Thursday, April 11, 2019

SEC enforcement officials give tips on cooperation, Wells process at SEC Speaks

By Amanda Maine, J.D.

SEC Enforcement Co-Directors Stephanie Avakian and Steve Peikin led a panel discussion with Division officials at this year’s PLI SEC Speaks conference in Washington, D.C. The officials gave advice on how to communicate with the Division staff on ways to increase cooperation credit and how to engage in constructive communication with enforcement staff leading up to enforcement actions.

Cooperation. According to Avakian, high quality cooperation can advance the staff’s investigations in a meaningful way by reducing resources expended and returning money to harmed investors more quickly. What the Commission focuses on in determining cooperation credit falls into four broad categories: self-policing, cooperation, remediation, and self-reporting, Avakian explained.

Marc Berger, regional director of the SEC’s New York Regional Office, said that the Commission is trying to send a clear message about cooperation in its orders. For example, in February the Commission announced settled charges against Gladius Network LLC, which had not registered its 2017 initial coin offering (ICO). Gladius later self-reported its violations to the SEC and agreed to register the tokens and return any investor money upon request. Due to the company’s substantial cooperation with the SEC, it escaped having to pay a penalty, Berger explained, directing listeners to look at the language in the SEC’s order of settlement relating to remedial steps taken by the Gladius and its extensive cooperation with the staff.

Former Commissioner Daniel Gallagher, appearing on the panel as a commentator, inquired about the lack of uniformity in the Commission’s cooperation policy and whether it might adopt something more formal. Peikin noted that the Department of Justice has a much more prescriptive policy that provides more clarity about what defendants will get if they self-report. Peiken said that the SEC enforcement staff likes having flexibility, although he acknowledged that it is an imperfect science.

Avakian noted that some SEC orders, including Gladius, credit respondents’ affirmative assistance with staff in an investigation. Expanding on affirmative assistance, Berger said it can take the form of factual presentations by the respondent’s counsel that can help narrow issues. With respect to the staff’s document requests, Berger advised that they can sometimes have unintended consequences, and it is helpful if counsel can help eliminate some of the “noise” resulting from a document request that includes documents that are not useful to the investigation. The staff is trying to streamline investigations, and it will be noticed if a respondent is proactive and forthright and establishes a good relationship with the enforcement staff.

When asked if a privilege waiver is necessary to receive cooperation credit, Associate Director Anita Bandy said the short answer is no, and the staff generally avoids asking for a privilege waiver. The Division tries to work with counsel in coming up with a plan that balances privilege with cooperating, she said. Companies that want to cooperate will find a way to strike this balance, she added. For example, if a company declines to tell the staff what a witness said during its own internal investigation, causing the staff to “redo” the investigation of the witness, the company should not expect the same cooperation credit as a company that did communicate what the witness said, she explained.

Some of SEC orders of settlement involve the respondent agreeing to engage an independent compliance consultant (ICC). Bandy said the Division looks at a variety of factors in determining on whether to recommend an ICC, including the nature of the conduct, how widespread the conduct was, and how far up the conduct extended. The Division will also examine what kind of remediation has taken place, how long remedial measures have been in place, and whether they have been effective. We don’t take a cookie-cutter approach to ICCs, she added, noting that the terms of an ICC have become more variable, both in length and in scope. Being mindful of scope-creep, the staff wants to make sure that any independent compliance consultancy be tailored to the conduct at issue, Bandy said.

Multi-jurisdictional investigations. Berger also addressed how the Division approaches multi-jurisdictional investigations. If the SEC is involved at the outset, there should be both investigation and resolution coordination, he said. The staff is always assessing whether it is in the SEC’s best interest to pursue these cases given its limited resources but assured that once the SEC becomes part of the investigation, it is it the Commission’s interest to see it through.

He also advised that the SEC wants a global resolution to investigations and that it is not helpful when parties try to split regulators off and try to negotiate separately. Moving toward a global resolution will result in offsets, such as criminal restitution offsetting civil disgorgement, he said, pointing specifically to the parallel actions brought against Lumber Liquidators last month. Lumber Liquidators agreed to pay $6 million in disgorgement, which was offset from the DOJ’s action in which the company agreed to pay $33 million in criminal fines and forfeiture. Internationally, he gave the example of the litigation against Petrobras, which was subject to offsets involving non-U.S. enforcement actions.

Wells submissions. The staff gave some pointers on how to respond to a Wells notice and how not to respond. Chief Counsel Joe Brenner advised counsel to prioritize and focus on what really in dispute. A Wells notice will typically identify every statute and rule that the staff thinks was violated; however, it is not necessary to address each and every one in a Wells submission, Brenner explained. He advised counsel to be realistic on goals for the Wells submission, observing that if every single thing is challenged, the submission risks losing credibility.

Peikin, who has spoken publicly about the Wells process, asked whether counsel should include in its Wells submission what commissioners have said about Wells submissions in their public remarks. Brenner noted that the staff interacts with the commissioners on a daily and weekly basis and quoting what a commissioner has said publicly is generally not effective.

Regarding expert reports in a Wells submission, Brenner said that they can be effective if they are able to be admitted in court. However, he added that some seem designed just to inform the Division if the case ends up in litigation, the defendant’s counsel will be presenting an expert. Peikin also noted that some submissions try to get around page limits by using small fonts and very small margins, which he cautioned against because that just results in losing the attention of the staff.

Meeting with Division staff. Avakian asked what can be effective when counsel presents its views to Division staff in a meeting. Bridget Fitzpatrick, chief litigation counsel, first advised that it is not effective if counsel describe how experienced they are, how smart they are, and how the staff should be intimidated. She quipped that the SEC has gone up against some of the best trial lawyers in the country and will not be intimidated by such talk.

Instead of general proclamations about counsel’s litigation prowess, it would be more effective to provide specifics, such as explaining how testimony regarding specific document introduced at trial with a key witness would frustrate the Division’s attorneys during cross examination, Fitzpatrick explained. Peiken agreed, adding that it is effective if counsel can describe how they will beat the SEC at trial, and not just that they will beat the SEC at trial.