What Is an SEC Deferred Prosecution Agreement?

Our Former Federal Prosecutors and SEC Defense Attorneys Help Companies and Their Executives Secure Favorable Resolutions During and Prior to SEC Investigations

In recent years, the U.S. Securities and Exchange Commission (SEC) has increasingly offered deferred prosecution agreements to companies and individuals accused of securities law violations. When facing the potential for civil or criminal prosecution by the SEC and the U.S. Department of Justice (DOJ), securing a deferred prosecution agreement can provide a favorable resolution—though it is still imperative to ensure that the terms of the agreement are fair and reasonable in light of the relevant facts and circumstances involved.

The SEC’s use of deferred prosecution agreements began in 2010. One year after the U.S. Department of Justice (DOJ) began employing non-prosecution agreements under its Foreign Corrupt Practices Act (FCPA) Corporate Enforcement Policy, the SEC announced its new Cooperation Initiative. The SEC described the initiative as “a series of measures to encourage individuals and companies to cooperate with SEC investigations and enforcement actions,” and these measures included both deferred prosecution agreements and non-prosecution agreements.

The SEC has continued to use deferred prosecution agreements in the years since. As the SEC explains, “A deferred prosecution agreement is a written agreement between the Division [of Enforcement] and a company . . . in which the Division agrees to forego an enforcement action against the company if, among other things, the company agrees to certain undertakings, or changes in behavior.” For companies (and individual executives and employees), securing a deferred prosecution agreement can provide a means to avoid facing the time, burden, expense, and risk of litigation or a federal trial.

Deferred Prosecution Agreements in SEC Cases

Deferred prosecution agreements offer advantages for both companies (or individuals) and the U.S. government. A deferred prosecution agreement is, in essence, a contract between the parties that provides for the government to release its claims if the counterparty satisfies certain conditions. In SEC matters, these conditions typically include paying a monetary settlement, fully cooperating with authorities, and ceasing the unlawful practices that gave rise to the SEC’s investigation.

For companies and individuals that are able to meet these conditions, entering into a deferred prosecution agreement with the SEC allows them to avoid the risks and uncertainties of civil or criminal litigation. This can be particularly important for individuals facing criminal charges, as a conviction in federal court can result in substantial fines and long-term imprisonment. For companies, avoiding adverse verdicts in federal district court is also critical, as the costs of such verdicts can be astronomical.

The SEC benefits from deferred prosecution agreements because they help to close its open investigations more quickly. Deferred prosecution agreements also allow the SEC to monitor companies’ and individuals’ compliance with federal securities laws, and the SEC can use deferred prosecution agreements to establish favorable case law as well. As a result, companies and individuals that are facing scrutiny from the SEC will often have the opportunity to negotiate the terms of a deferred prosecution agreement.

When Can Companies and Individuals Targeted in SEC Investigations Seek Deferred Prosecution Agreements?

Companies and individuals can seek deferred prosecution agreements at various stages of the SEC enforcement process. However, generally speaking, it is best to begin pursuing a deferred prosecution agreement sooner rather than later. This helps to demonstrate good faith to the SEC, and it can help to avoid the time, costs, and business disruptions involved in facing federal litigation.

Specifically, companies and individuals can seek to negotiate deferred prosecution agreements when:

1. The SEC Has Initiated an Investigation or Inquiry

If the SEC has initiated an investigation or inquiry, this does not necessarily mean that charges are imminent. But, companies and individuals targeted in SEC investigations and inquiries should defend themselves vigorously—and this includes exploring the possibility of negotiating a deferred prosecution agreement with the SEC.

2. The SEC Has Obtained a Grand Jury Indictment

If the SEC has obtained a grand jury indictment, this means that it has secured the evidence it needs to pursue charges in federal court. However, the SEC may still be willing to negotiate a plea deal, and it may be possible to negotiate a deferred prosecution agreement at this stage as well. If seeking a deferred prosecution agreement following an indictment, it is important to work quickly, as the SEC will likely place a relatively short deadline on the company’s or individual’s time to respond.

3. The SEC Has Filed Charges in Federal Court

If the SEC has already filed charges in federal court, it may still be possible to negotiate a favorable deferred prosecution agreement—though the SEC’s willingness to negotiate will depend heavily on the circumstances involved. At this stage, individual targets in particular will need to be able to affirmatively demonstrate that deferred prosecution is warranted. Negotiating a deferred prosecution agreement with the SEC at this stage will generally require the advice and representation of an experienced defense team.

When Should Companies and Executives Seek Deferred Prosecution Agreements from the SEC?

With all of this in mind, when should companies, corporate executives, and other targeted parties seek deferred prosecution agreements from the SEC? This is a question that needs to be answered on a case-by-case basis. When facing prosecution by the SEC, it is critical to make informed and strategic decisions. This includes the decision to enter into a deferred prosecution agreement. Sometimes, it will make sense to consider a deferred prosecution agreement as a first resort, while in other cases it will make more sense to take a more defensive approach.

With that said, if the SEC has (i) clear evidence of wrongdoing, and (ii) the intent to pursue charges, then it will often be in the targeted company’s or individual’s best interests to seek a favorable deferred prosecution agreement. Once it becomes clear that the target in question is at risk, and once it becomes clear that the SEC is committed to pursuing civil or criminal charges, then the benefits of negotiating a deferred prosecution agreement will generally outweigh the consequences involved.

But, even if a company or individual is confident that negotiating a deferred prosecution agreement is the right path forward, it is important to approach this process with the help of experienced federal defense counsel. There will be a lot at stake, and negotiating a deferred prosecution agreement with the SEC requires a comprehensive understanding of the relevant facts and law. With this in mind, it is important to engage experienced federal defense counsel as soon as possible.

Contact the Federal Defense Lawyers at Spodek Law Group

Our federal defense lawyers have extensive experience representing companies and corporate executives in high-stakes SEC investigations. If you have questions about seeking a deferred prosecution agreement from the SEC, we invite you to get in touch. For a confidential and complimentary consultation, please call 908-643-7005 or tell us how we can help online today.

Speak with our legal team at Spodek Law Group today. Call 908-643-7005 or contact us online for a confidential consultation.