The SEC’s 2001 Report of Investigation and Statement, commonly referred to as the Seaboard Report, reflects a philosophy that investors are best protected by a policy that balances the need to ensure that the laws are vigorously enforced with the need to offer companies some incentive to self-report and cooperate.
Accordingly, the Seaboard Report lists 13 non-binding criteria that the SEC will consider in bringing, or declining to bring, an enforcement action:
- the nature of the misconduct involved and whether it involved recklessness, deliberate indifference to indicia of wrongful conduct, or willful misconduct;
- whether the misconduct arose from “a tone of lawlessness” set by those in control of the company and whether compliance procedures were in place to prevent the misconduct;
- whether the misconduct occurred with the participation of senior personnel;
- the duration of the misconduct;
- the harm to shareholders, including decline in stock price;
- how the misconduct was detected and who uncovered it;
- how long after discovery of the misconduct it took to implement an effective response;
- the steps taken by the company upon learning of the misconduct, including whether (i) the company immediately stopped the misconduct, (ii) persons responsible for any misconduct are still with the company, (iii) the company promptly, completely and effectively disclosed the existence of the misconduct, (iv) the company cooperated completely with regulators, (v) the company identified additional related misconduct, (vi) the company took steps to identify the extent of damage to investors, and (vii) the company appropriately repaid those adversely affected by the conduct;
- the nature of processes to resolve these issues and ferret out necessary information, including informing the Audit Committee and the Board of Directors;
- whether the company committed to learn the truth, fully and expeditiously, by conducting a thorough review of appropriate scope that was overseen objectively and whether outside counsel was retained;
- whether the company promptly made available to the SEC the results of its review;
- whether the company adopted new and more effective internal controls and procedures designed to prevent a recurrence of the misconduct; and
- whether the company has changed through a merger or bankruptcy reorganization.1
1 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 44969 (Oct. 23, 2001), available here.