Cooperating With the SEC: Benefits and Risks.

Whether SEC cooperation helps is case-specific, as “cooperation credit” remains discretionary.

While cooperation can substantially reduce (and sometimes eliminate) criminal or civil charges, penalties, and other sanctions, there is no guarantee. However, in appropriately handled cases, cooperation can materially reduce the risks involved, as an example of these risks.

How does the SEC assess corporate cooperation?

The SEC’s corporate cooperation framework dates back to 2001, when it published the “Seaboard Report” (following the U.S.While the SEC has revised the framework in recent years, Seaboard continues to provide guidelines for how the Agency assesses corporate cooperation.

What examples of cooperation credit are there?

Many examples illustrate the impact of corporate cooperation in SEC investigations.

In 2002, Xerox accepted a $10 million penalty. The SEC stated in its order that “Xerox’s cooperation efforts were incomplete in some respects” and set the penalty at a level that partially reflected the company’s lack of full cooperation in the investigation.

In 2013, Weatherford accepted a $1.875 million penalty and paid $65.6 million in disgorgement and prejudgment interest, with the penalty assessed in part for the company’s lack of cooperation early in the investigation

In SEC v. Lybrand, a court held that defendants’ “honesty and cooperation” presented “important considerations” toward reducing “the penalty imposed in the public interest.”

Can the SEC assess sanctions that can cut off capital market access or disqualify a company’s employees from serving in senior management or as registered representatives?

Yes, and in these cases companies will want to pursue an SEC waiver when facing sanctions under the Securities Act and Exchange Act. Specifically, certain SEC orders, consent decrees, and administrative orders trigger Rule 506(d) “bad actor” disqualifications that prevent companies from continuing to raise capital under Rule 506.

What assistance earns SEC cooperation credit beyond subpoena compliance?

While complying with subpoenas is essential, compliance is a legal requirement. As SEC’s former Enforcement Director Gurbir Grewal observed, “Responding to the SEC’s inquiries promptly and with candor, although critical, is not and does not suffice, as it is mandatory. Companies that earn cooperation credit, however, usually have gone above and beyond what is required.”

In other words, while companies that fail to fully and promptly comply with subpoenas generally forfeit the opportunity to present cooperation as a mitigating factor, compliance with subpoenas is not the hallmark of cooperation, it’s a legal obligation. Rather, as the Seaboard Report explains, cooperation is about doing more than just complying with the SEC’s subpoena power: “The SEC’s enforcement staff will not afford cooperation credit to a company that fails to provide what the SEC has requested under its subpoena power. Compliance is not equal to cooperation.”

As a matter of policy, Grewal noted that cooperation with an SEC enforcement proceeding requires “affirmative conduct, usually in the company’s own interest to help the SEC promptly, efficiently, and comprehensively ascertain the facts.”

Expedited access to relevant documents and witnesses is a good example of affirmative conduct that can (and can, when handled appropriately) earn corporate cooperation credit. As a result, when handling SEC investigations for corporate clients, we focus our efforts on leveraging both the opportunities and risks presented by the cooperation process with the SEC and, if applicable, other federal authorities.

Informed, well-developed factual explanations are also much more likely to result in cooperation credit than are purely argumentative presentations. For example, rather than just claiming “the statute of limitations precludes enforcement action in these cases,” well-prepared SEC defense counsel will provide the SEC with the facts and applicable legal principles that support the conclusion that the statute of limitations precludes enforcement action, and then, along with a more accurate, comprehensive, and well-informed picture of the facts, they will leave the SEC’s staff to arrive at the conclusion themselves.

Similarly, instead of saying “even if the company failed to comply with the rule in question, the SEC staff should drop the case, as it would be unfair to penalize the company over a technicality,” companies and their lawyers can demonstrate their willingness to cooperate by precisely identifying their client’s alleged misconduct and the evidence supporting that misconduct. This helps the SEC staff efficiently and more comprehensively execute their investigation, which can expedite the process, limit the scope of any pending enforcement action, and, in some cases, result in a finding of no action.

Counsel’s credibility also plays a role. In close cases, SEC staff will often rely on counsel’s representations to make informed decisions, and they will be more inclined to rely on counsel who has a demonstrated track record of honesty and candor.

The concept of “remediation” is distinct from “cooperation.” Remediation involves correcting misconduct and strengthening (or establishing) appropriate compliance controls, and while remediation can also be used to seek credit in an SEC enforcement action, cooperation refers to offering affirmative assistance to the SEC’s enforcement investigation (such as the examples discussed above).

The SEC publishes no numerical formula for calculating the amount of cooperation credit a company can expect, and it offers no specific assurance that affirmative cooperation will materially reduce its sanctions. Companies seeking to avoid criminal or civil charges, penalties, or other SEC sanctions will need to weigh their prospects for cooperation against the risks involved, and they will need to carefully balance the SEC’s interest in affirmative assistance with the privilege, parallel-case, employee, and collateral risks discussed in detail below.

