SEC Investigations 101: 20 Frequently Asked Questions

The Securities and Exchange Commission is more active than ever, filing 734 actions in 2012 and seeking an 18.5 percent increase in its 2013 budget. Most large corporations will face an SEC investigation at some point. News of an investigation need not induce panic, since many do not lead to enforcement action. By taking some sensible steps, you can greatly enhance your chances of resolving the matter with minimal damage. This article, in FAQ format, addresses 20 decision points commonly faced by counsel during an SEC investigation and provides a starting point for developing a strategy.

1.         Should I comply with a request to voluntarily produce documents?

The SEC staff is unable to issue subpoenas until a formal order issues, but may ask for early voluntary production of documents. Declining such requests is not a successful strategy, since the staff can easily obtain formal authority. Moreover, informal requests are likely to be less onerous than the subpoena that will follow upon your refusal. By providing the information voluntarily, you can argue you are cooperative, which may result in leniency. Your cooperation will also foster a good relationship with the SEC staff, which will help with negotiations concerning additional requests. Finally, since it is easier for the staff to drop informal investigations than formal ones, it is wise to provide exculpatory material early.

2.         Once I learn of SEC interest in my company, should I conduct an internal investigation?

It is impossible to formulate an effective strategy without knowing the full scope of the problematic conduct. As soon as you learn of the prospect of an SEC investigation, you should commence a thorough internal investigation by interviewing knowledgeable employees and collecting relevant documents. Be careful to inform employees that the attorneys conducting the investigation represent the company.

3.         Should I self-report potential wrongdoing?

Self-reporting is almost always a good idea and can, along with other cooperation, serve as a basis for leniency. There is little downside to self-reporting, since most cases of serious misconduct will be uncovered anyway.

4.         When should I start preserving documents?

As soon as you learn of the possibility of an SEC inquiry. Counsel need to take special steps to educate themselves about electronic documents by interviewing IT personnel and becoming familiar with data storage processes. The consequences of failing to preserve are disastrous.

5.         Can I refuse to comply with SEC document subpoenas?

Refusing to comply with SEC document requests is seldom a good idea. In response, the staff will bring a subpoena enforcement action, which will be given expedited and favorable treatment by the court. Arguments that documents are “irrelevant” or are being sought without “probable cause” will not prevail, so reserve court challenges for highly unreasonable subpoenas. Clients are best served when counsel negotiates reasonable limits with the SEC.

6.         My client received a background questionnaire to fill out before testimony. Should we do this?

There is no downside to doing so, since the staff can ask the questions anyway. Filling out the questionnaire will save time, foster good will, and expedite matters.

7.         Who sees the documents I produce?

SEC form 1662 sets forth the permissible uses, including sharing documents with other agencies. The SEC will not agree to shield sensitive business or technical information. The best you can do is prevent the documents from being provided to Freedom of Information Act requesters under 17 CFR §200.83.

8.         Must I get a different lawyer for each employee?

Assessing the potential conflicts among participants is one of the most difficult challenges. Most matters are rife with competing assertions of blame. Where conflicts exist, each relevant individual (or group with common interests) should have separate counsel. Determining whether the company must pay for counsel requires an examination of employment contracts, by-laws, etc. Where the company has no obligation to pay, it may anyway to foster a good working relationship with co-counsel.

9.         Who may attend testimony?

The witness and his/her counsel.

10.       Should my client assert the Fifth Amendment?

Although Fifth Amendment assertions cannot be used against a defendant in criminal cases, such assertions generate adverse inferences in civil SEC actions. Further, these assertions create an impression that your client has something to hide and will usually result in an action being brought. Fifth Amendment assertions should be reserved for cases of serious misconduct likely to result in criminal prosecution.

11.       Other than objecting, what should I do during testimony?

Take copious notes. Transcripts are not usually available for weeks and you cannot take copies of the exhibits. You should carefully summarize the testimony and the exhibits to assist in preparation of other witnesses.

