SEC Provides More Transparency About The Benefits Of Self-Reporting, Remediation, And Cooperation

Although the SEC has said for decades that it recognized and rewarded company cooperation, until very recently, the SEC has not identified with much specificity how and why cooperation—such as self-reporting, remediation, and assistance with the agency’s investigation—resulted in a more favorable outcome. And there have been plenty of settlements where it was difficult to discern whether the SEC gave any credit for cooperation, or if it did, whether the cooperation resulted in imposing a smaller penalty or bring lesser charges.

But in several recent cases, the SEC has expressly stated that it declined to impose civil penalties in light of each company’s significant cooperation, which included self-reporting the violations.

For example, on September 25, 2023, the SEC announced settled charges on a without-admitting-or-denying basis against GTT Communications, Inc., a multinational telecommunications and internet service provider, for disclosure failures. The SEC stated in its press release that it declined to impose a civil penalty because GTT self-reported, undertook affirmative remedial measures, and provided substantial cooperation.

According to the SEC’s order, GTT encountered accounting challenges after the company made eight acquisitions in a two-year period. In 2017 and 2018, the company struggled to integrate data into its operating systems. Over time, the failure to properly integrate two critical systems—a client management database and a third-party bill processing system—caused a persistent discrepancy between actual expenses, as reflected in invoices received from vendors, and the company’s expected expenses. According to the SEC, GTT was never able to reconcile these two systems and knew that it lacked sufficient information necessary to accurately record and report certain expenses. To achieve consistency between the two systems, the SEC found that the company made unsupported adjustments of more than $35 million that resulted in underreporting the cost-of-revenue and at least a 15% overstatement in reported operating income in three quarters from 2019 through 2020. The SEC also found that the company failed to disclose material facts about these unsupported adjustments.

In December 2020, GTT disclosed that certain previously issued financial statements should no longer be relied on and that it had commenced an internal investigation. After discovering the issues concerning costs, the company attempted to remediate its accounting and financial reporting issues and promptly self-reported to the SEC the matters that were subject to its ongoing internal investigation. It also cooperated extensively with the SEC Staff during its investigation.

The SEC issued a cease-and-desist order against violations of non-scienter-based antifraud provisions of the Securities Act of 1933, as well as certain reporting, record-keeping, and internal control provisions of the Securities Exchange Act of 1934. Notably, SEC declined to impose a civil penalty, identifying and crediting the following company efforts:

• Providing presentations concerning the findings from its internal investigation;
• Identifying key documents and witnesses and promptly making them available;
• Facilitating testimony from former employees;
• Rebuilding its cost-of-revenue accounts;
• Replacing certain members of management, its board of directors, and its auditor; and
• Overhauling its accounting function, including its policies and procedures relating to cost of revenue.

Although the SEC did not include scienter-based fraud charges (Section 10(b) and Rule 10b-5 charges against GTT), it did not explain whether that was a result of the company’s cooperation or for other reasons.

The SEC has also been more transparent about cooperation credit in other cases, such as:

• Stanley Black & Decker Inc. – The SEC declined to impose a civil penalty as part of a June 2023 settlement against a tools company relating to its alleged nondisclosure at least $1.3 million of perquisites and personal benefits it provided to certain executives and a director from 2017 through 2020.
• View, Inc – The SEC declined to impose a civil penalty as part of a July 2023 settlement with a California-based manufacturer of “smart” windows arising from alleged material misstatements about $28 million in projected warranty-related liabilities.

In each of these settlements, the SEC noted that a penalty was not imposed because the company had self-reported, cooperated with the SEC’s investigation, and implemented remedial measures.

These recent actions appear to respond to the cries for the SEC to be more transparent and specific by identifying both the actions credited for cooperation and how the settlement improved. That said, many continue to believe that the SEC does not give enough of a benefit to those that self-report, remediate, and cooperate. And in other SEC settlements, it is difficult to discern whether any cooperation credit was given.

Companies should seek the advice of experienced counsel when considering whether to self-report potential misconduct to the SEC, implementing remediation, and evaluating cooperation and other strategies in responding to an SEC investigation.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Sharon M. Bunzel, an O'Melveny partner licensed to practice law in California, Jorge deNeve, an O'Melveny partner licensed to practice law in California, Andrew J. Geist, an O'Melveny partner licensed to practice law in New York, Mia N. Gonzalez, an O'Melveny partner licensed to practice law in New York, Michele Wein Layne, an O'Melveny of counsel licensed to practice law in California, Steven J. Olson, an O'Melveny partner licensed to practice law in California, Mark A. Racanelli, an O'Melveny partner licensed to practice law in New York, and Caroline K. Katz, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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