Part III: Self-Reporting And Cooperation — Key Issues

The Department of Justice, like the SEC, offers the prospect of credit in the charging process in exchange of self-reporting and cooperation. Like the Commission, DOJ defines the question of cooperation in terms of furnishing all the facts. Unlike the SEC, its policy statements are less clear as to what is required. In practice however, that lack of clarity quickly disappears.

The McNulty memo, in statements which are not dissimilar from those used by its predecessors, discusses cooperation in general terms, noting for example that “[i]n gauging the extent of the corporation’s cooperation, the prosecutor may consider, among other things, whether the corporation made a voluntary and timely disclosure, and the corporations’ willingness to provide relevant evidence and to identify the culprits within the corporation, including senior executives.”

The prospects for credit offered in this portion of the McNulty memo are, however, limited by another portion of the memo which states that “whereas natural persons may be given incremental degrees of credit … for turning themselves in, making statements against their penal interest, and cooperating in the government’s investigation of their own and others’ wrongdoing, the same approach may not be appropriate in all circumstances with respect to corporations.” While the memo goes on to detail procedural and substantive limitations on the circumstances under which prosecutors can seek a waiver of privilege, this passage seems to suggest that cooperation may not yield credit. These statements seem to be tempered, if not contradicted, by recent remarks by the head of DOJ’s criminal division. In those remarks, she stated flatly that cooperation will yield benefits for a corporation.

Whichever statement is correct in practice, the necessity for privilege waivers to maximize cooperation credit is clear. Two surveys, one by a number of business and bar organizations taken before the McNulty memo, and a second and less formal one conducted by the Former Chief Justice of the Delaware Supreme Court after its issuance, confirm the fact that in practice waivers are a necessity.

While the necessity for waivers to gain cooperation credit may be clear, any organization considering the question must carefully assess the impact on the company and its employees. Both the SEC and DOJ focus on privilege waivers as a means to obtain all the facts and, in some instances, those which the government might not otherwise obtain. At the same time, waiver can impede the ability of the organization to secure all the facts, remedy the situation and thus ultimately to obtain cooperation credit. Stated differently, the demands of the SEC and DOJ may in fact impede the ability of the company to fully determine the facts and remedy the situation to ensure compliance with the law in the future – the very goals the SEC and DOJ are to implement.

In The Dog Days Of Summer, Its Time To Begin Reforming Enforcement Policies

Its late August when many are on vacation and watching the last days of summer disappear before school starts and the fall rush begins. It’s easy to tell this in Washington because the commuting is easy.

Another sure sign is the SEC enforcement docket – seen any cases lately? The flow of cases out of the enforcement division has trickled down to virtually none. No enforcement actions filed since last Friday.

This lull of late summer provides an excellent opportunity for the enforcement division to begin reviewing its policies and procedures to increase transparency and fairness. A good place to start is with an open jacket Wells process, brought up months ago by then Commissioner Atkins (discussed here). The Wells process is suppose to be an opportunity for the possibly to be accused to provide their views to the staff and the Commission about a potential enforcement action. A full and fair opportunity to do so can only aid the prosecutorial decision making of the staff and the Commission.

Yet, at the present time, this process is impeded because the person receiving the Wells call frequently only knows a fraction of the facts which are available to the staff and the Commission. While traditionally Wells submissions have focused on the staff providing the Commission with the facts and the about-to-be-accused arguing legal issues, it seems clear that allowing the person preparing the Wells submission access to the facts should enhance the process, providing other views about not just the legal questions, but also the factual issues involved in the potential action.

Most enforcement cases and many legal issues turn on the facts. Indeed, the Commission has made it clear that prosecutorial decision making is a question of judgment and a function of the facts. Consider for example, the Commission’s Seaboard Release on cooperation (discussed here). The Release makes it clear that cooperation by an issuer with the Commission begins with a full and complete report of the facts. Conversely, prosecutorial decision making is clearly hindered by an inability to determine the facts. It is in this context that the much-discussed issue of privilege waivers typically arises – if privilege is asserted the staff and Commission may not have access to all the facts (discussed here).

Likewise, any person facing a prospective enforcement action needs to be aware of all the facts and circumstances before determining how to proceed. Before arguing in a Wells submission that the action should not be brought or that an alternative should be considered, all of the facts must be known. Before any settlement can be negotiated, the person entering into the settlement should know the facts. An open jacket process should provide the staff and the Commission with additional points of view about the potential action. Clearly additional points of view should aid prosecutorial decision making.

A few years back some of the Commission’s offices experimented with an open jacket Wells process. The procedure used was straight forward. As part of the Wells process the staff made available at the Commission’s office the relevant part of the investigative file for review by defense counsel. This should have produced better Wells submissions and more principled settlements. Unfortunately, the experiment was never carried forward to all of the SEC’s offices. This deprives the potential defendant of an opportunity to fully discuss the situation in a Wells and the staff and Commission of the benefit of having all sides of the possible issues fully vetted.

Now, in these dog days of summer when the case load and the traffic are slow, the staff should have the time to look into reforming enforcement policies. An open jacket Wells process should aid everyone while making the Commission’s processes more transparent and fair. And, fairness should be the key to good law enforcement.