Can I Have a Lawyer Present During SEC Testimony??

If you receive an SEC administrative subpoena, you can (and should) engage an attorney. 5 U.S.C. § 555(c) states that, “At the discretion of the agency concerned, individuals or their representatives may be permitted to appear for the purpose of making written or oral presentations...” and that, “Individuals appearing under § 555(c)(2) shall have the right to counsel.” SEC Rule 7 makes this explicit: “Any person who is compelled to appear, or who appears by request or permission of the Commission, in person at a formal investigative proceeding may be accompanied, represented and advised by counsel.”

However, you should not assume that your lawyer can intervene during compelled SEC testimony. SEC Rule 7(c) sets out the principal things counsel may do, limiting counsel to advising the witness before, during and after the examination, questioning the witness briefly at the conclusion of the examination to clarify answers, and making summary notes solely for the witness’s use.

Under SEC Rule 7(c)(1), counsel may “[a]dvise such person before, during and after the conclusion of such examination,” which includes advising the witness whether to assert an applicable privilege or decline to answer a particular question. And, while counsel may still assert any applicable privileges on your behalf, you will be responsible for your testimony. SEC Rule 7 imposes no truthfulness obligation by its own terms; the duty to answer accurately arises from the oath administered at the testimony and from the federal false-statement and perjury statutes.

If you receive an SEC administrative subpoena and refuse to comply, the SEC may seek to enforce the subpoena in federal district court. The SEC conducts administrative investigations, so if the Commission’s investigative staff cannot compel compliance on its own authority, it may seek enforcement in federal court. If the federal court orders you to comply and you fail to do so, you could face contempt charges and fines.

You may also be able to negotiate an extension of the SEC subpoena’s deadline. However, while subpoena extensions are common, they are not guaranteed.

The deadline for the SEC subpoena will generally be the deadline for preserving potentially responsive records. In general, the issuance of an SEC subpoena triggers your organization’s obligation to preserve all records that could be relevant to the SEC’s investigation. This includes documents, emails, and all other forms of electronic records.

What Can My Lawyer Actually Do During SEC Testimony?

If you have a lawyer with you, what can you expect your lawyer to do? While attorneys will know more about their roles, a clear understanding of the SEC’s procedural rules (promulgated at 17 C.F.R. § 203.7, referred to as SEC Rule 7 throughout our practice material) will help you best utilize your counsel.

According to SEC Rule 7, an attorney can do the following when providing counsel during SEC investigative testimony:

• Advise the witness “before, during and after the conclusion of such examination.”
• Request clarification, “at the witness’s request, to ask a brief clarifying question after the witness’s examination concludes.”
• Speak with the witness confidentially during an SEC proceeding. Under C.F.R. § 203.7(a), “Counsel may advise the witness about any aspect of the proceedings. Counsel may advise the witness during the proceeding and before, during, and after any examination.”
• Speak with the SEC staff outside the examination. SEC Rule 7 does not address such communications, but as a practical matter counsel routinely contacts the staff conducting the investigation on the witness’s behalf.

These are the basic things your attorney will do during your SEC examination. Your lawyer should know the specifics of his or her role; however, knowing how your attorney can help you (and what your attorney cannot do during testimony) will help ensure you have productive SEC representation.

• Counsel cannot object to SEC staff’s questioning in the same way that an attorney would object to questioning of a witness in a federal civil or criminal trial. In an SEC administrative proceeding, traditional evidentiary objections generally do not apply. SEC Rule 7(c) does not authorize trial-style evidentiary objections; it limits counsel to advising the witness, briefly questioning the witness at the conclusion of the examination to clarify answers, and making summary notes for the witness’s use.
• Counsel cannot intervene and answer the witness’s questions. SEC Rule 7(e) explicitly forbids this: “This right shall not be construed to entitle counsel to answer questions on the witness’s behalf or to otherwise intervene during the examination.”
• Counsel cannot control the scheduling of the examination. While your attorney may request breaks and other scheduling changes at the appropriate times, the SEC staff will control the examination’s scheduling.
• Counsel will do what it can to help you listen more than you speak. We describe this as the 80/20 maxim. This refers to an informal communication principle that suggests that effective communication requires listening 80 percent of the time, and only speaking 20 percent of the time.
• Counsel cannot insist on your listening 80 percent of the time and speaking 20 percent of the time. The 80/20 maxim is not a procedural or evidentiary rule, but even so, it is an essential rule to follow for anyone subject to a subpoena in an SEC investigation.

Is Every SEC Interview Sworn and Formally Transcribed?

No, this depends on whether the SEC is conducting an “informal inquiry” or a formal “administrative investigation.”

Informal SEC inquiries are common, and they are relatively easy for the SEC to commence. By definition, these investigations are informal, and the SEC will rely on the subject’s (or other potential witness’s) cooperation in response to voluntary requests for information, records, and interviews.

