The U.S. Securities and Exchange Commission (SEC) announced late last year that it has entered into a deferred prosecution agreement with an individual in exchange for assistance in an enforcement action. In 2010, the SEC created a program to encourage companies and individuals to report securities law violations. Rather than offering reduced penalties in exchange for cooperation, deferred prosecution agreements (DPAs) offer the chance to avoid enforcement by the SEC entirely, although the program is far from perfect. The agency has entered into DPAs with two companies since then, but the most recent one is the first to involve an individual.
The Enforcement Cooperation Initiative (ECI) encourages cooperation from people who might be involved in unlawful activity, or who might work for a company that is violating the law. By offering DPAs in exchange for full cooperation, the SEC offers the chance to avoid any further investigation or prosecution, as well as any associated criminal history. In a DPA, the SEC agrees to defer enforcement, provided that the individual or company cooperates “fully and truthfully” and complies with other conditions and restrictions. The deferral of prosecution becomes permanent if the cooperator successfully completes the deferral period.
A few features of the ECI program remain uncertain, even more than four years after its launch. Full cooperation might mean cooperation with other government agencies besides the SEC, which are not bound by the SEC’s DPA. This potentially affects an individual’s Fifth Amendment right against self-incrimination. Coming forward does not guarantee a DPA, as the SEC sets out four ambiguous factors that it will use to determine whether and how much it will credit cooperation:
1. The amount or type of assistance offered;
2. The importance of the matter in question;
3. Society’s interest in holding the individual accountable; and 4. The appropriateness of leniency based on the individual’s “risk profile,” such as any prior offenses.
The SEC’s first individual DPA is with Scott Herckis, the former administrator of a Connecticut-based hedge fund, Hepplewhite Fund, LP. The individual reportedly worked in that position from 2010 to 2012, when he resigned and reported suspected misconduct to the government. The SEC commenced an enforcement action against the hedge fund manager, Berton M. Hochfield. SEC v. Hochfield, et al, No. 1:12-cv-08202, complaint (S.D.N.Y., Nov. 9, 2012). It alleged that Hochfeld had misappropriated over $1.5 million from the hedge fund and had misrepresented the fund’s performance to its investors. Herckis reportedly produced “voluminous documents” detailing Hochfeld’s activities.
In late November 2012, the SEC obtained an order freezing the defendants’ assets and appointing a receiver. Last October, the court approved distributions totaling $6 million to thirty-five former investors. A final judgment entered in January 2014 requires disgorgement by Hochfeld of almost $1.8 million, along with forfeiture and restitution of about $2.9 million. As for Herckis, his DPA states that he aided and abetted Hochfeld’s violations of securities law. It bars him from providing any services to a hedge fund for five years, and requires him to disgorge $50,000 to the fund established for investors.
Defendants in criminal cases should consult with an experienced criminal defense attorney in order to ensure that their constitutional and procedural rights are recognized and protected. Michael J. Brown has worked in law enforcement and as a prosecutor, and he has fought for west Texas defendants for more than twenty years. Contact us today online or at (432) 687-5157 to schedule a confidential consultation to discuss your case.
More Blog Posts:
Former Oil and Gas CEOs Charged with Bribery Under FCPA, Texas Criminal Lawyer Blog, January 24, 2014
Fine Against Hedge Fund for Insider Trading is Largest in History, While Individual Traders Face Possible Jail Time, Texas Criminal Lawyer Blog, January 15, 2014
Insider Trading Charges and Forfeiture Suit Brought Against Former Microsoft Senior Manager and Friend, Texas Criminal Lawyer Blog, January 8, 2014
Photo credit: By Tomwsulcer (Own work) [CC0], via Wikimedia Commons.