SEC Announces First Deferred Prosecution Agreement with an Individual (with Kuczajda Comment)

The SEC announced a deferred prosecution agreement ("DPA") with an individual: former hedge fund administrator, Scott Herckis, who helped the agency take action against a hedge fund manager who stole investor assets. According to the SEC press release, DPAs encourage individuals and companies to provide the SEC with information about misconduct, and subsequently assist with an investigation. In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.

Scott Herckis, an administrator for Heppelwhite Fund LP, is the first individual to enter into a DPA with the SEC. According to the DPA, the SEC filed an emergency enforcement action against founder and manager of Heppelwhite, Berton M. Hochfeld, in November 2012 with voluntary and significant cooperation from Herckis. The enforcement action found that Hochfeld misappropriated $1.5 million from the hedge fund and overstated its performance to investors. The DPA states that Herckis aided and abetted Hochfeld's securities law violations.

Under the terms of the DPA, Herckis must comply with certain prohibitions and undertakings, and is prohibited from serving as a fund administrator or otherwise providing any services to a hedge fund for a period of five years. The DPA also requires Herckis to disgorge approximately $50,000 in fees he received for serving as the fund administrator, which will be added to the Fair Fund that has been created to help compensate Heppelwhite investors. Although the SEC had previously announced the availability of DPAs for both entities and individuals in January 2010, the DPA with Herckis marks the first DPA with an individual.

Kuczajda Comment: The SEC's first use of a DPA with an individual is a further step in the SEC's goal to encourage individuals to report potential securities law violations directly to the SEC and to voluntarily cooperate with SEC investigations. Employers should take heed. The SEC has now reiterated its message that reporting perceived fraud directly to the government, and full cooperation, can have benefits not only for innocent whistleblowers, but even where a witness is complicit in the alleged fraud. DPAs to individuals therefore compliment the SEC's increasing number of financial payouts to whistleblowers pursuant to the Dodd-Frank Act by arguably providing incentives, short of a financial reward, to culpable individuals who report potential violations and cooperate. Potential whistleblowers and cooperators who may have their own legal exposure, however, should also pay attention. Herckis did not remain anonymous and agreed to disgorgement and substantial undertakings. He also accepted responsibility, admitted the facts in the DPA, and agreed to a long tolling of the statute of limitations. It thus remains unclear precisely what benefit Herckis received for blowing the whistle on his employer, and more generally what leniency culpable individuals can expect to receive from the SEC if they come forward.

See: SEC Deferred Prosecution Agreement; SEC Press Release. See also: Evaluating SEC Non-Prosecution and Deferred Prosecution Agreements.