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SEC Enters Into First Deferred Prosecution Agreement with Individual

November 15, 2013
Harter Secrest & Emery LLP

On November 12, 2013, the Securities and Exchange Commission (SEC) announced that it had entered into its first-ever deferred prosecution agreement with an individual, rather than corporate, target of a securities fraud investigation. This agreement provides a novel example of the SEC’s ongoing efforts to encourage cooperation with its investigations, and demonstrates the importance of understanding cooperation options when responding to an SEC investigation.

BACKGROUND

The SEC entered into the deferred prosecution agreement with Scott J. Herckis, who had acted as the Fund Administrator for a now-defunct hedge fund, Heppelwhite Fund LP. The SEC previously charged Heppelwhite Fund’s principal, Berton M. Hochfeld, with securities fraud for misappropriating assets and making material misstatements to Fund investors. In that proceeding, the SEC obtained a consent judgment against Hochfeld, freezing his assets, disgorging misappropriated funds, and imposing civil penalties. In a parallel criminal proceeding, Hochfeld pled guilty to securities and wire fraud, and was sentenced to two years in prison. As a result of these actions against Hochfeld, the SEC has returned more than $6 million to defrauded Fund investors.

Herckis’s cooperation permitted the SEC to initiate the action against Hochfeld and obtain these results. In particular, Herckis resigned as Fund Administrator and communicated to the SEC how Hochfeld had misappropriated Fund assets. Herckis also detailed the fraud with documentary corroboration. The deferred prosecution agreement recites that the SEC’s actions against Hochfeld resulted from Herckis’s “immediate and complete cooperation.”

THE DEFERRED PROSECUTION AGREEMENT

The deferred prosecution agreement provides that, if Herckis fully complies with its stated terms, the SEC will not bring any enforcement proceeding against Herckis at the conclusion of the agreement’s five-year term.

The agreement requires Herckis to disgorge $50,290, reflecting a portion of the fees Herckis received as Fund Administrator. The agreement further prohibits Herckis from serving as a hedge fund administrator or working with any securities broker, dealer, or investment advisor for the ve-year duration of the agreement. In addition, the agreement requires Herckis to continue to cooperate fully with the SEC’s investigation.

In the agreement, Herckis admits to having aided and abetted Hochfeld’s violations of the securities laws. Herckis further admits that he knew or was reckless in not knowing that there were material misstatements in the monthly account statements provided to investors.

IMPLICATIONS

The deferred prosecution agreement entered into by Herckis and the SEC represents the next step in the SEC’s ongoing initiative to facilitate cooperation with its investigations. In January 2010, the SEC first announced a series of measures designed to encourage cooperation, including authorizing Enforcement Division staff to use deferred prosecution agreements, along with cooperation agreements and non-prosecution agreements. The Department of Justice has traditionally used these tools, but the SEC had not previously utilized them. In May 2011, the SEC announced for the first time that it had entered into a deferred prosecution agreement with a company that was the subject of an investigation.  The agreement with Herckis demonstrates that the SEC will use the cooperation tools available to it with individuals as well as corporate entities.

The availability of agreements providing these new incentives to cooperate is a recent development in SEC enforcement practice of which companies facing investigation must be aware. Furthermore, the availability of such incentives to individuals, as well as companies, poses an additional complication for any party that could be implicated in an SEC enforcement action, as the greatest benefits of cooperation, including non-prosecution agreements, deferred prosecution agreements, and cooperation agreements, may be available only to the party that first comes forward to cooperate with the government.

CONCLUSION

The availability of formalized incentives to cooperate with SEC investigations is an important development that anyone facing the prospect of such an investigation should consider. HSE attorneys can assist you in determining whether coming forward voluntarily to cooperate with the SEC or any other enforcement agency is appropriate under the unique circumstances of each investigation. If you would like our assistance, or if you have any questions about this LEGALcurrents®, please contact any member of our Government and Internal Investigations or Securities practice groups at (585) 232-6500.

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