Employee Interviews During SEC Investigations.

Does an employee have to participate in a voluntary SEC interview?

No. The federal government cannot require employees (or anyone else) to participate in a voluntary SEC interview; SEC staff request such interviews, and the employee is free to decline.

Can employee interview answers make an employee a subject of an SEC investigation?

Yes. If it is not clear when an employee provides testimony whether they are an investigation subject, and it becomes clear from their answers that they are, or that they had or have involvement in an activity that is the subject of the investigation, then the SEC investigation can shift to treating them as a subject.

Can an employee retain personal counsel to represent them during an SEC interview?

Yes, employees may retain personal counsel to represent them during questioning by the SEC staff.

If company counsel prepares an employee for questioning by the SEC staff, does company counsel represent the employee?

No. Company counsel does not represent an employee merely by preparing the employee for questioning by the SEC staff.

Can the SEC staff contact employees before the SEC has identified any subjects of an investigation?

Yes. Early in an investigation, SEC staff may contact employees (and others) whom they consider potential witnesses.

Can SEC staff interview employees who are not investigation subjects?

Yes, and they frequently do so.

Does the SEC keep investigations public?

Generally, no. SEC investigations are generally nonpublic before an enforcement action is filed.

Are recipients of SEC requests bound to keep the requests confidential?

Not automatically. The SEC staff may request confidentiality, and some laws and regulations may require confidentiality, but in many cases, recipients of SEC requests are not bound to keep the requests confidential.

Is an SEC Interview Voluntary, Proffered, or Compelled Testimony?

What Types of SEC Interviews are Most Common?

The two most common types of SEC interviews are informal interviews and subpoenaed interviews.

How are Informal SEC Interviews and Subpoenaed SEC Interviews Different?

Informal interviews are generally voluntary and unsworn, whereas subpoenaed interviews are compelled testimony (which, unless a negotiated agreement provides otherwise, is typically sworn, transcribed, and compelling in nature). While employees are not required to participate in an informal interview, employees’ refusal to participate may, in many circumstances, prompt the SEC to issue a subpoena.

What is an Attorney Proffer in an SEC Investigation?

An attorney proffer is an interview in which counsel for the employee presents counsel’s account of an employee’s alleged role in a transaction in question.

Is an Attorney Proffer Different from an SEC Interview?

Yes. In an attorney proffer, counsel speaks on behalf of the employee rather than the employee testifying, but counsel may not knowingly make false statements of material fact to the SEC staff. In contrast, during an SEC interview, the employee provides the testimony and may be prosecuted under 18 U.S.C. § 1001 for a materially false statement, and for perjury as well if the testimony is given under oath.

What Protections Apply to a Proffer in an SEC Investigation?

Proffer protections depend on the terms that are negotiated with the SEC staff. There are no automatic use-immunity protections for proffers in SEC investigations; in federal proceedings, statutory use immunity may be compelled under 18 U.S.C. §§ 6002-6004. Use immunity is the legal presumption that the information proffered will not be used to prosecute the individual for the crime discussed.

Does an Attorney Proffer Satisfy a Subpoena for Testimony?

Absent an agreement with the SEC staff, an attorney proffer does not satisfy an employee’s obligation to respond to a subpoena for testimony.

Do Labels such as “Witness,” “Subject,” and “Target” Have Legal Meanings in Federal Securities Law?

No. Federal securities statutes assign no legal consequences to the labels “witness,” “subject,” and “target.”

Why Does the SEC Refer to Individuals as “Witnesses,” “Subjects,” and “Targets”?

These are labels that the SEC staff use for administrative purposes, and that may change as an investigation develops. While it is advantageous to be labeled a “witness” rather than a “subject” or “target” of an SEC investigation, these labels have limited significance in the grander scheme of determining liability.

Do I Need Separate Counsel From My Employer’s Lawyer?

What is an Upjohn Warning?

An Upjohn warning occurs when lawyers for a company identify the company as their client. During an Upjohn warning, lawyers from a company explain to an employee that they represent the company and not the employee.

Do I Need Independent Counsel When My Employer’s Lawyer Gives Me an Upjohn Warning?

Not necessarily. While not legally required unless there is a direct conflict of interest, independent counsel may be necessary depending on the situation. If there is a potential for you to become a subject of the investigation, then independent counsel may be advisable.

When Does My Employer Have to Pay for Independent Counsel?

Generally, employers have no legal obligation under federal law or federal regulations to fund independent counsel for employees who are witnesses in an SEC investigation.

If My Employer Pays My Independent Counsel’s Fees, Does My Employer’s Lawyer Represent Me?

No. If a company pays an employee’s legal fees, the lawyer may still represent the employee, provided the employee gives informed consent, the payment does not interfere with the lawyer’s independent professional judgment, and client confidences are protected. Under ABA Model Rule 1.8(f), “a lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6.”

