Play Along or Risk Losing It All: Cooperation and Remediation in SEC Investigations

Dmitriy Smirnov

February 26, 2024

Securities Law

Few stories that begin with a government investigation have a happy ending. This is one of them, and the reason is the company’s decision to cooperate and remediate before charges were filed—a smart decision that started with the hiring of competent SEC defense counsel. 

Recently, View, Inc. (“View”), a manufacturer of “smart” windows, came under SEC scrutiny for, among other things, underrepresenting “in a series of periodic reports, proxy statements, and registration statements” its warranty liability for the cost of replacing and shipping defective windows it sold to customers.  The SEC also took the position that View had insufficient internal accounting and disclosure controls and failed to maintain books and records that accurately reflected the liabilities. 

As a result, the SEC filed an administrative proceeding against View, alleging that the company had violated Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) and Rules 12b-20, 13a-11, 13a-13, 13a-15(a), and 14a-9 of the Securities Act of 1933 (“Securities Act”) for failing to:

• • accurately report its warranty liability for fiscal years 2019 and 2020 and the first quarter of 2021 in its filings to the SEC;
  • retain sufficient internal accounting and disclosure controls; and 
  • maintain accurate books and records reflecting the manufacturer’s liabilities.1

The situation was primed for a bad ending, including the possibility of a full-blown enforcement action and severe penalty. But that is not how this story ends.

On July 3, 2023, instead of facing the scarlet letter of a significant civil penalty for these numerous violations, View avoided an enforcement action in federal court and settled with the SEC with no civil penalty.2 

Why?  

Because of View’s cooperation with the SEC’s investigation and pre-charge remediation efforts. 

While it may appear to the uninformed that remediation and cooperation expose a company to regulatory risk, the truth is that the benefits often far outweigh these risks.  It certainly did in this case.

The SEC, as in the case of View and many others, offers benefits for cooperation and remediation, often involving a significant reduction—or even the elimination—of civil penalties in their entirety.

In the case of View, the acts that the SEC considered in its decision to not impose civil penalties were the following: 

• providing detailed explanations and summaries of specific factual issues at all stages of the investigation;
• providing detailed financial analyses from an outside consulting firm about the recorded warranty liabilities and other related issues;
• identifying key documents and witnesses that the SEC had not yet identified; 
• implementing new disclosure and warranty liability controls;
• hiring a new Chief Financial Officer and other senior accounting staff to enforce these controls; and
• implementing enhanced training for its finance and accounting personnel.3

Companies and individuals that take a similar tack when embroiled in an SEC investigation may also reap these same rewards, avoiding astronomical penalties and fines—or worse still, becoming embroiled in costly civil enforcement actions with greater stakes.

In many cases, the SEC may credit companies that cooperate and take prompt remedial action, including:

• limiting enforcement actions to the officer and employees responsible for the misconduct, and not proceeding against the company itself; or
• reducing or eliminating charges, monetary penalties, and other sanctions.

View’s case was one recent example of how significant a role cooperation and remediation play in the context of SEC enforcement investigations. 

The same is true for companies and individuals that refuse to cooperate and take remedial action in an SEC investigation. 

In those instances, the SEC has been shown to pursue additional enforcement action, pursue additional sanctions, and increase financial penalties against uncooperative companies and individuals.4  In fact, a factor the Commission has considered when determining whether the imposition of penalty is in the public interest was whether the company or individual cooperated and was honest with authorities.5

There is no guarantee that the Commission will forego an enforcement action, penalties, or sanctions—as these decisions vary widely based on the facts and circumstances of each case—but a company’s cooperation and remedial action can be the deciding factor between reducing—and even avoiding—penalties and sanctions or on the other hand, suffering greater penalties. 

This is why hiring a lawyer who understands the significance of cooperation and remediation in the SEC enforcement context and can offer guidance to companies and individuals facing an SEC investigation or enforcement action is critical. 

Anel Viamontes is an associate with the law firm of Fridman Fels & Soto, PLLC and a member of the firm’s Securities Litigation and SEC Enforcement Practice Group. The Group is led by partner Alejandro Soto, a former senior official with the SEC.

1 View, Inc., Admin. Proc. File No. 3-21505, Exchange Act Release No. 34-97830, 2023 SEC LEXIS 1692 (Jul. 3, 2023).

2 Id

3 Id

4 Press Release, U.S. SEC, Xerox Settles SEC Enforcement Action Charging Company with Fraud (Apr. 2002), available at sec.gov/news/press/2002-52.txt (imposing a $10 million penalty which partially reflected the company’s lack of full cooperation in the investigation); see also Press Release, U.S. SEC, SEC Charges Weatherford International With FCPA Violations (Nov. 2013), available at https://www.sec.gov/news/press-release/2013-252#:~:text=Weatherford%20agreed%20to%20pay%20%2487,agencies%20for%20the%20sanctions%20violations (imposing a $1.875 million penalty assessed in part for lack of cooperation early in the investigation).

5 SEC v. Lybrand, 281 F. Supp. 2d 726, 730 (S.D.N.Y. 2003), aff’d on other grounds, 425 F.3d 143 (2d Cir. 2005) (Lybrand factors).