SEC’s New Enforcement Cooperation Initiative

The Securities and Exchange Commission announced a new initiative encouraging cooperation. They put on a big media blitz. Big enough that they even allowed me to ask a question of SEC Enforcement Director Robert Khuzami.

For the first time, 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.

The SEC will have some new cooperation tools at its disposal:

  • Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.
  • Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.
  • Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.

One thing that came out of my discussion with Khuzami (I’m not sure I should call him Rob.) is that the SEC is looking towards the Department of Justice and criminal prosecutions on how to use these tools. But the SEC, as a civil enforcement agency, is not used to having the benefit of these tools.

Plus, the enforcement division can only make a recommendation to the Commission with a cooperation agreement. The Commission can ignore the cooperation and still bring down its full hammer on a someone even if they are a whistle blower and cooperating with the enforcement division. The cooperation message I was hearing from the SEC did not give me the warm fuzzies.

Nonetheless, the new tools should encourage cooperation and be beneficial to SEC Enforcement. For individuals, they have the prospect that they may not be prosecuted. Companies may also induced by being able to avoid the filing of the typical SEC complaint, with pages and pages of misconduct.

To publicize the new cooperation initiative, the SEC even assembled a new Enforcement Cooperation Initiative website. The best publicity will be an individual or company benefiting from cooperation.

Sources:

Social Networking is Serious Business – Presentation Materials

I  joined John Pepper, the CEO of Boloco and Russ Edelman the CEO of Corridor Consulting at meeting of the New England Chapter of AIIM on Friday. The topic was “Social Networking is Serious Business.”

Russ started us off with a great background on Web 2.0 and social networking tools.

Here is the slidedeck he used:

AIIM New England Social Networking Presentation

John showed how he uses web 2.0 tools as part of his business. It was an impressive display of how he listens to his customers. My favorite story was John seeing a tweet from a customer in one of the Boloco locations complaining the background music was too loud. John called up the store manager and told him to turn it down. The customer was happy in minutes. We were also happy that John handed out Boloco cards for some free burritos.

Being the lawyer and compliance guy on the panel, I focused on the regulatory, compliance and legal issues related to web 2.0 / social networking. I showed some of the downside and the ways to get yourself in trouble. In other words, I put the emphasis on the “serious” part in the presentation name.

Here is my slidedeck:

Social Networking is Serious Business – AIIM Presentation

Since my slides are mostly images instead of words, you may be wondering what I was saying. You can see my notes along with the slides: Social Networking is Serious Business. Hosted on JDsupra.

A big thanks to the New England Chapter of AIIM for inviting me.

Martin Luther King, Jr.

I Have a Dream – Address at March on Washington August 28, 1963.

“I have a dream that one day this nation will rise up and live out the true meaning of its creed: ‘We hold these truths to be self-evident, that all men are created equal.'”

“Let freedom ring. And when this happens, and when we allow freedom ring—when we let it ring from every village and every hamlet, from every state and every city, we will be able to speed up that day when all of God’s children—black men and white men, Jews and Gentiles, Protestants and Catholics—will be able to join hands and sing in the words of the old Negro spiritual: “Free at last! Free at last! Thank God Almighty, we are free at last!”

Sources:

Compliance Bits and Pieces for January 15

Here are some interesting compliance, risk and ethics stories from the past week:

Robert Kennedy, the Travel Act and the FCPA by Thomas Fox in Tfoxlaw’s Blog

Robert Kennedy’s contribution is that while Attorney General, he urged Congress to enact the Travel Act in 1961 which was passed as part of the same series of bills as the Wire Act and was a part of his program to combat organized crime and racketeering. The Travel Act is aimed at prohibiting interstate travel or use of an interstate facility in aid of a racketeering or an unlawful business enterprise.

New Cooperation Tools, Units An Enforcement Game Changer by Melissa Klein Aguilar for Compliance Week

Forging ahead with the revamp of its Enforcement Division, the Securities and Exchange Commission unveiled new tools to incentivize individuals and companies to cooperate with the enforcement staff during investigations, including deferred- and non-prosecution agreements and a so-called Seaboard Memo for individuals. For the first time, the SEC set out in a new policy statement how it will evaluate whether, how much, and in what manner to credit cooperation by individuals, to serve as an incentive for people to report violations and cooperate fully and promptly in enforcement cases.

Employee Wrongdoing: Drawing the Line by Chris MacDonald on The Business Ethics Blog

Should companies ever tolerate unethical behaviour in the workplace? Never? What about really small stuff? What about really important employees? How strictly should they monitor employees? Won’t intense scrutiny hurt morale?

Earning Cooperation Credit in an FCPA Case by Thomas Gorman for SEC Actions

For corporations, the SEC, like the Department of Justice and other federal law enforcement agencies, has long held out the prospect of credit in the charging process in exchange for cooperation. While there is no talismanic test which will guarantee a company that it can secure enough credit to avoid being charged, the SEC’s Seaboard Release, discussed here, contains an example of a company that did in fact earn sufficient credits and discusses general principles regarding cooperation.

