In January, 2010, the Securities and Exchange Commission (“SEC”) announced its Enforcement Cooperation Initiative (“Initiative”), which provided the SEC with the ability to offer certain individuals or entities immunity or other preferential treatment in exchange for information about illegal activities and/or cooperation with the SEC in connection with SEC enforcement actions. These techniques, such as cooperation and immunity agreements, or deferred and non-prosecution agreements were adopted by the SEC as a result of their effectiveness against organized crime investigations and the then recent hires by the SEC from the U.S. Attorney’s Office which regularly employs those tools.
For a full description of the types of agreements in which the SEC may enter with an enforcement target or other “person of interest,” see the 2013 Enforcement Manual HERE. Since the Initiative began, the SEC has entered into thirteen cooperation agreements, three deferred prosecution agreements and four non-prosecution agreements. See those agreements on the Initiative website HERE.
On November 12, 2013, the SEC announced its first deferred prosecution agreement with an individual. Scott Herckis (“Herckis”) had brought to the attention of the SEC certain fraudulent activities at the Heppelwhite Fund LP, where he acted as fund administrator through his financial and accounting services firm, SJH Financial, LLC. With the information and materials provided by Herckis, the SEC was able to bring an enforcement action against fund manager Berton Hochfeld for misappropriating over $1.5 million from the fund and overstating performance. The harmed Heppelwhite investors have since been granted a $6 million distribution by a federal judge.
After Herckis became aware of the fraudulent scheme, his actions and omissions enabled the scheme to continue for many months, yet without his cooperation and information, the scheme may have gone undetected. The deferred prosecution agreement provides for sanctions and penalties against Herckis for his role in the fraud but no further action will be taken against him for his violations, provided he does not violate the terms of the agreement. This leaves industry participants pondering what further action the SEC would have taken against Herckis had he not cooperated and what the value of a deferred prosecution agreement might really be. Click HERE to read the Herckis deferred prosecution agreement.
The SEC and federal prosecutors are continuing to explore alternative approaches to penalize companies and their principals for what they consider egregious securities law violations. In the recent criminal proceeding of SAC Capital Advisors LP (“SAC”), prosecutors considered whether criminal charges under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) would be appropriate. RICO allows for criminal charges, with substantial penalties, against the leader of an organization for acts that they ordered others to commit. Traditionally RICO has been successfully used against organized crime figures. Federal prosecutors have taken the position that RICO may also be successfully used against the leaders of a legal entity, which could greatly increase the potential personal liabilities that an executive may face. Although the SEC has now incorporated certain enforcement techniques used by criminal prosecutors, the SEC can only bring civil actions against alleged wrongdoers, but it can, and with increasing frequency does, refer cases over to the Justice Department for criminal prosecution.