When is it Permissible to Have Separate Representation but Still Share the Same Attorney for Certain Aspects of an SEC Investigation?

When there are no conflicting interests. Under ABA Model Rule 1.7, “Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.” A concurrent conflict of interest arises if “(1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.”

Can’t This Conflict Be Waived?

Not always. Under ABA Model Rule 1.7(b), “informed consent” is only possible “if the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client,” and if the “representation is not prohibited by law.”

What Happens if a Common-Interest Agreement is Entered Into by Companies and Employees who are in the Same Case?

If a common-interest agreement is entered into, all participating companies and employees can still be adverse to each other. Common-interest agreements do not prevent any of the companies or individuals from becoming adverse to the others.

What Does the Common-Interest Privilege Protection Mean in Relation to Attorney-Client Privilege?

The common-interest privilege means that if an employee or company is entitled to assert the attorney-client privilege over a specific topic, the employee or company does not lose that privilege by disclosing it to another company or employee with the same interest. It is important to remember, however, that this does not extend to protecting facts and information that is not otherwise privileged.

What Rights Do I Have During Formal SEC Testimony?

How Does Formal SEC Testimony Work?

Formal SEC testimony is generally recorded, and the witness has the right to have a lawyer present. This testimony will be conducted by the SEC attorneys on the investigation team, and at times by an SEC supervisor as well.

When Can My Lawyer Help Me During Testimony?

C.F.R. §203.7 allows for lawyers to advise witnesses during formal SEC testimony. The section provides that “The right to be accompanied, represented and advised by counsel shall mean the right of a person testifying to have an attorney present with him during any formal investigative proceeding and to have this attorney advise such person before, during and after the conclusion of such examination.”

When Can My Lawyer Ask the Witnesses Questions?

C.F.R. §203.7 also allows for lawyers to ask the witness limited “clarifying” questions at the end of the SEC’s examination. “The right to counsel includes the right to have the attorney question such person briefly at the conclusion of the examination to clarify any of the answers such person has given.”

How Long After My Testimony Do I Have the Right to Access the Testimony Transcript?

Under 17 C.F.R. § 203.6, a witness, upon proper identification, has the right to “inspect the official transcript” of the witness’ own testimony. A copy may be procured upon written request and payment of the appropriate fees.

Will the SEC Always Provide a Copy of the Transcript of My Testimony?

No. “In a nonpublic formal investigative proceeding, the Commission may for good cause deny a request for a copy of the transcript.”

Can I Assert the Fifth Amendment During an SEC Interview?

Yes, but generally a witness cannot assert the Fifth Amendment blanketly. Witnesses must generally assert the Fifth Amendment on a “question-by-question basis” as each question is asked by the SEC staff.

What Type of Testimony Should I Assert the Fifth Amendment Over?

The Fifth Amendment applies in circumstances where a witness’s answer could supply information that could support a criminal prosecution of the witness. The privilege may be asserted, although it cannot be used for the purpose of obstructing the law.

Do I Have the Right to Review the Transcript for Any Inaccuracies?

Not automatically. While C.F.R. §203.6 allows for witnesses to review and obtain copies of their transcripts (with certain restrictions), the regulation does not explicitly provide for a correction procedure that is similar to a Rule 30(e) correction procedure in federal litigation.

The privilege against self-incrimination applies only in response to questions that could be answered with incriminating information.

The privilege against self-incrimination is not a broad or absolute right.

Federal securities laws do not provide a broad witness privilege for the privilege against self-incrimination.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

Can a Mistaken SEC Interview Answer Become a Crime?

What is an SEC Form 1662?

An SEC Form 1662 is a form that the SEC uses to disclose how it may use, retain, and share the information that it obtains during its investigations. These include both voluntary and compelled interviews.

Can the SEC Share Information with Other Federal or State Authorities?

Yes, the SEC states, “The Commission may disseminate the information that it obtains and uses, and the information that it obtains and uses may be shared with other federal agencies and state, local, or foreign authorities.”

Can an SEC Testimony/Interview Be Used by Other Federal or State Agencies?

Yes. “The Commission may also share any information it obtains and uses with other federal agencies and state, local, or foreign authorities.”

Can the SEC Refer a Matter to the Justice Department for Criminal Investigation?

The SEC does not pursue criminal charges. However, the SEC can make a referral to the Department of Justice if it identifies an alleged criminal offense. “The Commission may also make criminal referrals to the U.S. Department of Justice (the “Department of Justice”).”

What are the Criminal Charges for Making False Statements to Federal Investigators?

The criminal charge for making a false statement to a federal investigator is generally 18 U.S.C. Section 1001. It is important to note that an individual can face charges under Section 1001 even if they are not convicted of a substantive securities offense.

