How to Prepare a Witness for SEC Testimony.

The SEC can share investigative information with criminal authorities and regulators, meaning an SEC examination will frequently trigger parallel enforcement inquiries. A witness’s Fifth Amendment strategy should be resolved before the witness enters the room.

Witness preparation is also a form of document review. Our lawyers will reconcile witnesses’ recollections with prior productions, including emails, calendars, transaction records, and other means of evidence. Witness preparation is meant to test recollection and explain procedures to the witness, not to prescribe substantive answers or prepare a “script.”

Generally, witnesses should be encouraged to answer unless they assert a claim of privilege. This includes invocations of the Fifth Amendment. While invocations of the Fifth Amendment generally cannot be used to support adverse inferences in federal criminal matters, they can support adverse inferences in civil matters. Invoking the Fifth Amendment before the SEC does not automatically impose a FINRA bar, though FINRA Rule 8210 separately requires associated persons to provide information, documents, and testimony at FINRA’s request.

Rather than relying on a memorized script, witnesses need to be able to communicate what they know as honestly and accurately as possible, regardless of how the SEC phrasings questions. Our lawyers help witnesses develop an understanding of the likely topics of the investigation, the nature and scope of the SEC’s request, and the witness’s potential liability.

Our role continues during the testimony itself, and we then provide witnesses with the opportunity to make corrections, supplement their testimony, and assist with any follow-up requests. We also assist with any related requests by the SEC while protecting witness confidentiality as much as possible.

What Are the First Steps After Receiving an SEC Testimony Subpoena?

An SEC testimony subpoena can compel the production of documents, a sworn examination, or both. If the witness is an associated person of a broker-dealer or financial institution, they may have other obligations to respond to an examination as well. If the recipient of the subpoena has not yet preserved documents, this should be among the first steps, and in many cases, it should happen as soon as the recipient is on notice that an SEC inquiry is reasonably foreseeable.

What Are the Rights of a Witness?

SEC witnesses have the right to be accompanied by counsel. Witnesses have the right to refuse to give testimony that may subject them to criminal charges. Testimony by SEC witnesses may be used in investigations into other matters and by authorities and regulators outside of the federal government. Witness testimony, statements made during SEC examinations, and information obtained from witnesses are subject to disclosure.

All of this, and more, is described by the SEC in SEC Form 1662 (attached to all SEC subpoenas).

What Happens to Information Provided During an SEC Examination?

Parallel criminal investigators may also be able to obtain any information that is provided to the SEC during the SEC’s examination. This means that preparing to testify before the SEC also means preparing to potentially testify before a grand jury or in federal court.

For SEC investigations, witnesses have several protections. For example, witnesses have the Fifth Amendment right against self-incrimination. While the U.S. Constitution and the Fifth Amendment provide this protection in all circumstances, including SEC investigations, it may not be as clear how and when to assert this right. Importantly, SEC staff does not have the authority to grant immunity from criminal prosecution in exchange for testimony.

Can I Refuse to Testify to the SEC?

This is a critical issue that requires careful consideration. In some cases, it may be more prudent to invoke the Fifth Amendment or decline to testify unless a clear decision about the scope and nature of the government’s investigation has been made.

What happens if I decline to testify?

The SEC is required to issue a formal order before its staff can issue investigative subpoenas. Once a formal order issues, designated SEC staff may investigate the matter and compel testimony from relevant persons. If a person refuses to comply with an SEC testimony subpoena, it is possible that the witness may have waived his or her Fifth Amendment right against self-incrimination. This is true even if a person has previously claimed this right before the SEC. Importantly, while a person who provides a false statement to the SEC may be liable under criminal law as well, a person who refuses to testify before the SEC is not necessarily liable for perjury.

What is the legal penalty for making a false statement in SEC testimony?

Under 18 U.S.C. § 1001, “knowingly and willfully” makes a “materially false, fictitious, or fraudulent statement or representation” or conceals a “material fact by means of a false or fraudulent statement or representation” to any federal department or agency. This includes the SEC.

Can Company Counsel Safely Prepare an Employee for Testimony?

When company counsel helps prepare employees for testimony, one potential issue is who the counsel represents. Generally, company counsel represents the company and not the employee, so any conflicts between the company and the employee can be problematic. Employees should be aware of the counsel’s client, and if an employee is not comfortable with the counsel’s client, he or she can seek separate representation. In some cases, company counsel may also represent employees, but this typically happens in the case of a separate engagement.