12.       Can several different SEC attorneys question my client?

One staff attorney asks the bulk of the questions. However, the supervisor will usually ask a few questions. When the case involves a particular area of expertise, such as accounting, a knowledgeable staff member may ask additional questions.

13.       Should I order a transcript of the testimony?

It is almost always a good idea to order transcripts to help you with preparation of witnesses, to horse-trade with other counsel, and to help prepare your Wells submission (discussed below), even if it increases the chances that private plaintiffs will discover the transcript. You cannot order the transcript from the court reporter, but must send an order form to the SEC. You can only order transcripts of witnesses you represent.

14.       Should I waive the attorney-client privilege?

To show cooperation, a party may choose to produce privileged documents, such as internal investigation materials. This is a bad idea. Special confidentiality agreements are possible for such productions, but they provide minimal protection. The risks associated with waiver outweigh the benefits, because you can cooperate without waiver by providing only the factual information gleaned from your investigation.

15.       At the testimony’s conclusion, the SEC staff asked me if I wanted to ask any questions. Should I have?

Most defense attorneys mistakenly abstain from asking questions to avoid giving the SEC “free discovery.” Counsel should use this opportunity to clarify any misstatements or ambiguous testimony and present exculpatory facts useful for the Wells submission.

16.       We provided material to the SEC, but have heard nothing. Can I ask them if we are in the clear?

The staff issues termination letters to inform interested persons that it completed the investigation without recommending enforcement action. If you have not heard anything, you should ask for one.

17.       We received a Wells Notice. How should we respond?

A “Wells Notice” states that the staff intends to recommend an action and briefly summarizes the case. It includes an invitation to provide a submission to go to the Commissioners along with the staff’s recommendation. Upon issuance, the staff will generally accommodate requests to meet and review investigative files. You should use this opportunity to obtain as much information as possible, especially the nature of evidence you have not seen.

A Wells submission is not always advisable. The staff has invested significant resources by this time and is unlikely to change its mind. One exception is where there are many potential defendants with different culpability levels. You may have success convincing the Commission that certain defendants should not be sued. Be careful with your Wells submission, because the Commission may offer admissions against you in subsequent proceedings.

18.       The SEC brought an administrative proceeding against my client instead of a court action. Is that good or bad?

The SEC has discretion over whether to bring actions administratively or in federal court. Administrative cases are usually less serious and/or involve registered individuals. They are not tried before a jury and are not governed by the rules of evidence. The mere fact that an administrative law judge (ALJ) is the fact-finder does not mean that the deck is stacked against you. ALJs are impartial and separate from the Commission, and find in a defendant’s favor when warranted.

19.       Should I settle once it is clear that the SEC is going to sue?

“Settlement” is a misnomer when dealing with the SEC. The staff demands that defendants agree to a consent judgment ordering monetary relief and an injunction against future violations. Usually, the monetary relief will be equal to or more than the Commission would get if it were to win (except in cases of cooperation or inability to pay). The Commission does not give discounts in weaker cases.

Given these settlement practices, it is often best to focus on beating the SEC at trial, where your chances are good. The SEC justifies its budget by touting the number of cases brought, so most resources go into bringing cases instead of trying them. Most litigated matters are handled by a single litigator with minimal support, resulting in a recent string of high-profile losses.

20.       The SEC proposed settling my case for an injunction against future violations and no penalties. Is this too good to be true?

A lot of things are too good to be true, but this may not be one of them. The SEC waives penalties upon a showing of inability to pay. Before agreeing, counsel should examine the injunction’s collateral consequences. For example, injunctions against registered representatives of broker-dealers can result in disqualification from registration.

David Marder is a partner at Robins, Kaplan, Miller & Ciresi L.L.P. He represents parties in investigations and actions brought by the SEC, FINRA, and state securities regulators, and in private securities actions, including litigation and arbitration. He is also a former senior trial counsel and assistant district administrator at the Securities and Exchange Commission. Marder can be contacted at

Reprinted with permission from Corporate Counsel. Copyright 2013 ALM Media Properties LLC. Further duplication without permission is prohibited. All rights reserved.

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