March 20, 2012
On March 19, 2012, the Securities and Exchange Commission ("SEC") announced that it had credited the substantial cooperation of a former senior executive of an investment adviser in an investigation by declining to take enforcement action against him. The SEC’s announcement can be found here. This is the first time the SEC has publicly recognized the cooperation of an individual since the announcement two years ago of its policy statement intended to incentivize individuals to cooperate in investigations, found here. This announcement provides some much needed insight into the potential benefits of cooperating in an SEC investigation. However, the unique facts of the case mean that it will have limited application to other cases.
I. SEC’s Cooperative Initiative
As we have discussed in a prior alert, SEC’s Initiative to Foster Cooperation–Perspective and Analysis (Jan. 14, 2010),, the SEC announced a new policy under which individuals could cooperate in an enforcement investigation to avoid a civil enforcement action or receive a lesser sanction. Although the evaluation of cooperation requires a case-by-case analysis of the specific circumstances presented, the Cooperation Policy Statement explained that the SEC’s general approach would be to determine whether, how much, and in what manner to credit cooperation by individuals by evaluating four considerations: (1) the assistance provided by the cooperating individual in the SEC’s investigation or related enforcement actions; (2) the importance of the underlying matter in which the individual cooperated; (3) the societal interest in ensuring that the cooperating individual is held accountable for his or her misconduct; and (4) the appropriateness of cooperation credit based upon the profile of the cooperating individual.
II. The Subject Investigation
On February 3, 2011, the SEC brought a settled enforcement action against AXA Rosenberg, an institutional money manager that specializes in quantitative investment strategies, alleging concealment of an error in the computer code of the quantitative investment model that the firm used to manage client assets. Under the settlement, the adviser, without admitting or denying wrongdoing, agreed to pay $217 million to clients plus a $25 million penalty.
III. Analysis of the Cooperation Provided by a Senior Executive of the Respondent
In a public statement on March 19, 2012, Robert Khuzami, Director of the SEC’s Division of Enforcement, praised the substantial cooperation provided by a senior executive of AXA Rosenberg, and stated that the credit given to this individual "demonstrates that the Enforcement Division fully recognizes the value of cooperation in SEC investigations, and will seek to reward such cooperation appropriately." The corresponding Litigation Release issued by the staff provides the following analysis of the cooperation provided by the executive under the four factors outlined in the Cooperation Policy Statement:
As we have discussed in our prior alert on the SEC’s cooperation initiative, one of the challenges the SEC faces in motivating individuals to cooperate is that the public lacks a record of the benefits of individual cooperation. The SEC’s March 19 announcement represents an initial step in the direction of creating a public record of the potential rewards for cooperation. In this case, the SEC appears to be saying that under the right circumstances, it is possible for an individual to avoid an enforcement action through cooperation.
However, one of the other challenges we also noted is that it is difficult for the SEC to afford leniency to individuals in the securities industry consistent with its investor protection mandate. Accordingly, we anticipated that the SEC would find few circumstances in which it can provide sufficient incentives to individuals in the securities industry to cooperate. The unique circumstances of this case appear to reinforce the point. Here, the executive is retired from the securities industry and thus by his own actions has addressed the SEC’s concerns about the potential for future violations.
In sum, the SEC’s announcement is a first step in creating a public record of the potential rewards for individual cooperation in an investigation. However, there remains a relative scarcity of guidance in this area, and this case is highly fact-specific. The decision of whether to cooperate in an investigation will remain a highly judgmental process, dependent on a range of variables of each individual case.
 SEC Credits Former Axa Rosenberg Executive for Substantial Cooperation during Investigation, Litig. Release No. 22298 (Mar. 19, 2012).
 Policy Statement Concerning Cooperation by Individuals in Investigations and Related Enforcement Actions, Exchange Act, Release No. 61,340, 17 C.F.R. § 202.12 (Jan. 13, 2010).
 See Gibson, Dunn & Crutcher Client Alert, SEC’s Initiative to Foster Cooperation–Perspective and Analysis (Jan. 14, 2010). [hereinafter "Gibson Dunn SEC Cooperation Client Alert"].
 Press Release, U.S. Sec. and Exch. Comm’n, SEC Charges AXA Rosenberg Entities for Concealing Error in Quantitative Investment Model, Press Release No. 2011-37 (Feb. 3, 2011).
 See Robert Khuzami, Director, Division of Enforcement, Public Statement by SEC Staff: Commission Credits Individual Under Cooperation Initiative (Mar. 19, 2012).
 Gibson Dunn SEC Cooperation Client Alert, supra note 3.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you work or any of the following members of Gibson Dunn’s Securities Enforcement Group:
Mark K. Schonfeld (212-351-2433, email@example.com)
Joel M. Cohen (212-351-2664, firstname.lastname@example.org)
Lee G. Dunst (212-351-3824, email@example.com)
Barry R. Goldsmith (212-351-2440, firstname.lastname@example.org)
George A. Schieren (212-351-4050, email@example.com)
Alexander H. Southwell (212-351-3981, firstname.lastname@example.org)
Jim Walden (212-351-2300, email@example.com)
Lawrence J. Zweifach (212-351-2625, firstname.lastname@example.org)
© 2012 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.