Nevada and New Hampshire Data Security and Privacy Laws Take Effect from the Privacy & Information Security Law Blog by Hunton & Williams LLP

On January 1, 2010, two important state data security and privacy laws took effect in Nevada and New Hampshire. The laws create new obligations for most companies that do business in Nevada and for health care providers and business associates in New Hampshire.

New Social Media Policies Database

Thumbs-up approved with a blue filter

I assembled a collection of social media policies: Social Media Policies Database.

So far I have 117 a bunch in the database. That’s a very small number, but I think most companies want to keep their policies private. If I am missing any, please leave a comment letting me or send me an email: [email protected].

I have added a column for industry. So far I have the following industries:

  • Education
  • Finance
  • Government
  • Healthcare
  • Law firm
  • Media
  • Non-profit
  • Professional services
  • Retail
  • Technology

One thing that really stuck out is the varied names for the policies.  “Social media guidelines” with 9 and “social media policy” with 13 were the most popular names.

Questions and Answers with Robert Khuzami

After the news conference announcing the Rearrangement of its Enforcement Program, the Securities and Exchange Commission offered a group of bloggers the chance to ask questions to Robert Khuzami, the Director of Enforcement. (It must have felt like Obi-Wan stepping into the cantina full of low-life scoundrels.)

The blogging participants:

Mr. Khuzami let us know that the specialized units and cooperation initiatives came out of the self-assessment they conducted last year. Now that the heads of the new units have been made, those heads will start filling out their ranks.

Bruce started off questions by asking for more information on the new Office of Market Intelligence. This unit is combining two existing units, Market Surveillance and Internet Enforcement. It sounds like this will be a big source of information flow for the SEC with lots of complaints and charges coming in one place, getting filtered and sent to the right people for the appropriate action.

I asked about the creation of the new specialized units which are great for expertise, but may push information into silos. Mr. Khuzami pointed out that one of the current problems is that information is currently too diffuse across the SEC. There is a going to be hybrid approach. Not everything is going to end up in these units. He thinks expertise is very important. These units are going to be national in scope, so the people will spread out across the regional offices.

Laura Richman wanted to know if the SEC Commissioners are going to be comfortable with the new cooperation protocols. The enforcement division can only make a recommendation. It’s up to the Commission to decide whether to prosecute or settle. (This is unlikely to give the warm fuzzies to someone who is thinking about acting as a whistleblower or a company cooperating with an issue.)

Todd Sullivan was surprised that the cooperation initiatives were not already available to the SEC. Mr. Khuzami pointed out that criminal prosecutions have used cooperation strategies for a long time. It’s a new concept to civil proceedings.

Cate wanted to know if the SEC could develop the experience or tools to differentiate between proprietary trading versus market making. The SEC wants better information.

Francine wanted to know if the SEC will step up its enforcement actions against the accounting firms. Timeliness is key. If there is a long time between the misconduct and the prosecution, then there is a lost opportunity to stop others by setting an example.

Mr. Khuzami pointed out the SEC has been through a tough year but his group wants to use their professional skills and do good work. He thinks the Division is coming together and moving forward in a positive direction.

I want to thank Mark Story, the SEC’s Director of New Media, for inviting me to the press conference and Rob (I think I can call him that now) for taking the time to talk with us.

SEC Rearranges its Enforcement Program

The Securities and Exchange Commission reorganized its enforcement division. Enforcement Director Robert Khuzami announced a new program announced the creation of new units.

First, the SEC are expanding the whisteblower program. They are calling it a “cooperation program.”

Then there are five new units in the enforcement division.

Asset Management Unit

The unit specializing in asset managers, including hedge funds and private-equity firms, is set to be jointly run by Bruce Karpati, who has run the agency’s hedge-fund working group for the past several years, and Robert Kaplan, another SEC veteran.

Mr. Karpati was founder and head of the SEC’s Hedge Fund Working Group, and has served as Assistant Regional Director for the New York Regional Office of the SEC. Earlier, he was a Branch Chief and Attorney in the Division of Enforcement at the agency. Previously, Mr. Karpati was an Associate at Dechert LLP in Washington, D.C..

Mr. Kaplan has served as Assistant Director of the SEC’s Division of Enforcement. He previously held positions as Assistant Chief Litigation Counsel and Senior Counsel/Staff Attorney in the Division. Earlier, he was an Associate with Morgan, Lewis & Bockius LLP in New York.

Market Abuse Unit

Daniel Hawke, head of the Philadelphia office, was selected to run the market abuse unit, which will focus on insider-trading and market-manipulation cases.

Mr. Hawke is Director of the SEC’s Philadelphia Regional Office. He joined the SEC’s Philadelphia office as Associate Regional Director, and previously served in the Washington, D.C. office as Branch Chief and Staff Attorney in the Enforcement Division. Earlier, he was a Litigation Partner at Tucker, Flyer & Lewis LLP in Washington, D.C.

Structured and New-products Unit

Kenneth Lench will run the structured and new-products unit, which will focus on derivatives and newly developed products.

