Deal or No Deal: Deciding to Settle or Litigate When Faced with a DOJ or SEC Enforcement Action Under the Current Administration
For those facing a potential enforcement recommendation at the close of a white collar investigation, choosing whether to litigate against or settle with the government agency is a critical strategic crossroads. Recent statements by officials from both the Department of Justice (“DOJ”) and Securities Exchange Commission (“SEC”) have provided clarification on what factors to consider when making that decision. Specifically, these statements have indicated an increased threshold to receive cooperation credit, stricter compliance and monitorship requirements, and a potential easing of the former administration’s “anti-piling on” policy. Broadly, these statements evince a government enforcement regime that both increases the risk of litigation but also expands the cost of settlement. Accordingly, it is more important than ever for those facing an enforcement action to seek advice on what to do when the government comes calling.
Cooperating with a government investigation action is one way for a party to receive credit and mitigate adverse settlement terms, but the government has recently raised the bar for what counts as sufficient cooperation. Deputy Attorney General Lisa Monaco’s keynote address at the American Bar Association’s National Institute on White Collar Crime last fall directed the DOJ to restore prior guidance requiring a higher threshold for companies to receive cooperation credit. Namely, a company is required to identify all individuals involved in the misconduct, “regardless of their position, status or seniority” and must provide the government with all “non-privileged information about individual wrongdoing” to be eligible for cooperation credit.
These stricter requirements were reemphasized by other DOJ officials last month. In his March 3, 2022 address to the ABA Institute on White Collar Crime, Attorney General Merrick Garland made clear that “[w]hen we give a company the opportunity to come clean, it must come clean about everyone involved in the misconduct, at every level.” In his own remarks that same day, Assistant Attorney General Kenneth Polite Jr. again admonished that “a corporation must notify the department of all relevant, non-privileged facts and evidence about the misconduct and all of the individuals involved” to receive cooperation credit.
But the DOJ is not the only agency to signal more stringent requirements for cooperation. In his remarks last fall at SEC Speaks 2021, Gurbir Grewal, Director of the SEC’s Division of Enforcement, explained that the SEC, “in appropriate circumstances,” would be “requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest.” As we noted in March 2022, these admission requirements have been reiterated over the past few months by other SEC officials. For this reason, we further explained that companies should expect greater pushback on “no admit, no deny” settlement terms by the SEC.
Monitorships and Compliance
While the government has raised the bar on the level of cooperation needed to reach acceptable settlement terms—or even a settlement at all—corporate obligations do not stop when the settlement is signed. Settlements often include periods of mandatory compliance reporting or independent monitorships. Recent government statements indicate stricter requirements for those terms as well.
In an article from January, we explained that the DOJ under the current administration has placed a growing emphasis on corporate monitorships in reaching resolutions. Looking again towards Deputy AG Monaco’s statements from fall 2021, she left no doubt that any previous DOJ guidance suggesting “that monitorships are disfavored or are the exception” was rescinded. Rather, the decision to impose a monitor requirement would depend on “the facts and circumstances of each case.”
Assistant AG Polite’s March 25, 2022 remarks at NYU Law’s Program on Corporate Compliance and Enforcement makes clear what one of those key “facts and circumstances” will be: a company’s own compliance program. As he explained, “[b]ased on what we learn about the company’s compliance program, we determine whether an independent compliance monitor should be imposed.” But he also made clear that the existence of a compliance program was not enough. Instead, “companies that make a serious investment in improving their compliance programs and internal controls will be viewed in a better light by the Department.” Thus, Assistant AG Polite laid out an exemplar company that would not require an independent monitor, i.e., one that:
- Has invested—not just from a financial perspective, but from a concerted commitment from the top down—in implementing a strong compliance program;
- Has been able to test its controls and demonstrate they are effective;
- Has made relevant updates to its program to adapt to changing risks; and
- Has cultivated a strong culture of compliance and ethical values.
To put it in his plain terms, “[s]upport your compliance team now or pay later.”
