DOJ and SEC Tout Parallel Objectives Regarding Individual Accountability, Timely Disclosure, and More

A Common Goal: Deterrence

Monaco’s Memo states that “U.S. federal prosecution serves as a particularly significant instrument for accountability and deterrence,” and that corporate criminal enforcement will “always be a core priority” to “strengthen[] our markets, discourage[] unlawful business practices, and uphold[] the rule of law.” Similarly, Wadhwa has cited the SEC’s goal of “deterring misconduct, affirmatively shaping market behavior, and ensuring public accountability . . . [in] craft[ing] effective enforcement recommendations to the Commission.”² In conjunction with a request for a budget increase to the United States House of Representatives, Grewal has reiterated his Three R’s — “[t]he Division aims to enhance Americans’ trust through robust enforcement, robust remedies, and robust compliance.”³

Speedy Pursuit of Individual Wrongdoing and Gatekeeper Accountability

“[S]peed is of the essence,” according to the Monaco, and prosecuting and punishing individual wrongdoers is the DOJ’s “number one priority . . . whether wrongdoers are on the trading floor or in the C-suite” and without regard to their position, status, or seniority.

Meanwhile, the SEC is focused on “gatekeeper accountability” and pursuing enforcement actions against lawyers, partners of accounting firms, and individuals who “serve as the first lines of defense against misconduct.”⁴ Individuals who commit or cover up wrongdoing, fail to implement compliance programs, or otherwise engage in line-stepping are prime targets for the SEC.

The SEC touts recent examples of robust enforcement of gatekeepers. For example, the SEC has charged (i) an attorney with playing a critical role in the fraudulent and unregistered sale of millions of shares of securities by two groups, and (ii) an accountant with failing to register his firm with the Public Company Accounting Oversight Board and failing to comply with auditing standards in an audit of a public company client, two requirements that were “essential to the gatekeeping function.”⁵ In addition, the SEC recently charged a major accounting firm when it found a number of the firm’s audit professionals cheated on exams required to obtain and maintain licenses, and the firm withheld evidence of the misconduct from the SEC during its investigation. The firm admitted the facts underlying the SEC’s charges, agreed to pay a $100 million penalty, and agreed to undertake extensive remedial measures to fix the firm’s compliance culture.⁶

Timely Disclosures and the SEC’s “Carrots and Sticks” Approach

According to the Memo, if companies timely and thoroughly cooperate, the DOJ will not seek a guilty plea or require an independent compliance monitor (absent aggravating factors). Timely and thorough cooperation means disclosure of “all relevant, non-privileged facts about individual misconduct swiftly and without delay.” Mere disclosure of records is insufficient; and productions should prioritize “information and communications associated with relevant individuals during the period of misconduct.” The DOJ will reduce or eliminate cooperation credit in the face of intentional or undue delay. Where a DOJ component does not already have a written policy on corporate voluntary self-disclosure, Monaco now requires it.

Championing a “carrots and sticks” approach, the SEC will “continue to recommend no-admit-no-deny settlements in the majority of cases” and reward “companies and individuals that hold themselves accountable for misconduct and proactively cooperate and remediate.”⁷ According to Grewal, “cooperation is not the mere absence of obstruction.”⁸ Cooperation is more than timely subpoena responses, more than witness availability, more than self-reporting to the SEC when a violation is about to be publicly announced due to charges by another regulator, and more than a presentation that fails to fairly and fully present the facts.⁹ Citing the 2001 Seaboard Report, the SEC’s 2010 Policy Statement Concerning Cooperation by Individuals, the SEC’s Enforcement Manual, and recent orders, Grewal favors carrots when a cooperator takes significant, tangible steps that enhanced the quality of the SEC’s investigation, allows the SEC to conserve resources and bring charges more quickly, or helps the SEC to identify additional conduct or other violators that contributed to the wrongdoing. For example, a recent order concerning disclosure of inaccurate and misleading sales numbers in connection with a bond offering praised steps that a company took (during the pandemic) to (i) collect, translate, synthesize, and present significant volumes of relevant materials to staff, (ii) make current and former employees available for interviews, and (iii) present and submit narrative submissions that highlighted critical facts. In exchange, the SEC imposed a reduced penalty on the company.

Compliance Program Adequacy: Executive Compensation Consequences

Monaco directs prosecutors to scrutinize compliance programs and consider whether they are “well designed, adequately resourced, empowered to function effectively, and working in practice.” The DOJ will look for built-in deterrent mechanisms that penalize individuals — for example, by including compensation escrow and claw back provisions when violations occur. The DOJ is also in favor of mechanisms that reward individuals for compliant behavior.

