The Securities and Exchange Commission has for the first time employed a new tool to encourage individuals involved in fraud investigations to cooperate by deferring their prosecution.
On Tuesday, the regulator announced that it had reached a deferred prosecution agreement with Scott Herckis, the former administrator for Heppelwhite, a $6 million hedge fund. The S.E.C. said that Mr. Herckis had given it enough information about accounting discrepancies at the hedge fund to allow it to shut down the fund last year and file an emergency enforcement action against Berton M. Hochfeld, the fund’s founder.
The S.E.C. accused Mr. Hochfelt of misappropriating over $1.5 million from the hedge fund and overstating its performance to investors.
In return for Mr. Herckis’s help, the commission said it had agreed not to prosecute Mr. Herckis under a deferred prosecution agreement, a tool the regulator has previously used to reward companies which cooperate with them.
“This continues to show that the S.E.C. is going to use all its tools in its tool belt to go after the big fish,†said Steven Nadel, a hedge fund lawyer at Seward & Kissel.
The S.E.C. created the deferred prosecution agreement in 2010 to help strengthen cases against fraud, giving investigators access to documents and first-hand evidence. Under a deferred prosecution agreement, the S.E.C. promises to forgo enforcement action against a company or individual on condition of its full cooperation.
“This is a potential game-changer for the division of enforcement,†said Robert Khuzami, the director of the division of enforcement, at the time. “There is no substitute for the insiders’ view into fraud and misconduct that only cooperating witnesses can provide.â€
But some critics say deferred prosecution agreements allow companies and individuals to be let off too easily and question whether it should become a standard for policing misconduct.
On Tuesday, Scott W. Friestad, an associate director in the S.E.C.’s division of enforcement, addressed this concern, saying that the commission remained committed to rewarding proactive cooperation. But, he added, “The most useful cooperators often aren’t innocent bystanders.â€
Under the terms of the agreement, the S.E.C. has accused Mr. Herckis of aiding and abetting Mr. Hochfeld. As a result, he will be banned from acting as a fund administrator and will not be allowed to provide any other services to hedge funds for five year. He will also be required to give up $50,000 in fees he received for his work with Heppelwhite.
The $50,000 paid by Mr. Herckis will go into a fund that has been created to compensate Heppelwhite’s roughly 25 investors. Additional funds will be added after the sale of Mr. Hochfeld’s assets and an antique collection he acquired with stolen money.
The S.E.C. made its first deferred prosecution agreement in 2011 with Tenaris, a steel pipe manufacturer, over allegations that the company had violated the Foreign Corrupt Practices Act by bribing officials in Uzbekistan during an auction to supply pipelines for transporting natural gas and oil. Tenaris was forced to pay $5.4 million in fines and prejudgment interest.
