An SEC Subpoena Arrived: Your First Steps.

An SEC subpoena is a legal demand for records, sworn testimony, or both. Receiving an SEC subpoena does not establish wrongdoing under the federal securities laws, although it is a matter that demands immediate attention. In many cases, companies and individuals receive subpoenas from the SEC before they are aware that an SEC investigation has begun.

Along with the demand for records, testimony, or both, an SEC subpoena also contains a deadline for production and/or testimony. Upon receipt of an SEC subpoena, relevant individuals and entities should promptly take steps to preserve all relevant records, including emails, text messages, voicemails, and other data stored on computers, hard drives, and in the cloud, so that records are not lost or deleted in the ordinary course of business.

In many cases, the subpoena will not identify the target of the SEC’s investigation or the specific legal theory under which the SEC is conducting its inquiry. Similarly, people outside the securities industry will sometimes receive subpoenas from the SEC. If the SEC staff makes a voluntary telephone inquiry, this does not itself compel a response, but recipients will still need to make informed decisions about whether to voluntarily disclose information in anticipation of a formal subpoena.

If the SEC staff has set a deadline that makes it unreasonably burdensome to prepare and produce an informed and compliant response, the SEC staff may grant response extensions upon request. However, these requests must typically be made before the original deadline has passed.

How Do I Preserve and Produce Records Correctly?

The Preservation Process

Preservation planning is critical. To be effective, the preservation process needs to identify each likely custodian of responsive records, and then comprehensively preserve these individuals’ and entities’ responsive information. In the corporate setting, this typically requires suspending automatic deletion of all email and messaging system records and other relevant electronic and physical files across the company’s servers and hard drives. In the individual setting, this typically means suspending automatic deletion of records for relevant accounts and identifying all relevant company- and personal-owned devices (including computers, tablets, and smartphones) that have or are expected to have relevant information. Importantly, storing work-related records on a personal device does not exempt these records from the SEC’s subpoena, and, in some cases, it can heighten the recipient’s exposure by triggering privacy and password-protected data issues.

The collection phase is equally important. Effective collection generally involves taking digital images of all relevant hard drives and extracting relevant information from all other electronic sources that have been been imaged or accessed. As a general matter, efforts to collect relevant electronic records must avoid creating new versions of information and altering the original information’s system metadata. For example, this means that taking screenshots and printing out individual emails is generally inadequate.

The Production Process

In addition to explaining what information it wants, an SEC subpoena will typically explain how it wants that information produced. It will typically state whether it wants the records in native format or in a load file format (e.g., PDF with corresponding load files). It may also list specific requirements for data formats, electronic-discovery load files, file naming, Bates identifiers, and other items. For example, if the subpoena’s production instructions demand production of all electronic files in native format and include relevant encrypted files, the responding individual or company will need to produce those native files, including any corresponding password or decryption key needed to read them.

In addition to producing documents in response to the subpoena, a recipient will often need to produce a privilege log if it withholds any records on the grounds of attorney-client privilege, work product privilege, or any other legal privilege. It must generally identify the records produced, as well as the source, date, and description of the records it has produced and the bases for any withholding it claims to be justified.

When Do I Need to Preserve Records?

While this article focuses on the response to a formal SEC subpoena, it is important to note that, for companies and individuals, the duty to preserve records in order to prevent a charge of spoliation (destruction or alteration of documents) also arises upon reasonable anticipation of an SEC investigation. As a result, appropriate preservation measures may need to be taken even before the formal service of an SEC subpoena.

Can I Challenge or Narrow an SEC Investigative Subpoena?

Challenging the Subpoena

Because an SEC investigative subpoena is an agency demand and not a court order, the procedures and requirements that govern compliance with a subpoena issued by a federal court under Federal Rule of Civil Procedure 45 do not apply in this case. For example, Federal Rule of Civil Procedure 45 requires the party that is served with a subpoena to state its objections within 14 days, and this requirement generally does not apply to SEC investigative subpoenas (14-day objection periods are not applicable here). Similarly, no single rule governs objections to SEC investigative subpoenas nationwide, and the only way to ensure you do not mistakenly miss a deadline to object is to negotiate with the SEC staff on an individual case-by-case basis.