Likewise, the SEC’s focus on prophylactic measures points to a need for the same compliance program features. To establish incentives to prevent corporate wrongdoing, the SEC has been vocal about its commitment to entering SOX 304 orders against executives at companies that have been required to restate financials. SOX 304 orders require executives to reimburse companies for bonuses, incentive-based compensation, and profits from stock sales in such circumstances.¹⁰ In a recent proceeding involving a construction company, C-suite executives collectively agreed to return around $2 million in bonuses and compensation, while agreeing to cease and desist from violating Section 304 of SOX. The SEC also promises to continue to deploy officer and director bars in cases involving scienter-based violations, along with conduct-based injunctions that enjoin defendants from engaging in specific conduction in the future.¹¹

Monitorships and Undertakings

Espousing a case-by-case approach to imposing independent compliance monitorships, the Memo states that the DOJ will consider a variety of factors, including: whether the misconduct was satisfactorily self-disclosed; whether there was a compliance program designed to detect and prevent similar misconduct at the time of the misconduct and during the investigation; whether the criminal conduct was pervasive; whether the misconduct was approved or ignored by senior management; and whether adequate investigative or remedial steps were taken.

While the SEC has been silent on monitorships, Grewal has noted that undertakings — which tend to limit activities, functions, or operations of a company — continue to be an important feature of settlements as they target future compliance with the securities laws.¹² In some cases, undertakings require a party to hire an independent compliance consultant to review and improve existing compliance programs.¹³ As such, both agencies are armed with tools to implement lasting and specific remedial measures by agreement.

History of Misconduct

The Memo details the DOJ’s criteria for weighing prior misconduct in determining appropriate penalties. It clarifies that the DOJ will consider prior criminal, civil, and regulatory proceedings from any jurisdiction, heavily weigh recent misconduct, consider whether a company inherited compliance shortcomings in a recent merger or acquisition, and consider whether a company is an outlier in a highly regulated industry, such as insurance, transportation, or energy. The DOJ will not enter into successive deferred or non-prosecution agreements for repeated criminal conduct.

The SEC also aims for specific deterrence: “[w]hen a firm repeatedly violates [securities] laws or rules, they should expect to be penalized more harshly than a first-time offender might be for the same conduct.”¹⁴ By imposing penalties that are proportional to the egregiousness of an offense and that account for repeated misconduct, the SEC aims to “make it harder for market participants to simply ‘price in’ the potential costs of a violation.”¹⁵

What This Means for You

Organizations should take the following steps to answer to these dual objectives:

• Invest in regular updates to your compliance program. Start with high risk areas, such as cybersecurity and firm communications applications. Periodically train individuals on such updates and risks.
• Ensure that your compliance program details methods for preserving, monitoring, and collecting data. Provide regular training programs that reach domestic and foreign outposts.
• Design compliance program features that reward compliant behavior and specifically target individual missteps. Feature these aspects in presentations to the government.
• Follow recent DOJ and SEC settlements to understand how both agencies are rewarding and punishing companies for specific facets of compliance programs.
• If you receive an inquiry from either agency, immediately outline an investigation plan, witness availability, and how to gather and prioritize evidence that directly pertains to individual accountability.
• Engage experienced counsel who know both the DOJ and the SEC and can help advise you and your company on the best path forward.

¹ Fry Wernick, Zachary Terwilliger & Peter Thomas, DOJ Corporate Enforcement Shift May Chill Self-Disclosures, Law360.com (Oct. 2, 2022), https://www.law360.com/articles/1536100/doj-corporate-enforcement-shift-may-chill-self-disclosures.

² Sanjay Wadhwa, Deputy Dir., Div. of Enf’t, Sec. & Exch. Comm’n, Remarks at SEC Speaks ( Sept. 9, 2022), https://www.sec.gov/news/speech/wadwah-remarks-sec-speaks-090922.

³ Gurbir S. Grewal, Dir., Div. of Enf’t, Sec. & Exch. Comm’n, Testimony on “Oversight of the SEC’s Division of Enforcement” Before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets (July 21, 2022), https://www.sec.gov/news/statement/grewal-statement-house-testimony-071922.

⁴ Gurbir S. Grewal, Dir., Div. of Enf’t, Sec. & Exch. Comm’n, Remarks at SEC Speaks 2021 (Oct. 13, 2021), https://www.sec.gov/news/speech/grewal-sec-speaks-101321.

⁵ Id.

⁶ Grewal, supra at note 3.

⁷ Id.; Wadhwa, supra at note 2.

⁸ Gurbir S. Grewal, Dir., Div. of Enf’t, Sec. & Exch. Comm’n, PLI Broker/Dealer Regulation and Enforcement 2021 (Oct. 6, 2021), https://www.sec.gov/news/speech/grewal-pli-broker-dealer-regulation-and-enforcement-100621#_ftnref12.

⁹ Id.

¹⁰ Wadhwa, supra at note 2.

¹¹ Grewal, supra at note 4.

¹² Grewal, supra at note 4.

¹³ Id.

¹⁴ Grewal, supra at note 8.

¹⁵ Id.