On March 19, 2012, the Securities and Exchange Commission ("SEC") announced that in exchange for his substantial cooperation during the agency's enforcement action against AXA Rosenberg Group LLC and its CEO, Barr M. Rosenberg, it would not take enforcement action against an unnamed former AXA Rosenberg senior executive.

Previously, the SEC had alleged that AXA Rosenberg, an institutional money manager, concealed a material error in the computer code of the model it used to manage client assets.  The coding error affected the portfolios of more than 600 of the firm's clients and resulted in losses of approximately $217 million.  In 2011, AXA Rosenberg and its CEO, Barr M. Rosenberg, settled SEC enforcement actions relating to the error and resulting losses.

The announcement of “non-action” against the AXA Rosenberg senior executive represents the first case where the SEC has delineated the circumstances under which individuals may receive credit as part of the SEC's Cooperation Initiative.  Previously, the only guidance was the SEC's Policy Statement Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions ("Cooperation Policy "), which became effective January 19, 2010, and provided the analytical framework used to evaluate whether an individual's cooperation warranted credit.

SEC’s Cooperation Policy

Cooperating witnesses are in the unique position of providing the SEC with first-hand evidence relevant to investigations.  The SEC has recognized that cooperators "can significantly enhance the Commission's ability to stop fraud, secure strong settlement and trial outcomes and return funds to harmed investors," while enabling the agency to investigate alleged misconduct more quickly and efficiently.

The SEC's Cooperation Policy, codified at 17 CFR § 202.12, recognizes the tension between the competing objectives of holding individuals fully accountable for misconduct while providing incentives for individuals to cooperate with law enforcement agencies.  The Cooperation Policy was designed to provide a framework for resolving that tension in ways that would maximize the SEC's law enforcement interests.

As noted in the Cooperation Policy, the SEC has a variety of tools for facilitating and rewarding cooperation by individuals, ranging from agreeing not to pursue an enforcement action to pursuing reduced charges and sanctions.  In determining whether to reward an individual for his or her cooperation, the SEC evaluates the following four considerations on a case-by-case basis:

• The assistance provided by the cooperating individual in the investigation;
  
  
• The importance of the underlying matter in which the individual cooperated;
  
  
• The societal interest in ensuring that the cooperating individual is held accountable for his or her misconduct; and
  
  
• The appropriateness of cooperation credit based upon the profile of the cooperating individual. 

Ultimately, the goal of the Commission's analysis is to determine whether the public interest is served by rewarding an individual's cooperation.

SEC’s Cooperation Policy Applied to the AXA Rosenberg Case

The SEC's March 19, 2012 announcement provides an example of the circumstances under which individuals may receive credit for cooperation since the Cooperation Policy became effective in January 2010.  After applying the framework from the Cooperation Policy, the SEC determined that the following factors weighed in favor of declining to take enforcement action against the former senior executive from AXA Rosenberg:

• Assistance Provided:  The SEC determined that the senior executive's assistance was substantial to its investigation of AXA Rosenberg and its CEO, because this individual was the first to offer his cooperation, voluntarily requested to be considered under the SEC's Cooperation Initiative, and provided important detailed information without imposing conditions on his cooperation.  The SEC noted that agreeing to cooperate without imposing conditions enhanced the senior executive's credibility, because he had not been promised any specific outcome in exchange for his truthful testimony.  Finally, the SEC found that the senior executive's cooperation was timely and complete, which allowed the SEC to take prompt enforcement action against the company and its CEO, while also conserving investigative resources.
  
  
• Importance of the Underlying Matter:  The SEC determined that the senior executive provided information that led to the first ever enforcement action arising from material errors in a quantitative investment model, an area of priority for the SEC's Division of Enforcement.  Additionally, the SEC found it significant that it was able to return all $217 million in losses to AXA Rosenberg's clients, while collecting an additional $27.5 million in civil penalties from the company and its CEO.
  
  
• Societal Interest in Holding the Senior Executive Accountable:  In determining that the public had little interest in holding the senior executive accountable, the SEC found that the executive played a minor role in the concealment of the error.  In addition, the SEC determined that the executive advocated that AXA Rosenberg's CEO be informed of the error.
  
  
• Profile of the Senior Executive:  The SEC determined that the senior executive did not have any prior disciplinary or regulatory history, and had resigned from his position at AXA Rosenberg and retired from the investment advisory industry.  Based on these facts, the SEC determined that the senior executive was no longer in a position to commit future violations of the federal securities laws.

Weighing all of these factors together, the SEC announced its decision not to take enforcement action against the cooperating former senior executive of AXA Rosenberg.  Robert Khuzami, Director of the Division of Enforcement, stated that this case "demonstrates that the Enforcement Division fully recognizes the value of cooperation in SEC investigations, and will seek to reward such cooperation appropriately."

Looking Forward

With this March 19, 2012 announcement being the first and only instance where the SEC has given credit under its Cooperation Program, the SEC has set a relatively high bar for future cooperators.

In many ways this case sets a high bar for individuals seeking to cooperate, as it provided the SEC with the opportunity to publicize a perfect model of cooperation with a government investigation, with all factors weighing against taking enforcement action against the individual.  The senior executive here voluntarily agreed to cooperate early in the investigation, without having a cooperation agreement in place.  He provided detailed and complete information based upon his intimate knowledge of the individuals and investment models at issue.  The senior executive had a relatively low level of culpability when compared to the company's CEO, who directed others within the organization to ignore and conceal the error.  The senior executive had not been in regulatory trouble before, and retired from the investment advisory industry, making it virtually impossible for him to commit future violations of the federal securities laws.  Additionally, several factors outside the individual's control weighed in his favor, as the enforcement actions related to a priority area for the Division of Enforcement, the firm's clients had all $217 million in losses attributable to the error returned to them, and the SEC collected large civil penalties.

While it remains to be seen how the SEC will react in situations where not all factors weigh so strongly in favor of leniency, this announcement provides at least some guidance for potential cooperators and suggests that they should act quickly, voluntarily and without conditions in order to take full advantage of the SEC's Cooperation Program. 

© 2012 Perkins Coie LLP