by T. GormanPosted on Posted in SECActions

Self-reporting and cooperation were key topics for the SEC and the DOJ in recent remarks at an FCPA conference. SEC Enforcement Director Andrew Ceresney, and Assistant Attorney General Leslie Caldwell both addressed American Conference Institutes’ 32nd FCPA Conference. Both stressed the importance of self-reporting and cooperation.

After reviewing the importance of self-reporting and cooperation to the agency, Director Ceresney then announced a new policy (here). To encourage self-reporting violations “the Enforcement Division has determined that going forward, a company must self-report misconduct in order to be eligible for the Division to recommend a DPA or NPA to the Commission in an FCPA case.”

Self-reporting, however, is not sufficient to warrant entering into such an agreement. Determinations of how much credit will be given “are made by evaluating the broad factors set out by the Commission in the Seaboard report. In addition to self-reporting, factors considered include a corporation’s self-policing, remediation, and cooperation.” Overall obtaining a DPA or an NPA represents significant cooperation.

Three examples of when this type of credit is available are, according to the Director:

1) The settlement with PBSJ Corporation earlier this year. There the SEC charged the company with paying bribes to secure Qatari government contracts. The firm self-reported, took immediate steps to end the misconduct and fully cooperated. That cooperation included making foreign witnesses available for interviews and providing factual chronologies, timelines, internal summaries and full forensic images. The firm paid over $3 million in disgorgement and prejudgment interest but a penalty of only $375,000 – about 10% of the disgorgement.

2) The Ralph Lauren settlement in 2013. There within two weeks of discovering the conduct the firm self-reported. The cooperation included voluntarily and expeditiously producing relevant documents, furnishing translations of foreign language documents and taking significant remedial measures. The firm paid over $700,00 in disgorgement and prejudgment interest.

3) The Tenaris, S.A. settlement in 2011 which was the first DPA. There the company immediately reported, conducted a thorough internal investigation, fully cooperated with the investigation and took significant remedial steps. No penalty was assessed.

These examples should serve as a “blueprint for companies regarding what kind of cooperation and remediation efforts are required to maximize the benefits of the SEC’s cooperation program,” according to the Director.

Assistant Attorney General Leslie Caldwell also stressed self-reporting and cooperation (here). She defined cooperation as: 1) voluntarily self-disclosure; 2) fully cooperating; and 3) undertaking timely and appropriate remediation.

To give further definition to these factors, while stressing the primacy of identifying the individuals who participated in the conduct, Ms. Caldwell began by defining “voluntary self-disclosure: “To quality, the disclosure must occur before an investigation – including a regulatory investigation by an agency such as the SEC . . . is underway or imminent. And disclosures that the company is already required to make by law, agreement or contract do not qualify.”

A second key is the “focus on individual accountability for corporate criminal conduct announced earlier this year by Deputy Attorney General Sally Yates . . .” Companies must “affirmatively work to identify and discovery relevant information about individuals. . . And internal investigations cannot end with a conclusion of corporate liability, while stopping short of identifying those who committed the underlying conduct,” Ms. Caldwell noted.

There are, of course, instances where the company may not have all the facts despite its best efforts. While it is “[o]our presumption . . . that the corporate entity will have access to the evidence . . . there are instances where you do not, or you are legally prohibited from handing it over . . . you need to explain that to us. And know that we will test the accuracy of your assertions.”

The Department does recognize, according to the Assistant AG, that in some instances the government may be able to obtain evidence that is not available to the company. In other cases former employees may refuse to cooperate. And at times the DOJ may ask the company to stop. “In these circumstances, the company of course will not be penalized for failing to identify facts subsequently discovered by government investigators.”

The final key to cooperation is remediation. Here a factor to be considered is whether and how employees involved are disciplined. In addition, the DOJ will “examine the company’s culture of compliance including an awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated,” according to Assistant AG Caldwell. To aid the Department in this area an experienced compliance counsel was recently retained who will help assess the programs instituted. In the end, self-reporting is the first step toward securing a DPA or an NPA from the SEC. Cooperation credit from the DOJ may follow from identifying those involved.

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by T. GormanPosted on Posted in SECActions

The SEC filed a settled action involving a registered investment adviser that made false statements in marketing materials about a strategy utilized by a sub-adviser. The adviser failed to evaluate statements in the materials and ignored red flags. In the Matter of Virtus Investment Advisers, Inc., Adm. Proc. File No. 3-16959 (November 16, 2015.

Respondent Virtus has been a registered investment adviser since 1969. F-Squared had been a registered investment adviser since March 2009. That same year Virtus and F-Squared began talks to have F-Squared serve as a sub-adviser for two Virtus-advised mutual funds. Those funds would then adopt the AlphaSector strategy originated by F-Squared.

F-Squared launched its first AlphaSector index in late 2008. That strategy is an ETF sector rotation strategy that was based on an algorithm which yields a signal indicating whether to buy or sell nine industry ETFs. F-Squared claimed that the strategy had a successful “live” track record dating back to 2001. In fact no assets tracked the strategy until 2008. The back-tested track record was substantially overstated. The Commission brought a settled enforcement action in which F-Squared admitted the facts (here).

Virtus was negligent in not knowing that the F-Squared track record and performance was false. From the outset Virtus expressed skepticism about the claimed track record. Nevertheless, it took no steps to verify it. Rather, the adviser recommended F-Squared and its strategy to the boards of the two mutual funds. The claims regarding the track record for the strategy were repeated in materials presented to the board, investors and those used by wholesalers.

In late 2009 FINRA raised concerns with Virtus regarding the track record for the AlphaSector Rotation Index that was included in mutual fund marketing materials. The regulator told Virtus that the track record was based on back-testing. Nevertheless, the incorrect claims were used in marketing materials.

Two years later market participants told certain Virtus wholesalers that the AlphaSecotr indexes were back-tested and “live” assets had not been tracking those indexes since 2001. Virtus also received conflicting representations from Howard Present, the founder and CEO of F-Squared, about the origins of the strategy. While he was asked to address those concerns, no answers were furnished and Virtus failed to follow-up. Similarly, in May 2013 principals from the firm that provided F-Squared with the signals for AlphaSector told Virtus they thought the track record may have been miscalculated. There was no follow-up.

Virtus did not have any written policies and procedures for evaluating and monitoring the accuracy of third-party-produced performance information or marketing materials. The firm also failed to maintain sufficient records to demonstrate the calculation of the performance or rate of return of the historical performance of the AlphaSector indexes.

The Order alleges violations of Advisers Act Sections 204, 206(2) and 206(4) and Investment Company Act Section 34(b). To resolve the proceedings Respondent agreed to implement certain undertakings, including the retention of a compliance consultant. The firm also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. It will pay disgorgement of $13.4 million, prejudgment interest and a civil penalty of $2 million.

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