As we have previously discussed, the Securities and Exchange Commission ("SEC") recently issued guidelines for assessing individual cooperation in investigations and enforcement actions as part of a set of new initiatives designed to help the SEC Staff accelerate investigative proceedings. (See Davis Polk Client Newsflashes, SEC Enforcement Director Introduces New Unit Chiefs and Cooperation Incentives and SEC Enforcement Division Releases Detailed Information Regarding Cooperation Initiatives.) On February 23, at a program co-sponsored by the New York City Bar and the District of Columbia Bar, SEC Deputy Director of Enforcement Lorin Reisner provided further insight on the cooperation initiatives; below we summarize select highlights relating to (a) who may be eligible to take advantage of these cooperation mechanisms, (b) the potential consequences to an individual of cooperating, or refusing to cooperate, and (c) the impact of these initiatives on multiple representation scenarios.
Eligibility for Cooperation Initiatives
The SEC’s recent policy statement (17 C.F.R. § 202.12) details the factors that the Commission and Staff plan to weigh when deciding whether, and how extensively, to credit individual cooperation in investigations and enforcement actions. At the February 23 program, Deputy Director Reisner reiterated that the SEC is looking to extend credit for cooperation to individuals who have knowledge that is useful to the SEC and are less culpable than others against whom the information may be used. Reisner stated firmly that the SEC will not extend such benefits to individuals who are responsible for egregious conduct or who, in the SEC’s view, are in a position to do further harm to investors. He noted, however, that the fact that an individual may have acted with scienter with respect to the conduct at issue will not necessarily render the individual ineligible for the benefits of the cooperation initiatives.
Moreover, Reisner indicated that the SEC will only extend cooperation credits to individuals who are “motivated and effective” as cooperators. By this, he explained, the SEC expects individuals to be candid and thorough in the information they provide the SEC; Reisner was careful to note that the Staff is not seeking to limit counsel’s ability to advocate on behalf of the individual with respect to the terms of cooperation or the credit to be received.
Reisner also addressed the scenario in which an individual has cooperated with a company’s internal investigation, the results of which are then shared by the company with the SEC. Reisner indicated that generally such an individual would not have the ability to receive cooperation credit from the SEC in exchange for the prior cooperation with the company’s investigation.
Consequences of Providing Cooperation or Refusing to Cooperate
At the February 23 program, Reisner reiterated that because the ultimate determination of disposition and penalties is reserved to the Commission, the Staff cannot make commitments in negotiating cooperation arrangements. He did say, however, that greater credit will be given to those who cooperate early, particularly those who contact the SEC before an investigation has been opened.
Significantly, Reisner announced that there will be negative consequences for individuals who refuse to enter cooperation agreements after the SEC asks them to do so; such individuals should expect the Enforcement Division to seek “the full extent of penalties and remedies available” and bring the individual’s refusal to cooperate to the attention of the Commission. The SEC’s new initiatives therefore appear to create not only strong incentives to provide cooperation but substantial disincentives to refusing to do so.
Reisner addressed concerns from defense counsel that it is difficult to assess the likely benefits of cooperation before seeing these new initiatives in action. He remarked that the SEC’s program will only succeed if the SEC can build a record of individuals providing cooperation and receiving benefits in return. Reisner noted that the SEC’s litigation releases will indicate when an individual’s cooperation has been provided. He expects the Enforcement Division in the near future to begin resolving cases in which individuals have provided the SEC cooperation pursuant to these new initiatives.
Comments on Multiple Representation
Finally, we note Reisner’s comments on the impact of the cooperation initiatives on potential multiple representation scenarios. Reisner observed that credit likely will be limited to the first person who cooperates, and that a cooperator’s assistance could well implicate other individuals. Accordingly, Reisner noted that when considering whether joint representation is appropriate in a given case, counsel should consider each potential client’s eligibility for cooperation credit and the possible implications of such cooperation for other existing or potential clients. While Reisner did not say so explicitly, Reisner’s comments could be taken to signal the Staff’s enhanced scrutiny of multiple representation scenarios more generally, including those in which counsel represents both the company as well as individual officers or employees.