In a pair of sharply-worded letters, Sen. Charles Grassely (R-Iowa) asked the Securities and Exchange Commission and Department of Justice to explain exactly what information is shared with defendants facing both civil and criminal proceedings.
It's a fairly common scenario in securities fraud matters - take Tuesday's cases against four hedge fund managers, for example, who face both SEC and DOJ charges.
What’s not clear is how much the SEC tells the targets of its investigations about DOJ’s interest in bringing criminal charges — an issue that could be especially relevant if an individual is considering cooperating with the SEC.
Grassley in Feb. 8 letters to SEC Chairman Mary Schapiro and Attorney General Eric Holder Jr. asked for copies of written guidance on collaboration and communication between the two agencies.
Grassley wrote that SEC Enforcement Division head Robert Khuzami in a November speech “seemed to describe a process in which the SEC would gather information from DOJ for attorneys representing potential targets of an investigation.”
He quoted Khuzami as saying that lawyers “may well pause before signing up their clients to [cooperate with] the SEC without knowing what the Justice Department is doing… [so] there is going to be earlier and more frequent collaboration between us and Justice.... We are going to try to get those individuals answers whether or not there is criminal interest in the case so defense counsel can have as much information as possible.”
But Grassley noted that the SEC’s enforcement manual “describes a policy very different from Director Khuzami’s practice.”
The manual states that it’s “the general policy of the Commission not to comment on investigations conducted by law enforcement authorities responsible with enforcing criminal laws.”
Grassely wrote, “It looks like there may be a big divide between the stated policy and the actual practice on this issue. So, which is it? Should the SEC provide information about the DOJ’s criminal inquiries, or not? Does the SEC actually do so, or not?”
In a press release, he said, “All the promises of financial regulatory reform ring hollow if the administration is allowing the top enforcement official at the SEC to relay to potential targets of an investigation exactly what the Justice Department has in store for them.”
Grassley also asked Schapiro and Holder to provide detailed information about communications between SEC and DOJ officials concerning the Justice Department’s intentions to pursue any criminal charges in the Goldman Sachs and Pequot Capital Management cases, and the SEC’s decision to settle the matters.
What’s less clear in Grassley’s letter is the context of Khuzami’s quotes. In the quoted passage, Khuzami seemed to be discussing instances where individuals cooperate with the SEC in exchange for leniency.
One of his signature initiatives as enforcement chief has been to establish a “Seaboard for individuals.”
In 2001, the SEC released the Seaboard report (named after Seaboard Corp., which was under investigation) detailing how it would credit corporations for self-policing, self-reporting, cooperation and remediation when making enforcement decisions. But no standard existed for individuals until last month, when it was formally unveiled.
According to the SEC, the initiative provides a “wide spectrum of tools available to the Commission and its staff for facilitating and rewarding cooperation by individuals ranging from taking no enforcement action to pursuing reduced charges and sanctions in connection with enforcement actions.”
Schapiro and Holder have until Feb. 22 to respond to senator’s request.