Getting Cooperation Credit in SEC Settlements: Strategies for Defense Lawyers

Getting Cooperation Credit in SEC Settlements: Strategies for Defense Lawyers

Settling an SEC enforcement action can be a complex process for companies and individuals. The SEC’s cooperation program provides incentives for defendants to cooperate with investigations in exchange for more favorable settlement terms. As a defense lawyer, understanding how to secure cooperation credit for your client can make a big difference in the outcome. This article examines strategies and key factors for obtaining cooperation credit in SEC settlements.

Self-Reporting Potential Violations

One of the most effective ways to get cooperation credit is for your client to self-report potential securities law violations to the SEC before an investigation begins. This shows the agency that your client is willing to take responsibility for their actions. According to SEC officials, self-reporting combined with remediation and ongoing cooperation often results in no civil penalties in settlements[5].

The key is for your client to self-report early, before the SEC learns about the issue from other sources. Make an effort to disclose all relevant facts, rather than just the minimum. Admitting wrongdoing upfront and providing evidence demonstrates your good faith cooperation. Of course, the violations still need to be remediated and your client must continue cooperating as the investigation unfolds.

Responding to Subpoenas and Information Requests

Once an SEC investigation is underway, responding thoroughly and promptly to subpoenas and requests for information is essential. Slow rolling document productions, challenging subpoenas, and withholding materials can lead to enforcement litigation from the SEC – resulting in loss of cooperation credit[2].

While clients may be tempted to resist broad information requests, taking an obstructionist approach often backfires. It’s better to err on the side of overproducing documents and providing SEC staff with context about your production. Demonstrate that you’re making a good faith effort to share all relevant materials.

That said, don’t waive privilege without careful consideration. Oral presentations to SEC staff allow you to provide insights about documents while maintaining privilege claims. Consult with the SEC on privilege issues to avoid later challenges that could undermine cooperation credit.

Encouraging Witness Cooperation

Having your client and other witnesses participate in interviews with SEC staff is another key element of cooperation. Make witnesses available quickly when requested and prepare them to provide direct and truthful testimony.

Avoid overtly “woodshedding” witnesses or coordinating testimony in a way that obstructs the investigation. Don’t attend interviews if you’re also representing other clients with potential exposure. The SEC will view this as a conflict of interest rather than true cooperation.

For third-party witnesses you don’t represent, consider reaching out to encourage cooperation if it will aid your client’s case. Just be careful not to cross any ethical lines regarding witness tampering.

Implementing Remediation Measures

Remediating compliance issues at your client’s company demonstrates an ongoing commitment to cooperation. Developing enhanced policies, procedures, training programs and controls reassures SEC staff that past problems are being addressed.

The remediation should go beyond surface-level fixes and address root causes of violations. Be prepared to demonstrate how your remediation measures directly respond to the problems at issue. Ongoing monitoring and testing give further proof that your client is committed to preventing future violations.

Providing Internal Investigation Results

Conducting an internal investigation shows your client is taking allegations seriously. To get full cooperation credit, the internal investigation should be thorough and independent. Simply going through the motions with a limited review headed by an insider won’t suffice.

Hire reputable outside counsel and empower them to follow the facts wherever they lead. Direct your client to cooperate fully with the internal investigation by providing documents, access to witnesses, resources, etc. Then share the findings with SEC staff so they can rely on the work you’ve already done.

Avoiding Obstructionist Tactics

Certain aggressive defense tactics are counterproductive if your goal is to obtain cooperation credit. For example, filing specious privilege claims over documents can drag out productions. Making dubious legal arguments against SEC authority or jurisdiction undermines credibility. Launching PR campaigns to dispute allegations prematurely antagonizes staff.

Occasional good faith disagreements with SEC staff may arise despite your best cooperation efforts. But a consistent pattern of obstructionist behavior makes cooperation credit unlikely. Counsel your client to avoid these unhelpful tactics, even if they provide short-term delays.

Proactively Managing Multi-Agency Investigations

Since many SEC investigations involve parallel proceedings by DOJ or other agencies, proactively coordinating with staff across agencies is wise. Duplicative requests and interviews waste resources for all parties. Offer to facilitate information sharing with other regulators to streamline processes.

When contemplating settlements, take a coordinated approach. Don’t play agencies against each other angling for a better deal. Be transparent about your negotiations and settlement posture across the board.

Weighing the Benefits and Drawbacks of Cooperation

Despite the advantages, cooperation isn’t always optimal. For some clients, fighting allegations to the bitter end may be a better strategic choice. Assessing the strength of the SEC’s case, the nature of the charges, and potential exposure are key factors.

If the SEC’s case appears weak, cooperation credit may not be worth the de facto admission of guilt. For serious charges like fraud, the benefits of cooperation are limited since penalties will still be harsh. On the flip side, cooperation makes sense for strict liability offenses where intent is not an element.

The stage of the investigation also matters. Cooperation is more impactful earlier on versus late in the game after significant resources have been expended.

Navigating the Gray Areas of Cooperation

While the SEC lays out general criteria for cooperation credit, there are many gray areas that leave room for interpretation. Defense lawyers have latitude in how they approach cooperation, and SEC staff have leeway in deciding what warrants credit.

There are no guarantees of specific benefits or perfectly formulaic recipes for cooperation. You have to make judgment calls about where to draw lines on privilege waivers, witness preparation, remediation efforts, and more based on the unique circumstances of your case.

Maintain open and candid communication with SEC staff about your cooperation dilemmas. They will usually provide reasonable accommodations and guidance on how to balance competing interests.

Maximizing Settlement Outcomes Through Cooperation

While not a panacea, leveraging cooperation opportunities thoughtfully can yield significant advantages in SEC settlements. Reduced civil penalties, lighter sanctions, and narrower charges are all possible benefits.

Avoid overpromising clients that cooperation will lead to a slap on the wrist. But highlight tangible examples of companies and individuals who received leniency through cooperation when advocating this approach.

With strategic cooperation and remediation, you can often achieve settlements that are “good enough” resolutions, even if not outright victories.