Another potential issue is when employees and companies have divergent interests. This is common in SEC matters. Employees may believe that they are being singled out, or that the company is trying to make the employee a scapegoat. The company may believe that employees are responsible for regulatory violations, and company counsel may find it necessary to assert this defense. For these reasons, if the interests of the company and the witness are divergent, it is important for both to engage separate counsel. Individual witnesses have many different types of exposure, and separate counsel can help avoid conflicts that would interfere with providing effective representation to the individual.

Multiple representation can also present additional issues. First, it can create conflicts among multiple clients, which may complicate the attorney-client relationship. Second, it could create concerns that the witnesses have coordinated their testimony. If witnesses have coordinated their testimony, then the testimony may not be viewed as independent verification, and the SEC may not give the testimony as much weight as otherwise would be deserved.

Communications with counsel and counsel’s work product relating to SEC testimony may be protected by attorney-client privilege or the work-product doctrine. In some cases, the SEC may be requesting information about a topic that is also the subject of an examination by other regulatory and criminal authorities. In these cases, privilege protections for information provided to the SEC can extend to parallel investigations as well.

Witness preparation must also involve an evaluation of whether a voluntary waiver of privilege makes sense. A voluntary waiver can expose confidential materials to other authorities. The SEC may share these materials with parallel criminal investigators, or they may be disclosed pursuant to other authorities’ requests or court orders.

Proper witness preparation must also involve a detailed discussion about the scope and nature of the attorney-client privilege. The attorney-client privilege protects communications between a client and the attorney in order to obtain legal advice. However, the privilege does not protect the factual information disclosed by the client to the attorney. If a fact itself is not protected, a witness can be compelled to reveal it, even if the witness has learned it as a result of communications with the attorney.

While this privilege does not protect the fact itself, it does protect the attorney’s legal advice. The goal of witness preparation is to help witnesses rely on their independent recollection. Witness testimony should not be a result of preparing with counsel, and the witness should be able to testify to what he or she independently remembers without disclosing counsel’s specific advice.

If any of this describes your situation, it is worth talking it through with counsel. Spodek Law Group can be reached at 212-300-5196.

How Should a Witness Review Records Without Changing Recollection?

Truthful uncertainty is much safer than guessing about forgotten events. If you don’t remember a specific fact, it is better to tell the SEC that you don’t remember it than it is to guess about an event and be wrong. It doesn’t matter if you were expected to remember the fact. It is better to tell the SEC that you don’t remember the fact than it is to guess about an event and be wrong.

During the SEC examination, you will likely be asked questions that have inaccurate premises in them. For example, an SEC investigator might ask, “Why did you make a fraudulent transfer on May 1, 2023?” If you didn’t make a fraudulent transfer on May 1, 2023, your first step is to reject the investigator’s premise. For example, you could say, “I didn’t make a fraudulent transfer on May 1, 2023.” Only after rejecting the premise do you address the investigator’s remaining question. For example, “I did make a transfer on May 1, 2023, but it wasn’t fraudulent.”

If an investigator asks a compound question, it is possible that different parts of the question require different answers. For example, an investigator might ask, “Did you discuss this transaction with Employee A, and did you both decide to do it this way?” You may remember discussing the transaction with the employee, but you may not remember deciding to do it a certain way. If you have different answers to different parts of the question, you should separate the question and provide an answer for each part.

Mock questioning is designed to help witnesses practice their listening and accuracy. It is not designed to help them memorize scripted answers. During the mock questioning process, we work with our clients to ensure that their testimony will be based on their actual independent recollection, and not based on their lawyer’s preparation.

When reviewing records during the witness preparation process, the witness should distinguish between their own recollection and any conclusions they have drawn that are based solely on the records they are reviewing. For example, if you remember a specific event, you should be clear that you remember it. However, if you don’t remember the event, but you have reconstructed it through the records you reviewed, you should be clear about that as well.

The witness’s chronology should similarly distinguish between dates and events remembered and dates and events that were reconstructed from the witness’s records.

A lawyer’s witness preparation must be consistent with both the ethical rules governing the lawyer’s practice and criminal law. With respect to ethical obligations, ABA Model Rule 3.4(a) says that a lawyer “shall not unlawfully obstruct another party’s access to evidence or unlawfully alter, destroy or conceal a document or other material, or unlawfully counsel or assist another person to do any such act.”

There are also statutory constraints on witness preparation. For example, 18 U.S.C. § 1512(b)(1) prohibits anyone from “knowingly using intimidation, threats, or corruptly persuades another person, or engage in misleading conduct toward another person, with intent to: (A) influence, delay, or prevent the testimony of any person in an official proceeding; (B) cause or induce any person to withhold a record, document, or other object; (C) cause or induce any person to alter, destroy, mutilate, or conceal a record, document, or other object; or (D) cause or induce any person to evade legal process.”

How Should Counsel Manage Testimony-Day Procedure and Remote Logistics?