Narrowing the Subpoena

When it comes to responding to an SEC investigative subpoena, one of the primary roles of legal counsel will be to review the subpoenas in question and then negotiate with the SEC staff to limit the scope of the recipient’s responsibilities to include only the information that is actually relevant to the investigation (or that the SEC staff is actually willing to work with). In some situations, this will involve limiting the request’s timeframe, and in others, it will involve narrowing the recipient’s preservation and production obligations to apply to specific records and specific personnel. When negotiations with the SEC staff are necessary, it is generally necessary to also seek an extension of the recipient’s compliance deadline, as negotiations generally do not suspend a recipient’s compliance obligations.

Will the SEC Enforce Its Investigative Subpoena if I do not comply?

Do Not Unilaterally Disregard an SEC Investigative Subpoena Based on Overbreadth

While an investigative subpoena may be overbroad, this is generally not a sufficient basis for a subpoena recipient to unilaterally refuse to comply. If a recipient unilaterally refuses to comply, the SEC may seek federal-court enforcement of the subpoena under 15 U.S.C. § 78u(c). In enforcement proceedings, the U.S. District Court will examine the legitimacy of the SEC’s investigation, the procedural regularity of the SEC’s subpoena, and the relevance of the responsive documents or testimony demanded by the subpoena to the investigation at hand. If the SEC satisfies these requirements, the court will order the subpoena recipient to comply.

How Should I Handle the SEC’s Subpoena Process?

Due to the numerous risks involved in responding to an SEC investigative subpoena, it is important to engage experienced legal counsel immediately. With our experience representing companies and individuals on both sides of the SEC investigative process, the attorneys at Spodek Law Group are intimately familiar with the risks involved in responding to an SEC investigative subpoena as well as the strategies that can be used to preserve the recipient’s rights while protecting the recipient’s exposure.

How Do Privilege and Accidental Disclosure Affect My Production?

Attorney-Client Privilege

Attorney-client privilege protects certain confidential communications between clients and their lawyers. The purpose of attorney-client privilege is to protect confidential relationships, and the scope of attorney-client privilege is broad enough to encourage clients to share their confidential information without concern. However, attorney-client privilege does not protect every document held by a lawyer. For example, financial statements, sales agreements, or other non-confidential documents that were not created during legal representation are not protected. Along with explanations of documents to produce in response to an SEC subpoena, the subpoena’s instructions may also include explanations of documents to withhold, requests for privilege logs, and/or other requirements. If the subpoena’s instructions include requests for privilege logs, and your company or you are entitled to withhold documents on the grounds of privilege, you must include a privilege log with your production. This privilege log must include a description of each withheld document, the parties involved in the communication, the privilege asserted, and the factual basis for the privilege claim.

Accidental Disclosure

If a party inadvertently discloses documents or information and invokes federal law’s protections against waiver based on the circumstances involved, then evidence that would have been privileged under Evidence Rule 502(b) may be withheld from subsequent disclosure. This includes taking reasonable steps to prevent and correct inadvertent disclosures in federal investigations and proceedings, such as attempting to recover the improperly disclosed materials, promptly withdrawing consent for the disclosure, or seeking a court order to claw back the documents or information.

If your company or you has entered into a private clawback agreement to protect inadvertently disclosed privileged or work product-protected information during an SEC investigation, then Evidence Rule 502(e) suggests the clawback agreement will be binding only on the parties to the agreement. However, under Evidence Rule 502(d), a federal court may order the nonwaiver of privilege or work product protection to apply not only within the court’s own proceeding but also in any other federal or state proceeding.