If, however, the Commission determines that it needs to acquire information from non-cooperative third parties, it can designate the investigation as a “formal investigation.” In formal investigations, the Commission can authorize specifically designated personnel to issue administrative subpoenas, which can command (among other things) individuals to produce documents and give testimony.

A formal order authorizes SEC staff members to issue administrative subpoenas. It is also referred to as an “Order of Formal Investigation,” and it is required to issue an SEC subpoena. Formal orders are issued in most cases where an SEC administrative subpoena is issued to a private party (i.e., a company, financial institution, or individual). Formal orders explicitly state that a “formal investigation” is warranted, and while they authorize the issuance of subpoenas, formal orders do not state that the SEC has found any evidence that securities laws have actually been violated.

An SEC administrative subpoena is an agency-level demand, not a federal-court order, and the SEC issues it on its own authority. SEC administrative subpoenas can demand the production of records, testimony, or both.

While SEC administrative subpoenas command testimony, SEC interviews are not always sworn and transcribed. SEC subpoenaed testimony is almost always taken under oath and formally transcribed, but voluntary SEC interviews do not necessarily have to be sworn or transcribed (although they often are).

While an SEC administrative subpoena is not a court order, it is very similar in nature to a federal-court subpoena issued under Fed. R. Civ. P. 45, and the SEC will seek an enforcement order in federal district court if it believes there is sufficient cause to warrant judicial enforcement. Nevertheless, Fed. R. Civ. P. 45 does not automatically govern SEC administrative subpoenas, and the rules that govern the issuance, service, and enforcement of SEC subpoenas can differ from the rules that govern subpoenas issued under Fed. R. Civ. P. 45.

How Should I Answer Questions Without Creating Additional Risk?

Generally, the best way to answer SEC questions without creating additional risk for yourself is to answer truthfully and concisely while staying within your knowledge and recollection.

Specifically, when answering SEC questions during a subpoenaed examination or a voluntary interview, there are seven key principles that all witnesses should keep in mind:

• 1. Never Knowingly Lie. If you know the answer to an SEC question, you will want to answer. However, you should never, ever knowingly provide materially false answers to the SEC. Knowingly making false statements in matters, questions, or demands within the Commission’s jurisdiction can have severe consequences under federal criminal law.
• 2. Never Guess. If you do not know the answer to an SEC question, or if you do not recall the answer, you should state this clearly. Never guess, speculate, or offer opinions in an attempt to answer any question to which you do not have certain knowledge.
• 3. Request Clarification When Necessary. If a question is unclear, if you do not understand the terms used in a question, or if you do not know what the question is asking, you should request clarification. SEC testimony is a process of communication. When asked an unclear question, you can (and should) ask what is meant by the question before you answer.
• 4. Request and Review Relevant Documents When Necessary. SEC examiners often ask witnesses questions about particular documents. If a document is not in front of you, you should request that the SEC examiner provide the document so that you can review it before answering. This is true for both SEC and third-party documents.
• 5. Answer Only the Question That Was Asked. Only answer the question that was asked. You should not offer explanations, you should not volunteer more information than necessary, and you should not answer a question that you believe is being asked. The less that you say (provided that you answer the question at hand truthfully and comprehensively) the less that you risk accidentally speculating or unintentionally disclosing unnecessary information.
• 6. Consider Both 18 U.S.C. § 1001(a) and 18 U.S.C. § 1621. If you are subject to an SEC subpoena, you should be aware that knowingly providing materially false information can be a crime even if you are not under oath. In federal criminal law, a specific provision, 18 U.S.C. § 1001(a), is one of the primary tools for the prosecution of false statements in the federal government. Section 1001(a) specifically targets those who make “any materially false, fictitious, or fraudulent statement or representation” or who use “any false, fictitious, or fraudulent document or writing” in matters, questions, or demands within the jurisdiction of the Executive Branch (which includes the SEC). In the context of SEC testimony, Section 1001(a) applies whether you are testifying voluntarily or under oath. But, if you are testifying under oath, then the U.S. government may also have grounds to prosecute you for the crime of perjury under 18 U.S.C. § 1621.
• 7. Correct Your Testimony When Necessary. If you realize during the examination that you have given the SEC an incorrect answer, you can (and should) correct it on the record as soon as possible. This is especially important when you are testifying under oath, but correcting the record is important in all cases.

Spodek Law Group, led by managing partner Todd Spodek, defends clients in federal criminal and white collar matters.

Can My SEC Testimony Lead to a Criminal Case?

The SEC’s Division of Enforcement staff are attorneys, accountants, and other professionals who investigate individuals and companies to determine whether they may have violated federal securities laws. If criminal conduct is involved, this often leads to an investigation by federal prosecutors from the U.S. Department of Justice (DOJ), FBI agents from the Federal Bureau of Investigation, and other federal criminal and regulatory authorities.

While the SEC refers criminal cases to the DOJ, the SEC does not prosecute defendants or impose imprisonment. Instead, the SEC seeks civil penalties and injunctive relief, and it refers criminal matters to the DOJ for criminal prosecution.