During an examination, witness counsel has specific procedural rights and obligations. Pursuant to 17 C.F.R. § 203.7, “Any person whose testimony is required by subpoena is entitled to be accompanied by counsel of his or her choice… and he or she shall be permitted to consult his or her counsel, and a lawyer testifying as a witness shall be permitted to counsel with the counsel in regard to his or her duties as a witness.” Importantly, counsel’s right to intervene includes “objections that are brief in nature and not designed to influence the witness’s testimony.”

Conversely, while brief objections are permissible, they do not provide “the opportunity for witness’s counsel to make a long or extended argument or a speech intended to coach the witness during the examination.”

Remote testimony introduces unique logistical issues. One key concern is attorney-client consultations. When a witness is testifying via phone, video, or other means of remote communication, counsel needs a confidential means by which to communicate with the client. This could be a separate phone line, a separate video connection, or chat. The means used must allow counsel to communicate with the client without interrupting the flow of testimony or preventing the court reporter from creating an accurate record.

Remote testimony also requires a clear protocol for handling exhibits, screen sharing, and other similar issues. For example:

• If an SEC investigator shows a document that is unmarked, how will the investigator or witness counsel mark the document before it is exhibited on the screen?
• If the investigator wants to exhibit a document without screen sharing it for review by the witness’s counsel, how will the investigator deliver the document to counsel before or during its exhibition?

Another important part of remote-testimony planning is creating a backup plan for internet or audio connectivity. If the testimony is interrupted by a lost connection, how will everyone reconnect? Who will initiate the reconnection process? Does the witness or witness’s counsel have backup audio or internet? Does the witness or witness’s counsel have the court reporter’s name and contact information in case of technical failure?

Witnesses also have rights and other needs that must be addressed prior to testimony. For example, under the Americans with Disabilities Act (ADA) and other relevant authorities, individuals with actual or perceived physical or mental impairments have a right to reasonable accommodations unless these accommodations present an undue burden on the government. In the context of SEC testimony, this could include accommodations for visual impairments, hearing impairments, and other physical or mental disabilities.

Along with any applicable accommodations, witnesses may need to request reasonable breaks due to fatigue. Fatigue can impair the witness’s listening ability, recall, and other cognitive functions. While the witness’s counsel should only request breaks when necessary, counsel should also ensure that the witness knows when to signal for a break so that they can remain fully present and alert throughout the examination.

What Should Happen After the SEC Testimony Ends?

Final Opportunities to Correct or Supplement the Record

Before testimony concludes, witnesses have the opportunity to make any corrections or otherwise supplement the record. These are important opportunities to address ambiguities or any incomplete answers and to add any new exculpatory facts that may have become apparent during the examination.

Witness’s counsel also has the opportunity to ask closing questions. These questions are designed to place into the record any exculpatory facts that the witness may have inadvertently omitted, or clarify any points that the counsel thinks may be ambiguous.

Witness’s Right to Purchase Its Testimony Transcript

Pursuant to 17 C.F.R. § 203.6, “Any witness whose testimony is taken by subpoena pursuant to a formal order issued by the Commission shall be entitled to purchase a copy of the transcript of the testimony.”

Post-Testimony Interactions with the SEC and Other Authorities

As a matter of fact, any interaction between the witness and the SEC following the witness’s testimony must also be coordinated through the witness’s counsel. With that in mind, we guide our clients through:

• Interactions with Parallel Criminal Investigators and Federal Prosecutors, as well as with Other Civil Regulators
• Correcting, Supplementing, or Explaining Testimony (and providing substantive-matter advice)
• SEC Staff Requests for Additional Documents, Additional Testing of Records, or Additional Appearances
• Responses to Further SEC Staff Requests Following the Witness’s Testimony

While testimony before the SEC is subject to various privilege protections, in some cases, these protections may be waived, or they may not apply. If a witness (or someone else) inadvertently provides information in contradiction of a privilege, this can trigger parallel investigations. Thus, the witness and witness’s counsel must carefully monitor the timing and content of all subsequent interactions.

While witnesses may supplement or explain their testimony to a certain extent, an individual’s explanation of why previous statements were inconsistent does not necessarily remove the inconsistent statements from the record. Similarly, supplemental submissions should not be viewed as an eraser or replacement of answers to questions in a sworn transcript.

The Wells Process

If the SEC’s investigation reveals (or believes it reveals) evidence of an enforcement violation, the SEC staff will (or may) issue a “Wells notice.” This is a formal notice that the staff has concluded its investigation and is preliminarily planning to recommend a certain enforcement action.

While the SEC’s issuance procedures imply a general issuance policy regarding Wells notices, they are not issued in all cases.

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.