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Execs Face Up to 5 Years in Prison for Lying to SEC

Two former employees of a biotech have pleaded guilty to criminal charges of obstructing an SEC investigation.  The Justice Department accuses one of the defendants with testifying falsely before the SEC about his manipulative purchases and sales of the OTC-traded biotech.  The other employee is accused of providing a back-dated document to the SEC with the intent to obstruct the SEC’s investigation.  The two defendants face prison sentences of up to 5 years for obstructing an agency proceeding. 

Although the SEC only has civil enforcement powers, it can (and will) bring in the Justice Department if you lie to SEC investigators.  Better to take your civil medicine (fine or industry bar) than to wind up a guest of the state. 

Department of Justice Allows Credit for Identifying Only Senior Execs

The Department of Justice has revised its corporate prosecution policy to allow credit to corporations that identify senior officials without identifying every individual involved.  In criminal cases, the defendant corporation must identify “every individual who was substantially involved in or responsible” for the misconduct.  In civil cases, the corporation must identify every person “who was substantially involved” to earn maximum cooperation credit.  The new policy offers prosecutors discretion over the prior policy, which according to Deputy Attorney General Rod Rosenstein, made prosecutions more difficult, time-consuming, and inefficient.  Mr. Rosenstein made clear that “pursuing individuals responsible for wrongdoing will be a top priority in every corporate investigation.”


 Many defense lawyers had hoped that the Rosenstein-led Justice Department would completely rescind the Yates memo, which requires the prosecution of individuals and only allows cooperation credit if companies identified the wrongdoers.  The revised policy that focuses on senior officials and those substantially involved makes practical enforcement sense but probably offers little comfort to senior executives facing off against the Department of Justice. 

Hedge Fund CFO Barred and Fined for Unauthorized Money Movements

The former Chief Financial Officer of a now-defunct hedge fund was fined and barred from the industry for authorizing improper inter-fund transfers and other financial improprieties.  The SEC alleged that the CFO authorized the ongoing transfers of funds from an affiliated offshore fund to facilitate the activities of a cash-strapped on-shore funds.  The CFO continued the practice even after two subordinate accountants resigned after complaining that the practice did not comport with the funds’ governing documents or applicable accounting standards.  The SEC accused the CFO with aiding and abetting his firm’s activities that defrauded investment advisory clients.

OUR TAKE: The SEC will seek to hold individual officers accountable for the illegal actions of the firms they manage.  The SEC’s Enforcement Division has cited personal accountability as a core enforcement principle.


Chief Accounting Officer Barred and Fined for Approving CEO Expenses

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.  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.


SEC Enforcement Division Targets Financial Executives

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 Billion vs. $4 Billion 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?


SEC Enforcement Director Stresses Individual Liability in FCPA Cases


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.


SEC Chair Calls for “Zero Tolerance” Enforcement


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.


Large Hedge Fund Manager and CEO to Pay $413 Million to Settle Bribery Charges


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.