Can a Mistake in Testimony Be Rectified by Admitting Truth Later?

Section 1001 does not provide for a recantation defense, which allows a defendant to confess the mistake he or she made and rectify it before getting in trouble with the law.

Is It the Same Legal Violation under Section 1001 and Section 1519 for Making False Statements?

No. While both sections apply to false statements made in federal matters, they apply in different circumstances and they are distinct offenses, with their own elements. 18 U.S.C. Section 1519 is charged when a person destroys, alters, conceals, or falsifies a record or document with intent to impede a federal investigation or matter, while 18 U.S.C. Section 1001 is charged when a person knowingly and willfully makes a materially false statement, or uses a false writing, in a matter within federal jurisdiction.

Which Work Messages and Personal-Device Records Must I Preserve?

What Does “Knowing Destruction, Alteration, or Concealment of a Record” Under 18 U.S.C. Section 1519 Mean?

In order to satisfy the “knowingly” element of Section 1519, an employee must intentionally engage in the destruction, alteration, or concealment of a record with the intent to impair the ability of an authority to use the record in a matter that is within the jurisdiction of the United States.

Should I Preserve My Work Emails and Other Electronic Communications?

Generally, yes. Document preservation obligations in federal proceedings include a company’s records and employees’ communications that are relevant to the matter. This may include the electronic records that employees keep on their work computers.

Can the SEC Staff Obtain the Records of My Brokerage or Other Financial Institutions?

The SEC staff can issue subpoenas to any third party for any relevant records that may be in their possession. This includes a brokerage or a personal financial institution that provides records to a company or an employee.

Do I Have to Preserve the Business Messages on My Personal Cell Phone, Tablet, or Other Device?

If your business messages are stored on your personal cell phone, tablet, or other device, then you have to preserve those messages as well.

Are There Any Specific Requirements for the Preservation of Business Messages?

Under Section 17(a) of the Exchange Act, broker-dealers must preserve all business communications including written communications made by employees. Similarly, under the Advisers Act, investment advisers are required to preserve written communications with their clients, as well as those that their employees use in relation to recommending or buy-sell advice.

What Is the Maximum Punishment Under 18 U.S.C. Section 1519?

Under Section 1519, a defendant who is convicted of federal law violations can face a prison sentence of up to 20 years.

What Other Aspects of a Subpoena Can I Discuss with the SEC Staff?

Beyond the items being requested, parties to a subpoena are often able to negotiate deadlines for producing subpoenaed materials as well as the potential for “rolling productions.”

Can Refusing SEC or FINRA Questioning Cost My Career?

What are the Sanctions for Failing to Cooperate with a FINRA Investigation?

FINRA Rule 8210 requires covered persons (which include all persons subject to FINRA jurisdiction) to “provide information to FINRA when requested in writing, including testimony as to any matter that FINRA deems relevant to its rule-enforcement activities.” If an individual fails to cooperate, FINRA may charge them with a rule violation and impose the sanction of a one-year suspension (or permanently bar the individual from participating in the industry).

Can I Assert My Fifth Amendment Rights in a FINRA Investigation?

Generally no. The Fifth Amendment protects an individual’s right against self-incrimination only when facing questioning by the government. A self-regulatory organization like FINRA does not present a government concern and, therefore, does not trigger protections under the Fifth Amendment.

Can I Be Fired for Refusing to Cooperate with an SEC or FINRA Investigation?

Generally, at-will employees can be terminated by their employer at any time and for any reason. But, this is subject to limitations placed on at-will employees’ rights by federal and state statutes, company policies, employment contracts, or certain state-law public-policy exceptions.

Will the SEC Inform FINRA of My Termination?

FINRA firms are generally required to file Form U5 within 30 days after terminating an employee’s registration. This form provides notice of the employee’s termination and includes their U5 registration status, their date of termination, their termination reason, and their company’s “comments” section.

If I Cooperate with the SEC, Can I Refuse to Participate in a FINRA Investigation?

No. Even if an employee chooses to cooperate with the SEC, the employee must still satisfy its compliance obligations under FINRA Rule 8210.

How Long Does it Take for the FINRA Suspension to Be Effective?

Under FINRA Rule 9552, a noncompliance suspension does not become effective until 21 days after notice.

What is the Maximum Sanction for Failing to Cooperate with FINRA Rule 8210?

If the individual completely refuses to cooperate with FINRA, the FINRA Sanction Guidelines recommend barring the individual from the industry for an appropriate period.

Is FINRA Part of the U.S. Government?

No, FINRA is not part of the government. It is a private securities self-regulatory organization that sets rules for brokers and investment firms and investigates them for potential rule violations.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.