A previous post in this occasional series on the new Enforcement Manual considered its discussion of the Wells Process (discussed here). Another key section discusses “cooperation credit,” considered in Section 4.3 and titled “Waiver of Privilege.”

Perhaps the most striking point in the section is the statement that the staff shall not ask a party to waive either the attorney client privilege or the work product doctrine. This directive, while perhaps consistent with earlier Commission policy, is the first flat statement on the point. It mirrors the position recently articulated in the new chapter to the U.S. Attorney’s Office Manual authored by Deputy Attorney General Filip on cooperation discussed here.

Beyond this statement, the guidance is less clear. The Section discusses different paths to cooperation credit. One path is the production of facts. Here, it specifies that “if a party seeks cooperation credit for timely disclosure of relevant facts, the party must disclose all such facts within the party’s knowledge.” Privilege waivers are not required, just the all the facts.

Another path is a various other acts which may assist the staff with its investigation. These include “voluntary production of relevant factual information the staff did not directly request and otherwise might not have uncovered; requesting that corporate employees cooperate with the staff and making all reasonable efforts to secure such cooperation; making witnesses available for interviews when it might otherwise be difficult or impossible for the staff to interview the witnesses; and assessing in the interpretation of complex business records.” These examples are in part drawn from, and are consistent with, Seaboard, the SEC’s 2001 Release on cooperation.

The critical issue may be what happens if the company wants to cooperate and assert privilege. In this instance the Section states: “A party’s decision to assert a legitimate privilege will not negatively affect their claim to credit for cooperation. The appropriate inquiry in this regard is whether, notwithstanding a legitimate claim of privilege, the party has disclosed all relevant underlying facts within its knowledge.”

These pronouncements may present a dilemma for a business organization seeking cooperation credit. In most instances the company will have collected at least a significant portion of the facts available to it from an internal investigation. That investigation is frequently conducted by independent counsel acting under the direction of the SOX empowered audit committee. As the Manual acknowledges, much of that inquiry will be covered by privilege. Without a waiver, the company would have difficulty seeking cooperation credit which, when privilege is asserted, is based on producing all the facts.

The Manual however, states that the underlying facts to the investigation are not privileged. Under that view, the company would not have to waive privilege to produce all the facts to the SEC. If the company however, disagrees in whole or in part, then it may not be able to obtain cooperation credit either by producing facts or through other acts.

It seems doubtful that the Manual intended to alter traditional SEC cooperation standards. Under those standards a company not waiving privilege could obtain cooperation credit, although it would not avoid prosecution based on that credit as discussed here. At best, the position of the Manual is not clear. Unclear standards however, ratchet up the pressure on a business organization seeking cooperation credit to avoid or mitigate a possible prosecution because they tend to propel it toward any act which might build credit, including waiver.

The SEC settled with two of the six defendants in its two-year old case against six former officers of Putnam Fiduciary Trust Company, a Boston based transfer agent. The complaint, initially filed in 2006, alleged that the defendants’ violated Securities Act Section 17(a), Exchange Act Section 10(b) and Investment Company Act Sections 34(b) and 37 by defrauding a defined contribution plan client and a group of Putnam mutual funds of approximately $4 million.

Specifically, the complaint alleged that Putnam delayed by one day investing certain assets of Cardinal Health, Inc. in January 2001. When the markets rose the next day, Cardinal’s defined contribution plan lost nearly $4 million in possible gains. Rather than inform Cardinal of the error, the loss was split between that company and other fund clients. Cardinal was charged $1 million of the loss and about $3 million was improperly shifted to certain Putnam mutual funds through a variety of fraudulent and illegal actions. In addition, some of the defendants took steps to cover up the distribution of the losses. SEC v. Durgarian, Case No. 05-12618 (D. Mass. Jan. 3 2006).

The six defendants named in the complaint are: 1) Karnig Durgarian, former senior managing director and chief of operations of PFTC, as well as principal executive officer of certain Putnam mutual funds from 2002 through 2004; 2) Donald McCracken, former managing director and head of global operations services of Putnam; 3) Virginia Papa, former managing director and director of defined contribution servicing; 4) Sandra Childs, a former managing director who had overall responsibility for Putnam’s compliance department; 5) Kevin Crain, a managing director who had responsibility for Putnam’s plan administrator; and 6) Ronald Hogan, former vice-president who had responsibility for new business implementation at PFTC.

On Friday, defendants Karnig Durgarian and Ronald Hogan settled. Each consented to the entry of a permanent injunction prohibiting future violations of the sections alleged in the complaint. In addition, Karnig Durgarian consented to the entry of an order imposing a civil penalty of $100,000 while Ronald Hogan agreed to the entry of an order imposing a $35,000 penalty.

Previously, the court dismissed the Commission’s complaint as to defendants Virginia Page, Sandra Childs and Kevin Crain. The SEC has appealed that decision to the First Circuit Court of Appeals where the case is pending.