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SEC Rewards More Cooperation

Two more individuals benefit from commission’s new program to go easy on cooperative subjects of investigations.

At least two more individuals recently benefited from the Securities and Exchange Commission’s two-year-old program to reward those who agree to cooperate with its investigations.

In the most recent case last month, John Cinderey, a former executive vice president at San Francisco–based United Commercial Bank, agreed to settle SEC charges that he misled the bank’s independent auditors about risks the bank faced on a number of outstanding loans during the financial crisis in 2008 and 2009. Cinderey was accused of altering memoranda prepared for the auditors and circumventing accounting controls and policies.

In announcing the terms of the settlement, the SEC said it reflected credit given to Cinderey for his “substantial assistance” in the investigation and the fact that he has entered into a cooperation agreement to assist in any ongoing related enforcement actions.

In another deal in March, the SEC announced it would not take enforcement action altogether against an unnamed senior executive at AXA Rosenberg Group, crediting him with substantial cooperation during the agency’s investigation into the nondisclosure of a coding error in the firm’s quantitative investment process. The investigation had resulted in two settled enforcement actions last year against the firm and Barr Rosenberg. The SEC had found that the error impacted more than 600 client portfolios and caused about $217 million in losses.

The SEC said the senior executive’s cooperation proved valuable because of its timeliness and quality, which allowed the regulator to conserve its investigative resources. “At the outset of the investigation, the senior executive was the first to offer his cooperation and voluntarily requested to be considered” under the SEC’s Cooperation Initiative, the regulator stated in making the announcement.

The unnamed executive was also praised for being forthcoming and providing “truthful, complete and reliable information” during meetings. “In particular, his position in the organization, relationship with charged parties and intimate knowledge of the quantitative investment models allowed him to provide detailed and credible information that was important to the SEC staff’s investigation,” the SEC added, stressing that the individual provided the substantial assistance without conditions. “By doing so, he enhanced his credibility by showing that he had not been promised any specific outcome in exchange for his truthful testimony,” the SEC further stated.

The SEC has always considered cooperation when it decides whether to proceed with an investigation or some sort of sanctions. When it announced its Cooperation Initiative in January 2010, however, the commission created a formal mechanism that provided clear incentives for individuals and companies to cooperate and assist with SEC investigations and enforcement actions.

An SEC official says the cooperation program came in response to repeated requests from the legal community for the commission to provide specific guidance about how it will reward cooperation.

In announcing the program more than two years ago, the SEC laid out three different types of agreements, cooperation agreements, deferred prosecution agreements and nonprosecution agreements, and said it would take into account a number of considerations when offering them: the assistance provided, the importance of the underlying matter, the societal interest in ensuring the individual is held accountable for his or her misconduct and the appropriateness of cooperation credit.

Over the 27 months, the SEC has signed nearly 40 cooperation agreements, although not all of them have been publicly announced. Many of them are currently ongoing.

The SEC has announced one deferred prosecution agreement — with Tenaris on May 17, 2011 — which was the commission’s first-ever use of this approach. It accused the global manufacturer of steel pipe products of violating the Foreign Corrupt Practices Act by bribing Uzbekistan government officials.

It also announced three nonprosecution agreements — with Fannie Mae and Freddie Mac on December 16, 2011 and Carter’s on December 20, 2010.

In addition, on September 24, 2010, Richard Vlasich, who was accused with another individual of engaging in illegal insider trading in the securities of XTO Energy, was not required to pay a civil penalty “based on his agreement to cooperate in the commission’s investigation and any related enforcement action.”

On May 26, 2011, the SEC announced that the terms of the settlement with Shannon Stith, the former chief financial officer of PCSEdventures!.com, reflected credit given to Stith for her substantial assistance in an investigation and her agreement to enter into a cooperation agreement to assist the commission in an ongoing related enforcement action against PCSEdventures!.com, and another individual. PCS was accused of making false public announcements.

Last December the SEC entered into a cooperation agreement with John Easom, a Vital Signs executive vice president, one of eight people charged with insider trading.

And on February 1, 2012, the SEC announced that Credit Suisse was not charged based on its substantial cooperation in an investigation related to charges that four former long-time investment bankers and traders at the firm engaged in a complex scheme to fraudulently overstate the prices of $3 billion in subprime bonds during the height of the subprime credit crisis. The regulator also said the SEC’s investigation was assisted by cooperation provided by David Higgs, former head of hedge trading, and traders Faisal Siddiqui and Salmaan Siddiqui.

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