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Since being sworn in as SEC chairman in August, Harvey Pitt has already changed some of the agency’s process and approach to enforcement investigations and actions. With respect to process, Chairman Pitt has introduced the concept of “real time” enforcement, which is achieved by responding as quickly as possible to wrongdoing to enhance the deterrent effect of the SEC’s enforcement program. Possible steps the SEC might take to achieve “real time” enforcement include (1) instituting more trading suspensions, asset freezes and registration withdrawals, (2) truncating the post-Wells negotiating period, (3) filing authorized cases immediately if there is no prospect for settlement, (4) taking the testimony of several witnesses from a single case simultaneously and (5) requiring people to file a statement with the SEC as to all the facts and circumstances concerning the matter to be investigated pursuant to a provision of the Securities Exchange Act of 1934 that has been rarely if ever used. The use of trading suspensions and registration withdrawals will likely be focused on smaller capitalized companies that became public more recently, including many e-commerce companies. Moving the enforcement process along more expeditiously presents greater challenges to those defending SEC investigations. The decision on the level of cooperation and any corresponding mitigating actions will need to be made more quickly. This decision is sometimes complicated and could be the most important one made in responding to an investigation. In the past, the SEC enforcement staff has always encouraged cooperation in their speeches and other communications and said that “credit” was given for such cooperation. It did so, though, without providing much detail or guidance as to what type of cooperation would be most valuable and rewarded, and without clearly articulating what “credit” was given. The staff never publicly gave an example where an enforcement action was not instituted because there was sufficient cooperation or other mitigating circumstances. THE � 21(A) REPORT On Oct. 23, the SEC gave more than lip service to this issue by releasing a report of investigation and statement. Report of Investigation Pursuant to � 21(a) of the Securities Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 44969, AAER No. 1470 (Oct. 23). A report of investigation is issued by the SEC when it wants to communicate enforcement policies through a statement instead of an enforcement prosecution. The � 21(a) Report was issued as an alternative to bringing an enforcement action against Seaboard Corp. for violations of the federal securities laws by the controller of one of its subsidiaries. The � 21(a) Report went well beyond the facts and circumstances of the Seaboard matter by identifying ways that companies can either avoid prosecution or mitigate the sanction. It identified four general strategies: self-policing, self-reporting, remediation and cooperation. The � 21(a) Report also goes far beyond the commission’s usual generalized encouragement of cooperation, setting out specific criteria that the commission will use to decide whether to institute an enforcement action, as well as the nature of such action or sanction if it is pursued. In SEC Press Release 2001-117, Director of Enforcement Stephen Cutler said, “Crediting those who seek out, self-report and rectify illegal conduct is critical to achieving the Commission’s goal of ‘real-time enforcement.’ We hope that, by setting forth a framework for exercising its prosecutorial discretion, the Commission will encourage companies to address unlawful conduct swiftly and meaningfully and to cooperate with law enforcement authorities. The result will be more efficient and effective enforcement of the federal securities laws.” In the � 21(a) Report, the SEC also notes the time and money saved by the government and investors when businesses cooperate with commission investigations. THE SPECIFICS: GUIDELINES FOR COOPERATION The � 21(a) Report and press release set forth the following four broad measures of cooperation that SEC staff may consider when deciding how to proceed in an investigation or action: (1) whether there was self-policing before the misconduct was discovered, such as effective compliance procedures and an appropriate attitude toward compliance by management; (2) whether the misconduct was promptly and comprehensively self-reported when it was discovered; (3) whether remedial measures were taken, including disciplining wrongdoers, adjusting internal deterrence procedures and compensating those affected; and (4) whether there was cooperation with law enforcement authorities, including providing information about the violations and remedial efforts. THE CAVEATS The � 21(a) Report underscores that protecting investors is a primary goal for the SEC. As a result, the � 21(a) Report contains several critical caveats to the individual or entity hoping to exchange information and remedial efforts for leniency from the SEC. First, the SEC warns that the criteria discussed above are not exhaustive. Compliance with this list does not necessarily create a safe harbor from liability. As the commission explains with alacrity, the criteria are merely guidelines and are not to be interpreted as rules, commitments, promises or binding precedent. Further, in cases where there is great harm and egregious behavior, it is possible that no amount of cooperation will shield a person from liability or result in a lighter sanction. Beyond these caveats stated in the � 21(a) Report, there are other obvious risks and tactical disadvantages that those seeking SEC leniency must take into account. For example, there are great risks to those who waive privileges as part of their cooperation. The parent company that the SEC decided not to take action against in its � 21(a) Report “did not invoke the attorney-client privilege, work product protection or other privileges or protections with respect to any facts uncovered in the investigation.” This is an important factor to the enforcement staff, as it has stated publicly since the issuance of the � 21(a) Report that it would seldom be satisfied, for example, with being provided with just an investigative report and would almost always insist on also obtaining the “raw data” underpinning the report, such as attorney notes or transcripts of relevant interviews. Waiving privileges opens a Pandora’s box of issues. Many SEC actions are accompanied by collateral private litigation. In situations where there is both an SEC investigation and private litigation, and the private litigation includes greater financial exposure, a common strategy is to attempt to resolve the SEC matter without admitting or denying any of the allegations and without waiving any privileges or other rights in the private action. There is great risk that providing information to the staff effectively waives privileges in all collateral private matters. The SEC attempted to address such concerns over waiving privileges in a footnote to its � 21(a) report, stating that: In some cases, the desire to provide information to the Commission staff may cause companies to consider choosing not to assert the attorney-client privilege, the work product protection and other privileges, protections and exemptions with respect to the Commission. The Commission recognizes that these privileges, protections and exemptions serve important social interests. In this regard, the Commission does not view a company’s waiver of a privilege as an end in itself, but only as a means (where necessary) to provide relevant and sometimes critical information to the Commission staff. Thus, the Commission recently filed an amicus brief arguing that the provision of privileged information to the Commission staff pursuant to a confidentiality agreement did not necessarily waive the privilege as to third parties. Brief of SEC as Amicus Curiae, McKesson HBOC Inc., No. 99-C-7980-3 (Ga. Ct. App. Filed May 13). Moreover, in certain circumstances, the Commission staff has agreed that a witness’ production of privileged information would not constitute a subject matter waiver that would entitle the staff to receive further privileged information. However, the SEC’s position on third-party waivers may not always be persuasive, and the risks of waiving privileges must be closely examined. Despite there being no guarantee of reduced liability, the potential benefits to be gained from cooperating with the SEC are immense. In the best situation, an enforcement action, and the accompanying negative publicity and collateral damage, may be avoided entirely. In other situations, sanctions may be reduced from the harsh to the acceptable. While there is not a clearly delineated safe harbor from liability, the SEC’s efforts to encourage cooperation warrant serious consideration and analysis. Michael J. Missal is a partner, and Karsie A. Kish is an associate, in the Washington, D.C., office of Kirkpatrick & Lockhart LLP. Both are members of its Securities Enforcement and Litigation Group.

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