by T. GormanPosted on Posted in SECActions

Is the sky falling or are we on our way to a new normal when it comes to earning cooperation credit from the Department of Justice? These questions were raised in remarks by Deputy Attorney General Sally Yates in remarks delivered to the New York City Bar Association White Collar Crime Conference (May 10, 2016)(here).

At the center of the questions, of course, is the Yates memorandum on cooperation which requires that “a company provide all the facts about individual conduct in order to qualify for any cooperation credit.” The announcement of this policy, according to Ms. Yates, has drawn comments from the defense bar which range from “The sky is falling” to “Nothing has changed.”

While the individual accountability policy has been the focus of attention, Ms. Yates stated that “as I’m sure many of you would agree, the notion that a cooperating company must relate facts about the conduct of individuals within the corporation is nothing new.” This does not mean that the firm must conduct an overly broad, years long, multimillion dollar investigation “every time a company learns of misconduct . . .”

Likewise, the requirement does not mean that on “the first day” the company must have all the facts lined up or be disqualified. Firms “should also know that counsel for the company is not required to serve up someone to take the fall in order for the corporation to get cooperation credit – a hypothetical person sometimes referred to as the ‘vice president in charge of going to jail.’” To the contrary, if the firm conducted an “appropriately tailored investigation and truly did everything they could reasonably be expected to do to determine who did what, but simply can’t figure it out, they are not precluded from receiving cooperation credit,” Ms. Yates noted. At the same time the DOJ will “pressure test your investigation.”

The policy is having a salutary effect, according to the Deputy AG. First, while there were predictions that firms would no longer cooperate, that has not proven to be the case. To the contrary “companies are not only continuing to cooperate, they are making real and tangible efforts to adhere to our requirement that they identify facts about individual conduct, right down to providing what I’m told are called ‘Yates Binders’ . . . that contain relevant emails of individuals being interviewed by the government.” Second, nobody has “told us that they will be forced to waive privilege . . .” Third, “our new approach is causing positive change within the companies. Compliance officers have said that our focus on individuals has helped them steer officers and employees within their organizations toward best practices and higher standards.”

Finally, the policy is having a significant impact on the DOJ. In criminal and civil actions there is more of a focus on individuals as there should be. The Antitrust Division recently announced that it is revamping its procedures to ensure that culpable individuals are identified as early as possible. Likewise, the FCPA Unit of the Fraud Section recently announced a new 12 month pilot program. While “change is hard” the Deputy AG noted, and may result in “temporary uncertainty,” a “new normal will exist.”

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by T. GormanPosted on Posted in SECActions

Last year the number of securities class actions filed with accounting allegations exceeded the average over the last ten years. Likewise, the number of accounting cases filed last year alleging internal control violations was the highest since 2006, according to a report prepared by Cornerstone Research titled Accounting Class Action Filings and Settlements, 2015 Review and Analysis (here).

The 71 accounting cases filed last year is the highest since 2011 when 80 such actions were initiated. At the same time the percentage of securities class actions that contain accounting allegations declined to 38% (71 of 118) compared to 41% (69 of 101) in the prior year. The largest percentage of those accounting cases (38%) were filed in the ninth circuit – the highest number of such cases filed there in ten years. The number of actions involving firms listed on the NASDAQ and the NYSE was about evenly split.

The number of accounting cases filed against firms based outside the U.S. increased to 20 or 28% of the total of these cases. That compares to 14, or 20% of the total, the prior year and 15, or 32% of the total, in 2013. The number of accounting cases filed against firms based outside the U.S. last year is the second highest total over the last decade.

Over half of the accounting cases were brought against firms in the consumer non-cyclical sector were against biotechnology, pharmaceutical and healthcare companies. That is consistent with historical trends. The number of actions filed against industrial sector firms, however, increased to twice its historical average. In contrast, cases against firms in the financial sector declined.

Finally, last year about 30% of the accounting cases involved a restatement. That represents a decline from the 42% in the prior year, 40% in 2013 and 38% in 2012. In contrast, over the past six years most accounting cases contain allegations regarding internal controls. That trend accelerated last year with 52% of the actions containing such a claim. Similarly, the number of accounting case settlements containing such an allegations was the highest in 10 years.

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