How Cooperation with the SEC Can Help Mitigate Securities Fraud Penalties


How Cooperation with the SEC Can Help Mitigate Securities Fraud Penalties

Getting caught committing securities fraud is a scary proposition for any company or individual. The penalties can be severe, including huge fines, barred from the industry, and even jail time. However, cooperating with the Securities and Exchange Commission (SEC) can help mitigate some of these penalties. This article will examine how working with the SEC, instead of fighting them, can reduce sanctions and allow a company to move forward.

What is Securities Fraud?

Securities fraud refers to deceptive practices in connection with the buying and selling of investment vehicles like stocks, bonds, and derivatives. Some examples include:

  • Insider trading – using non-public information to make investment decisions
  • Accounting fraud – falsifying financial statements and reports
  • Pump-and-dump schemes – artificially inflating the price of a stock through false information
  • Churning – excessive trading by a broker to generate commissions

Securities fraud erodes trust in capital markets, so the SEC takes enforcement very seriously. They have a range of penalties at their disposal for violations of securities laws.

SEC Penalties for Securities Fraud

The SEC has a lot of leverage when it comes to punishing securities fraud. Some of the sanctions they can impose include:

  • Fines – The SEC often imposes heavy fines based on the severity of the violation. For example, Goldman Sachs paid $550 million in 2010 to settle charges related to misleading investors in a mortgage-backed security.
  • Disgorgement – The SEC can force wrongdoers to give up (disgorge) any profits or other ill-gotten gains from illegal activity. Former WorldCom CEO Bernie Ebbers had to pay $7.2 million in disgorgement in 2005.
  • Bars from the Industry – For serious or repeat violations, the SEC can bar individuals from working in the securities industry or serving as an officer or director of a public company.
  • Referral for Criminal Prosecution – If fraud is egregious, the SEC may refer the case to the Department of Justice for criminal prosecution. This can lead to jail time.

Facing charges from the SEC is daunting given their broad powers. However, cooperation can mitigate penalties.

How Cooperation with the SEC Can Help

Instead of fighting securities fraud charges, cooperating with SEC investigations can lead to reduced sanctions. There are a few ways working with the SEC can help:

  1. Settlement Discounts – The SEC’s Cooperation Initiative offers incentives like reduced penalties and no industry bars for companies that self-report violations and cooperate fully. Settlements are faster and less costly.
  2. Avoid Criminal Prosecution – If fraud is self-reported and the SEC believes the cooperation is genuine, they likely won’t refer the case for criminal prosecution. This avoids huge legal fees and potential jail time.
  3. Leniency for Individuals – Cooperating employees and executives can receive leniency, like no civil penalties or industry bars, for reporting misconduct and aiding investigations.
  4. Remediation Credit – The SEC considers companies’ remediation efforts when imposing sanctions. Proactive improvements to compliance programs and internal controls are viewed favorably.

Essentially, by working with the SEC instead of resisting, companies and individuals show accountability and save time and money. While penalties aren’t eliminated, self-reporting and cooperation can dramatically reduce sanctions.

Requirements for Cooperation Credit

For companies and individuals to receive full cooperation credit and benefits from the SEC, certain criteria must be met:

  • Timely self-reporting as soon as the violation is discovered
  • Fully admitting wrongdoing and accepting responsibility
  • Identifying all individuals involved in the misconduct
  • Providing all evidence and documents requested
  • Making witnesses available for interviews and testimony
  • Disclosing full details of internal investigations
  • Proactively undertaking remediation and improvements

Anything less than full cooperation will limit the benefits received. The SEC wants to see companies turn over all information willingly, admit faults, and take tangible steps to correct them. Half-hearted or delayed cooperation won’t suffice.

Are There Risks of Cooperating?

While cooperation with the SEC generally leads to reduced penalties, companies do need to weigh certain risks and considerations:

  • Staff may recommend harsher sanctions if they feel cooperation is inadequate.
  • Details provided may lead to shareholder lawsuits, reputational damage, or additional regulatory actions.
  • Cooperating individuals still face sanctions like trading bans, fines, and clawbacks.
  • Criminal prosecution is still possible depending on the circumstances.
  • Ongoing legal and investigation costs can be substantial.

Waiving privileges and providing evidence that implicates employees or executives is also challenging. There are no guarantees of leniency. The risks and costs of cooperating must be carefully evaluated against potential benefits.

Recent Examples of Successful SEC Cooperation

There have been many recent cases where cooperation and self-reporting to the SEC produced tangible benefits:

  • JPMorgan – The firm paid $250 million in 2020 to settle SEC charges that its wealth management division misused customer funds and made false disclosures. The settlement was significantly reduced thanks to JPMorgan’s cooperation.
  • Blue Bell Creameries – The ice cream maker and former CEO paid $19 million in 2020 but avoided fraud charges after self-reporting misstatements and cooperating with an SEC probe.
  • Theranos – Former Theranos scientist Tyler Shultz avoided charges in 2022 despite working at the company. His early cooperation with the SEC was viewed favorably.

These cases illustrate how companies and individuals can gain significant benefits by choosing to cooperate with SEC investigations rather than fight allegations.

Key Takeaways on Cooperating with the SEC

Here are some key points for companies and individuals facing securities fraud charges:

  • Self-reporting and transparent cooperation with SEC probes can lead to reduced civil fines, fewer charges, and avoidance of criminal prosecution.
  • However, full cooperation is required – anything less limits benefits received.
  • While penalties can be lowered significantly, legal costs and reputational damage may still occur.
  • The risks of cooperating should be weighed against potential savings and mitigation of sanctions.
  • Experienced legal counsel is essential when navigating cooperation with the SEC.

Securities fraud charges from the SEC can have catastrophic implications. But upfront cooperation, admission of wrongdoing, and good faith efforts to make amends can dramatically improve outcomes relative to fighting allegations. Companies and individuals facing enforcement actions should carefully consider the pros and cons of working with the SEC to mitigate penalties.