Although Assistant AG Polite’s statements have been the most clear-cut guidance on the interplay between monitorships and compliance to-date, they are simply a culmination of government intention that has been echoing throughout the white collar space in recent months. For example, Director Grewal, in his remarks last fall at SEC Speaks 2021, provided the same warning against a “check the box” approach to compliance as Assistant AG Polite in his recent statements. Director Grewal additionally noted the SEC’s own ability to require a settling party “to hire an independent compliance consultant to review policies and procedures and to determine improvements that can prevent future misconduct.” Moreover, in a March 3, 2022 panel regarding recent developments in the Foreign Corrupt Practices Act, officials from both the DOJ and SEC spoke on the continuing use of monitorships and warned that compliance program presentations should ideally involve a companies’ most knowledgeable operations personnel, not just outside counsel and a slide deck—a sentiment Assistant AG Polite reiterated a few weeks later as well.
Finally, these parallel statements by different agencies like the DOJ and SEC are not mere coincidence and raise an issue that should be considered at the outset of any enforcement matter: regulatory duplication—i.e., the pursuit of enforcement actions by multiple government agencies against the same party for the same alleged misconduct. Although regulatory duplication may seem unintuitive or even unfair on its face, the Fifth Circuit Court of Appeals succinctly explained the reasoning for simultaneous actions:
“The simultaneous prosecution of civil and criminal actions is generally unobjectionable because the federal government is entitled to vindicate the different interests promoted by different regulatory provisions even though it attempts to vindicate several interests simultaneously in different forums.”
Sec. & Exch. Comm’n v. First Fin. Grp. of Texas, Inc., 659 F.2d 660, 667 (5th Cir. 1981).
More recently, companies have been less concerned with the complexities of dealing with simultaneous enforcement actions because of the “anti-piling on” policy instituted by the DOJ under the Trump administration. Under that policy, first explained during former Deputy Attorney General Rod Rosenstein’s 2018 address to the New York City Bar White Collar Crime Institute, DOJ officials were instructed “to appropriately coordinate with one another and with other enforcement agencies in imposing multiple penalties on a company in relation to investigations of the same misconduct.”
Although the current administration’s DOJ has not formally rescinded the anti-piling on policy, the recent statements by government officials noted above may be the proverbial writing on the wall. For example, an increasing emphasis on inter-agency coordination was apparent in AG Garland’s discussion of various partnerships between federal, state, and even international agencies as a “force-multiplier.” But perhaps the most noticeable harbinger of a potential easing of the DOJ’s anti-piling on policy comes from contrasting former Deputy AG Rosenstein’s announcement of the policy with Assistant AG Polite’s March 3rd remarks.
Former Deputy AG Rosenstein’s announcement rooted itself in a central thesis: “reinforcing [the DOJ’s] relationship with good corporate citizens.” It focused on the perceived unfairness towards corporations when simultaneous enforcement actions by different agencies were being pursued for the same alleged misconduct. And while former Deputy AG Rosenstein noted that “[s]ometimes, penalties that may appear duplicative really are essential to achieve justice and protect the public,” the keystone of his announcement was that “[c]orporate America should regard law enforcement as an ally.”
Compare this to Assistant AG Polite’s March 3rd statements. Rather than businesses, he noted that “[c]onsidering victims must be at the center of our white-collar cases.” He further highlighted the unfairness of white collar crimes to their victims, whom he explained are “often at an information disadvantage” and difficult to identify. Indeed, he ended his remarks with a reminder to those in private practice:
“When you come in to advocate for your clients, I welcome the discussion of your company, your culture, your legal reasoning, your dollars and cents. But when you do, do not forget your humanity. Tell me about how you are effecting change to ensure that we bring justice to the wronged and the wrongdoers. Tell me about the people.”
While this shift in focus could be viewed as a simple appeal to pathos by a new administration, it is nonetheless important for the message it conveys: “corporate America” is no longer the star of the show; rather, the attention is on the victims. And that shift away from a business-centric enforcement regime means that there is at least some reason to be wary of the longevity of any policy, including the anti-piling on policy, that was built around that focus.
Considered together, these recent developments add to the already-complicated structure of white collar enforcement. On one hand, settlement may become a harder pill to swallow, given the increasing costs of cooperation and stricter compliance and monitorship terms. On the other, navigating litigation may become even more fraught if interagency coordination starts to mean more rather than less simultaneous enforcement actions. Even with these added complexities, one thing is clear; as AG Garland explained, the government’s interest “in prosecuting corporate crime . . . is waxing again.” With that in mind, it is essential now more than ever for those faced with an enforcement action (or actions) to seek competent advice and counsel to make sure that they are in the best position to reach a proper resolution, regardless of whether that means settlement or litigation.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.