The SEC this year has demonstrated its willingness to incentivize whistleblowers and companies to share information about misconduct and assist with the SEC’s investigations. To that end, the SEC issued its first Deferred Prosecution Agreement (DPA) with an individual on November 12, 2013. A DPA is an agreement whereby the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.
This first DPA is with Scott Herckis, a former Fund Administrator for Connecticut-based hedge fund Happelwhite Fund LP. In September 2012 Herckis resigned and contacted government officials regarding the misappropriation by the fund’s founder and manager, Berton Hochfeld, of $1.5 million in hedge fund proceeds. Herckis further reported that Hochfeld had overstated the fund’s performance to investors. Herckis’s cooperation with the SEC, including producing voluminous documents and helping the SEC staff understand how Hochfeld was able to perpetrate the fraud, led the SEC to file an emergency action and freeze $6 million of Hochfeld’s and the fund’s assets. Those frozen assets will be distributed to the fund’s investors.
SEC associate director Scott W. Friestad explained the reasoning for the first DPA of this kind:“[w]e’re committed to rewarding proactive cooperation that helps us protect investors, however the most useful cooperators often aren’t innocent bystanders. 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.”
The DPA states that Herckis aided and abetted Hochfeld’s misappropriation and recklessly prepared monthly account statements that materially overstated the rate of return to potential investors. As part of the DPA deal, Herckis must continue to cooperate with the SEC and cannot serve as a fund administrator with any hedge fund for five years, and cannot associate with any broker, dealer, investment adviser, or registered investment company. He must also disgorge $48,000 in fees he received working for the hedge fund. Subject to the continuing cooperation of Herckis and compliance with all terms of the DPA, the SEC agreed that it will not bring any enforcement or proceeding against Herckis involving that investigation.