The SEC Opens Its Toolbox: Non-Prosecution and Deferred Prosecution Agreements

more+
less-

Last year the SEC announced it was adopting new procedures to encourage greater cooperation in its enforcement investigations, including the use of cooperation agreements, non-prosecution agreements and deferred prosecution agreements. Non-prosecution agreements and deferred prosecution agreements are typically used in criminal proceedings to encourage cooperation by important witnesses and provide fair and specific treatment of cooperating witnesses.

In the last few months, the SEC has begun using its new tools to encourage greater cooperation from companies. The SEC entered its first non-prosecution agreement in December 2010 with Carter’s Inc. In the Carter’s case the EVP of Sales, Joe Elles, allegedly gave substantial discounts to the company’s largest customer and hid them from the company. Because the company didn’t know, it did not recognize the discounts until later reporting periods, which caused the company’s results for the quarters in which the discounts were given to be artificially inflated. The SEC brought an action against Elles, but entered into a non-prosecution agreement with Carter’s. The SEC identified the following factors as relevant to its decision not to bring an action against Carter’s: (1) the “relatively isolated nature” of the unlawful conduct; (2) the company’s “prompt and complete” self-reporting of the misconduct to the SEC; and (3) the company’s “exemplary and extensive” cooperation in the inquiry, including a “thorough and comprehensive” internal investigation. The SEC did not require Carter’s to waive its attorney-client privilege.

The SEC recently announced its first use of a deferred prosecution agreement, with Tenaris S.A., a manufacturer of steel pipe products from Luxemburg, listed on the New York Stock Exchange. A world-wide internal investigation conducted by Tenaris’ outside counsel revealed Foreign Corrupt Practices Act violations in Uzbekistan, where Tenaris allegedly bribed Uzbek officials and made $5 million in profits from pipeline contracts. The company self-reported to the SEC and the Department of Justice, cooperated with the government, and made extensive efforts at correcting the violations.

The SEC said that Tenaris was an appropriate candidate for the first deferred prosecution agreement because of its “immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training.”

Under the deferred prosecution agreement, the SEC will not bring civil charges against Tenaris unless the SEC determines that the company has not complied with its obligations under the agreement. Although Tenaris shared the results of its internal investigation with the government, the agreement does not require it to waive the attorney-client privilege. Tenaris agreed to pay $5.4 million in disgorgement and interest.

By eliminating the Hobson’s choice of either cooperating and not knowing what will happen, or not cooperating and not knowing what will happen, the certainty provided by deferment and non-prosecution agreements will allow lawyers to better advise their clients on the consequences of self-reporting and corrective actions, and should make it easier for the SEC to secure cooperation from companies and individuals on a fair and reasonable basis.

The entire article includes a discussion of the use of non-prosecution and deferred prosecution agreements by the Department of Justice, and the DOJ’s Thompson Memorandum, McNulty Memorandum, and Filip Memorandum, and their effect on attorney-client privilege and director indemnification.

LOADING PDF: If there are any problems, click here to download the file.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Brad Hamilton, Jones & Keller, PC | Attorney Advertising

Written by:

more+
less-

Jones & Keller, PC on:

JD Supra Readers' Choice 2016 Awards
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:

Sign up to create your digest using LinkedIn*

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Already signed up? Log in here

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
×
Loading...
×
×