By Robin M. Bergen and Shawn J. Chen
In an earlier post, we discussed the SEC Enforcement Division’s new Cooperation Initiative which it implemented early last year. As part of its efforts to “improve the quality, quantity, and timeliness of information and assistance it receives,” the SEC authorized the use of three new enforcement tools: (1) cooperation agreements, recommending credit for cooperation; (2) deferred prosecution agreements (“DPAs”); and (3) non-prosecution agreements (“NPAs”). On May 17, 2011, the Enforcement Division entered into its first DPA with Tenaris S.A., resolving allegations that Tenaris employees had purportedly bribed foreign officials in violation of the Foreign Corrupt Practices Act. Since the Enforcement Division has only recently begun to use these new enforcement tools (it signed its first NPA with Carter’s Inc. in December 2010), it remains to be seen how much these new measures will affect the current enforcement dynamic.
According to the Tenaris DPA, in March 2009, Tenaris, a global manufacturer of steel pipe products, became aware that some of its payments to sales agents may have improperly benefited employees of a third party. After launching an internal investigation, Tenaris informed the DOJ and the SEC about these allegations in June 2009. Eventually, after a world-wide investigation of its business operations and controls, Tenaris determined that, on four occasions in 2007, its then-regional sales personnel paid an agent to obtain competitors’ confidential bid information for certain Uzbek government contracts. Tenaris allegedly understood that this would be accomplished by the agent paying bribes to Uzbek government officials. According to the DPA, Tenaris was able to use this information to revise its own bids for those government contracts, which were subsequently awarded to Tenaris.
In announcing the Tenaris DPA, Director of Enforcement Robert Khuzami stated that Tenaris’s response “demonstrated high levels of corporate accountability and cooperation.” He emphasized Tenaris’s “immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training” as factors that made it an appropriate candidate for the SEC’s first DPA. As part of a two-year agreement, Tenaris promised to refrain from any further violations of federal or state securities laws and agreed to pay $5.4 million in disgorgement and prejudgment interest. Tenaris also agreed to a separate non-prosecution agreement with the DOJ, resulting in a $3.5 million criminal penalty.
While the substantive provisions of the Tenaris DPA might seem, at first blush, to be similar to those of a typical settled injunctive proceeding — e.g., promising to refrain from future violations of law coupled with the payment of a monetary sum — there are some distinctions that could make a difference. For example, a settled injunctive action generally disqualifies a company from claiming well-known seasoned issuer (“WKSI”) status. See 17 C.F.R. § 230.405. This may, in turn, hamper an issuer’s ability to access the capital markets quickly. Similarly, by agreeing to a settled injunction, a company gives up its “safe harbor” protections for forward-looking statements under the PSLRA. See 15 U.S.C. § 77z-2. By contrast, with a DPA or NPA, since there is no “judicial or administrative decree or order,” these collateral consequences do not apply.
On the other hand, if the Tenaris DPA is any indication, there may be specific undertakings included in a DPA or NPA that are more onerous than anything a district court could impose. For instance, Tenaris agreed to conduct “effective training regarding anticorruption and compliance with the FCPA” for a large swath of its employees worldwide — with the SEC presumably being the sole arbiter of what constitutes “effective” training.
In light of these distinctions, then, it is all the more important for the SEC to provide useful guidance so that companies and their counsel can reasonably assess under what circumstances the SEC might offer a DPA or NPA and how the terms of that resolution might differ from those reached in the absence of such an agreement. The SEC Enforcement Manual tries to do this — but it only goes so far. The Enforcement Manual specifies that a DPA or NPA may be made available after consideration of four factors: (1) the assistance provided, (2) the importance of the underlying matter, (3) the societal interest in ensuring accountability, and (4) the appropriateness of cooperation credit based on the profile of the cooperating individual. Exactly how the SEC weighs these different factors, however, remains largely opaque.
The Tenaris DPA refers to the company’s “extensive, thorough, real-time cooperation . . . which included timely, voluntary and complete disclosure of certain conduct.” It also noted Tenaris’s re-examination of its compliance programs, together with “enhanced compliance measures” that were implemented after the internal investigation. Yet each of those factors was also apparently present in other recent FCPA settlements that were resolved through traditional injunctive proceedings. In a 2009 speech, Khuzami stated that cooperators should only be rewarded after providing “extraordinary cooperation.” Yet the only thing we can infer from the Tenaris DPA is that the company’s self-disclosure was apparently provided without a waiver of the attorney-client privilege, since the DPA refers exclusively to non-privileged matters.
In addition, the Tenaris case presented a relatively small number of bribe payments. Yet there is no indication that this played a role in the Enforcement Division’s exercise of its discretion. And most baffling is the Enforcement Manual’s reference to the “societal interest in ensuring accountability.” Nothing in the Tenaris DPA sheds any light on what those words might mean.
Perhaps future examples will help define when these new cooperation tools will be used and provide the SEC staff with an opportunity to explain how the benefits of self-disclosure and cooperation outweigh the risks. Without some way to assess the availability and likely end results of a possible DPA or NPA, however, companies will have few assurances that a public mea culpa is preferable to quiet remediation, thereby putting in doubt the additional motivating effect the SEC hoped to achieve with these initiatives.
(Robin M. Bergen and Shawn J. Chen are partners at Cleary Gottlieb Steen & Hamilton in Washington, D.C.)