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Securities and Exchange Commission (“SEC”) Director of Enforcement Robert Khuzami took three further steps Wednesday to make good on his promise to accelerate and improve the SEC’s enforcement processes. In particular, he named Chiefs for five new specialized investigative units, initiated the Office of Market Intelligence, and announced additional incentives and guidelines for cooperating witnesses.
These initiatives were key features in a speech by Director Khuzami to the New York City Bar on August 5, 2009 and are designed to increase and accelerate investigations and enforcement proceedings. (See Davis Polk Client Newsflash, SEC Announces Significant Enforcement Initiatives). The SEC already has begun implementing other elements of Khuzami’s speech, including delegation of more authority to the enforcement staff and curbing the use of tolling agreements in enforcement investigations. One initiative from Khuzami’s August 5 speech that remains a work in progress is a “flattening” of the Enforcement Division management structure by “redeploying” Branch Chiefs to eliminate an additional layer of management.
New Investigative Unit Chiefs
In a press conference Wednesday, Director Khuzami appointed heads of five new investigative units, as follows:
- Market Abuse Unit Chief: Daniel Hawke
Focus on large-scale market abuses, insider trading rings and complex manipulation schemes;
- Structured and New-Products Unit Chief: Kenneth R. Lench
Focus on complex derivatives and financial products;
- Foreign Corrupt Practices Act Unit Chief: Cheryl Scarboro
Focus on the bribery of foreign officials by U.S. companies;
- Municipal Securities and Public Pensions Unit Chief: Elaine C. Greenberg
Focus on municipal securities and public pension fund abuses;
- Asset Management Unit Co-Chiefs: Bruce Karpati and Robert Kaplan
Focus on investment advisers, investment companies, hedge funds, and private equity funds.
Khuzami described the units as forward-looking, and stated they will be provided with additional resources, including technological support and personnel with industry knowledge and market expertise. Each of the newly-named Chiefs has worked for years at the SEC in other roles.
Office of Market Intelligence
At the press conference, Khuzami also announced that Thomas A. Sporkin will head the new Office of Market Intelligence. The Office will act as an integrated monitoring system to more timely uncover financial fraud and refer it to the appropriate divisions within the SEC. The office will be responsible for gathering and analyzing tips and complaints, as well as working with several advanced information databases to identify market trends that pose risks to investors.
Cooperating Witnesses
Finally, and importantly, Khuzami introduced new cooperation incentives – which he described as a “game changer” in the SEC’s efforts to fight financial fraud – geared at providing new tools to help investigators gain cooperation from individuals and corporations. These tools mirror ones that have long been used by the Justice Department, and are outlined in a new chapter of the SEC’s Enforcement Manual titled, “Fostering Cooperation.” The new tools include:
- Cooperation Agreements – formal agreements whereby the cooperating individuals or corporations will receive credit from the Enforcement Division staff when it comes time for the staff to make an enforcement recommendation. The agreements may be entered into by the Director of the Division of Enforcement and those senior Enforcement Division staff to whom the Director has delegated authority. The Enforcement Manual specifies that such agreements may not contain assurances about how the Commission will ultimately act on the Division’s enforcement recommendations.
- Deferred Prosecution Agreements (“DPAs”) – formal agreements whereby the SEC agrees to forego an enforcement action against the cooperator if the individual or company complies with the requirements of the agreement during a period of deferred prosecution that should not exceed five years. Unlike cooperation agreements, DPAs require Commission approval.
- Non-Prosecution Agreements (“NPAs”) – formal agreements whereby the SEC agrees not to pursue an enforcement action against the cooperator if the individual or company cooperates fully. These require Commission approval and are to be used in “very limited” circumstances. The Enforcement Manual guidelines provide that NPAs generally will not be an option for individuals who have previously violated the federal securities laws.
In describing these new provisions, Khuzami placed a premium on the timeliness of cooperation, emphasizing that these agreements mainly will be offered to those who agree to cooperate early in the investigation, and that latecomers would “rarely” qualify. However, the SEC will not enter into NPAs until the facts are well enough developed for the SEC to fully understand the cooperator’s role in the conduct at issue.
It is unclear what the immediate impact of these changes will be. In the short term, while logistical hurdles remain (staffing these groups, etc.) it is a good bet that all of the new units will be eager to prove their commitment to their mission with aggressive investigations and cases. It is not yet clear how, and how often, the new cooperation provisions will be used. However, at a minimum, they provide a new set of options for consideration by those who discover potential securities law violations (within their own organizations or elsewhere) or who find themselves in the midst of an SEC enforcement inquiry or investigation. Perhaps most notably, the newly announced framework includes two new options for resolving an investigation – DPAs and NPAs – the use of which in the criminal context has increased significantly in the last ten years or so.
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