2007 Issue 1 - New York City Bar Association

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L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E tigation in discussing the criteria that the Commission would consider in assessing a corporation’s cooperation: Did the company promptly make available to our staff the results of its review and provide sufficient documentation reflecting its response to the situation Did the company identify possible violative conduct and evidence with sufficient precision to facilitate prompt enforcement actions against those who violated the law Did the company produce a thorough and probing written report detailing the findings of its review Did the company voluntarily disclose information our staff did not directly request and otherwise might not have uncovered Did the company ask its employees to cooperate with our staff and make all reasonable efforts to secure such cooperation 41 2. Evolution of Seaboard: Punishing Efforts that Impede Investigations As noted, the Seaboard Report exists as the Commission’s stated policy regarding cooperation. In the view of some practitioners, however, the SEC’s enforcement program has evolved to a point of appearing in some cases to affirmatively punish companies for inadequate cooperation. For example, in a May 2004 press release announcing its $25 million settlement with Lucent, the SEC underscored that its decision to sanction the company (in addition to the individual wrongdoers) was based on Lucent’s “lack of cooperation.” 42 Similarly, Banc of America agreed to a settled a cease-and-desist order that made findings of, among other things, inadequate responses to document requests that had the effect of impeding the SEC staff’s investigation and delaying their investigatory work. 43 Furthermore, SEC officials have admonished companies that efforts to interfere with Staff investigations will be punished. Associate Director of Enforcement Paul Berger explained that “[c]ompanies whose actions delay, hinder[,] or undermine SEC investigations will not succeed. Stiff sanctions and exposure of their conduct will serve as a reminder to companies that only genuine cooperation serves the best interests of investors.” 44 Likewise, then Enforcement Director Cutler commented, “Any ef- 41. Id. at 3-4. 42. SEC Press Release 2004-67, Lucent Settles SEC Enforcement Action Charging the Company with $1.1 Billion Accounting Fraud (hereinafter, “SEC Press Release 2004-67”), available at http://www.sec.gov/news/press/2004-67.htm. 43. See In re Banc of America Securities LLC, SEC Rel. No. 34-49386, 82 SEC Docket 1264 (Mar. 10, 2004). 44. SEC Press Release 2004-67, n.42 above. T H E R E C O R D 218
L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E fort to impede an SEC investigation may itself become the subject of an enforcement proceeding.” 45 And, on multiple occasions, Cutler stressed that the “integrity of the investigative process” is sacred and a complementary goal to cooperation. 46 Former SEC General Counsel Prezioso has also warned that independent investigations “are worse than useless if conducted ineffectively.” 47 3. Sanctions Coupled with this evolving expectation of cooperation is the SEC’s escalation of the level of monetary penalties. In an April 2004 speech, Cutler explained that the SEC’s approach to fines had changed: “We’re clearly in the midst of an evolution, if not a revolution in thinking. In a decade, we’ve gone from a regime in which monetary penalties were imposed only rarely to one in which large penalties seem to be part of virtually all significant settlements.” 48 He also noted that the SEC now “start[s] with the presumption that any serious violation of the federal securities laws should be penalized with a monetary violation.” 49 While sanctions of more than $10 million were considered large only a few years ago, hundred-million-dollar penalties are now not uncommon. Thus, the incentives to cooperate, and the costs of not cooperating have increased dramatically. On January 4, 2006, acting unanimously, the SEC issued a Statement Concerning Financial Penalties, setting forth the factors it will consider in deciding whether and how to impose penalties in enforcement actions against corporations. 50 The Statement identifies two principal considerations that will guide the SEC’s determination whether a corporate penalty is appropriate: (1) [t]he presence or absence of a direct benefit to the corporation as a result of the violation, and (2) the degree to which the penalty will recompense or further harm the injured shareholders. 45. Kathleen Day, SEC Gets Tough on Hindering Investigations, Wash. Post, Mar. 19, 2004, at E1 (quoting Cutler). 46. Cutler, UCLA Speech, p. 49 in Report above; see also Cutler, Remarks Before D.C. <strong>Bar</strong>, n.177 in Report above. 47. Prezioso, Vanderbilt Remarks, n.176 in Report above. 48. Stephen M. Cutler, Speech at 24th Annual Ray Garrett Jr. Corporate & Securities Law Institute (Apr. 29, 2004), available at http://www.sec.gov/news/speech/spch042904smc.htm. 49. Id. (emphasis added). 50. SEC Press Release No. 2006-4, Statement of the Securities and Exchange Commission Concerning Financial Penalties, available at http://www.sec.gov/news/press/2006-4.htm. 2 0 0 7 V O L. 6 2 , N O. 1 219
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THE RECORD OF THE ASSOCIATION OF TH
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Of Note THE NEW YORK CITY BAR PRESE
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O F N O T E cial Department, were p
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Formal Opinion 2006-3 Outsourcing L
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2007 Issue 1 - New York City Bar Association

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