Philadelphia partner Mary Hansen published an article in Business Law Today, titled, “SEC announces First Deferred Prosecution Agreement with an Individual.”
Mary discusses how on November 12, 2013, the Securities and Exchange Commission (SEC) announced it had entered into a deferred prosecution agreement (DPA) with Scott Herckis, a former hedge fund administrator, for his role in an allegedly fraudulent scheme involving Heppelwhite Fund, LP, a Connecticut-based hedge fund. Under the agreement, the SEC agreed to defer charging Herckis with violations of the federal securities laws, and Herckis agreed to disgorge $50,000 in fees he received for services provided to the fund and to be barred from, among other things, providing services to hedge funds for five years.
Herckis agreed to admit certain factual statements contained in the DPA “in any future Commission enforcement action in the event [Herckis] breaches” the DPA. As a result of Herckis’ cooperation, the SEC was able to file an emergency action and freeze more than $6 million in the assets of the fund, HCM and Berton Hochfeld, which, subject to the court’s approval, will be distributed to the fund’s investors. In addition, Hochfeld pleaded guilty in federal court to securities and wire fraud charges. He was sentenced on August 5, 2013, to two years in prison.
The Cooperation Initiative, now embodied in the SEC’s Enforcement Manual, garnished significant attention when it was announced in 2010. In announcing the program, the staff indicated that the initiative was expected to “result in invaluable and early assistance in identifying the scope, participants, victims and ill-gotten gains associated with fraudulent schemes.”
In announcing the DPA with Herckis, the staff stressed that it believed the DPA struck the right balance between recognizing significant cooperation and holding Herckis responsible for his misconduct. It is not clear, however, the extent of the benefit Herckis received by self-reporting and cooperating. It appears the greatest benefit Herckis received from the DPA is that a DPA is likely to have less of an adverse impact on his ability to practice as a CPA (outside the financial industry) than if he had been charged with fraud.
Mary concluded that the Herckis DPA may illustrate the staff’s willingness to recognize self-reporting and substantial cooperation. It also illustrates, however, that the staff will continue to insist on traditional sanctions including disgorgement and industry bars even when the violator has rendered substantial cooperation. The Herckis DPA also demonstrates that the SEC’s policy regarding admissions in the context of settlements is still evolving and that the staff may be open to using different language regarding admissions to provide some protection with respect to related criminal and private civil actions.