The Securities and Exchange Commission gives credit to accused wrongdoers willing to play nice during its probes. For example, in last month’s settlement agreement with Sunrise Senior Living, which it had accused of financial-reporting fraud between 2003 and 2005, the regulator implied the result could have been harsher. “The terms of the proposed settlement [pending a federal judge's approval] with Sunrise reflect credit given to Sunrise for its substantial assistance in the investigation,” the SEC said.
As a result, the assistant-living-facilities company does not have to pay the SEC any fine. Instead, to end the three-year-old case, Sunrise has agreed to be prohibited from violating securities laws and has done so without admitting or denying guilt.
However, the two former Sunrise employees also involved in the investigation, ex-CFO Larry Hulse and ex-treasurer Kenneth Abod, have had to pay: $164,993 and $25,000, respectively. Like the company, the two men have not admitted or denied the SEC’s conclusions.
Considering that SEC investigations usually take a few years to complete, companies and officers who find themselves dealing with the commission’s investigators have to think ahead when deciding whether to aid the SEC with its probes or keep their mouth shut.
A new study finds that it may pay — at least in dollar terms — to help the SEC by sharing results of internal investigations and keeping the public informed when something has gone awry. Rebecca Files, an accounting professor at the University of Texas at Dallas, claims that while cooperating with the SEC increases a company’s likelihood of getting sanctioned, being both cooperative and forthcoming in information shared with investors can result in lower penalties. “It’s just like going to the cops and turning yourself in,” she says. “You’ll still have to pay some cost for your actions, but the penalty will be significantly reduced.”
Files based her findings on a study of 1,249 restatements made between 1997 and 2005, 10% of which resulted in a sanction against the company or its managers. She drew her conclusions on how forthcoming companies were about their problems in press releases and 8-Ks, as well as how quickly they came forward after a problematic reporting period. Since the SEC’s dealings with these companies occur behind closed doors, she could not know how fully cooperative they were in any investigation.
Files considers volunteer companies to be those that have initiated an independent investigation into their misconduct and whose information is assumed to be shared with the SEC through company-hired forensic accountants, attorneys, and directors. Another caveat to her findings: Files’s study looked only at misstatements, which account for a small portion of the SEC’s enforcement actions.
Keep in mind that beyond monetary payouts, companies still do bear some expense when they deal with the SEC’s enforcement team. Sanctions against firms include orders to cease and desist from violating securities laws, censures, and trading suspensions.
In a sense, Files’s study suggests, companies — in their effort to cooperate — could actually work against themselves by giving the SEC a more solid case in which to sanction them. “Voluntarily providing information to SEC staff may improve their ability to build a successful case against the firm or its managers by providing information the SEC may have overlooked,” Files writes in her working paper.
Going forward, companies accused of wrongdoing may have to pay even less. In January the commission announced it had adopted new internal guidelines — similar to those used at the Department of Justice — designed to encourage more companies and individuals to come forward, and help the SEC in its overall mission of combating securities fraud.
The new guidance set out new so-called cooperation tools, or written agreements between the regulator and companies and individuals that come forward and could stand to receive lesser penalties or no enforcement action whatsoever by helping with the investigation. The thinking goes that the agency will grant more lenient settlement terms in return for more information.
In these agreements, parties that give “substantial assistance” to SEC investigators will be rewarded with a request by SEC staffers to the commissioners that they receive reduced sanctions or none at all, Robert Khuzami, director of the SEC’s Division of Enforcement, has said. In addition to the Sunrise case, the SEC credited General Re Corp., a Berkshire Hathaway subsidiary, in January for its “remediation efforts and cooperation” in the investigation into whether it had helped AIG and Prudential Financial falsify financial reports. Gen Re agreed to pay the SEC $12.2 million to settle the regulator’s charges.