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“Game-Changer”? The SEC’s effort to foster cooperation with a reorganized Enforcement Division
January 19, 2010
Government Investigations and White Collar Defense Alert
Author(s): David A. Feldman

The SEC’s Division of Enforcement introduced two significant initiatives last week, one to foster increased cooperation in its investigations and one to reorganize the Division into five specialized national units. The cooperation initiative adopts techniques used by the Department of Justice—including cooperation letters, deferred prosecution agreements, and non-prosecution agreements—in an effort to obtain “invaluable and early assistance” from individuals aware of potential violations of the securities laws. While it will take time to determine the impact of these initiatives on Division of Enforcement investigations, it is essential that individuals and companies responding to SEC investigations be mindful of the new landscape.

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Heralding it as a “potential game-changer,” the SEC’s Director of the Division of Enforcement, Robert Khuzami, introduced last week a set of new standards and tools designed to foster cooperation by individuals and companies in enforcement actions.[1] That same day, Mr. Khuzami named unit chiefs for five specialized units within the Enforcement Division, as well as the head of the new Office of Market Intelligence.[2] Mr. Khuzami stated that each of the five national specialized units—asset management, market abuse, structured and new products, Foreign Corrupt Practices Act, and municipal securities and public pensions—will “benefit greatly” from the cooperation initiative.

The Division’s cooperation initiative recognizes the reality that under the existing SEC investigative regime, individuals often lack any meaningful incentive to cooperate proactively during an SEC investigation. To be sure, individuals and companies have long been subject to enhanced penalties in SEC actions—not to mention potential criminal prosecution for false statements, perjury or obstruction of justice—when their actions are perceived to reflect a lack of cooperation or truthfulness.[3] Reliable benefits for proactive cooperation, however, have been far more elusive. It is not hyperbole, therefore, to describe a program that offers the prospect of meaningful credit for cooperation with the SEC as a “potential game-changer.”

Whether or not the new initiative turns out to be an actual game-changer will depend upon how the SEC resolves the fact, acknowledged in its Enforcement Manual, that “there exists some tension between the objectives of holding individuals fully accountable for their misconduct and providing incentives for individuals to cooperate with law enforcement authorities.”[4] The extent to which the new standards and tools succeed in prompting individuals to share information with the SEC in circumstances where they would not otherwise have been inclined to do so will depend upon the SEC’s willingness and ability to provide rewards for cooperation sufficient to overcome the collateral risks and costs.

The cooperation standards, set forth in a new Section 6 of the Enforcement Manual entitled “Fostering Cooperation,” list four primary considerations for evaluating any credit to be awarded for an individual’s cooperation: (1) the assistance provided by the cooperating individual; (2) the importance of the underlying matter; (3) the societal interest in holding the individual accountable for his or her misconduct; and (4) the cooperating individual’s personal and professional profile, to the extent such consideration is in the public interest.[5]

In situations where these considerations indicate that some reward for cooperation by an individual (or company) is merited, the Enforcement Manual now includes additional new tools—long available to Department of Justice prosecutors in criminal investigations—for doing so:[6]

  • Cooperation Agreements. Enforcement staff may now enter a written agreement with a potential cooperating individual wherein the Division agrees to recommend that the individual receive credit for providing substantial assistance in connection with an investigation and related enforcement actions. Recommendations set forth in such a cooperation agreement will not be binding on the Commission, which may or may not act in accordance with the Division’s recommendations.
  • Deferred Prosecution Agreements. The Commission may enter a written agreement to forego an enforcement action in return for an agreement to cooperate fully and truthfully and comply with express prohibitions and/or undertakings during a period of deferred prosecution not to exceed five years.
  • Non-Prosecution Agreements. In “limited and appropriate circumstances,” the Commission may enter a written agreement not to pursue an enforcement action, in return for an agreement to cooperate fully and truthfully and comply with express undertakings. Non-prosecution agreements will not be entered into in the early stages of an investigation when the role of a cooperating individual and the value of cooperation are unclear. Non-prosecution agreements will almost never be available to individuals with prior securities violations on their record.

