SEC’s First Deferred Prosecution Agreement With an Individual

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The Securities and Exchange Administration announced that it entered into its first deferred prosecution agreement with an individual. What’s remarkable is that this is first time the SEC has done so.

Back in early 2010, the SEC announced that it had launched a new enforcement cooperation initiative. The SEC did a big (for the SEC) marketing campaign to announce initiative. The SEC even went so far as to allow me and a few other bloggers to chat with then SEC Enforcement Director Robert Khuzami. The SEC set out how it will evaluate whether, how much, and in what manner to credit cooperation, to serve as an incentive to report violations and cooperate fully and promptly in enforcement cases.

It’s been almost three years and the SEC has finally found a bad guy willing to cooperate. Scott Herckis served as administrator for Connecticut-based Heppelwhite Fund LP. The fund was run by Berton M. Hochfeld. The SEC filed an emergency enforcement action against Hochfeld in November 2012 for misappropriating more than $1.5 million from the fund and overstating its performance to investors. The SEC’s action halted the fraud.

Herckis started as the Heppelwhite fund administrator in 2010. Hochfeld asked for transfers from the fund’s account to Hochfeld’s account. Eventually those transfers ended up getting very large and Herckis realized the fund’s NAV was overstated. He resigned and contacted the SEC.

“We’re committed to rewarding proactive cooperation that helps us protect investors, however the most useful cooperators often aren’t innocent bystanders,” said Scott W. Friestad, an associate director in the SEC’s Division of Enforcement. “To balance these competing considerations, the DPA holds Herckis accountable for his misconduct but gives him significant credit for reporting the fraud and providing full cooperation without any assurances of leniency.”

Herckis cannot serve as a fund administrator or otherwise provide any services to any hedge fund for a period of five years, and he also cannot associate with any broker, dealer, investment adviser, or registered investment company.  The Deferred Prosecution Agreement requires Herckis to disgorge approximately $50,000 in fees he received for serving as the fund administrator.

I suppose that’s not a bad result for Herckis. It’s hard to assess his culpability in the fraud. Herckis looks more like a whistleblower. However, it appears that he continued to cooperate with Hochfeld’s fraud long after he realized it was wrong. The fraud would not have happened without Herckis allowing the transfers.

It’s good to see that the SEC is using its shiny new tools. The SEC announced its first Deferred Prosecution Agreement against a company back in May 2011.