SEC Cooperation Credit: How to Maximize the Benefit.

In 2001, the SEC issued Seaboard, a report detailing the framework that it uses to evaluate cooperation and cooperation credit. The Seaboard framework addresses four primary areas:

• “Self-policing”
• “Self-reporting”
• “Cooperation”
• “Remediation”

When is cooperation more important?

The SEC also notes that cooperation “is more important the earlier it is provided in the SEC’s enforcement process.” This means that, as a general rule, providing assistance to the SEC early in the process is more likely to earn the cooperation credit than providing assistance after the SEC has been at the enforcement process for a while.

How should we document our efforts to cooperate?

We encourage our clients to document their efforts to cooperate with the SEC and to remediate promptly and fully. If possible, we advise documenting cooperation and remediation efforts in contemporaneous, specific, and well-documented form. If you decide to cooperate and engage in remediation, we will assist you in documenting your efforts and, if necessary, communicating them to the SEC.

What is the best case scenario when it comes to securing SEC cooperation credit?

In a best-case scenario, securing SEC cooperation credit can lead to the elimination of criminal or civil charges, reduction in monetary penalties, and avoidance of nonmonetary sanctions such as federal oversight monitors. This may, in turn, reduce the costs of defending against the SEC’s investigation.

How can I determine how much SEC cooperation credit will be available for my company?

The amount of SEC cooperation credit available is case-specific. The SEC does not publish percentage discounts for cooperating entities. With a unique and case-specific approach to negotiating with the SEC, however, we can help you effectively leverage your company’s cooperation and remediation efforts.

When should a company self-report possible securities violations?

Does cooperation with the SEC guarantee a particular SEC enforcement outcome?

No, cooperation with the SEC does not guarantee a particular SEC enforcement outcome, or the specific enforcement outcome of any other criminal or civil defendant or entity.

When is the self-reporting component of cooperation most effective?

The self-reporting component of cooperation is at its strongest, generally, when it occurs before the SEC finds out about the company’s possible securities violations from another source.

Can my company self-report possible securities violations before it is finished conducting its internal investigation?

Yes, my company can self-report possible securities violations before it is finished conducting its internal investigation. In many cases, sharing preliminary findings on an ongoing basis may demonstrate a level of cooperation that is most likely to be deemed “reasonable,” which is the standard that governs in this area.

You should speak with your defense counsel as soon as possible about deciding whether to self-report, deciding what information to self-report, and deciding how to self-report.

Can the information my company self-reports be shared with any other authorities?

Yes, information a company self-reports to the SEC may be shared with criminal or foreign authorities if the SEC finds that sharing it is in the public interest.

Does voluntary self-reporting immunize any of my company’s executives or employees?

Voluntary self-reporting does not immunize any executive or employee from prosecution or civil enforcement by the SEC. Instead, companies can share their internal investigation findings, evidence, and documents with the SEC. While not always required, sharing a comprehensive and accurate internal investigation report can prove beneficial.

What will determine the settlement outcome for companies that cooperate with the SEC?

The SEC generally considers companies’ scienter, the resulting harm, the severity of the violation, the company’s financial condition, and the company’s cooperation and remediation efforts when determining the settlement outcome in any given case.

Can the SEC impose SEC cooperation credit sanctions?

Yes, the SEC can impose SEC cooperation credit sanctions if a company does not adequately fulfill the requirements of cooperation and remediation under the Seaboard framework.

For example, the SEC imposed a $1.875 million penalty against Weatherford in 2013 for failing to “promptly and fully” cooperate and “continuing to play cat and mouse with federal investigators.”

Do you have an example of a company that promptly self-reported to the SEC?

Yes, GTT is an example. GTT promptly self-reported its accounting problems and related violations to the SEC, and GTT then worked closely with the SEC’s Enforcement Division to identify the problem area and make necessary disclosures to its shareholders.

How can counsel investigate without waiving privilege?

What does attorney-client privilege protect?

Attorney-client privilege protects the communication between the client and the attorney; it does not protect the underlying facts. Therefore, companies can disclose pertinent and relevant facts learned during an internal investigation without waiving their right to attorney-client privilege.

What does work-product protection cover?

Work-product protection covers documents and other tangible things that are prepared by a party in anticipation of litigation. These documents include, but are not limited to, interview notes, legal research, trial plans, strategy statements, and other materials that counsel may find useful during the representation of the company.

Can counsel selectively waive privilege and work-product protection?

Most federal circuits have rejected a selective privilege waiver. This means that if a company wishes to produce documents or other materials to the SEC, it should do so while being mindful of the risk that doing so may also waive privilege and work-product protection with respect to other parties to the litigation.

What are the risks with the SEC’s confidentiality agreements?

