SEC Deferred Prosecution Agreements Explained.

# SEC Deferred Prosecution Agreements Explained The U.S. Securities and Exchange Commission (SEC) does not handle criminal investigations, that’s the U.S. Department of Justice (DOJ). Instead, the SEC handles civil enforcement. So, in order to receive a deferred prosecution agreement (DPA), SEC targets will need to work out specific conditions with the SEC enforcement staff, while DOJ targets will need to work out conditions with the appropriate federal prosecutors. A deferred prosecution agreement is a form of deferred adjudication agreement with which the government agrees to suspend prosecution. Rather than having a conviction entered, a DPA stipulates that prosecution will be deferred, so long as the parties fulfill the conditions of the DPA. As an example, a party may agree to stop their activities, pay a certain amount, and cooperate with further investigations. If the party fails to cooperate to the government’s satisfaction, then this constitutes a breach of the DPA’s terms. The government agrees to prosecute for the charged offense only if the other party fails to comply with the agreement’s terms. If the defendant meets the conditions of the agreement, then the government is generally required to dismiss the deferred charges. However, if the defendant breaches the terms of the agreement, then the government can (and will) resume prosecution. Both criminal and civil enforcement agencies use deferred prosecution agreements. The SEC is one example of a civil enforcement agency that can enter into deferred prosecution agreements. A 2018 study counted more than 150 corporate deferred prosecution agreements entered into by the U.S. Department of Justice from 2015 to 2017 alone. Not just in the United States, but other nations’ governments use DPAs as well. For example, the Serious Fraud Office is the UK’s national anti-fraud agency, and it entered into the UK’s first DPA in 2015. ## When Will the SEC Offer a Deferred Prosecution Agreement? Section 6.2.3 of the SEC Enforcement Manual, titled “Deferred Prosecution Agreements,” establishes the procedures for SEC staff seeking to enter into DPAs with targeted entities. Section 6.2.3 states, “Prior to entering into a DPA, the staff must obtain Commission approval.” Further, “Upon completion of a DPA, the staff must seek Commission approval of any proposed dismissal of an enforcement action, or order the proceedings terminated in the case of any other form of DPA.” The SEC announced its “Cooperation Initiative” on January 13, 2010. In this announcement, the SEC claimed, “the SEC and the Department of Justice (DOJ) have been working together to more-effectively and more-quickly punish wrongdoing. When the SEC is dealing with a fraud or other form of wrongdoing, these agencies are more and more likely to be pursuing the matter simultaneously in civil and criminal proceedings.” In May 2011, the SEC announced the first-ever DPA in the SEC’s history, entered into by Tenaris S.A. and the SEC on May 17, 2011.

A study conducted by law professors and students at the University of Southern California School of Law analyzed the first four corporate DPAs offered by the SEC to see which of the “Seaboard” factors are considered by the SEC when awarding DPAs. The Seaboard Report is the framework for assessing companies’ self-policing, self-reporting, remediation, and cooperation. According to the study, in all four cases, the SEC focused on the companies’ self-policing, self-reporting, remediation, and cooperation under the Seaboard Report. In other words, the government is willing to enter into a DPA when it believes that the accused company is committed to cooperation, and to substantially and meaningfully self-policing and remediating the problem. Can an individual be awarded a DPA by the SEC? Yes, while there is a greater likelihood of a DPA being offered to corporations, an individual can still be awarded a DPA by the SEC. This is a relatively rare scenario, as most individuals do not have a record of self-policing and remediation efforts, and they are less likely to have the financial means to settle their case out of court. As discussed, the SEC will enter into a DPA in instances in which the enforcement staff determines that doing so is appropriate. When will that be? Sometimes SEC staff may offer to enter into a DPA before filing an enforcement action. And, in other instances, the SEC may enter into a DPA before filing an enforcement action, but after the government is in the process of negotiating a settlement with the defendant. How does the DOJ evaluate whether to offer corporate DPAs? The DOJ explains this in the Principles of Federal Prosecution of Business Organizations, Section 9.2.2: “Prosecutors are encouraged to defer prosecution of corporations in cases where there are particular reasons to believe that prosecuting the corporation would result in substantial collateral consequences such as causing innocent shareholders, employees, or other creditors to lose their jobs or investments.” ## How Does an SEC Deferred Prosecution Agreement Differ from Other Possible Resolutions? How does an SEC deferred prosecution agreement (DPA) differ from other possible forms of resolution?

There are several differences between a DPA and an ordinary guilty plea. First, as described above, a DPA creates no conviction. Second, whereas defendants on probation are under judicial supervision (which is not true for defendants on DPA compliance), defendants subject to DPAs will generally have their compliance monitored by their in-house corporate compliance team.

There are also several differences between a DPA entered into by the SEC and a DPA entered into by the DOJ. First, while the DOJ and the SEC both offer DPAs, whereas an ordinary DPA entered into by the DOJ often requires an indictment or other criminal charges, an SEC DPA generally will be entered into prior to any enforcement action. Second, even when an ordinary DPA entered into by the DOJ requires an indictment or other criminal charges, it also generally will require a request for a continuance under the Speedy Trial Act.

The difference between a deferred prosecution agreement (DPA) and a non-prosecution agreement (NPA) is that a DPA defers any potential prosecution, while an NPA promises that there will be no enforcement action.

Along with DPAs and NPAs, the other possible forms of resolution to SEC enforcement action for companies and individuals are consent judgments and litigation. A consent judgment is an order entered into by a federal court in cases involving resolved claims, whereas litigation occurs when the parties have been unable to resolve the claims on the merits.

