How to Protect Yourself When Facing Both SEC and DOJ Scrutiny.

The SEC is the U.S. Securities and Exchange Commission. Its Division of Enforcement investigates potential federal securities-law violations. Unlike the DOJ, which handles criminal cases, the SEC pursues civil and administrative remedies through SEC hearings and in federal court.

What Is the Justice Department?

The Justice Department is the U.S. federal law enforcement agency. Its SEC-related focus is on the federal criminal securities laws.

SEC and DOJ proceedings can advance simultaneously when the DOJ’s Criminal Division or U.S. Attorney’s Offices pursue criminal cases based on the SEC’s findings.

What Is the Federal Bureau of Investigation?

The FBI is the investigative agency within the DOJ. It investigates federal crimes, including securities fraud.

Most criminal securities-fraud allegations are handled by the FBI on the DOJ’s behalf, working in conjunction with the SEC’s Enforcement Division to ensure efficient use of federal resources.

Do Other State or Federal Agencies Have Authority?

Yes. State securities regulators also have authority. State securities regulators enforce their own blue sky laws and can investigate independently or alongside the SEC, although the National Securities Markets Improvement Act of 1996 preempts much state authority over “covered securities.” Other federal agencies, the IRS Criminal Investigation Unit, the Federal Trade Commission (FTC), and the Financial Crimes Enforcement Network (FinCEN), may conduct joint investigations with the SEC and/or the DOJ, as needed.

Can I Deal with Each Agency Directly?

Yes. When facing an SEC and/or DOJ investigation, you can reach out directly to the agency involved. However, there are significant risks in doing so.

The SEC and DOJ are interested in ensuring a criminal prosecution if warranted. If you make self-incriminating statements that trigger DOJ intervention (if not already involved) or SEC referral (if DOJ is involved), you could potentially avoid a financial penalty while risking a lengthy prison sentence.

What should I do immediately after learning about both investigations?

Should My Company (or Do I Need to) Start an Internal Investigation?

When a company or committee learns of an SEC or DOJ investigation, its next steps will involve determining what is required by law, and what is in its best interests. This might include launching an internal investigation to help the company and its committee:

• Make informed decisions about whether to conduct its own inquiry to discover the truth;
• Gain insight into potentially pertinent issues for its investigation, the government’s investigation, and any future litigation;
• Evaluate the necessity of engaging outside counsel, and, if appropriate, outside consultants, as well as determine the scope of the engagement (including the necessity of conducting interviews or reviewing records); and
• Preserve its defenses by preparing a cohesive defense strategy.

The decision regarding whether to conduct an internal investigation, as well as the key steps and questions to be considered, are all critical. Our attorneys routinely advise companies and board committees as they make these critical decisions.

What Is a Preservation Duty and a Litigation Hold?

A company’s (or an individual’s) “preservation duty” is a legal obligation to preserve potentially relevant records and data when it is reasonably foreseeable that litigation or a government investigation will occur. When triggered, a company or individual should implement a “litigation hold” that suspends automatic deletion and destruction of potentially relevant records in order to comply with its preservation duty.

As established in 18 U.S.C. § 1519, knowingly destroying, concealing, altering, or falsifying records with the intent to obstruct a federal investigation is a federal crime. In this sense, when conducting its own internal investigation and/or complying with an SEC or DOJ investigation, a company or individual must be careful not to inadvertently destroy or eliminate potentially pertinent records.

Can I Seek Advancement of Legal Costs From My Company?

Many companies’ bylaws and board charters will provide for the advancement of legal costs to officers and directors pending the final resolution of an investigation, SEC enforcement proceeding, or criminal prosecution. Many companies incorporated in Delaware also have the benefit of Delaware General Corporation Law § 145(e), which explicitly permits advancement in certain circumstances.

The amount that can be advanced depends on several factors. As well, while advancement will generally provide officers and directors the ability to maintain their defense costs, it may need to be paid back in certain situations (e.g., if indemnification is not available under Delaware’s legal framework, or the individual is ultimately found to have engaged in non-reimbursable conduct).

Can I Use My D&O Insurance Policy to Cover Defense Costs?

Companies, officers, and directors can sometimes use their D&O insurance policies to cover defense costs when facing SEC and DOJ investigations. However, insurers often deny claims based on the policy’s notice, consent, exclusion, or allocation provisions, so it is important to understand the policy’s key terms and conditions.

What Are the SEC’s Formal and Informal Investigation Procedures?

When conducting investigations, the SEC has formal and informal procedures. It can issue subpoenas to obtain records or testimony, and it also allows companies and individuals to voluntarily produce records and testify at no expense to the agency. For an in-depth look at the SEC’s formal and informal investigation procedures, see this article.

Can I stay silent during SEC and DOJ questioning?

Does the Fifth Amendment Protect Me or My Company from Self-Incriminating?

The Fifth Amendment to the U.S. Constitution protects “the accused” from testifying against himself. However, the scope of the Fifth Amendment’s protection is an area of much dispute. In fact, federal courts have been split on whether the Fifth Amendment protects corporate shareholders who have no direct legal relationship with the entity under investigation.

Ultimately, the same Fifth Amendment concerns that individuals must contemplate when making the decision to assert (or not assert) the Fifth Amendment privilege in SEC and DOJ investigations apply to corporate investigations as well.

Does Asserting the Fifth Amendment Privilege Incur any Risks?

The risks associated with asserting the Fifth Amendment privilege depend on the circumstances involved. For example:

When Must I Invoke the Fifth Amendment Privilege?

