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Swift, Extensive and Extraordinary Cooperation: The SEC View

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  • Baker, John
    The Securities and Exchange Commission said today that it decided not to bring any enforcement action against a registered transfer agent because of its
    Message 1 of 2 , Jan 3, 2006
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      The Securities and Exchange Commission said today that it
      decided not to bring any enforcement action against a registered
      transfer agent because of its "swift, extensive and extraordinary
      cooperation" in the SEC's investigation. Litigation Release No. 19517
      (Jan. 3, 2006). The announcement was made as the SEC filed a civil
      fraud action against six former officers of the transfer agent for their
      fraud in covering up a $4 million loss arising from their employer's
      delay in investing assets of a defined contribution plan client. (It
      was only a one-day delay, but the market happened to do very well that
      day.) The officers shifted $3 million of the costs of the delay to
      shareholders of affiliated mutual funds through deception, illegal trade
      reversals, and accounting machinations; the defined contribution plan,
      without disclosure of the problem, had to bear the other $1 million.

      In other words, the problem was caused by the employer, and the
      loss was its responsibility. To protect the company, six officers, all
      of them quite senior, engaged in a cover-up. There is an object lesson
      there about throwing away your career to save your employer from its
      mistakes, but we all know that one (even if, time and again, people who
      should know better do it anyway). How did the company get off
      scot-free, while its officers took it in the neck? Through its swift,
      extensive and extraordinary cooperation, which consisted of:

      --Prompt self-reporting*

      --An independent internal investigation

      --Sharing the results of that investigation with the government,
      including not asserting any applicable privileges and protections**

      --Terminating and otherwise disciplining responsible wrongdoers

      --Providing full restitution to its defrauded clients

      --Paying for the attorneys' and consultants' fees of its
      defrauded clients

      --Implementing new controls designed to prevent the recurrence
      of fraudulent conduct


      *The self-reporting happened "promptly" three years after the
      events in question. According to the SEC complaint, one of the six
      officers, who had been terminated for other reasons, left a voicemail at
      that time with an internal auditor for the company's corporate parent.

      **As I posted last year, at least one court has ruled that a
      company waives the attorney work product privilege when it provides
      documents to the SEC:

      http://groups.yahoo.com/group/FundLaw/message/988


      The SEC's press release, with a link to the litigation release
      and thence to the complaint, is at

      http://www.sec.gov/news/press/2006-2.htm


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1220 19th Street NW, Suite 600
      Washington DC 20036
      202.419.8413
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
    • Baker, John
      Some further thoughts on yesterday s enforcement action: Was the SEC right? Was this really swift, extensive and extraordinary cooperation, justifying a
      Message 2 of 2 , Jan 4, 2006
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        Some further thoughts on yesterday's enforcement action: Was
        the SEC right? Was this really swift, extensive and extraordinary
        cooperation, justifying a complete absence of enforcement action? More
        broadly, did the company do the right thing?

        Frankly, it's gratifying to see that this kind of comprehensive
        response resulted in an appropriate use of prosecutorial discretion.
        Armed only with a single voicemail three years after the fact, the
        company (in reality, one suspects, the corporate parent) conducted a
        swift and thorough investigation that netted a number of officers at the
        managing director level. Clients received full restitution, including
        the unusual step of payment for their attorneys' and consultants' fees.
        While the company's actions may be seen as a road map to avoiding
        enforcement action, they really were the right thing to do. Only the
        privilege waiver gives me pause. It may have been the right thing to do
        here, but it certainly isn't the right thing to do in every case. The
        SEC loves them, though.

        Of course, my comments assume the accuracy of the SEC's releases
        and complaints; the former officers deny the charges against them
        (except for one, who declined comment). For a news report that includes
        their statements, see

        http://www.businessweek.com/ap/financialnews/D8ETGHV83.htm?campaign_id=a
        pn_home_down&chan=db


        John M. Baker <JMB@...>
        Stradley Ronon Stevens & Young, LLP http://www.stradley.com
        1220 19th Street NW, Suite 600
        Washington DC 20036
        202.419.8413
        202.822.0140 fax
        FundLaw Listowner http://groups.yahoo.com/group/fundlaw




        -----Original Message-----
        From: FundLaw@yahoogroups.com [mailto:FundLaw@yahoogroups.com] On Behalf
        Of Baker, John
        Sent: Tuesday, January 03, 2006 9:02 PM
        To: fundlaw@yahoogroups.com
        Subject: [FundLaw] Swift, Extensive and Extraordinary Cooperation: The
        SEC View

        The Securities and Exchange Commission said today that it
        decided not to bring any enforcement action against a registered
        transfer agent because of its "swift, extensive and extraordinary
        cooperation" in the SEC's investigation. Litigation Release No. 19517
        (Jan. 3, 2006). The announcement was made as the SEC filed a civil
        fraud action against six former officers of the transfer agent for their
        fraud in covering up a $4 million loss arising from their employer's
        delay in investing assets of a defined contribution plan client. (It
        was only a one-day delay, but the market happened to do very well that
        day.) The officers shifted $3 million of the costs of the delay to
        shareholders of affiliated mutual funds through deception, illegal trade
        reversals, and accounting machinations; the defined contribution plan,
        without disclosure of the problem, had to bear the other $1 million.

        In other words, the problem was caused by the employer, and the
        loss was its responsibility. To protect the company, six officers, all
        of them quite senior, engaged in a cover-up. There is an object lesson
        there about throwing away your career to save your employer from its
        mistakes, but we all know that one (even if, time and again, people who
        should know better do it anyway). How did the company get off
        scot-free, while its officers took it in the neck? Through its swift,
        extensive and extraordinary cooperation, which consisted of:

        --Prompt self-reporting*

        --An independent internal investigation

        --Sharing the results of that investigation with the government,
        including not asserting any applicable privileges and protections**

        --Terminating and otherwise disciplining responsible wrongdoers

        --Providing full restitution to its defrauded clients

        --Paying for the attorneys' and consultants' fees of its
        defrauded clients

        --Implementing new controls designed to prevent the recurrence
        of fraudulent conduct


        *The self-reporting happened "promptly" three years after the
        events in question. According to the SEC complaint, one of the six
        officers, who had been terminated for other reasons, left a voicemail at
        that time with an internal auditor for the company's corporate parent.

        **As I posted last year, at least one court has ruled that a
        company waives the attorney work product privilege when it provides
        documents to the SEC:

        http://groups.yahoo.com/group/FundLaw/message/988


        The SEC's press release, with a link to the litigation release
        and thence to the complaint, is at

        http://www.sec.gov/news/press/2006-2.htm


        John M. Baker <JMB@...>
        Stradley Ronon Stevens & Young, LLP http://www.stradley.com
        1220 19th Street NW, Suite 600
        Washington DC 20036
        202.419.8413
        202.822.0140 fax
        FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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