DOJ’s Monaco Memo Reverberates In SEC Approach To Recidivism – Securities

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The Justice Department’s “Monaco memo” on combating corporate crime, released in September, made much of how the DOJ will evaluate a company’s history of wrongdoing in resolving the current charges. Recidivism, the memo noted, “may be indicative of a company operating without an appropriate compliance culture or institutional safeguards.” Therefore, DOJ may treat repeat offenders more seriously when misconduct reflects a failure to remedy prior violations or adopt internal mechanisms that deter those violations.

Deputy Attorney General Lisa Monaco reinforced those sentiments in a speech shortly after the memo was released. Noting that 10-20% of corporate criminal decisions involve repeat offenders, she warned: “If a company still believes that criminal decisions can be priced as the cost of doing business, we have a message – times have changed.”

But how will a company’s history of misconduct weigh on enforcement efforts beyond the DOJ? Although the Securities and Exchange Commission has not formally stated that it will adopt the principles of the Monaco Memo, the SEC’s Enforcement Manual, statements by the SEC Enforcement Chief, and recent SEC settlements all suggest that the Commission will take a similar approach to corporate recidivists.

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At the investigative stage, the SEC’s enforcement handbook instructs staff to consider whether suspected wrongdoing involves a repeat offender. Because any potential SEC investigation involves weighing the investment of SEC resources against the seriousness of the alleged offense, a company’s recidivist status may tip the needle in favor of an investigation when other considerations are not dispositive. These other considerations may include an immediate need to protect investors, the effect of the alleged activity on the fairness of U.S. securities markets, or the fulfillment of the SEC’s programmatic objectives.

Recidivism also weighs heavily at the enforcement stage. Gurbir Grewal, head of the SEC’s enforcement division, has warned, “when a company repeatedly violates our laws or regulations, they should expect to be punished more severely than a first-time offender would be for the same conduct.” In addition to increased penalties, prophylactic relief may be introduced in cases involving recidivists. As Grewal noted in 2021 congressional testimony, prophylactic relief can include officer and director bars, associational bars, suspensions and conduct-based injunctions.

This is not just rhetoric. In early 2021, the enforcement department reversed course on a Trump-era policy, announcing it would no longer recommend settlement offers to financial entities conditioned on granting so-called bad actor waivers. These waivers, when issued, preserve certain privileges under securities laws, including a person’s ability to serve as an investment adviser or a firm’s ability to invoke the statutory safe harbor for forward-looking statements. Without a waiver, violation of securities laws may trigger automatic disqualification from these privileges. Previously, settlement firms – even those with histories of wrongdoing – had been allowed to submit settlement offers alongside their waiver applications, with each subject to the other’s approval. The new policy, which decouples the settlement and waiver processes, signals a tougher stance by the SEC and one in which requests for waivers are likely to be scrutinized in relation to an offender’s repeat offender status.

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The SEC’s attention to recidivism is also evident in recent settlements. For example, steel pipe maker Tenaris SA’s June 2022 settlement of civil FCPA charges — of more than $78 million — related to bribes paid by its Brazilian subsidiary, Confab Industrial, is its second FCPA settlement with the SEC. In 2011, Tenaris entered into a deferred prosecution agreement with the SEC for FCPA violations in Uzbekistan. The 2022 settlement noted this, explaining that “[d]despite known corruption risks associated with its Brazilian operations and previously being subject to . . . a deferred prosecution agreement with the Commission. . . Tenaris failed to devise and maintain a system of internal accounting controls.”

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While the 2022 settlement does not expressly state that Tenaris received a harsher penalty due to its past violations, Tenaris’ settlement included a civil penalty of $25 million in addition to disgorgement and prejudgment interest. However, Tenaris was given credit for its cooperation and remedial efforts. These efforts included “providing translated copies of various documents and relevant testimony and encouraging parties outside the Commission’s subpoena power to present relevant evidence and information.” Tenaris also made improvements to its internal accounting controls and terminated certain Brazilian agents. These considerations dovetail with the Monaco Memo’s commitment to reward cooperation and remediation by companies that discover misconduct within their ranks.

Although the SEC has not explicitly adopted the principles of the Monaco memo, the SEC’s internal guidance (including its enforcement manual) and public statements indicate that recidivism, as well as potential mitigating components such as self-disclosure and cooperation, will all factor into the calculation of SEC enforcement.

The content of this article is intended to provide a general guide to the topic. Specialist advice should be sought regarding your specific circumstances.

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