by Laurence Lieberman and Paul Glass, Taylor Wessing LLP, and Howard Fischer
Traditionally, the English courts have been critical of plea bargaining, co-operation agreements and immunity agreements. This is perhaps best reflected by the comments of Mr Justice Bean in December 2010 in relation to the settlement reached between the Serious Fraud Office (SFO) and BAE Systems following the well-publicised corruption investigations into BAE by the SFO and the U.S. Department of Justice. The Judge was scathing about the settlement entered into between the SFO and BAE, and noted that, whether or not pleas have been agreed, the Judge is not bound by any such agreement, and any view formed by the prosecution on a proposed basis of plea is deemed to be conditional on the Judge’s acceptance of the basis of plea. Exploiting this unease, defence Counsel will no doubt emphasise that witnesses may have received some benefit for their testimony, which may carry more weight with English judges than it might in the U.S., where plea bargains and such attacks on evidence obtained as a result are more commonplace.
The Serious Organised Crime and Police Act 2005 gave certain prosecutors in the UK the ability to issue immunity notices and to enter into agreements with a view to reduced sentences in exchange for co-operation and assistance in bringing other offenders to justice. The Financial Services Authority (FSA) was not given these powers, and so during 2007 and 2008, it undertook sustained lobbying of the Government to obtain these powers on the basis that they were essential for the FSA to be able to successfully tackle insider dealing, on which it had a poor success record at the time. As a result, section 113 of theCoroners and Justice Act 2009 gave the FSA the power to issue immunity notices and to enter into plea-bargain agreements. It has exercised those powers on a number of occasions, more recently in the successful prosecution in 2010 of Malcolm Calvert, a former investment banker at Cazenove.1 In that case, a Mr Hatcher, who bought and sold shares for Mr Calvert on information he provided, was not prosecuted because he was granted immunity by the FSA (although he was given a civil fine)2 in return for evidence against Mr Calvert. However, there has been relatively limited use by the FSA of these powers, certainly when compared to their extensive use by the U.S. Securities and Exchange Commission (SEC), including in the successful Rajaratnam prosecution in 2011.
In the current political climate, the FSA will want to increase its use of immunity and/or plea-bargains as a tool in building major cases. That said, doubts remain as to the ability of the FSA to gather sufficient evidence for this to be a truly effective tool in its fight against insider dealing. Any prosecuting authority must be able to present a defendant with sufficient weight of evidence that he perceives the acceptance of a plea-bargain, or opting for immunity in exchange for giving evidence against other wrongdoers, is a preferable option to the risk of being prosecuted himself. This was shown to great effect in the Rajaratnam trial,3 where the SEC and the U.S. Attorneys Office were able to put wiretap evidence before the other parties involved in the insider dealing "ring," with those parties then accepting plea bargains which required them to cooperate in the prosecution. This substantially strengthened the case against the "ringleader," Rajaratnam himself, who was ultimately convicted on all counts (the criminal case was not brought by the SEC, but it is likely that such a prosecution would have been brought by the FSA in the UK).
We can expect to see increased attempts by the FSA to use plea bargains to continue its efforts against insider dealing, but it remains to be seen how the FSA intends to develop its capabilities in this area. Given the numerous arrests over the past two years by the FSA in its insider dealing investigations (which have not yet resulted in prosecutions), the FSA will no doubt be developing its strategies in this regard at the moment, but until information regarding any arrangements entered into following those arrests becomes public, the FSA’s approach remains unclear.
In stark contrast, the use of co-operation and immunity agreements has greatly accelerated in the U.S. since 2010, when the SEC announced its adoption of an initiative to incorporate new forms of "co-operation agreements" whereby individuals and entities would be able to obtain more favourable treatment by cooperating in the SEC’s investigation and enforcement process.
The co-operation initiative introduced three new weapons into the SEC’s enforcement arsenal:
The co-operation program is intended to serve several purposes. First, it should facilitate the obtaining of evidence by converting scheme insiders to co-operators who would then be able to guide the investigation based on their knowledge. Secondly, it will smooth the SEC’s pursuit of higher ranking violators by offering incentives to lower ranking employees to cooperate, enabling the SEC to focus on the most culpable wrongdoers. Thirdly, it will assist in preserving scarce prosecutorial resources in two ways: by using insiders to propose shortcuts and through earlier case resolution.
Co-operation also offers significant benefits to co-operators. Most obviously, a co-operator can secure far better terms than would be available should one be later held liable. By co-operating, one can secure an early resolution of the case against one, at far better terms. Secondly, even if one is still charged with some violation, it is a lesser one, and it can be done in a separate proceeding away from the publicity glare and spotlight of the main case.
The U.S. approach reflects the belief that it often pays to, in effect, make a deal with the (smaller) devil in order to catch the larger one. It also reflects the belief that, by providing incentives to co-operate with law enforcement, ultimately more good can be accomplished. It reflects an approach that prioritises resolving a problem over an automatically adversarial approach.
As noted above, co-operation agreements greatly aided the Rajaratnam prosecution. A brief look at the first cases of a non-prosecution and a deferred prosecution agreement help illustrate the factors that come into play when considering the real-life application of the above principles.
— First Uses of Powers
The first use of a non-prosecution agreement was in connection with an investigation into financial fraud and insider trading at Carter’s, Inc., the children’s clothing company. While the SEC ultimately charged Carter’s’ former Executive Vice President for the misconduct at issue, Carter’s was not charged on an entity level but entered into a non-prosecution agreement in December 2010.
The non-prosecution of Carter’s was predicated on several factors, most notably the fact that the conduct appeared to be isolated and that, once discovered, Carter’s self-reported the conduct and undertook remedial action. The non-prosecution agreement was predicated on Carter’s continued co-operation with any investigation, including but not limited to the one that produced the agreement relating to the conduct at issue, and its undertaking not to publicly deny any of the factual bases of the agreement in any proceedings involving the SEC. Any violation of the agreement would subject Carter to additional securities enforcement proceedings, as well as the risk of a reference for potential criminal proceedings for knowingly providing false or misleading information. Importantly for the co-operator, the agreement provided that, should Carter’s come under investigation by any other federal, state, or self-regulatory organisation, it could request that the SEC issue a letter to that organisation detailing its co-operation, although it could not serve as blanket immunity from any other such prosecution.4
The first reported deferred prosecution agreement was entered into by the SEC and Tenaris, S.A. in May, 2011, with respect to an investigation into Tenaris having made various improper payments to Uzbeki officials in connection with bidding for government contracts. As the agreement publicly set forth, Tenaris voluntarily disclosed the violations on a timely basis to the SEC, conducted an extensive internal investigation, and issued a detailed report to the SEC. Furthermore, Tenaris reviewed its compliance programme and undertook to update it with enhanced procedures designed to prevent a recurrence of the violation. The agreement put off, for a period of two years, any enforcement action, as long as Tenaris tolled any applicable statute of limitations, and continued to co-operate fully during that time period.5
Laurence Lieberman is a partner and Paul Glass is a senior associate in the Financial Disputes and Contentious Regulatory Group at Taylor Wessing LLP. Telephone: +44 (0) 20 7300 4869/4792; E-mail: firstname.lastname@example.org or email@example.com.
Howard Fischer is a Senior Trial Counsel in the New York Regional Office of the Securities and Exchange Commission.
Disclaimer: The SEC disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners or other members of staff.
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