, of course, was not the situation with criminal prosecutors. So when former AUSA Rob Khuzami joined the SEC in March 2009, one of his priorities was to establish a program that would allow just this sort of cooperation. Less than a year later, the Commission unveiled a policy statement outlining circumstances in which individuals could cooperate with SEC investigations and receive credit for their cooperation. The statement laid out four factors the SEC would consider in assessing how much credit should be given to cooperating individuals: (1) the assistance provided by the individual; (2) the importance of the underlying matter; (3) the societal interest in holding the individual accountable; and (4) the individual’s profile, including his or her history of lawfulness and acceptance of responsibility for any prior misconduct.
Unfortunately, the ensuing two years have not provided many opportunities for the program to be put into effect. But March brought two matters in which the SEC announced credit that had been granted to individuals in exchange for cooperating with investigations.
The first, announced on March 19th, related to a settled enforcement action brought in February 2011 against AXA Rosenberg. In that matter, the SEC found that the Orinda, Calif.-based institutional money manager, specializing in quantitative investment strategies, concealed a material error in the computer code of the model it used to manage client assets. The error affected over 600 client portfolios and caused roughly $217 million in losses. Over a year later, the Enforcement Division announced credit given to a “senior executive” who had given substantial assistance to the staff’s investigation. Khuzami made a separate public statement to highlight the significance of the matter. Going through the four factors laid out in 2010, the SEC said:
- The senior executive was the first to offer cooperation in the AXA Rosenberg matter, gave high-quality assistance, and did so without conditions. His help allowed the staff to conserve resources that would have been spent to dig up his information by other means;
- This was the first enforcement action ever arising from errors in a quantitative investment model, and it fully addressed the harm caused by the misconduct. All losses were returned to investors, and a significant penalty was imposed in addition;
- The executive had played a limited role in events surrounding concealment of the coding error, and he advocated that the CEO be informed of it. Interest in holding the executive accountable for any misconduct was therefore minimal; and
- The executive had no disciplinary or regulatory history, and is no longer associated with any regulated entity. He is in fact retired from the investment advisory industry, and is not in a position to commit future violations of the securities laws.
This last factor has led some thoughtful lawyers at Gibson Dunn to suggest that the announcement may not mean very much. After all, in some ways this is the easy case to give credit. If the executive is retired anyway, what is the risk in letting him go without any charges? It is true that the Enforcement Division will not necessarily consider itself bound by these facts, but I think the publicity given to the matter is significant and offers at least a partial roadmap for how future cooperators might best position themselves for credit from the SEC.
United Commercial Bank / John Cinderey
The second case received far less hoopla, and was first publicly noticed by Bruce Carton at Securities Docket, as far as I can tell. It was part of a financial crisis-related accounting matter filed first in October 2011 against executives of San Francisco-based United Commercial Bank. On March 27, the SEC brought a settled action against John Cinderey, a former executive vice president who, acting at the direction of his superiors, misled the outside auditors evaluating financial statements of the bank. The complaint alleges that Cinderey altered memos prepared for the auditors and circumvented accounting controls and policies that required the bank to accurately assess the risks associated with loans. Cinderey agreed to settle the charges and accepted a permanent injunction against violating provisions of the securities laws regarding record-keeping, misleading outside auditors, and internal controls. He did not have to pay a civil penalty, partially in acknowledgement of a $40,000 penalty he paid in a related FDIC matter, but also because of “his substantial assistance in the investigation and the fact that he has entered into [a] cooperation agreement to assist in an ongoing related enforcement action.”
So the individual cooperation program is up and running. Companies facing SEC investigations should consider that the SEC now has two functioning programs designed to elicit information from individuals that might lead to enforcement actions. The whistleblower program is authorized to pay 10-30% of a judgment the SEC collects in an enforcement to informants who bring the staff original information leading to that judgment. Under the individual cooperation program, the SEC can avoid limit claims against an individual or avoid charges entirely if some liability might otherwise lie. People who qualify for one likely would not qualify for the other, but two angles for reporting information to the staff exist that did not two years ago. It’s almost enough for companies to beef up their compliance regimes and avoid having issues to report in the first place.