The DOJ uses deferred prosecution agreements as an alternative to negotiating a guilty plea or seeking to prosecute corporate criminal cases.Court supervision is one significant difference between criminal probation and a DPA. As explained, criminal probation defendants are supervised by the federal court. Defendants subject to a criminal DPA are not. Therefore, criminal probation is a different form of punishment from a DPA, even in circumstances in which the government enforces strict compliance with the DPA’s terms.

The DOJ describes deferred prosecution agreements as intermediate options to be entered into if indictment and declination are both deemed inappropriate.

As discussed above, some defendants in criminal cases enter into plea agreements with the DOJ. In these cases, the defendant agrees to plead guilty to the offenses charged, provided the sentencing court remains open to considering a specific sentence that is less than the defendant’s statutory maximum sentence. ## What Terms Can an SEC Deferred Prosecution Agreement Require? In a deferred prosecution agreement (DPA), the terms and conditions are negotiated between the government and the defendant. However, in order to be approved for entry into a DPA, defendants must offer terms that go far enough.

The government may demand, among other things, an admission of wrongdoing as a term of the DPA. Also, the government may require that the defendant implement improvements to its corporate compliance system to protect against the recurrence of similar wrongdoing in the future.

While the Enforcement Manual states that the length of a DPA may not exceed five years, the SEC’s deferred prosecution agreement is the result of negotiations between the SEC and the parties involved. Therefore, the length of any particular SEC deferred prosecution agreement is negotiated case by case and is frequently far shorter than five years; the SEC’s first DPA, entered into with Tenaris S.A., ran for a term of two years.

The Enforcement Manual lists three typical terms for which the government considers relevant, namely, “complete, truthful and continuing cooperation; meaningful and ongoing compliance and remedial measures; and any other appropriate remedial measures (e.g., compensation of affected investors).”

Generally, SEC DPA terms also require complete, truthful, and continuing cooperation in the ongoing investigation. The other term, meaningful and ongoing compliance and remedial measures, can encompass a wide range of potential terms depending on the case at hand. For example, if a company is accused of securities fraud, then it may be required to adopt new internal policies and procedures in order to make sure the fraud does not happen again.

Also, DPAs may require periodic reporting. Generally, this means a defendant will be required to submit reports confirming to the SEC that it has remediated any wrongdoing (if appropriate) and remains in compliance with its DPA terms. DPAs also require defendants to avoid engaging in similar conduct in the future.

DPAs may also require the defendant to make restitution to any parties harmed. For instance, if an SEC enforcement action is for securities fraud, then as part of its DPA, the defendant company may need to compensate all investors who lost money as a result of the fraud.

Furthermore, the government can require the removal of any executives who were involved in the unlawful activity. While this is common in criminal DPAs entered into by the DOJ, it is less common in SEC deferred prosecution agreements. ## Does a DPA Require Legal Advice from a Law Firm with Experience Defending Federal Government Investigations? Entering into a DPA with the SEC in exchange for avoiding civil enforcement penalties is a high-stakes and highly complex situation. In many cases, DPAs can be very beneficial for the defendants. However, before offering to enter into a DPA, defendants need to make an informed and tactical decision about their defense strategies and the risks and benefits associated with any terms and conditions.

At Spodek Law Group, our attorneys handle matters representing companies and individuals in federal investigations involving the SEC and the DOJ. We can advise our clients on whether they should pursue a DPA, and, if so, how they should structure their offer to the government. ## What Risks Continue During and After an SEC Deferred Prosecution Agreement? The SEC makes all deferred prosecution agreements publicly available. The enforcement staff makes these documents available for review on the SEC’s website. As a result, even if your company or business manages to avoid any enforcement action, other parties may still become aware of your investigation. As an example, this means that if you enter into a DPA, it is still possible that you will have to provide additional disclosures to affected investors.

A DPA also usually tolls the statute of limitations as long as the DPA is effective. This means that the limitations period is suspended for as long as the DPA is in effect, so the SEC does not lose the ability to bring the deferred charges during the deferral period if the company breaches the agreement. As explained above, DOJ DPAs allow the DOJ to introduce evidence of wrongdoing if the defendant breaches the DPA. Generally, however, SEC DPAs do not. The SEC’s Enforcement Manual provides that a DPA requires the party to admit, or not contest, the facts underlying the potential violations, which are set out in a statement of facts appended to the agreement. Nevertheless, in certain circumstances, the SEC will still insist that defendants’ DPAs include a “carve-out” allowing it to use the defendant’s prior admissions as a basis for enforcement after a breach. Also, in the event that enforcement staff determines that a company or business’s breach of its DPA’s conditions warrants enforcement, it can (and will) recommend to the Commission that the company’s DPA be terminated. Then, the Commission can authorize an SEC enforcement action. Here, too, the Commission must authorize the SEC to pursue an enforcement action. Another possibility of entering into an SEC DPA is the possibility of facing a parallel civil SEC and criminal DOJ investigation. While not every SEC investigation will lead to a parallel DOJ investigation, and not every DOJ investigation will lead to a parallel SEC investigation, it is not uncommon for the two investigations to go on concurrently. This happens when the DOJ and the SEC work together in order to punish fraud as discussed above. If your company or business is facing a DOJ investigation, it should assume that it could also be facing an SEC investigation. It should not be surprising if the DOJ and SEC are cooperating to punish corporate wrongdoing under the “Cooperation Initiative.” While you will need to engage separate defense counsel for each agency, the enforcement defense strategies for each agency must be aligned in order to avoid unintended consequences.

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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.