Should Our Company Voluntarily Self-Report Suspected Securities Violations?

There is no such thing as a “universal duty” to self-report all suspected securities violations. Instead, under federal securities law, the duty to self-report is case-specific. For example, in certain circumstances, the duty to self-report may arise from a company’s contractual obligations to its insurers, and, in other circumstances, the duty to self-report may arise from a company’s contractual obligations to its customers and/or investors. As a result, companies that suspect a securities law violation must make informed, case-specific decisions about whether to self-report, rather than simply complying with (or ignoring) a rule that doesn’t exist.

Voluntarily disclosing unrequested information to the SEC is listed in the Seaboard Report as a factor that may entitle a company to cooperation credit, and it may be the most effective way to start building “bona fides” in the eyes of the SEC’s staff, especially in a situation in which the SEC is already aware of (or is about to become aware of) the company’s conduct. In this regard, self-reporting and presenting the SEC with information that the SEC does not have yet is consistent with the concept of “affirmative conduct” discussed above.

How Do Parallel Civil and Criminal Investigations Affect the Cooperation Process?

As a result of an SEC investigation, a company may face not only the risk of an enforcement action, but also the risk of parallel criminal proceedings and private civil litigation. To that end, while companies seek to resolve SEC investigations as favorably as possible, they must also consider the potential ramifications of their resolutions in parallel (or potentially subsequent) proceedings.

This involves not only managing the risk of a parallel criminal proceeding, but also managing various other collateral risks as well. While the consequences of an SEC enforcement action will depend on the nature and extent of the company’s conduct, they can include (among many others) loss of insurance, loss of licensure, debarment, loss of customers, loss of future business opportunities, and other reputational consequences.

Similarly, companies that are under investigation by the SEC need to assume that the SEC staff will share information obtained through the investigative process with the U.S. Department of Justice (DOJ) for the purpose of pursuing criminal enforcement. As a result, companies will need to work closely with their DOJ defense counsel (if applicable) to ensure that their SEC defense strategy does not inadvertently increase their risk of civil or criminal liability.

What is “Seaboard Analysis”?

We refer to “Seaboard analysis” as the step-by-step process companies use when assessing their prospects for obtaining cooperation credit for SEC investigations. In all the examples discussed above, we refer to cooperation in connection with:

• Self-policing
• Self-reporting
• Cooperation
• Remediation

These categories are identified in the Seaboard Report, and the SEC continues to refer to them in its assessment of corporate cooperation cases. Companies seeking to obtain cooperation credit should use this same four-part framework.

Can SEC Cooperation Waive Privilege or Create Criminal Exposure?

Inappropriately handled SEC investigations can expose companies to a variety of risks, including the risks of criminal enforcement and private litigation. Even where appropriate in light of the circumstances, cooperation efforts must be carefully considered in light of the various risks involved.

Waiving the Attorney-Client Privilege

Waiving Work-Product Protection

Limitations of “Confidentiality” and “No Waiver” Agreements

SEC Cooperation as Admissible Evidence

The Corporation’s Fifth Amendment Privilege

The Corporate Counsel’s Work-Product Privilege

Privilege Assertions that are Susceptible to Challenges

Voluntary Disclosure and Third-Party Discovery

Risks of Providing Documents and Evidence to the SEC

Risks of Providing Interview Notes to the SEC

SEC Confidentiality Agreements and “Privilege-Free” Statements

Privileges and Immunities Relating to Corporate Cooperation

Privileges and Immunities Relating to Employee Cooperation

Disclosures That “Are Required” or “Are a Result” of an SEC Investigation or Civil Litigation

Attorney-Client Privilege and Third-Party Challenges

The Attorney-Client Privilege and Third-Party Litigation

Potential Problems with Non-Disclosure Agreements (NDAs)

Risks of Improperly Asserting the Attorney-Client Privilege or Work-Product Protection

When a company improperly asserts the attorney-client privilege or work-product protection, the SEC is entitled to seek enforcement of its subpoena in federal court. This can result in:

• Delaying the resolution of the SEC investigation;
• Increasing the costs of the investigation;
• Inviting the SEC’s unwanted scrutiny, which can heighten the risk of the investigation becoming more adversarial;

And, in some cases, it can lead to a finding of contempt, which can carry both civil and criminal penalties.

Todd Spodek and the attorneys at Spodek Law Group handle federal cases of this kind from New York, Brooklyn, Queens and Los Angeles.

What Happens to Employees When Their Company Cooperates?

The SEC recognizes the value of companies that encourage their employees to assist in the SEC’s investigations. In cases involving a company’s decision to either engage in or rely on employee cooperation, companies may be able to obtain substantial (and sometimes total) credit.

With that said, employees have rights and protections as well. During the SEC’s investigation, an employee can invoke their Fifth Amendment privilege against self-incrimination, regardless of their company’s decided approach to cooperation. Importantly, a company cannot “waive” an employee’s Fifth Amendment privilege.

