When home mortgage giant Freddie Mac announced last month that the Justice Department’s three-year probe into its accounting practices would not result in criminal charges, company spokespersons had to tread carefully while delivering the good news.
“It is Freddie Mac’s understanding that it is the practice of the U.S. attorney’s office for the Eastern District of Virginia neither to issue official notices nor to confirm publicly the conclusion of an investigation,” company spokesman Doug Duvall diplomatically told reporters.
“However, the U.S. attorney’s office has not initiated contact with us in well over two years and it is our understanding that the matter is inactive. Accordingly, we expect no further action in this matter.”
Duvall would not elaborate on how the company came to this conclusion, but he tells Compliance Week: “We fully disclose major litigation affecting the company. As long as it is out there, we must keep it in the public domain.”
Freddie’s announcement may have been inspired by rival Fannie Mae’s similar news in August. Then, the company said that the U.S. attorney for Washington, D.C., had advised it that prosecutors were “discontinuing their investigation” and “did not plan to file charges.”
Whatever the case, the mortgage companies’ announcements demonstrate a pesky detail about federal probes: No formal procedure exists to inform the targets that they are off the hook.
Procedure Can Be A Good Thing
The point is not as minor as it first sounds. Corporate targets of ongoing investigations frequently see their stocks sag or have trouble raising capital; relationships with customers can sour, and current or prospective employees may head for greener pastures rather than keep a tainted entry on their resume.
Robertson
Individual targets fare even worse, often getting fired and encountering serious difficulty finding new jobs. “They are scrambling, trying to establish themselves,” says Jeffery Robertson, a partner at the law firm Mayer, Brown, Rowe & Maw.
According to a Justice Department spokesperson, each U.S. attorney’s office has the discretion to notify an individual who has been the target of a grand-jury investigation that he or she no longer is a target. But prosecutors also have the discretion not to notify the subject, if doing so would harm the integrity of an investigation or the grand-jury process—and the U.S. attorney’s office does not have to disclose any reasons for its actions at all.
SEC spokesman John Nester stresses that as a policy, the Commission does not disclose the existence of an investigation in the first place, so it typically does not announce that one has ended. A company whose probe has ended without charges can, however, request a “comfort letter” from the SEC, which says the Division of Enforcement does not intend to bring charges at this time.
Sauer
Rick Sauer, a former SEC enforcement attorney and now partner at the law firm Vinson & Elkins, says that if a company or individual receives a Wells Notice—the SEC’s formal alert to an individual that he or she is a target of an enforcement action—then the agency also is supposed to notify the subject if prosecutors decide not to file charges.
In cases where a Wells Notice isn’t issued but the target is still “a significant figure in the investigation,” Sauer says, the SEC also should notify the subject when the probe ends. But, he concedes, “That is more discretionary. Some offices are more likely to do that” than others.
SUMMARY
Below is summary of The Compliance, Examinations, and Inspections Restructuring Act of 2005 (H.R. 4618).
Title: To amend the Securities Exchange Act of 1934 to establish rules and procedures for the delegation of compliance and inspections authority to the operating divisions of the Securities and Exchange Commission, and for other purposes.
Sponsor: Rep. Vito Fossella (R-NY); 3 cosponsors
Introduced: 12/17/2005
Latest Major Action: 1/10/2006 Referred to House subcommittee.
Status: Referred to the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.
Key Provisions:
Requires the subject of an SEC inquiry or inspection to be notified in writing at least every 120 days regarding the status of an ongoing proceeding.
Requires an SEC administrative division or office to obtain permission to conduct a sweep examination in the same manner and subject to the same procedures as SEC enforcement divisions or offices must follow in conducting a formal investigation or inquiry of registered entities.
Instructs the Chairman of the SEC to appoint an Ombudsman with respect to any problems resulting from SEC regulatory activities.
Expresses the sense of Congress that the SEC should develop and publish guidelines setting forth explicitly the benefit to either an issuer of securities or a registered entity if it self-reports an apparent violation of law, and subsequently becomes the respondent in an SEC civil injunctive action or administrative proceeding regarding the matter that was self-reported.
Source:
Summary Of H.R. 4618: Compliance, Examinations, and Inspections Restructuring Act of 2005(Library Of Congress)
SEC Makes Effort To Improve Contact
Robertson and other attorneys do credit the SEC with recently making more of an effort to contact companies. A spokesman for SunTrust Banks, for example, confirms that the SEC informed it in August that a formal inquiry into a past restatement “has been terminated and no enforcement action has been recommended to the Commission.” The spokesman, however, would not say whether SunTrust had to request the letter or the SEC sent it on its own.
And in July, Amerco, a holding company for U-Haul and several other businesses, said it had received a letter from the SEC’s Pacific Regional Office, saying the Commission had terminated its investigation and recommended that no enforcement action be taken against the company.
Goldstein
Then again, when the SEC ended an investigation into Sir Philip Watts, former chairman of Royal Dutch/Shell, for the company’s 2004 misstatement of oil and gas reserves, no letter was sent to the company. Instead, investigators simply called the lawyer representing Shell’s interests in the case, Joseph Goldstein of the law firm Mayer, Brown, Rowe & Maw.
“I had been in continuing communication with the SEC,” says Goldstein, who spent 15 years at the SEC himself.
Even so, experts say the regulatory agencies are more inconsistent than they admit. Fannie Mae and Freddie Mac, for example, are in the same business and faced probes of similar transgressions. But Fannie Mae implies in its statements that the U.S. attorney in Washington informed it that the probe had ended—indeed, the DoJ confirmed the probe’s termination to the Washington Post. But Freddie Mac, in the Eastern District of Virginia, received no such explicit confirmation from federal prosecutors there.
“Their actions do not suggest there is a uniform policy handed down from the Department of Justice’s home office,” Robertson says. “My experience is that [U.S. attorneys] take an office-by-office approach.”
U.S. Rep. Vito Fossella, R-N.Y., and a member of the House Financial Services Committee, tried to address this problem late last year when he introduced the Inspections and Examinations Reorganization Act (H.R. 4618). Part of the bill would require the SEC to notify registrants when an investigation or inspection has been closed. The bill also would require the SEC to update registrants every 120 days during an ongoing investigation on the progress of the case.
Craig Donner, a spokesman for Fossella, says the bill is still before committee. In May the SEC implemented several reforms of the agency’s inspections and examinations process, including Fossella’s recommendation that registrants receive that update every 120 days. One significant hole in the bill: It would only apply to broker-dealers and investment advisers, but not the vast swath of other companies that make periodic reports to the SEC.
Meisner
“I think a requirement of the [SEC] enforcement division to update subjects of an investigation of the status would be very well received in the securities bar and eliminate quite a bit of anxiety,” says Derek Meisner, a former branch chief for the SEC and now attorney with the law firm Kirkpatrick & Lockhart Nicholson Graham.
What should companies or individuals under investigation do if they haven’t heard from a regulator in awhile and want to know how the probe stands? That is a dicey decision, Meisner says, since sometimes it is better to let dormant investigations remain dormant. His rule of thumb: If a client has already disclosed the existence of an investigation, he has a continuing obligation to disclose the status of the probe. “So, it may not hurt to contact the SEC and update shareholders,” he says.
Then again, Robertson says, contacting the SEC could prompt some curious new investigator to take a fresh look at the case; some enforcement actions do fall by the wayside, and agency turnover might lead to a shift in priorities. “You would hate to make a phone call to remind the Staff of something they might have forgotten about,” he says.
Goldstein’s advice is more pointed. “If you don’t need a letter,” he says, “don’t ask for it.”
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