Securities Fraud: Self-Reporting and Cooperation in DOJ Investigations
Contents
Introduction
Securities fraud is a complex area of white collar crime that can lead to severe penalties for companies and individuals. However, the Department of Justice (DOJ) offers incentives for companies to self-report securities violations and cooperate with investigations. This article examines the key considerations around self-reporting securities fraud to the DOJ, the potential benefits of cooperating, and strategies to mitigate risks.
DOJ Self-Reporting and Cooperation Program
In recent years, the DOJ has emphasized the importance of voluntary self-disclosure and cooperation from companies facing securities violations. This is outlined in the DOJ’s Corporate Enforcement Policy which provides clear incentives for companies to come forward.
The policy indicates that companies receiving cooperation credit can expect tangible benefits such as:
- Presumption of a declination (no prosecution)
- Reduced penalties and oversight if a resolution is required
- Avoidance of the imposition of an independent compliance monitor
To qualify for these benefits, the self-disclosure must:
- Occur before an imminent threat of disclosure or government investigation
- Occur promptly after becoming aware of the violation
- Include all relevant facts known at the time
The company must also demonstrate full remediation and cooperation such as:
- Identifying all individuals involved in the violations
- Preserving and disclosing relevant documents and data
- Making witnesses available for DOJ interviews
Key Pros and Cons of Self-Reporting
There are several key pros and cons companies weigh when deciding whether to voluntarily self-report securities violations:
Pros
- Strong possibility of avoiding prosecution or receiving reduced charges
- Control over the narrative by presenting findings on your terms
- Avoidance of business disruptions from an unexpected investigation
- Protection of corporate reputation by taking ownership
Cons
- Loss of attorney-client privilege for investigation materials
- Uncertainty around how violations will be perceived
- Burden of conducting a thorough independent investigation
- Disclosure risks associated with reporting violations
On balance, the DOJ policy changes have made self-reporting an increasingly appealing option. Companies stand to gain significant benefits while avoiding the severe consequences of an unexpected government investigation.
One challenge companies face is that many areas of securities law contain gray areas subject to interpretation. Activities viewed by companies as normal business conduct could be deemed technical violations by aggressive prosecutors.
This makes it difficult to assess the risks of potential violations. Companies can mitigate this by:
- Conducting training to ensure awareness of gray areas
- Implementing controls around higher-risk activities
- Seeking outside counsel to evaluate areas of uncertainty
When violations do occur in gray areas, companies can point to good faith efforts to comply as a mitigating factor. The DOJ policy indicates this can help secure a declination even with the presence of aggravating factors.
Strategies for Mitigating Investigation Risks
While the benefits of cooperating are significant, securities investigations also pose major risks including:
- Reputational damage from disclosing violations
- Burdensome legal costs
- Business disruptions from the investigation
Companies can employ several strategies to mitigate these risks:
- Seeking advanced commitments – Companies can negotiate benefits like confidentiality for reports and a commitment not to prosecute before disclosing. This provides more certainty over how the violations will be handled.
- Coordination with the SEC – Close coordination with the SEC can help align resolution outcomes across agencies and avoid conflicting penalties.
- Structuring investigation scope – Companies can seek to structure investigations narrowly to avoid overburdening the business. However, investigations must still be thorough to qualify for cooperation credit.
Conclusion
The decision to voluntarily self-report securities violations involves an analysis of complex trade-offs. However, the DOJ has constructed their policy to make cooperation an appealing option for companies seeking mitigation of legal and business risks.
Seeking experienced counsel can help guide companies through the process of investigating potential violations, interfacing with regulators, and positioning for the most favorable outcomes. While securities cases always involve uncertainty, prudent preparation and cooperation helps provide more control over the final result.