When companies’ attorneys interview employees, it is critical for them to deliver clear, comprehensive “Upjohn warnings” (or company counsel warnings), as without appropriate warnings and informed consent, the employee may mistakenly believe the company’s attorneys are representing them personally. For companies’ attorneys and other outside counsel in SEC investigations, delivering appropriate warnings is a critical step for mitigating risks.

Can Company and Employee Defenses Diverge?

Yes, and when they do, this can create significant issues, especially if the company and its employees share the same outside counsel. For example, if the company is hoping to obtain the SEC’s cooperation credit, a responsible executive’s decision to present a contrary defense in the SEC’s enforcement proceeding can pose significant problems. While the SEC has noted that corporations and their lawyers cannot make a “deal” to make it “unfair” to pursue a responsible individual, the SEC has also made clear that companies’ attorneys cannot jointly represent them and their clients in cases with conflicting interests.

Can Companies Take Retaliatory Action or Prohibit Employees from Reporting to the SEC?

In certain cases, yes. However, in recent years, the SEC has been very clear about the limitations of taking retaliatory action and making deals with employees to prohibit (or impede) direct communications with the SEC. These limitations stem from two key sources:

• Exchange Act § 21F(h), “Protection for Whistleblowers”
• Exchange Act Rule 21F-17, “Staff communications with individuals reporting possible securities law violations”

As a result of these two provisions, companies must be very careful about how they respond to SEC investigations, and they must be extremely careful about what they say to their employees.

• Rule 21F-17, in particular, has implications for how companies handle employee exits. For example, while an employee’s future compensation may depend on the employee’s continued commitment to protect the company’s confidential information, any provisions prohibiting direct communication with the SEC staff can be challenged on grounds that they violate Rule 21F-17.

Can the SEC Charge Employees While Declining to Charge the Company?

Yes, and while the SEC has declined to explain its reasoning in specific cases, this is certainly possible when a company’s employees are responsible for conduct that is otherwise unconnected to the company’s business interests. The SEC is also not required to pursue an enforcement action against a company because it failed to intervene in a specific employee’s conduct, and, as a result, if a company cooperates in securing an informed and efficient investigation, the SEC has the ability to target the culpable individuals while not penalizing the innocent company.

How Should Companies Preserve and Produce Cross-Border Evidence?

When Companies’ Attorneys Deal with the SEC

When the SEC’s Enforcement Staff Conducts an Investigation

When Companies’ Attorneys Conduct Internal Investigations

The U.S. Federal Criminal Statute Against Evidence Tampering

Preservation Failures and Cooperation Credit

Foreign Privacy Laws and the SEC’s investigative Power

The U.S. Foreign Account Tax Compliance Act (FATCA)

GDPR Article 48 and Compliance with Foreign Legal Requirements

The Need for Certified English Translations

What Does the View Settlement Actually Prove About Cooperation?

On July 3, 2023, the public company View settled an SEC administrative proceeding. According to the settlement agreement, View received no civil penalty in the settlement. The agreement also states that, based on “View’s cooperation and remediation efforts,” the SEC did not pursue a “monetary penalty or seek injunctive relief.”

With that said, despite receiving no civil penalty, View still did not avoid enforcement entirely, in that, it still accepted the administrative enforcement action described above. Also, while View was able to resolve the enforcement proceeding without a civil penalty (or even disgorgement and prejudgment interest), this should not necessarily be interpreted as indicative of the penalties companies will face if they engage in substantive and informed cooperation with the SEC.

In View’s settlement, the alleged violations arose under the Securities Exchange Act, not under the Securities Act. Regarding the nature and scope of the cooperation efforts it presented to the SEC in order to seek a civil penalty reduction, View’s counsel states that View’s efforts included:

• Providing “detailed and informed factual explanations that anticipated the staff’s follow-up questions;”
• Identifying documents and witnesses that “had not been located by the staff yet, which expedited the process and eliminated unneeded work;” and,
• Assisting SEC staff in “resolving the investigation without need for judicial intervention.”

Regarding View’s remediation efforts, the settlement indicates that View accepted responsibility for its misconduct and took action to address it by implementing “new, improved controls for securities disclosures” and “procedures regarding the company’s warranty obligations.” Again, while the SEC recognized the benefits of the company’s remediation efforts, it is unclear why it did not also pursue a corporate monitor or independent compliance consultant.

What Type of Cooperation Credit Did the SEC Give View in Its Settlement Order?

The SEC’s settlement order described View’s cooperation efforts qualitatively, and did not assign any specific numerical or dollar value to the credit. As a result, the View settlement serves as a clear example of the types of affirmative cooperation and remediation companies should consider when facing SEC investigations, and as an example of the limits of the federal securities laws and the SEC’s enforcement proceedings (including the absence of clear guidelines or numerical formulas for calculating corporate cooperation credit).

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.