When I was a young attorney in the Enforcement Division of the Securities and Exchange Commission (SEC) back in the mid-to-late 1990s, the SEC did not have a formal cooperation program. There was thus no official means by which the SEC could either induce individuals to cooperate during the course of an investigation, or reward them for it. As a prosecutor, this was frustrating, as I recall instances where an individual under investigation had critical, insider information that if revealed would have made the case, but it never came to light as there was no upside for the target to speak the truth — it was simply safer and more prudent for him to plead the Fifth and deal with the consequences. In my opinion, the effectiveness of the SEC’s enforcement program suffered as a direct result, preventing it from being more proactive in identifying and halting fraudulent securities industry practices prior to the onset of the financial crisis.
Around five years ago, the SEC changed course. It formally adopted a cooperation program to incentive, recognize and, if appropriate, reward an individual’s substantial assistance. This change in approach was no doubt due to the SEC’s realization that while it is solely a civil law enforcement agency (it has no criminal powers despite what most people believe), it needed to start to act more like the criminal authorities –which have historically rewarded cooperators — if it wanted to meaningfully police complex securities fraud.
While the decision by securities defense counsel whether or not to cooperate an individual client under SEC investigation is a complex risk-reward calculus, I have found that where it has made strategic sense to do so, my clients have benefitted from the process. I represented the first individual cooperator in an insider trading case under the new SEC cooperation program with great success. As a result of my client’s prompt decision to cooperate, coupled with the nature of the information he provided, the SEC was able to make cases against others, and my client received a 75% reduction in the civil penalty assessed. (The SEC consistently touts this case as a poster-child of its individual cooperation program). I have also informally cooperated, without a formal cooperation agreement, clients who through proffers provided information to the SEC who were not subsequently charged. As a former SEC enforcement lawyer, I understand how the SEC conducts its investigations and build its cases. This, in turn, allows me to strategically prepare my clients to ensure that through truthful, credible and detailed assistance, they are in the best position to receive the maximum benefit from their cooperation.
Cooperating an individual client with the SEC is very much an art, and much less a science. It entails risks, particularly given that the SEC cannot and will not guarantee at the front-end of the process that your client’s cooperation will result in value to them, and if so, its extent. However, given the potential benefits of the SEC’s individual cooperation program, including leniency in charging decisions, reductions in disgorgement and civil monetary penalties, deferred prosecution agreements and decisions not to prosecute, SEC defense counsel should always consider cooperation as a potential strategic tool as part of an overall defense strategy.
David R. Chase, Esq., a former SEC prosecutor, is now an SEC defense attorney and represents individuals in SEC investigations and SEC litigation nationwide. You may contact him toll-free at:
800-760-0912 or e-mail at: david@davidchaselaw.com. The website of the Law Firm of David R. Chase, P.A., located in Fort Lauderdale, Fl., is: www.davidchaselaw.com.