The SEC often will offer confidentiality agreements that, on their face, seem to prevent third-party waiver findings. However, these agreements may be ineffective if a company uses a confidentiality agreement that contains a non-disclosure provision which the SEC has not approved.

What is Federal Rule of Evidence 502(a)?

Federal Rule of Evidence 502(a) is a procedural rule that states, generally:

“When the disclosure is made in a federal proceeding or to a federal office or agency and waives the attorney-client privilege or work-product protection, the waiver extends to an undisclosed communication or information in a federal or state proceeding only if: (1) the waiver is intentional; (2) the disclosed and undisclosed communications or information concern the same subject matter; and (3) they ought in fairness to be considered together. ”

How has the SEC described its policy for investigating companies facing internal inquiries?

The SEC has described its policy as following, “We are more interested in facts than in privileged communications or mental impressions of counsel. However, we understand that in many cases, it will be very difficult to provide facts without also providing privileged information. While we do not generally believe that we are entitled to privileged information, we will work with counsel to ensure that we get the information we need while also protecting the company’s privileges, work product, and other applicable protections.”

What is an Upjohn warning?

An Upjohn warning is an informative statement that counsel gives to the company’s employees and executives during the course of the company’s internal investigation. This is done so that everyone who interviews with counsel knows that counsel is the company’s attorney and not their individual attorney, and the company has the ultimate right to waive any privilege that may apply to the communication, including the right to disclose the interview memoranda.

What information can companies disclose without producing their interview memoranda?

If companies decide to cooperate with the SEC, they can share the information disclosed during the course of their internal investigation without producing their interview memoranda.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

How do parallel investigations affect SEC cooperation decisions?

Does the SEC always provide notice of a parallel investigation?

No, according to the SEC Staff Manual, “The staff may withhold notice of a parallel investigation if the staff believes that providing notice will, or may, interfere with the success of an ongoing criminal investigation, particularly if this investigation is covert.”

Does the Fifth Amendment protect against the production of corporate records?

No, the Fifth Amendment protects individuals from compelled testimony, but the Fifth Amendment does not apply to the production of corporate records by companies. In fact, it is well-established that companies cannot refuse to produce corporate records to the SEC’s investigators.

How does a company maximize the individual cooperation consideration available under 17 C.F.R. § 202.12?

Under 17 C.F.R. § 202.12, cooperation consideration is also available for individuals in SEC enforcement cases. It states, in part, “In determining whether, how much, and in what manner to credit cooperation by individuals, the Commission assesses the assistance provided by the cooperating individual in the investigation, the importance of the investigation in which the individual cooperated, the societal interest in holding the cooperating individual fully accountable for his or her misconduct, and whether it is in the public interest to award credit based upon the cooperating individual's personal and professional profile.” When individuals look to maximize their individual cooperation consideration, they need to evaluate their assistance, determine if their assistance is material to the Commission’s investigation or enforcement action, and assess whether the societal interest of their assistance outweighs all other factors.

When can the SEC conduct civil proceedings alongside a criminal investigation?

In United States v. Kordel, 397 U.S. 1 (1970), the U.S. Supreme Court held that the SEC can conduct civil proceedings alongside criminal investigations and prosecutions in appropriate cases.

What is a GDPR Article 48?

GDPR Article 48 is an article that restricts the transfer of data from the EU to non-EU member states where companies rely on the administrative demands of foreign authorities. In other words, for companies and other individuals to share EU data with the SEC’s investigators, they need to meet other specific conditions under the GDPR.

Does the SEC prohibit the use of contractual restrictions that interfere with direct communications to the SEC?

Yes, Exchange Act Rule 21F-17 explicitly prohibits companies from adopting any contractual restrictions that impede whistleblowers’ ability to directly communicate with SEC staff.

In September 2020, the SEC adopted a package of amendments to its whistleblower program rules, effective December 7, 2020, although those amendments left Rule 21F-17 itself unchanged.

We are closely monitoring the SEC’s proposed rule, and we advise all SEC-regulated companies to promptly adopt new policies and procedures regarding communications to the SEC.

Does the SEC prohibit companies from retaliating against qualifying whistleblowers?

Yes, Exchange Act § 21F(h)(1) prohibits companies from retaliating against qualifying whistleblowers. This is reinforced by the SEC’s ongoing efforts to protect potential whistleblowers from being intimidated, bullied, or otherwise coerced into signing confidentiality or other agreements.

What actions and records prove meaningful SEC cooperation?

What evidence demonstrates meaningful cooperation?