Confidential Spousal Communications and Adverse Spousal Testimony

Federal law provides two different types of marital protections during civil and criminal proceedings, and only one is likely to protect the spouse of a company director or an individual’s spouse during an SEC investigation. Confidential marital communications are privileged, but the privilege against adverse-spousal-testimony generally only applies in criminal proceedings, not civil SEC investigations.

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.

Can I Invoke the Fifth Amendment in an SEC Investigation?

The Fifth Amendment and the Individual

The Fifth Amendment protects individuals from being compelled to provide testimony that could lead to criminal prosecution. Individuals with the opportunity to assert this constitutional privilege must do so on a question-by-question basis, and, as the U.S. Supreme Court explained in Baxter v. Palmigiano, a person’s silence in a civil proceeding may justify an adverse inference.

The Fifth Amendment and the Corporation

On the other hand, the Fifth Amendment protects only individuals, and not corporations. The U.S. Supreme Court has clarified that the “privilege against self-incrimination applies to individuals and is not applicable to corporations” and, as Braswell suggests, this applies even when corporate records are kept by individuals who might be personally liable for a criminal offense committed with the records.

The Fifth Amendment and the Production of Documents

The Fifth Amendment typically does not protect documents produced under the SEC’s investigative authority, even if producing a document might expose the recipient to criminal liability. Fisher explains that the privilege’s scope, “at most,” extends to records created to facilitate a government-compelled testimonial confession, and therefore does not cover records produced pursuant to a subpoena which were “voluntarily created by an individual” (or even records produced pursuant to a subpoena that were a result of the documents’ contents themselves exposing the records’ producer to criminal liability). However, as Hubbell explains, even when producing the record does not expose the producer to criminal liability, the act of producing the record can communicate information (i.e. about the record’s existence, possession, and/or authenticity), and these facts “may communicate information . .. sufficient to expose the producer to criminal liability.”

The Fifth Amendment and SEC Testimony

When producing testimony, whether in response to a subpoena or by accepting an interview, individuals testifying before the SEC will be giving testimony to the SEC staff during an agency examination, not before the U.S. District Court in a courtroom or in chambers. If an individual provides a false statement to an SEC investigator, the individual can face criminal charges for that alone (and will be subject to prosecution for false statements under 18 U.S.C. § 1001, and for perjury under 18 U.S.C. § 1621 where the testimony is given under oath, just as if the individual were testifying in a courtroom in front of a judge).

How do I prepare for SEC testimony?

Due to the risks involved in testifying in response to an SEC investigative subpoena, it is important to engage experienced legal counsel immediately. This includes preparing to provide truthful answers that do not needlessly increase the recipient’s exposure and, where appropriate, resisting the SEC staff’s attempts to compel production of documents to which the recipient is entitled to invoke the Fifth Amendment.

Should I Hire My Own Lawyer for an SEC Subpoena?

Can My Company Attorney Represent Me for an SEC Subpoena?

If you are an employee of a company that has received an SEC investigative subpoena, your company attorney may be able to represent you under certain circumstances. This can include scenarios in which the company does not have a conflict of interest and is willing to pay your legal fees. However, even in these cases, there can still be potential conflicts between you and your company. When you have an individual obligation or liability in the event of an SEC enforcement proceeding and the company has a collective obligation, the interests you and your company are asserting should not be contrary to each other, and the company should not be restricting your ability to speak to the government. Additionally, even when you and your employer both have the same interest, they may diverge in an SEC investigation. You may need legal counsel who is available to represent you if you become the focus of the SEC’s investigation. Additionally, as discussed below, even if there are no conflicts between you and your company, if you are exposed to potential criminal prosecution, you will need criminal defense counsel who can coordinate your defense with the defense counsel for your company.

Should I Respond to an SEC Investigative Subpoena Personally?

