Skip to main content
Aug 31, 2007

The enforcer

A conversation with Walter Ricciardi, the SEC’s director of enforcement

The SEC has been busy this year, pursuing options backdaters, launching new compensation disclosure rules and e-proxies, investigating insider trading amidst a massive merger boom and dealing with some more very public governance failures. According to the SEC’s deputy director of enforcement, Walter Ricciardi, the current geyser of enforcement is dispersed across ‘just about every category of case that we bring, from insider trading to the sub-prime mortgage market, municipal finance ... the Foreign Corrupt Practices Act and options backdating.’

Ricciardi emphasizes that an investigation itself shouldn’t necessarily be viewed as bad, though general counsel may take small comfort from that statement. For corporate lawyers, preparation is key, particularly when disclosure is at issue. In a conversation with Corporate Secretary, Ricciardi offers up a number of suggestions for general counsel facing – and perhaps looking to dissuade – an investigation.

Who you gonna call?   

Once the SEC sets its sights on your company, Ricciardi says the first step is likely to be an internal investigation, and ‘the first factor is who’s going to conduct the investigation. You want to make sure it’s someone who is not conflicted.’ For instance, ‘how can an attorney cross-examine the CEO to find out what they knew and when they knew it when they’re also representing that person?’

Ricciardi also emphasizes the need to make sure ‘all relevant information is retained’ by sending out a documentation retention notice and putting a stop to any automatic deletion processes as ‘people might be going about destroying emails not knowing that there’s an investigation going on.’ This can serve the company well down the line, Ricciardi says: ‘One of the things we look for is what steps a company took after the events took place.’

Do it yourself

The SEC likes to be guided by internal investigations, especially when appropriate remedial action has already been taken: ‘That means less of a role for the staff in terms of what enforcement wants to do.’ It can help ease penalties ‘if we have confidence in the thoroughness and the non-conflicted nature of that investigation.’

At last May’s Corporate Secretary Think Tank, general counsel raised concerns over verbal versus written disclosure to the SEC. But Ricciardi is reassuring, explaining that the SEC strives ‘to work with counsel to find ways to get the information we need and ... have as little impact as we can on privilege. So, depending on the facts and circumstances, in some instances it may be sufficient to merely hear from counsel certain information and not necessarily receive a written report.’

Ricciardi says the SEC is usually confident about the results of internal investigations given that ‘general counsel are under the same ethical obligations as outside counsel.’ Certain situations are especially easy to handle internally: ‘If it’s a large corporation with an issue involving a subsidiary and I’ve seen no information showing that the problem went above that subsidiary, it could be that in-house lawyers could conduct a credible, appropriately scoped investigation of those circumstances.’

Taking it outside

So when is it necessary to look for outside help? According to a recent survey conducted by Robert Half Legal, 45 percent of corporate lawyers say they increased their use of outside counsel over the last year, with 16 percent of cases involving outside counsel falling in the compliance and regulatory spheres. One comment by Ricciardi affirms the trend: ‘I recommend that legal counsel represent everyone,’ he reasons. ‘If an attorney is perceived to say to the general counsel that they were involved in options grants and recognize they might have relevant information and might be a witness in that investigation they should be represented by counsel just like everyone else.’

Where outside counsel would be more reliable than in-house lawyers, he continues, is if ‘misconduct goes further up in the corporation and gets to the management level. Now you have a general counsel who is representing the company, and management in many ways can embody that company, so that could be viewed as a conflict.’

Once the determination to hire outside counsel is made, the other important concern is who should be responsible for retaining outside counsel if management is implicated. ‘It’s not appropriate for management to select the counsel who’s going to be investigating them,’ Ricciardi says. In these circumstances, he suggests going to non-conflicted board members, perhaps the audit committee, to select counsel and oversee the investigation.

On target

New moves at the SEC aim for better organization, Ricciardi promises: ‘We now approach issues on more of a working group basis. Instead of just having a small team working on each investigation we put working groups together to attack a problem in a coordinated fashion. On our options backdating investigations, we have calls every other week and information going out to all the different teams working on cases. We have the same system with insider trading and hedge funds.’

Technological advances fit the new approach: ‘We have new data management tools so information about investigations can be shared with a much larger team. People can see the connections between and across investigations. We also have some new technology for following up on the leads we get from self-regulatory organizations  so that we can spot more easily what appear to be suspicious trades.’

Same dog, new tricks

Though investigations are numerous, ‘the process by which investigations are conducted, where there is information related to potential illegal acts, has become more and more an accepted business approach to dealing with problems,’ Ricciardi comments. He doesn’t attribute investigations to poorer companies, however. ‘There are no perfect companies. But when there is an indication of potential misconduct, I believe the business community and other folks generally recognize it to be a good company that needs to take appropriate steps.’

Ricciardi touts increased diligence of both auditors and companies as the main reason investigations are more common. It isn’t that there’s more going wrong, it’s that ‘companies recognize that they have obligations when they come across misconduct,’ and upon discovery, ‘self-reporting is an appropriate behavior.’

Getting ahead of the SEC in disclosing problems gets brownie points with the regulator, says Ricciardi: ‘The business community understands now that there’s a need to go to the government and say, We’ve discovered this misconduct.’ For those resistant to this dictum, Ricciardi cautions, ‘If you don’t self-report and the government finds out about it through own resources, the penalty will be much more severe.’
       
 Just as the SEC values disclosure, it also values speed. ‘Getting a sense of urgency from counsel conducting an investigation is important,’ says Ricciardi. He also adds that a good tone at the top discourages trouble-makers. As such, it seems investigations are less threats, than catalysts for stronger companies.

Janine Armin

Janine Armin is deputy editor of Corporate Secretary