Securities Fraud: Self-Reporting and Cooperation in DOJ Investigations
Securities fraud refers to deceptive practices in connection with the buying and selling of investments like stocks, bonds, and other securities. This type of fraud often involves providing false or misleading information to investors in order to induce investment or impact stock prices. The U.S. Department of Justice (DOJ) aggressively prosecutes securities fraud cases. For companies or individuals facing potential securities fraud liability, self-reporting the misconduct and cooperating with DOJ can be critical to mitigating consequences.
Overview of Securities Fraud
The most common types of securities fraud include:
- Accounting fraud – Falsifying or manipulating financial statements and records to misrepresent a company’s financial performance. This can involve techniques like premature revenue recognition, hiding liabilities off the balance sheet, and overstating assets.
- Insider trading – Buying or selling securities based on material non-public information, in breach of a fiduciary duty or other relationship of trust and confidence.
- Market manipulation – Artificially inflating or depressing the price of a security through practices like spreading false information, wash trading, and rigging prices.
- Offering fraud – Deceiving investors about the nature, risks, and prospects of a security being offered for sale to the public.
Securities fraud violations can lead to civil liability and penalties under federal securities laws. They can also trigger criminal prosecution under various federal fraud and anti-corruption statutes. Penalties can include hefty fines, disgorgement of ill-gotten gains, bars from participating in the securities industry or serving as an officer or director of a public company, and even imprisonment.
DOJ’s Approach to Prosecuting Securities Fraud
The DOJ aggressively investigates and prosecutes securities fraud offenses through its Criminal Division’s Fraud Section and local U.S. Attorney’s Offices. Key statutes used to charge these cases include:
- Mail and wire fraud
- Securities fraud
- False statements
- Obstruction of justice
- Conspiracy
Companies and individuals suspected of securities fraud often face parallel civil investigations by the U.S. Securities and Exchange Commission (SEC) and class action litigation by injured investors.
DOJ prosecutors have significant discretion in deciding whether to bring criminal charges. They evaluate factors like:
- Nature and seriousness of the offense
- Pervasiveness of wrongdoing within a company
- Actual or potential harm to investors and markets
- History of similar misconduct
- Timeliness and nature of self-reporting
- Cooperation with the investigation
- Remedial steps to prevent recurrence
No two cases are alike. But generally, the timelier and more fulsome the self-reporting and cooperation, the better the chances of avoiding criminal prosecution or at least mitigating charges and penalties.
Self-Reporting Securities Fraud to the DOJ
The key starting point is for companies to promptly self-report evidence of potential securities fraud to DOJ. Under the U.S. Sentencing Guidelines, voluntary self-reporting is a prerequisite to getting cooperation credit in corporate prosecutions. The self-report should include:
- A clear description of the misconduct uncovered
- Identification of executives and employees involved
- An estimate of the losses and harm caused
- Disclosure of any pending private litigation or government investigations
Ideally, the report should also describe the company’s internal investigation process and remediation efforts underway. Companies should take care not to compromise attorney-client privilege or work product protections when self-reporting.
In addition to self-reporting, individuals can receive cooperation credit by voluntarily disclosing their own misconduct to DOJ before an imminent threat of disclosure or government investigation.
The timeliness of self-reporting is critical. The sooner misconduct gets reported, the more credit a company or individual will receive. Delay raises suspicion and makes cooperation seem more self-serving.
Cooperation in DOJ Investigations
Once a securities fraud investigation is underway, DOJ prosecutors expect robust cooperation from companies and individuals.
For companies, cooperation entails:
- Disclosing relevant facts about the misconduct, including identifying individuals involved and third party entities
- Preserving, collecting, and disclosing relevant documents and data beyond existing legal requirements
- Making current and former executives and employees available for DOJ interviews
- Disclosing information about involvement in similar past misconduct
- Providing information about other companies engaged in similar misconduct, if requested
Companies often conduct internal investigations led by outside counsel to gather facts and determine responsibility. DOJ expects companies to disclose all relevant factual findings, even privileged information – though not privileged documents themselves.
For individuals, cooperation requires:
- Admitting participation in unlawful activity
- Informing DOJ of other individuals involved and illegal activities they participated in
- Testifying truthfully at trials and other proceedings
- Neither falsely implicating nor protecting other individuals
- Voluntarily turning over relevant records beyond existing legal requirements
The common thread is that cooperation requires disclosure of all relevant facts about the offense and related misconduct. Invoking the Fifth Amendment, lying to investigators, or failing to produce relevant evidence can undermine claims of cooperation.
Benefits of Cooperation with DOJ
For companies and individuals alike, cooperation offers the possibility of more lenient charging decisions, reduced penalties, and avoidance of certain severe sanctions.
Potential benefits to companies include:
- Declination of criminal prosecution entirely
- Reduced criminal fines
- No appointment of a corporate monitor
- Avoidance of charges that would trigger mandatory debarment from government contracting
Individual benefits can include:
- Immunity from prosecution
- Dismissal of filed charges
- Reduction in penalties and prison sentence
- Avoidance of additional charges for obstruction of justice
However, DOJ offers no guarantees. The decision whether to prosecute or show leniency still resides fully within prosecutors’ discretion. Companies and individuals face the difficult decision whether to cooperate without knowing exactly what benefits they may receive.
Strategic Considerations Around Self-Reporting and Cooperation
The decision whether to self-report and cooperate with DOJ involves careful strategic analysis of the unique circumstances of each case. Some key considerations include:
- Stage of the misconduct – Has the securities fraud already occurred and concluded? Or is it early enough to prevent further harm through voluntary disclosure?
- Likelihood of independent detection – How likely is it DOJ or other agencies would uncover the misconduct on their own anyway? Imminent threats warrant more timely disclosure.
- Extent of wrongdoing – Does the misconduct seem isolated? Or is there evidence of pervasive fraud or weak internal controls?
- Potential penalties – What range of criminal fines, prison time, or other sanctions might apply based on the offenses and losses involved?
- Private litigation exposure – Is the conduct likely to trigger follow-on civil lawsuits by investors seeking damages? If so, cooperation may help mitigate liability risks.
- Reputational implications – How severely could revelations of misconduct or criminal prosecution damage the company’s or individual’s reputation?
- Indemnification availability – Can company executives or employees under investigation expect indemnification for legal costs or penalties imposed? If not, cooperation becomes more appealing.
The stakes around self-reporting and cooperation are often extremely high. Companies and individuals should carefully weigh options with experienced white collar defense counsel before making fateful decisions.
Conclusion
Securities fraud can have dire consequences for both companies and individuals who participate in or fail to prevent misconduct. Self-reporting and cooperation do not guarantee leniency. But they offer the best possibility of mitigating outcomes when facing DOJ scrutiny.
Companies and their counsel should evaluate the unique circumstances of each case and make strategic decisions guided by experience with DOJ’s approach to prosecution. Likewise, individuals should obtain expert guidance around the potential benefits and risks of cooperating in securities fraud investigations.