DOJ’s Monaco Memo Reverberates in SEC Approach to Recidivism
The Department of Justice’s “Monaco Memo” on combatting corporate crime, released in September, made much of how the DOJ will assess a corporation’s history of misconduct in resolving present charges. Recidivism, the memo observed, “may be indicative of a corporation that operates without an appropriate compliance culture or institutional safeguards.” Accordingly, DOJ may treat repeat offenders more severely when misconduct reflects a failure to remedy prior infractions or adopt internal mechanisms that deter those infractions.
Deputy Attorney General Lisa Monaco reinforced these sentiments in a speech delivered shortly after the memo’s publication. Noting that 10%–20% of corporate criminal resolutions involve repeat offenders, she cautioned: “If any corporation still thinks criminal resolutions can be priced in as the cost of doing business, we have a message—times have changed.”
But how will a corporation’s history of misconduct weigh on enforcement efforts beyond DOJ? Though the Securities and Exchange Commission has not formally stated it will adopt the principles articulated in the Monaco Memo, the SEC’s Enforcement Manual, statements by the SEC Enforcement Chief and recent SEC settlements all suggest that the Commission will take a similar approach to corporate recidivists.
At the investigation stage, the SEC’s Enforcement Manual instructs staff to consider whether suspected misconduct involves a recidivist. Because every potential SEC investigation involves a balancing of the investment of SEC resources against the seriousness of the alleged offense, a corporation’s recidivist status may tip the needle in favor of an investigation when other considerations are not dispositive. Those other considerations may include an immediate need to protect investors, the effect of the alleged activity on the fairness of US securities markets or the fulfillment of the SEC’s programmatic goals.
Recidivism also weighs heavily at the enforcement stage. Gurbir Grewal, head of the SEC’s Enforcement Division, has warned, “when a firm repeatedly violates our laws or rules, they should expect to be penalized more harshly than a first-time offender might be for the same conduct.” In addition to increased penalties, prophylactic relief may be deployed in cases involving recidivists. As Grewal noted in 2021 congressional testimony, prophylactic relief can include officer and director bars, associational bars, suspensions, and conduct-based injunctions.
This is not just rhetoric. In early 2021, the Enforcement Division reversed course on a Trump-era policy, announcing it would no longer recommend settlement offers for financial entities contingent on granting so-called bad actor waivers. These waivers, when issued, preserve certain privileges under securities laws, including an individual’s ability to serve as an investment advisor or a firm’s ability to invoke the statutory safe harbor for forward-looking statements. Without a waiver, violation of securities laws may trigger automatic disqualification from these privileges. Previously, settling firms—even those with histories of misconduct—had been permitted to submit offers of settlement alongside their waiver applications, with each conditioned on the approval of the other. The new policy, which decouples the settlement and waiver processes, signals a tougher stance by the SEC and one in which waiver requests will likely be scrutinized more closely against an offender’s recidivist status.
The SEC’s attention to recidivism also is evident in recent settlements. For example, steel-pipe manufacturer Tenaris S.A.’s June 2022 settlement of civil FCPA charges—to the tune of over $78 million—relating to bribes paid by its Brazilian subsidiary, Confab Industrial, is its second FCPA settlement with the SEC. In 2011, Tenaris entered a Deferred Prosecution Agreement with the SEC for FCPA violations in Uzbekistan. The 2022 settlement made note of this, explaining that “[d]espite known corruption risks in connection with its Brazilian operations and having been previously the subject of . . . a Deferred Prosecution Agreement with the Commission . . . Tenaris failed to devise and maintain a system of internal accounting controls.”
While the 2022 settlement does not expressly state that Tenaris received harsher punishment because of its past violations, Tenaris’ settlement included a $25 million civil penalty in addition to disgorgement and prejudgment interest. Tenaris did, however, get credit for its cooperation and remedial efforts. These efforts included “providing translated copies of various documents and relevant witness testimony and encouraging parties outside of the Commission’s subpoena power to provide relevant evidence and information.” Tenaris also made improvements to its internal accounting controls and terminated certain Brazilian agents. These considerations dovetail with the Monaco Memo’s commitment to rewarding cooperation and remediation by companies that discover misconduct in their ranks.
While the SEC has not explicitly adopted the principles expressed in the Monaco Memo, SEC internal guidance (including its Enforcement Manual) and public pronouncements indicate that recidivism, as well as potential mitigating components like self-disclosure and cooperation, will all factor into the calculus of SEC enforcement.
If you have any questions about the Monaco Memo or the SEC’s approach to recidivism, please feel free to contact the authors or any of their colleagues in Arnold & Porter’s White Collar or Securities Enforcement practices.
© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.