Mr. Lench has served as Assistant Director, Branch Chief, Assistant Chief Counsel, and Senior Counsel/Staff Attorney with the SEC’s Division of Enforcement. Earlier, he was a Senior Attorney with the SEC’s Division of Corporation Finance, and an Associate with Sills Cummis P.C. in Newark, N.J.  (Mr. Lench I have the same college/law school combination:  J.D. from Boston University School of Law, and a B.A. from Brandeis University.)

Foreign Corrupt Practices Act Unit

Cheryl Scarboro will be named chief of the agency’s unit that investigates foreign bribery by corporations.

Ms. Scarboro has served as Associate Director, Assistant Director, Deputy Assistant Director, and Staff Attorney in the SEC’s Division of Enforcement. She also was Counsel to SEC Chairman Arthur Levitt, Jr.. Earlier, she was an Associate at Sutherland, Asbill & Brennan LLP in Washington, D.C.

Municipal-Securities and Public Pension Unit

Elaine Greenberg, a veteran of the Philadelphia office, has been tapped to run the municipal-securities unit. This will also include the new focus on pay-to-play.

Ms. Greenberg is the Associate Regional Director of the Philadelphia Regional Office of the SEC and has served as the Co-Chair of the Division’s national Municipal Securities Working Group. Earlier, she was Assistant Regional Director, Branch Chief, and Staff Attorney in the Philadelphia office.

Beyond these five new units there are two other initiatives.

Office of Market Intelligence

The SEC also created a new Office of Market Intelligence that will assume the responsibilities of the Internet enforcement unit and add new duties, such as handling tips and referrals. Tom Sporkin will lead this office.

Cooperation

The SEC also wants to encourage greater cooperation from individuals and companies in the agency’s investigations and enforcement actions. The new cooperation tools, not previously available in SEC enforcement matters, include:

  • Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.
  • Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.
  • Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.

Sources:

SEC News Conference on its Enforcement Program

Bruce Carton of Securities Docket, Francine McKenna of Re: The Auditors and I are attending the SEC’s news conference virtually and taking notes using the CoverItLive tool embedded below.

Ethics of Congressional Stock Ownership

The Washington Post published a story using Congressman John Dinghell as an example of the ethics issues involved when you have an investor lawmaker: Dingells and GM illustrate limits of congressional conflict-of-interest rules. Kimberly Kindy and Robert E. O’Harrow Jr. use Congressman Dinghell because of his financial connection with General Motors. This connection was one both of capital and income. His wife was an executive at General Motors and they held a significant amount of GM stock. (She no longer works for GM and old GM stock… well you know what that is worth.)

I did not find the Dinghell example to be compelling. Congressman Dinghell represents metropolitan Detroit. His constituents are just as interested in the future of the automotive business as he is. It seems to me that his personal interests are aligned with those of his district. He and his wife were up front about their ownership of GM and their connection with the company.

That is not to say that legislators’ ownership of stock is not a problem. Uncertainty created about lawmakers’ motivation undermines confidence in Congress and the political process. It is often impossible to know whether the lawmaker is acting in the interest of citizens or their own portfolios.

Insider Trading

On top of that, the lawmakers on Capitol Hill are not prevented from trading on stock with inside information. Congressional portfolios have regularly outperformed those of average Americans over the years. There

Availability of Records

Over at the Sunlight Foundation they decided to drill down further at look at the availability of Congressional ethics filings. Daniel Schuman found that many ethics filings are required to be publicly reported, but are not available online and that many ethics filings are not publicly reported. A cynic would say that Congress does not want this information to be widely available.

References:

SUPERfreakonomics and Compliance

superfreakonomics

Steven D. Levitt and Stephen J. Dubner are back putting the freak in economics. As they did in Freakonomics, SUPERfreakonomics uses economic analysis to give some insights into actual human behavior.

When the original Freakonomics came out it was very original. Since then other books have hit the mainstream trying to do the same thing, most notably Malcolm Gladwell. SuperFreakonomics is good but comes across as much less original than the original. There are many other reviews of the book by people more competent at book reviews than me. The authors’ take on global warming has stirred up lots of controversy.

SuperFreakonomics has plenty of stories that compliance professionals should find interesting. It’s certainly worth your time to read the book.

One item in the book that caught my interest was some research by Melissa Bateson in her department’s break room. Faculty members paid for coffee and beverages by dropping money into an “honesty can.” Each week professor Bateson posted a new price list. She didn’t change the prices, but she did post a different photograph on the list each week. She alternated between using a picture of flowers and using a picture of human eyes.

i'm watching you

When the eyes were watching, nearly three times as much money ended up in the honesty can. Cues of being watched enhance cooperation in a real-world setting (.pdf) by Melissa Bateson, Daniel Nettle and Gilbert Roberts, published in Biology Letters 2006.

“We believe that images of eyes motivate cooperative behaviour because they induce a perception in participants of being watched. Although participants were not actually observed in either of our experimental conditions, the human perceptual system contains neurons that respond selectively to stimuli involving faces and eyes, and it is therefore possible that the images exerted an automatic and unconscious effect on the participants’ perception that they were being watched.”

Maybe I will scrap using my corporate signature in email and use that last set of eyes.

What are your thoughts?
eyes im watching you