US Attorney Announces SDNY Corporate Enforcement and Self-Disclosure Program

US Attorney for the Southern District of New York Jay Clayton announced a new Corporate Enforcement and Voluntary Self-Disclosure Program (SDNY CEP) for illegal activity involving fraud and misconduct affecting market integrity. Clayton announced that the purpose of the program is “to encourage early voluntary self-disclosure of criminal conduct, to promote timely and effective enforcement of criminal laws, to encourage repayment of victims, and to provide companies with greater certainty when reporting potential financial misconduct to federal prosecutors.”

Under the program, an eligible company that self-reports qualifying illegal activity and commits to remediation will be extended a conditional declination letter within two to three weeks. Then, as long as the qualifying company fully cooperates with law enforcement, commits to ongoing reporting of criminal conduct for three years, and remediates harm caused by the misconduct, it will receive a final declination letter, concluding the matter without criminal charges. According to Clayton, “[c]orporate leaders, as fiduciaries, have a fundamental duty to act with integrity and transparency when misconduct is discovered.” On the other hand, the US Attorney's Office for the Southern District of New York (the Office) cautioned that it will treat decisions not to self-report as “weighing heavily against any future declination request.”

Clayton previewed this program earlier this month at the annual Securities Enforcement Forum. There he stated that the Office will refrain from prosecuting companies that fully cooperate with criminal investigations, aiming to incentivize transparency and yield faster recovery of funds for victims. According to Clayton, “[c]ompanies need to know there is a specific benefit to cooperating with US prosecutors in rooting out wrongdoers.”

PROGRAM ELIGIBILITY

The SDNY CEP establishes six eligibility criteria. First, the Office defined categories of illegal conduct eligible for self-reporting: (1) fraud by a company or corporate entity, or an employee, officer, director, or agent of such an entity; (2) fraud in connection with a securities, commodities, or digital asset offering, or the trading or brokering of securities, commodities, or digital assets; (3) false statements or fraud upon an auditor or federal regulator of financial markets; or (4) other willful violations of the Securities Act of 1933, Securities Exchange Act of 1934, the Commodity Exchange Act, Investment Advisers Act of 1940, and Investment Company Act of 1940 that undermine the integrity of financial markets or harm customers, competitors, or market participants.

Second, eligibility under the SDNY CEP requires prompt voluntary disclosure to the SDNY before the company learns of the existence of a government investigation. However, knowledge of a whistleblower submission to the company or to a government agency, press reporting regarding the illegal activity, or a prior self-report to another agency will not automatically disqualify a company from receiving credit under the SDNY CEP. The disclosure must include all known facts about the nature of the misconduct and identify the individuals involved as well as affected parties.

Third, the program requires full, timely cooperation, including providing all relevant non-privileged documents and information, identifying likely witnesses or bad actors, and making best efforts to ensure employees, directors, and officers are available to and candid with the Office.

Fourth, companies must commit to remediation, which may include implementing changes to the company’s compliance program or taking disciplinary action against any individual involved in the misconduct.

Fifth, the reporting company must commit to making restitution to all injured parties before receiving a conditional declination and must make restitution to all injured parties before receiving a final declination.

And finally, companies with aggravating circumstances will not qualify for the program. The SDNY defined aggravating circumstances to include any nexus to terrorism, sanctions evasion, foreign corruption, sex trafficking, human trafficking and smuggling, international drug cartels, slavery, forced labor, or physical violence, including the knowing or reckless financing of these activities or laundering of funds in support of these activities. The Office will not, however, treat the seriousness of the offense, the pervasiveness, the severity of harm, past criminal adjudications, or the involvement of senior leaders as an aggravating or disqualifying circumstance.

INTERPLAY WITH DOJ’S CORPORATE ENFORCEMENT AND VOLUNTARY SELF-DISCLOSURE POLICY

The US Department of Justice’s (DOJ’s) Criminal Division has, in recent years, encouraged disclosure and cooperation through its Corporate Enforcement Policy (CEP), which also found parallels in other DOJ components such as the National Security Division. The CEP also seeks to encourage companies to quickly disclose misconduct in exchange for various forms of leniency. In particular, DOJ presumes a declination where, in the absence of aggravating factors, a company provides full and timely cooperation and appropriately remediates the misconduct. As part of that resolution, a company will be required to pay all disgorgement and victim restitution.

The SDNY announced that its program is “consistent with the CEP.” Nevertheless, the SDNY has clearly emphasized speed, committing to act quickly on its part where eligible companies decide to cooperate quickly on theirs. Previously, Clayton announced, “[t]ime matters . . . If the corporation says [it is] going to cooperate but still takes five years to get to the end of it, that’s not cooperation.” Clayton has also acknowledged the difficulties faced by companies navigating these internal investigations, stating his desire is to get “the bad people out of, hopefully, the good companies, and to do that as quickly as possible,” and that participation in a cooperation program enables the government to signal to the market that the company is fundamentally sound and addressing the problem.

Further, the programs differ in meaningful ways in terms of eligibility criteria. For example, the SDNY program is open to a narrower set of criminal violations than the CEP but also defines preclusive “aggravating circumstances” more narrowly. And significantly, the SDNY program has a more forgiving definition of what constitutes a “voluntary disclosure.” Under the CEP, for a disclosure to be considered “voluntary,” the conduct must not be “previously known” to the DOJ. The SDNY policy, however, focuses solely on the reporting company’s knowledge, providing a potentially considerable incentive for a company to self-report to SDNY rather than DOJ.

KEY TAKEAWAYS

This new enforcement approach seeks to incentivize transparency, as companies that come forward promptly with detailed evidence of wrongdoing and agree to continually cooperate with criminal probes may do so without fear of criminal prosecution. It is part of a concerted effort by DOJ to provide incentives to companies to come forward quickly with the aim of providing timelier resolutions, quicker victim restitution, and a focus on individual accountability.

How the SDNY’s approach will change a company’s calculus about when and whether to come forward—and if so, to DOJ’s Criminal Division or SDNY—remains to be seen and will depend both on how the policies are carried out in practice and the specific circumstances of a given matter. Nevertheless, the Office’s new policy underscores the importance of maintaining robust internal compliance programs and consideration of early engagement with prosecutors. Companies should remain attentive to corporate criminal enforcement and devote resources to compliance risks.