In addition to providing for these new tools, the SEC’s cooperation initiative also seeks to streamline the process for submitting witness immunity requests to the Justice Department for witnesses who have the capacity to assist in its investigations and related enforcement actions. The Commission has now delegated authority to the Director of Enforcement to make immunity requests to the Department of Justice, thereby eliminating a level of review.[7]

Finally, the initiative codifies guidelines on the use of proffer agreements. The guidelines provide that statements made by a person may not be used against that individual in subsequent proceedings, except as a source of leads to discover additional evidence and for impeachment or rebuttal purposes. In a related tool, the initiative provides that Assistant Directors may orally inform a person that the Division does not anticipate recommending an enforcement action based upon the evidence currently known to the staff.[8]

The new tools, and the more familiar ones referenced in the Enforcement Manual, constitute a “non-exclusive list of cooperation tools” among the “wide spectrum of tools available to the staff for facilitating and rewarding cooperation in its investigations and related enforcement actions.”[9] While the core question of what an individual must do in order to obtain substantial cooperation credit necessarily depends upon the unique facts and circumstances of each case, the new Enforcement Manual provisions reinforce Mr. Khuzami’s August 2009 remarks that “the purpose of these tools is primarily to reward extraordinary cooperation” that results in “tangible benefits for investors and the Enforcement program,” and are not for “being lenient for the sake of leniency, or for rewarding persons for simply complying with routine or expected requests.”[10] In this regard, the Enforcement Manual specifies that the Commission assesses a cooperating individual’s assistance by considering, among other things, whether the cooperation substantially assisted the investigation; the timeliness of the cooperation, including whether an individual offered to cooperate before or after obtaining knowledge of a pending investigation; the time and resources conserved as a result of the individual’s cooperation; and whether the individual authorized or encouraged others to assist the staff who might not otherwise have participated in the investigation.[11]

In its press release announcing the new program, the SEC stated that the cooperation initiative is “expected to result in invaluable and early assistance in identifying the scope, participants, victims and ill-gotten gains associated with fraudulent schemes.”[12] It is evident, however, that individuals are often able to provide “invaluable and early assistance” precisely because they were active participants in conduct that may violate the securities laws. It remains to be seen whether or not the SEC will use the tools available under its cooperation initiative with sufficient frequency and magnitude to convince such individuals to provide “invaluable and early” assistance where they would not have done so previously.

* * * * *

Based on the SEC’s description of how its cooperation initiative will be implemented and utilized, any individual or company considering pursuing this route with the Enforcement Division should have counsel experienced in both SEC Enforcement practices and the Department of Justice cooperation mechanism, upon which the SEC’s cooperation initiative is based. The attorneys in Nixon Peabody’s Government Investigations and White Collar Defense practice group bring precisely this blend of experience to their representation of individuals and companies in SEC investigations. With several Department of Justice alumni in its ranks, and over a dozen partners with experience representing individuals and companies at all stages of SEC investigative actions, Nixon Peabody’s attorneys are well situated to assist anyone who is considering pursuing the new cooperation initiative.


  1. “SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations” (Jan. 13, 2010), http://www.sec.gov/news/press/2010/2010-6.htm. [Back to reference]
  2. “SEC Names New Specialized Unit Chiefs and Head of New Office of Market Intelligence” (Jan. 13, 2010), http://www.sec.gov/news/press/2010/2010-5.htm. [Back to reference]
  3. See, e.g., SEC v. Lybrand, 281 F. Supp. 2d 726, 730-32 (S.D.N.Y. 2003) (imposing third tier penalties based on factors including “defendants’ lack of cooperation and honesty with authorities”), aff’d sub nom. SEC v. Kern, 425 F.3d 143 (2d Cir. 2005); SEC v. McCaskey, 98 Civ. 6153, 2002 U.S. Dist. LEXIS 4915, *50-51 (S.D.N.Y. March 26, 2002) (third tier penalty supported by defendant’s “failure promptly to own up to his wrongdoing”); United States v. Quattrone, 441 F.3d 153 (2d Cir. 2006) (conviction on obstruction of justice and witness tampering charges related to an ongoing SEC enforcement investigation reversed and remanded). [Back to reference]
  4. 17 CFR § 202.12 (Policy Statement of the Securities and Exchange Commission Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions); Enforcement Manual (January 13, 2010), § 6.1.1, http://www.sec.gov/divisions/enforce/enforcementmanual.pdf#6.2. [Back to reference]
  5. Enforcement Manual, § 6.1.1. [Back to reference]
  6. Enforcement Manual, § 6.2. [Back to reference]
  7. Enforcement Manual, § 6.2.5. [Back to reference]
  8. Enforcement Manual, § 6.2.1. [Back to reference]
  9. Enforcement Manual, § 6.2. [Back to reference]
  10. Robert Khuzami, Director of Division of Enforcement, U.S. SEC, “Remarks Before the New York City Bar” (Aug. 5, 2009), http://www.sec.gov/news/speech/2009/spch080509rk.htm. [Back to reference]
  11. Enforcement Manual, § 6.1.1. [Back to reference]
  12. “SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations” (Jan. 13, 2010), http://www.sec.gov/news/press/2010/2010-6.htm. [Back to reference]

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.