Securities & Related Investigations: Introduction
Since the 2008 financial crisis, government agencies around the world have launched investigations and brought enforcement actions at a pace and scale, and with sanctions, never before seen. Whether this increased enforcement activity is a reaction to the financial crisis and public cries for those who caused it to be “brought to justice,” or the result of more severe and systemic misbehaviour by participants in the world’s financial markets, may be open to debate. But what cannot be denied is that the decade since the financial crisis has brought dramatic changes in how securities and related investigations are conducted and resolved.
A crisis of a different nature rippled across the globe earlier this year with the covid-19 pandemic and ensuing market dislocation. Enforcement agencies and private-sector practitioners alike have had to adjust to a new working environment involving increased reliance on video interviews and digital productions. And while practitioners are only beginning to evaluate the pandemic’s long-term effects on securities and related investigations, authorities have acted swiftly to target covid-19-related fraud and have continued to press forward with existing matters. The US Securities and Exchange Commission (SEC), for example, has launched a Coronavirus Steering Committee to identify areas of potential market and investor risk and has separately emphasised the importance of controls relating to material nonpublic information and corporate disclosures in light of increased market volatility.
At the same time, certain existing trends in securities and related investigations are likely to continue. Among the recent developments shaping such investigations is an emphasis by regulators on encouraging cooperation with government investigations. In May 2020, the US Commodity Futures Trading Commission (CFTC) issued – for the first time since 1994 – new guidance on civil monetary penalties, which includes self-reporting and cooperation as mitigating circumstances. These guidelines have been incorporated into the CFTC’s public enforcement manual, updated in May 2020. In addition to cooperation guidelines that apply to individual cases, the SEC has increasingly relied on its whistleblower award program and, in recent years, has also launched large-scale voluntary self-reporting programmes relating to municipal bond offerings and investment adviser share class disclosures.
Furthermore, government agencies have also expressed heightened expectations that companies establish adequate reporting and investigating mechanisms to identify misconduct. In April 2019, for instance, the Department of Justice (DOJ) released guidance on corporate compliance programmes that included a new section dedicated to investigating misconduct. A June 2020 revision of the guidance includes an additional expectation that the compliance function monitor investigations and resulting discipline to ensure consistency.
In addition to these developments in government policy, the growing size and complexity, as well as the increasingly international nature of regulatory and criminal investigations, pose new challenges for practitioners in this field. This introduction discusses a few of these challenges, which the remainder of this publication addresses in detail.
First, government agencies increasingly assert jurisdiction and investigate conduct previously considered too removed in location or substance from their country. In the United States, in particular, the DOJ now routinely asserts jurisdiction where there is only minimal contact with the United States, such as a wire transfer that passed through a US correspondent bank account. The UK Serious Fraud Office similarly has theoretically expansive jurisdiction for any “act or omission” in the UK that forms a bribery offence. Brazil’s Administrative Council for Economic Defence has even broader theoretical jurisdiction for conduct that has an effect in Brazil. Practitioners defending clients in investigations in jurisdictions outside the client’s home country need to be at least familiar with the customs, procedures, and attitudes of those other government authorities. Practitioners must also develop a working understanding of the laws of the local jurisdiction.
Another challenge is the collection of evidence. A global investigation can require a client to collect evidence in multiple jurisdictions. Each jurisdiction will have its own laws governing how information may be collected and reviewed and what information may be transferred out of the country. Moreover, these laws are frequently changing, as demonstrated by the Court of Justice of the European Union’s recent landmark decision in Schrems II invalidating the EU–US Privacy Shield Framework. Practitioners working on matters related to Europe should be aware of the remaining EU data protection laws that govern the cross-border transfer of personal information, such as the General Data Protection Regulation, the EU Standard Contractual Clauses, and the October 2019 UK–US executive agreement under the US Clarifying Lawful Overseas Use of Data (CLOUD) Act. Employee interviews, typically a source of key information, may be difficult to conduct in jurisdictions with robust employment protection laws where adverse action taken against an employee may expose the client to a lawsuit. Government investigators may face their own problems; in the US, a federal court of appeals ruled in 2017 that testimony compelled by a foreign sovereign cannot be used in a US criminal proceeding.
A third challenge lies in the potential for collateral consequences resulting from a resolution with a government authority. A resolution in one jurisdiction may prevent a client from pursuing a particular defence or making particular arguments in another jurisdiction. Even if there is no such limitation, practitioners need to consider the practical effects of a resolution with one government authority, where detailed facts and conclusions (if not admissions) are often released publicly. Such a resolution also could impact private civil actions and criminal actions brought in multiple jurisdictions. Finally, practitioners need to carefully consider potential implications of such a resolution for the client’s business around the world, such as a revocation of a licence or debarment from government contracts.
In light of these and other challenges, practitioners need to develop defence strategies that take into account and respond to government authorities conducting investigations in multiple jurisdictions. Arguments, defences and strategic decisions made with respect to an investigation in one jurisdiction can have profound and, at times, adverse consequences in another jurisdiction.
We recognise that no single resource can provide all the information and guidance necessary to manage a complex cross-border investigation. But in Securities & Related Investigations Know-How, the global crisis management and white-collar defence groups at Cleary Gottlieb, in conjunction with other leading practitioners, have compiled in one convenient location an overview of the relevant government agencies, statutory and regulatory frameworks, and salient issues likely to arise in securities and related investigations. This publication aims to equip the reader with the tools necessary to ask the right questions, identify significant issues, and avoid harmful pitfalls.
In using the phrase “securities and related investigations”, we intend to cover not only government inquiries directly tied to investment products but also inquiries into other types of misbehaviour involving the financial markets, such as insider trading, accounting fraud, market manipulation, misrepresentations in disclosures, misappropriation of client funds and breach of conduct rules. This list is not exhaustive, and other related legal issues may be relevant. However, this publication does not address issues related to bribery or corruption, such as those arising under the US Foreign Corrupt Practices Act (which will be covered by another publication), although many of the broad considerations for the management of a global securities investigation may be relevant to global corruption and bribery investigations.