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SEC in first deferred prosecution agreement with an individual

The SEC said Tuesday it was entering into a deferred prosecution agreement with a former hedge fund administrator named Scott Herckis who helped the agency end a fraud involving a hedge fund manager stealing investor assets.

Deferred prosecution agreements (DPAs), traditionally used by the DOJ in criminal cases, encourage individuals and companies to share information with the enforcement agency concerning misconduct and to assist in any subsequent investigation. In return, the agency refrains from prosecuting the cooperating witness for their own violations if they agree to undertake certain compliance actions.

The SEC announced the adoption of deferred and non-prosecution agreements as part of its Cooperation Initiative in 2010.

In April this year, the SEC for the first time resolved an FCPA case using a non-prosecution agreement. Ralph Lauren Corporation paid $1.6 million in combined penalties to the DOJ and SEC in exchange for two non-prosecution agreements after admitting its Argentina subsidiary paid bribes to government and customs officials.

It was only the second time the DOJ and SEC used a pre-trial agreement in parallel in a case of any kind.

According to the SEC's DPA with Herckis, the agency was able to file an emergency enforcement action against the founder of Heppelwhite Fund LP, a Connecticut-based hedge fund, who had misappropriated more than $1.5 million from the hedge fund and overstated its performance to investors. The manager, Berton M. Hochfeld, saw his personal assets frozen, as well as those of his hedge fund. The $6 million in proceeds is being used to compensate defrauded investors.

An SEC official said Herckis wasn't an innocent bystander. But not providing a way for him to report ongoing injury to numerous investors wouldn't serve the greater good.

"To balance these competing considerations, the DPA holds Herckis accountable for his misconduct but gives him significant credit for reporting the fraud and providing full cooperation without any assurances of leniency, " said Scott W. Friestad, an associate director in the SEC's Division of Enforcement.


Julie DiMauro is the executive editor of FCPA Blog. She can be reached here.