Effective cooperation efforts with the SEC can take many forms. Cooperation includes:

• Targeting analyses of company data so that the SEC’s Enforcement staff spends less time and resources during its investigation.
• Promptly identifying witnesses who have knowledge of the relevant events at hand and providing the SEC with pertinent information about these individuals.
• Promptly responding to the SEC’s document requests and ensuring that these responses produce key documents as early as possible.
• Assisting with interviews, offering to have witnesses interviewed in a timely manner, and providing interview preparation materials and information when helpful.
• Taking a proactive approach during the investigation and proactively offering assistance.

What evidence demonstrates meaningful remediation?

Remediation generally includes:

• Disciplining or terminating individuals who are responsible for securities violations within the company.
• Developing new policies and procedures intended to prevent future securities violations within the company.
• Conducting employee training programs regarding compliance with the Securities Act of 1933, Securities Exchange Act of 1934, or other securities laws and regulations.
• Implementing internal compliance measures or controls designed to detect and prevent violations in the future.
• Restating financial disclosures or amending company statements in order to comply with applicable laws, regulations, or other requirements.

What evidence can establish when a company cooperated and remediated?

When deciding on cooperation and remediation as reasons to grant SEC cooperation credit, the SEC’s staff looks for evidence that these efforts occurred “promptly,” “meaningfully,” and “fully.” As such, establishing the timing and scope of your company’s efforts will be paramount. Companies should work with their defense counsel to preserve and document the timing and scope of these efforts in all relevant records, including, but not limited to:

• Legal-hold notices that establish when custodians received instructions to preserve data and other materials.
• Collection logs that establish when investigators preserved particular evidence and how this evidence was identified as pertinent.
• Production metadata that establish when specific materials were produced to SEC staff.
• Board minutes that can be used to document the authorization and timing of remedial measures (e.g., board members authorizing a new compliance policy).
• Correspondence with the SEC Staff (and with other authorities) that are stored and preserved in an electronic format to establish timelines and scope.
• Notes from interviews with internal and external personnel that establish the timeline and scope of investigations.
• Internal audit reports and other records that are stored and preserved.
• Notes from calls and meetings with SEC counsel and other involved parties.
• Client’s records of communications to investors and creditors.
• Documentation of compliance training and other similar training efforts.
• Correspondence with outside vendors that may facilitate future audits.
• Documentation regarding remediation efforts such as new and improved employee handbooks, compliance policies, and internal controls.
• Documentation of employee terminations, disciplinary actions, and reprimands in order to show a commitment to remediation.
• Documentation of employee interviews when conducted in the course of internal investigations.
• Documentation of disciplinary hearings.
• Employee certification and other documentation of compliance efforts.

How can cooperation affect the terms of an SEC settlement?

When the SEC’s Enforcement Division believes it has evidence sufficient to file charges, it submits a settlement recommendation to the Cooperation Committee. This recommendation may include a proposed fine or other sanction that the SEC considers appropriate. The Enforcement Division may also issue a recommendation to grant cooperation credit in the settlement process. The SEC’s staff can pursue an Enforcement Division recommendation to grant cooperation credit in the settlement process to ensure that an SEC cooperation credit result is at the forefront of negotiations.

Does cooperation entail the right to a neither-admit-nor-deny settlement?

As a general rule, cooperation does not entitle a respondent to a neither-admit-nor-deny settlement.

Can the SEC’s undertakings require companies to implement compliance measures in addition to voluntary remediation already completed?

Yes, in some cases, the SEC’s undertakings may include companies implementing additional compliance measures beyond voluntary remediation already completed.

Does an enforcement settlement with the SEC’s staff bind the SEC?

No, enforcement settlements with the SEC’s staff do not bind the SEC. To bind the SEC, an enforcement settlement with the SEC’s staff must be approved by the Commission.

Does the Enforcement Division’s settlement recommendation bind the Commission?

No, the Enforcement Division’s settlement recommendation does not bind the Commission. The Commission retains the discretion to reject the Enforcement Division’s recommendation.

Do SEC settlement orders assign a monetary value to cooperation and remediation?

In most SEC settlement orders, the SEC will describe a company’s efforts to cooperate and remediate. However, this generally will not include assigning a monetary value to that effort.

Can you quantify the effect of SEC cooperation credit on sanction reductions in a single settlement?

No, you cannot quantify the effect of SEC cooperation credit in a single settlement. As a general rule, the SEC takes into account both cooperation and remediation in the settlement process, and both of these factors tend to have an independent and distinct impact on the total sanction amount.

Can the SEC pursue culpable personnel without bringing charges against the company?

Yes, the SEC can pursue culpable personnel without bringing charges against the company that they work for. This scenario occurs in both public and private sector SEC enforcement cases.

For example, in some cases in the public sector, the SEC will choose not to pursue charges against a company even if this company has been implicated by the actions of one of its employees. In this situation, the company will have had opportunity to cooperate with the SEC during the investigation in order to ensure that its individual culpability will be limited to those of its employee.

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.