Tuesday, July 19, 2011
The Tenaris Settlement: No Big Deal
Contrary to public opinion and the blizzard of client alerts, the Tenaris settlement -- which was touted as the SEC's first use of a Deferred Prosecution Agreement -- was not such a great deal. In fact, it was a bad deal. In addition, the SEC's first use of a DPA is not a significant development since its usual settlements do not require the party to admit culpability.
Robert Khuzami deserves credit for more smoke and mirrors as he tries to re-engineer the SEC tools to fit the Justice Department's toolbox. Unfortunately, when you do not have criminal enforcement authority, you do not need the same tools as a federal prosecutor.
On the other side, it is hard to figure out why Tenaris agreed to the settlement. DOJ agreed to a DPA with Tenaris as well. Prosecutors, however, are precluded from seeking civil settlements in exchange for foregoing rights under a criminal statute. The criminal resolution must stand on its own. Federal prosecutors have found imaginative ways around this restriction and maybe Tenaris reflects such a solution where the civil settlement was reached in order to avoid a specific criminal resolution.
Prior to the Tenaris settlement, the SEC had only two enforcement options -- civil complaints seeking injunctive relief or administrative cease-and-desist orders. Of course, the SEC wants to be able to enter into cooperation agreements in order to gain inside information to advance an investigation. But such authority is really meaningless unless the SEC can guarantee a similar agreement with the Justice Department. No defense lawyer worth his or her price would allow a client to settle with the SEC and cooperate with the SEC unless there was a guarantee on the criminal side.
No one can figure out why Tenaris settled with the SEC. Under the agreement, Tenaris still had to disgorge profits and prejudgment interest; agree to implement compliance procedures; cooperate with the ongoing investigation; and comply with enhanced reporting obligations. All of these provisions are standard settlement provisions and so far there was nothing to cite as as benefit to Tenaris.
Moreover, Tenaris agreed to toll the statute of limitations thereby extending its potential exposure based on evidence gathered during the ongoing investigation. In addition, Tenaris gave away any claim it may have to deduct the financial penalty under the US tax code. In other words, the financial penalty was treated similarly to a criminal fine.
Tenaris' settlement underscores the importance of avoiding settlements just to settle. Tenaris abandoned any chance to argue that disgorgement is fundamentally different from a fine or penalty and seek a tax deduction for the financial penalty it agreed to pay.