When the SEC shares information with the DOJ, this information can become admissible in court. During the information exchange process, statements made by witnesses, including any statements and documents produced pursuant to SEC administrative subpoenas, can become evidence in federal civil cases brought by the SEC or in federal criminal cases brought by the DOJ.

To reduce the likelihood of facing additional scrutiny, if you are under investigation by the SEC, you should avoid destroying evidence, lying, or obstructing the SEC’s investigation. In many cases, destroying responsive evidence, lying during an SEC investigation, or obstructing an SEC investigation can establish federal criminal charges regardless of any underlying securities law violations.

If the SEC’s enforcement staff intends to recommend enforcement action against you, the staff may send you a Wells notice. This is typically the product of months or years of investigation and, while the Wells notice will not explain exactly why the SEC’s enforcement staff thinks you should be targeted, it will notify you that the SEC’s enforcement staff recommends taking action against you. If you receive a Wells notice, you should respond. The recipient of a Wells notice can provide arguments and other information opposing the enforcement staff’s recommendation, and these arguments will be considered by the Commission.

Can I Invoke Privilege or the Fifth Amendment?

The Fifth Amendment generally protects witnesses from answering questions where the answers present a genuine risk of self-incrimination. When available, witnesses generally assert their privilege under the Fifth Amendment on a question-by-question basis. Generally, the consequences of silence under the Fifth Amendment depend upon whether the case is civil or criminal in nature. In criminal cases, a witness’s silence under the Fifth Amendment is not considered by the factfinder. However, in civil cases, a civil factfinder can draw an adverse inference from a witness’s silence in response to questions to which he or she may have been compelled to provide a truthful answer but not to disclose the answer. In this scenario, silence under the Fifth Amendment may be considered as an admission by the witness of guilt or liability.

Even when the Fifth Amendment is formally invoked, if the U.S. government offers adequate statutory immunity, a witness can be compelled to provide truthful answers. When a witness is granted immunity, the Fifth Amendment privilege no longer applies. However, despite granting a witness statutory immunity, the U.S. government may still be entitled to seek enforcement of an SEC subpoena. So, even when granted statutory immunity, a witness may not be fully protected against the possibility of facing civil and criminal penalties in federal court.

Attorney-client privilege is another form of privilege that may apply in response to an SEC subpoena. Generally, the attorney-client privilege protects confidential communications for which the purpose is to seek or receive legal advice from an attorney. However, the attorney-client privilege does not apply to all communications involving an attorney. When an attorney is copied on an email or otherwise involved in a communication, this alone is not enough to establish the attorney-client privilege. While many emails copying an attorney qualify as privileged communications, demonstrating the existence of the attorney-client privilege requires more than merely copying an attorney on a communication.

Another form of privilege that may apply in response to an SEC subpoena is attorney work-product protection. Generally, the attorney work-product protection applies to materials (such as memoranda, notes, records, etc.) that were prepared because of an attorney’s reasonable anticipation of litigation. For communications and other materials that are not protected by the attorney-client privilege, the attorney work-product protection may still apply.

When responding to an SEC administrative subpoena, you will need to provide a privilege log identifying each document you are withholding and the privilege protection that you are asserting with respect to each document. This is similar to the requirement under Fed. R. Civ. P. 45 in federal district court. As a result, withholding subpoenaed documents without providing a privilege log is not permitted.

Do I Need My Own Lawyer Instead of Company Counsel?

Receiving an SEC administrative subpoena or other demand from the SEC does not necessarily mean that you are the target of an investigation. A subpoenaed individual may be solely a witness to another’s conduct, and, even if he or she has personally committed a securities violation, the subpoenaed individual may not be the target of a potential SEC enforcement action.

If you have been subpoenaed by the SEC, you will want to speak with an attorney immediately. If you are at the center of an SEC investigation, this will be particularly important. As a result, if you are an employee of a publicly traded company, or if you are an employee of a private company that is the subject of an SEC investigation, you should determine promptly whether you need your own lawyer or if you can be represented by your employer’s (company) counsel.

Many company attorneys will offer joint representation on behalf of companies and their employees or representatives. When possible, joint representation may make sense. However, this is not always the case. For example, in some cases, joint representation will be improper if the employee’s interests diverge from the employer’s interests. So, if you are being subpoenaed as an employee or representative of a company, you will want to determine promptly whether joint representation makes sense or whether you need independent counsel.

Whether you can be represented by company counsel should be determined based upon (i) the interests of the company versus the interests of you, (ii) whether the company’s counsel has informed you that he or she is representing you, and (iii) the content of your engagement letter. Your engagement letter should identify whom your attorney actually represents, and you should never assume that your employer’s counsel represents you. Note that the fact that your employer is paying your legal fees does not, by itself, make the employer’s counsel your attorney. While company attorneys may represent employees when your interests are aligned, you should not assume that the company’s counsel is your attorney.

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.