Asserting the Fifth Amendment privilege requires that the privilege be “asserted at the first time that it becomes necessary.” In most cases, this means that the privilege must be asserted question by question. In other words, when the witness knows that answering a question will make him/her “testify against himself,” the witness should invoke the privilege in response to that specific question.

Is Asserting the Fifth Amendment Privilege Mandatory?

Asserting the Fifth Amendment privilege is not mandatory. However, once asserted, an individual may need to assert the privilege for all subsequent questions that touch upon the same subject matter.

Do the Fifth Amendment and Right to Counsel Apply Simultaneously?

Yes. The Fifth Amendment and the Sixth Amendment to the U.S. Constitution apply simultaneously. The Sixth Amendment protects an individual’s right to seek legal counsel. Therefore, both protections should be considered, and your defense team should give you a recommendation on whether it is in your best interests to assert the privilege or request the presence of legal counsel.

What Are Other Risks Involved in Asserting the Fifth Amendment?

The Fifth Amendment privilege is available in criminal cases, civil cases, and administrative cases. In each case, the answer to this question involves a complex analysis of various constitutional provisions, laws, and precedents.

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 an SEC case continue during a DOJ investigation?

Can an SEC Case and a DOJ Case Move Forward at the Same Time?

Although it might be logical to delay civil or administrative cases during an investigation, criminal prosecutions take priority because the standard of proof is much higher. Even then, a parallel criminal investigation does not always stop an SEC civil enforcement case from moving forward in the courts.

If a company or individual needs to stop their civil or administrative case to protect their rights or the interests of justice, they must show a “compelling reason” to stay civil proceedings and, in most cases, they need to seek a stay from the federal district court.

Is the SEC Obligated to Tell the DOJ When It Uncovers Evidence of Criminal Liability?

No. Referral is discretionary. Under 15 U.S.C. § 78u(d)(1), “The Commission may transmit such evidence as may be available concerning such acts or practices as may constitute a violation of any provision of this chapter or the rules or regulations thereunder to the Attorney General, who may, in his discretion, institute the necessary criminal proceedings under this chapter.”

As, in turn, DOJ officials often collaborate with the SEC to determine if any violations of the federal securities law justify a federal criminal prosecution and, if a criminal case is not warranted, seek civil or administrative remedies through the SEC.

Do SEC and DOJ Officials Share Statements Provided to the SEC?

In parallel investigations, statements that a company or individual provided to the SEC can be shared with the DOJ. The DOJ and SEC coordinate their parallel proceedings under the guidance in the Justice Manual and the information-sharing provisions of the federal securities laws, rather than under any single formal agreement.

As stated in United States v. Kordel, 397 U.S. 1, 11 (1970), it is generally appropriate for the DOJ to conduct a “criminal investigation alongside the SEC’s civil enforcement action without a showing of ‘special circumstances’ justifying otherwise.”

Can the SEC Refer a Company or Individual to the Justice Department for Criminal Prosecution?

Yes, and the SEC will do so if it believes that a company or individual has knowingly violated the federal securities laws. In these cases, companies and individuals should understand that, even if they are not found criminally culpable, they can still be exposed to civil and administrative liability (if not criminal liability) for violations of the SEC’s rules and regulations.

Do employees need separate lawyers during parallel investigations?

Do Employees Need Separate Lawyers When Facing SEC or DOJ Scrutiny?

Companies’ and board committees’ legal representation is corporate in nature. Corporate counsel’s client is the company, not the employees, unless separately retained to represent them. This does not necessarily mean that the company’s and an employee’s interests are adversarial. Often they are aligned, so the company, board

How can cooperation with one agency increase criminal exposure?

What Is a Wells Notice?

A Wells Notice is a letter issued by the SEC Division of Enforcement (or one of its regional offices) notifying a target individual or entity that a violation of federal securities laws appears to have occurred and that the SEC is considering seeking enforcement charges. As well, the SEC will typically refer to this letter as a Wells Notice in public press releases.

What Is a Wells Submission?

A Wells submission is a response prepared by a Wells recipient that explains why the SEC’s contemplating enforcement charges are not justified. Although the SEC will ordinarily allow no more than 30 days for a target individual or entity to prepare a Wells submission, the process is fundamentally similar to an opportunity to present a defense at the investigative stage.

One important limitation of Wells submissions is that Wells recipients generally lack the right to inspect the SEC’s complete investigative file in preparation for their submission. While this presents significant obstacles to defending against the SEC’s contemplating enforcement charges, the SEC will nonetheless use admissions found in Wells submissions in all subsequent proceedings, and it will use them to build criminal cases if it refers matters to the DOJ.

What Is a Proffer?

A proffer is a form of interview with federal agents, prosecutors, and/or other government officials during which the speaker or witness offers to provide information to the government in exchange for certain protections. A proffer does not provide automatic immunity from federal prosecution.

The permitted uses of a speaker’s statements during a proffer depend on the specific written terms of the proffer agreement. Although the terms of a proffer agreement generally limit the government’s ability to use the information presented during the interview as substantive evidence against the speaker at trial, the government can still use information gained in a proffer to support charges based on additional evidence it develops during its investigation.

What Are the Key Considerations in Parallel Matters?

Parallel matters may include interviews, testimony, proffers, and negotiations with the SEC and/or DOJ. Because these efforts generally cannot run entirely in parallel, individuals and companies must work to ensure that they present consistent information across these events. As discussed above, information and admissions made in communication with one agency can have significant implications when facing scrutiny from the other. For this reason, individuals and companies must work closely with their defense counsel to develop and maintain a cohesive joint defense strategy that takes into account the unique risks and strategic considerations of having two federal agencies scrutinizing the same conduct.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.