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SEC using new investigation technique

Robert Khuzami

Rewarding targets of an investigation for their cooperation may be standard procedure for prosecutors but it’s relatively new for the Securities and Exchange Commission.

Speaking at the Rocky Mountain Securities Conference in Denver in early May, SEC enforcement director Robert Khuzami said the SEC has made deferred or non-prosecution agreements with about 25 people to provide inside information since the policy was implemented in January 2010.

Khuzami also said there are more agreements in the works.

“It’s new for the SEC but the devil is in the details,” said Carolyn G. Nussbaum, a Nixon Peabody securities litigation attorney. “There’s not a lot of track record here as to how and when it will be used.”

In fact, the first non-prosecution agreement the SEC publicly disclosed was with children’s clothes manufacturer Carter’s in December.  

Carolyn G. Nussbaum

An SEC press release said Carter’s was rewarded for its “complete self-reporting of the misconduct to the SEC” and its exemplary cooperation.

“He seems to be encouraging cooperation but many of us are out there watching what the SEC does. There’s a great deal of uncertainty about how they will use these tools,” Nussbaum said.

“It’s taken a little while for the staff to get used to the rule, and frankly, for the defense bar to get comfortable with it,” Khuzami said in the The Blog of Legal Times.

“I don’t have a problem with it as long as it’s done fairly,” said securities law attorney Steven E. Cole, of Leclair Korona Giordano Cole LLP.

Khuzami, a former federal prosecutor for the Southern District of New York and University of Rochester graduate, said he was hopeful a consensus could be reached regarding the potential problem of using SEC garnered information in a parallel criminal investigation.

“It’s no good if you cooperate with the SEC but then they turn around and give information to prosecutors who go after you criminally,” Nussbaum said.

SEC investigations are civil but its information the Department of Justice and other prosecutors might be able to use in a criminal case.

In addition to parallel criminal cases, information the SEC obtains could also apply to class action suits.

“The SEC is becoming more innovative in how it attempts to obtain information to aid in its investigations but whether that will be successful remains to be seen not only in the quality of information received but in the SEC’s ability to prosecute and obtain monetary awards and penalties,” Nussbaum said.

The cooperation agreements are just part of the changes the SEC has made under Chairman Mary L. Schapiro to improve its effectiveness, which has often been criticized particularly for its long standing policy of not requiring defendants to admit guilt or wrongdoing.

“Clearly the SEC is trying to redeem itself,” Nussbaum said. The Bernie Madoff scandal and others have tarnished its image and some such as Second Circuit Judge Jed Rakoff have questioned SEC settlements.

When Judge Rakoff rejected an initial 2009 settlement between Bank of America and the SEC regarding an investigation into bonuses it paid managers after receiving federal bailout money, he said the settlement “suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.’”

That seems unlikely to change.

Khuzami told the Colorado securities law conference the SEC’s goal is to get money back in the hands of investors and if the choice was between receiving settlement money or going to trial, “I think the tradeoff is worth it.”

Settlement monies can also go to the Treasury Department.

“The SEC wants to obtain a reasonable settlement consistent with their duty to enforce the laws,” Cole said. “It’s easier for them (targets) to settle if they don’t have to admit liability and it gives the SEC more flexibility to resolve cases.”

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