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SEC Enters Its First Non-Prosecution Agreement � But Are Companies Better Off?

December 22, 2010

Nearly a year ago the Securities and Exchange Commission (SEC) announced a host of new enforcement initiatives to incentivize cooperation by companies under investigation. Chief among these initiatives was the prospect of non-prosecution agreements for companies who, in an effort to avoid being a defendant in a civil SEC enforcement action, elect to cooperate/self-report. Such agreements have frequently been used by the Department of Justice to resolve criminal investigations. On December 20, 2010, the SEC entered into its very first non-prosecution agreement with Carter’s, Inc., a children's clothing company. While the resolution of this matter by a non-prosecution agreement might appear to be favorable news to companies facing the prospect of an SEC investigation, a closer analysis reveals that SEC standard operating procedures have not changed much, if at all, and cooperating firms may not actually benefit from this new initiative.


As widely reported in the press, the SEC announced the non-prosecution agreement with Carter's in conjunction with insider trading charges against the company's former vice president of sales. Most media reports have described the use of a non-prosecution agreement as a favorable resolution for Carter's based on its cooperation with the investigation.

A Closer Look: The Same Policy, With Harsher Penalties

The SEC press release announcing the non-prosecution agreement emphasized that the SEC did not charge Carter’s due, in part, to the company’s prompt and thorough self-reporting of the misconduct, its "exemplary and extensive" cooperation with the SEC and Carter’s significant remedial actions. If that sounds familiar to you, it should. In October of 2001, the SEC very publicly declined to bring charges against a company because of its conduct of "self-policing, self-reporting, remediation and cooperation with the Commission staff." See "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." Release No. 44969 / October 23, 2001.

So this announcement, after much fanfare, is an attestation that the SEC remains committed to rewarding the exact same factors announced in 2001. However, it is less clear that cooperating entities are better off. From the announcement in 2001 through the present, individuals and companies have provided complete and thorough cooperation in the hopes of not being charged with violations of the antifraud provisions of the federal securities laws. If successful, these respondents were never the subject of formal charges, were never the subject of an SEC press release describing the SEC’s views of the legal violations, nor were these respondents the subject of much media scrutiny. 

However, under the non-prosecution agreement with Carter’s announced this week, Carter’s is forced to take on significant duties to live up to the contract. Among other obligations: Carter’s may not make any statements denying, directly or indirectly, the factual basis for the agreement; Carter’s must continue its extensive cooperation with the SEC indefinitely; and Carter’s must waive any statute of limitations defense for any alleged breach of the non-prosecution agreement. Significantly, the SEC maintains sole discretion for determining whether Carter’s has violated the agreement and deciding whether to bring formal charges.

Final Thoughts

The decision to seek a non-prosecution agreement, or to try and take advantage of any of the other new enforcement initiatives designed to foster cooperation with the SEC staff, is one that must be considered carefully. Bracewell & Giuliani’s White Collar Criminal Defense group, which includes several former SEC enforcement attorneys, routinely advises clients with respect to these and other enforcement issues.