Responding to an SEC investigative subpoena involves numerous risks and obligations that typically exceed the ability of an individual or company to manage on its own. Working with experienced legal counsel can help the recipient of an SEC investigative subpoena effectively manage all steps of responding, from coordinating communications and performing privilege review and document production to handling testimony preparation. As discussed above, in some cases, these risks will go hand-in-hand with potentially parallel SEC and DOJ investigations. Working with legal counsel will also help the recipient of an SEC investigative subpoena make sure that it fulfills its preservation and production obligations without taking any extra steps that would expose the recipient’s corporate or personal records or communications to third parties.

Could There Be Parallel Criminal Exposure Following an SEC Investigative Subpoena?

Due to the intersection of civil and criminal law, even when an SEC subpoena is a civil matter, criminal exposure is still a possibility. SEC investigations may reveal what SEC staff consider to be suspected crimes, and the SEC will refer these suspected crimes to the Department of Justice. The SEC and DOJ routinely share information between their investigators. Thus, information supplied to the SEC can be shared with criminal prosecutors and used in a criminal enforcement action. Additionally, in addition to potentially parallel SEC and DOJ investigations, an individual or company’s information produced under the SEC’s investigative authority can be discoverable in private civil litigation or state securities-law litigation.

How Do I Pay for My Defense Counsel’s Fees?

For many individuals, paying for defense counsel is either a significant concern or is prohibitive. In the corporate setting, Delaware General Corporation Law § 145 permits companies to advance fees subject to statutory and contractual conditions, and similar rules apply in other jurisdictions as well. Individual recipients may also be eligible to have their defense fees covered under their employer’s D&O insurance coverage. Again, as with the above, you will want to ensure that you provide an SEC complaint or subpoena as soon as possible. Some claims-made D&O insurance policies impose stringent notice requirements and deadlines for submitting a timely claim for defense fees.

How Long Will the SEC Investigation Last?

How Long is the SEC Investigation Likely to Last?

Compliance with an SEC investigative subpoena is the first step in an SEC’s investigative process. Often, this first step is followed by additional requests for documents, and/or more extensive requests for testimony from individuals or companies, and/or other requests for other information and evidence. Following the documents, testimony, and other information it received, the SEC staff may then close its investigation without further action; it may send a Wells notice to an individual, a company, or both; or it may take enforcement proceedings against the SEC’s investigative target.

A Wells notice is a formal notification from the SEC staff to an individual or company that the staff has terminated its investigation and is recommending enforcement proceedings. Ordinarily, a Wells notice permits the recipient to provide a response before the SEC staff submits its enforcement recommendations to the SEC Commissioners. But, while the SEC has prescribed detailed procedures for other stages of the enforcement process, there is no standard statutory deadline that governs when an SEC investigation must conclude. Consequently, SEC investigations can, and often do, last for months or years.

When Will I Know If the SEC is Targeting Me Specifically?

As discussed above, an SEC investigative subpoena typically does not identify its target or indicate the specific legal theory at hand. At this point in the process, an investigative subpoena may appear to be just “fishing” for relevant information. If the SEC staff’s investigation goes this far, the investigation is likely to be targeting a company’s executives or employees in the securities industry (at least, these types of cases are more likely to take this form). In any event, individuals will want to be proactive and not wait to find out what (if anything) the SEC has against them.

When Will the SEC’s Investigation become Public?

SEC investigations are nonpublic, and the SEC has imposed restrictions on the disclosure of its ongoing investigations under 17 C.F.R. § 203.5. Of course, this can change. The most common situation in which the SEC’s investigation becomes public is when the SEC initiates enforcement proceedings in the U.S. District Court. The SEC may also terminate investigations without initiating enforcement proceedings. In these cases, the SEC will send out termination notices stating that it “does not currently recommend enforcement proceedings.” However, termination notices do not have the force of law and do not prevent the SEC from initiating SEC enforcement proceedings if circumstances change, and SEC investigators and U.S. District Court litigation will typically be a matter of public concern long before a termination notice is issued.

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.