While securities regulators say self-reporting offenses and cooperating with authorities may help advisors and firms get off easier, industry lawyers say there are negative consequences, including reputational damage and costly internal investigations.
When the Justice Department assesses an appropriate resolution in a case, a major determining factor is whether there’s been cooperation with enforcement, said Bill Stellmach, principal deputy chief of the fraud section at the DOJ, during the Practising Law Institute’s enforcement seminar Friday.
But as Jones Day partner Joan McKown and other defense attorneys on the panel pointed out, it’s a difficult decision for companies to decide whether or not to self-report an issue and cooperate fully with an investigation.
While agencies have said that if companies self-report, self-police and cooperate, consideration will be given, the perception among firms is that even if you do it all, the best you can hope for is deferred prosecution or non-prosecution, she said. “For a public company, it’s still a public shaming,” McKown said, which could mean negative consequences for the company's stock price and reputation. Additionally, the cost of investigation in these cases can be enormous, she said. Several of the securities attorneys on the panel noted they’ve had clients in the last year who have opted not to self-report.
But Andrew Ceresney, head of enforcement at the Securities and Exchange Commission, said the cost of failing to do so may be higher in the end. “With the whistleblower program now in existence, it’s just a tremendous risk we’ll find out about it not withstanding you report it to us,” he said. And if we do, and we learn you failed to self-report it to us, I can assure you our reaction would be even worse.”
The Commodity Futures Trading Commission’s record-breaking $800 million fine against Deutsche Bank this week is an example of the level of cooperation playing out in a recent case, said Aitan D. Goelman, director of enforcement at the CFTC.
The Deutsche Bank case was the eighth settlement the CFTC has made with institutions accused of manipulating the LIBOR benchmarks. But Deutsche paid an $800 million fine to CFTC, larger than other LIBOR banks and one of the largest fines imposed in the history of the agency.
When the CFTC went to the bank in 2010 seeking information about the integrity of LIBOR, the agency received only limited cooperation from Deutsche. It wasn’t until mid-2011 that the bank started to cooperate fully.
“Our penalty, the $800 million, reflects that there’s a difference in Deutsche Bank’s cooperation and other bank’s cooperation, particularly on timeliness,” Goelman said. “Now if Deutsche Bank had never cooperated, if they hadn’t turned it around in 2011, it would’ve been a much, much higher penalty.”
Additionally, companies’ cooperation will be measured, in part, by whether they provide prompt and meaningful evidence against individuals, something that has been lacking in the past, according to officials.
“It seems like a lot of times, if there’s an individual identified [as responsible for the offense], they’re either dead, working at a competitor, retired or outside our jurisdiction,” said Brad Bennett, head of enforcement at the Financial Industry Regulatory Authority.
“When something goes wrong at the top level, the argument is usually that it’s a mosaic of information, no one had all the pieces, so no one is truly culpable because no one knew everything. Conversely, when everything’s going right, it’s time to pay out bonuses, there’s always some senior person who’s 100 percent responsible and deserves the credit,” Bennett said.
“If you work in any complex organization, even in the government, mistakes get made,” Goelman said. But it’s how an organization handles the situation that really determines the outcome of the case.