The SEC barred and fined a public company Chief Accounting Officer for approving undisclosed expense reimbursements for the company’s CEO. The CEO ultimately repaid the $11.285 worth of perquisites incurred over a 5-year period for personal items such as private aircraft usage, cosmetic surgery, cash for tips, medical expenses, charitable donations, and personal travel expenses. The SEC asserts that the CAO approved the expenses in violation of company policy and without appropriate backup documentation and then failed to disclose the reimbursements in the company proxy statements. The SEC charges the CAO with causing the company to file false reports.
OUR TAKE: We wrote on Friday that the SEC is looking to hold financial executives accountable (see https://cipperman.com/2017/11/17/sec-enforcement-division-targets-financial-executives/). In this case, the SEC doesn’t even allege that the CAO derived any personal benefit by approving his boss’s expenses. Regardless, the SEC holds him accountable for allowing wrongdoing to occur.
In its 2017 fiscal report, the SEC’s Enforcement Division cites individual accountability as one of its core enforcement principles. The report expresses the Enforcement Division’s view that “individual accountability more effectively deters wrongdoing.” Since Chairman Clayton took office, the SEC has charged an individual in more than 80% of standalone enforcement actions. The report notes that it can be more expensive to pursue individuals, but “that price is worth paying.” The report notes a modest decrease in filed enforcement actions and recoveries since 2016: 754 vs. 784 cases (excluding municipal cases) and $3.8 Million vs. $4 Million in total money ordered.
OUR TAKE: “Just because you’re paranoid doesn’t mean they aren’t after you.” (Joseph Heller) The data and the explanation imply that the SEC will prioritize prosecuting individuals, even if the money ordered is smaller than in institutional actions, because of the fear and deterrent effect. If financial executives need another reason to engage a best-in-class compliance program, how about protecting yourselves from a career-ending enforcement action?
The SEC’s Enforcement Director, Andrew Ceresney, recently described how the SEC has prioritized FCPA (Foreign Corrupt Practices Act) enforcement with a focus on individual liability. Mr. Ceresney said the SEC has brought 21 FCPA cases and has taken “a lead role in fighting corruption worldwide.” Describing some recent FCPA enforcement cases, Mr. Ceresney highlighted the Enforcement Division’s “renewed emphasis on individual liability,” which includes holding CEOs accountable for ignoring red flags. Mr. Ceresney explained that “pursuing individual accountability is a critical part of deterrence.”
OUR TAKE: Individual liability should be a significant concern when the SEC and DoJ enforce the FCPA, which can carry criminal penalties. Firms should ensure a monitoring system that includes adequate follow-up on potential red flags.
In a recent speech, SEC Chair Mary Jo White called for “zero tolerance” for white collar enforcement and advocated for changing the law to make it easier for prosecutors and regulators. Ms. White described the SEC’s “priority that we are placing on establishing individual liability” with a focus on holding corporate officers accountable as the “core pillar of any strong enforcement program.” Ms. White argued for changes in the law that would allow prosecutors and regulators to punish an executive without showing that s/he participated or caused the wrongdoing. Ms. White lauded the UK regime that allows prosecution of senior executives for misconduct in their areas of responsibility if they failed to take reasonable steps to prevent the misconduct. Ms. White also expressed her support for deferred compensation arrangements that hold back compensation until a possible prosecution period has run. Ms. White also expressed support for a more-empowered SEC: “Although I often wish it were otherwise, the SEC does not have the authority to send anyone to jail.”
OUR TAKE: While the regulatory emphasis may change with a new Administration, both parties appear to favor heavier-handed enforcement against individual corporate actors. Other developed economies (e.g. UK, Japan, Canada, France) take a much more pro-government approach to private sector enforcement.
A large hedge fund manager and its CEO agreed to pay over $413 Million in civil and criminal penalties to the SEC and the Justice Department in connection with bribing foreign officials to invest sovereign wealth funds into the respondents’ investment funds. The SEC asserts that the firm did not follow its own anti-corruption procedures by failing to conduct required enhanced due diligence when concerns were raised. Although the SEC does not accuse the CEO of knowing about the bribes, they fault him and the CFO for approving the transactions despite red flags and warnings. As part of the settlement, the firm must hire a dedicated CCO that does not have any other job at the company. The SEC and DoJ allege several violations of the Foreign Corrupt Practices Act, the Investment Advisers Act, and the Securities Exchange Act. The SEC’s Enforcement Director admonished: “Senior executives cannot turn a blind eye to the acts of their employees or agents when they became aware of suspicious transactions…”
OUR TAKE: As firms go global to attract assets, the risk management infrastructure to ensure compliance with the FCPA and other laws (including laws of the local jurisdiction) must follow.