SEC ENTERS INTO FIRST DEFERRED PROSECUTION AGREEMENT WITH INDIVIDUAL

Late last year the Securities and Exchange Commission announced that it had entered into its first deferred prosecution agreement (DPA) with an individual who worked in an administrative capacity at a large hedge fund. The DPA allowed the SEC to successfully go after hedge fund manager Berton Hochfield who reportedly stole more than 1.5 million from his hedge fund and overstated the fund’s performance to investors.

A deferred prosecution agreement is a voluntary agreement between an individual and a government agency, in this case the SEC, where the agency will agree to lesser charge in exchange for the individual’s cooperation in connection with the investigation. In the Hochfield case, Scott Herckis voluntarily came to the SEC with concerns over certain accounting irregularities involving Hochfield’s hedge fund, Heppelwhite Fund, LP. Herckis produced a substantial number of documents and described in detail to the SEC how Hochfield perpetrated his fraud. Based upon the information Herckis provided, the SEC was able to take emergency action and freeze the fund’s assets within weeks of Herckis reaching out to the SEC. While Herckis did not get off “scot free” for his participation in the fraud scheme, he did receive a substantially reduced penalty. For example, instead of being unable to be a hedge fund administer for the remainder of his life, Herckis was only prohibited from being a fund administrator for 5 years. Herckis also had to disgorge the fees (approximately $50,000) he received in connection with the fraud.

This DPA is significant because it seems to support new SEC Chair Mary Jo White’s earlier statement that the SEC is going to strongly pursue individuals on the periphery to build its case against greedy insiders and their business entities. By adopting this outside in approach and offering DPAs to periphery individuals, the SEC is placing a significant carrot in front of those who were part of an overall fraud scheme but perhaps feel trapped and want out but do not know how to safely do so.
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Time will tell if this is an isolated DPA or just evidence of a new direction the SEC has embarked upon in gathering information in support of its investigations of securities fraud and other illegal market manipulations. Either way, if you believe you have information that may be important to the SEC, it is critically important that you approach the SEC. If done so in an appropriate manner, you may be able to negotiate a DPA that takes into account all of the issues you may be facing as a result of your involvement in the alleged illegal activity. If you have any questions, please feel free to contact H Adam Shapiro of Danziger Shapiro, P.C. and we will be happy to review and discuss your situation in confidence.

This entry is presented for informational purposes only and is not intended to constitute legal advice.