The Securities and Exchange Commission announced Tuesday its first deferred prosecution agreement with an individual — a former hedge fund administrator — who helped the agency take action against a hedge fund manager who stole investor assets.
DPAs encourage individuals and companies to provide the SEC with information about misconduct and assist with a subsequent investigation. In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.
According to the SEC’s agreement with Scott Herckis, he was the administrator for Connecticut-based Heppelwhite Fund LP, which was founded and managed by Berton M. Hochfeld. With voluntary and significant cooperation from Herckis, the SEC says that it filed an emergency enforcement action against Hochfeld in November 2012 for misappropriating more than $1.5 million from the hedge fund and overstating its performance to investors.
The SEC says its action halted the fraud and froze the hedge fund’s assets and Hochfeld’s personal assets, which are now being used to compensate defrauded investors. Last month, a federal court judge approved a $6 million distribution to harmed Heppelwhite investors.
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“We’re committed to rewarding proactive cooperation that helps us protect investors, however the most useful cooperators often aren’t innocent bystanders,” said Scott Friestad, an associate director in the SEC’s Division of Enforcement, in a statement. “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.”
Steve Crimmins, a partner with K&L Gates in Washington, who served for eight years as the SEC’s Deputy Chief Litigation Counsel, told ThinkAdvisor that DPAs were added to the SEC’s toolkit by former SEC Chairwoman Mary Schapiro, “but the SEC used them sparingly and only for entities.”
Tuesday’s use of a DPA for an individual “signals that the agency will be pushing harder to proactively encourage people to come forward with evidence that will give the SEC quick and solid wins,” Crimmins says.