Attorney-Client Privilege in SEC Investigations.

Attorney-client privilege does not apply automatically to every aspect of an SEC enforcement proceeding. In fact, maintaining the attorney-client privilege during an SEC investigation requires a detailed understanding of the law and focused legal strategy. While the scope of the privilege varies by jurisdiction, generally:

• The attorney-client privilege protects (i) confidential communications made, (ii) for the purpose of obtaining or providing, (iii) legal advice or assistance.
• The attorney-client privilege does not protect factual or business information that is merely shared with counsel, nor does it protect communications made in the course of SEC enforcement activities, such as during interviews, proffers, testimony, or when preparing a Wells submission.

What are the Consequences of Waiving Attorney-Client Privilege During an SEC Investigation?

If a company or individual waives its attorney-client privilege during an SEC investigation, this can have a broad effect. Even if the SEC and the target maintain the privilege during the government’s investigation, voluntary disclosure to the SEC can waive privilege in future private litigation. Disclosure during an SEC enforcement matter may also affect privilege in parallel DOJ investigations and civil litigation.

What are the Stages of an SEC Enforcement Matter?

SEC enforcement matters can be characterized as taking one of two forms: an informal inquiry or a formal investigation. In either case, the stages of an enforcement matter can vary, but they typically include interviews, proffers, testimony, and Wells submissions. Securities investigations can lead to administrative, civil, or criminal proceedings, and they can conclude in a variety of ways, including through settlements, trials, or other post-trial proceedings.

Which Communications are Privileged in an SEC Investigation?

As noted above, Model Rule 1.6 covers substantially more information than the attorney-client privilege. Rule 1.6(a) provides that, absent informed consent from the client, a lawyer generally cannot disclose “information relating to the representation of a client.” This obligation applies to both current and former clients, and it applies regardless of whether the information is privileged or confidential, or whether it was provided to the lawyer by the client or a third party.

The work-product doctrine is also a critical aspect of the privilege system. It protects materials prepared by or at the direction of an attorney when litigation is reasonably anticipated, or, in some cases, even when there is a mere “substantial” or “reasonable” possibility of litigation. Courts generally provide heightened protection for an attorney’s mental impressions, conclusions, and legal theories, and they routinely refuse to disclose such materials even where there is evidence of witness-tampering or evidence-destruction by the client.

One important caveat is that attorneys’ business advice is generally not protected under the attorney-client privilege, and this is true even if the business advice is given by in-house counsel. But, as noted above, it may still be protected under the confidentiality obligations of Model Rule 1.6. However, the attorney-client privilege may apply to so-called “mixed communications,” which are communications that contain both business and legal advice. This is particularly important because, as with all forms of protection, privilege is a cornerstone of the effective representation of clients in SEC enforcement matters.

The standard for protecting mixed communications varies, as courts across the country apply different standards for determining whether the attorney-client privilege applies. For example, the U.S. Court of Appeals for the D.C. Circuit has held that mixed communications are protected when one of the communication’s “significant purposes” is obtaining or conveying legal advice. Other courts apply a more stringent “primary purpose” standard, refusing to protect communications unless obtaining legal advice is the communication’s primary or dominant purpose.

The crime-fraud exception is another important aspect of attorney-client privilege. This exception applies when a client seeks legal advice in furtherance of an alleged or attempted crime, fraud, or other illegal act. Courts routinely apply this exception to communications that are arguably aimed at concealing or otherwise furthering evidence-destruction and witness-tampering, and enforcement lawyers increasingly rely on this exception to compel disclosure of communications that would otherwise be privileged.

Another important aspect of the attorney-client privilege in SEC enforcement matters is its application to internal-investigation reports. Simply calling a report an “attorney-client privileged” or “work product protected” document is not sufficient to protect it from disclosure; and, in many cases, it is not protected even if it was prepared by lawyers. Instead, preserving the privilege with respect to internal-investigation reports requires a focused and disciplined approach, and it requires ensuring that the report’s purpose and handling satisfy all relevant privilege requirements.

Who Controls Attorney-Client Privilege During a Company’s SEC Investigation?

In what situations do employees hold a personal attorney-client privilege in a company’s SEC investigation? As discussed above, Upjohn Co. v. United States extended the scope of corporate privilege to communications between counsel and personnel below the senior management level. Generally speaking, employees hold their own attorney-client privilege only in a limited number of scenarios. In most instances, the corporation owns the privilege regarding communications between the corporation’s counsel and the employee. In light of this, lawyers who represent corporations are required to provide what is known as an “Upjohn warning” to employees whom they interview in SEC enforcement matters. Specifically, this is an explanation that (i) the lawyer represents the corporation and not the individual and (ii) the corporation, not the individual, controls disclosure. Model Rule 1.13(f) states that “In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.”

In what manner can a company preserve and enforce its attorney-client privilege in an SEC investigation? Generally, the current corporate management team has control over the corporation’s attorney-client privilege. This is the rule set forth in Commodity Futures Trading Commission v. Weintraub, and it has significant practical implications for SEC and DOJ investigations involving allegations of executive misconduct. If the CEO, CFO, and other executives are all accused of misconduct, the decision regarding whether to preserve or waive the corporation’s privilege generally rests with those executives. However, there are exceptions to this rule. The corporate board of directors can issue a resolution delegating the corporation’s attorney-client privilege, including the authority to engage independent counsel to conduct an investigation, to a special committee. Similarly, if a company is required to hire an independent corporate monitor as part of a deferred prosecution or non-prosecution agreement, the company may be required to cede control of its attorney-client privilege as well.

Will Sharing Materials with the SEC Waive the Attorney-Client Privilege?

Is selective waiver of attorney-client privilege possible? As discussed, Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981) established that selective waiver is not a recognized concept in the U.S. District Court for the District of Columbia, while Diversified Industries v. Meredith indicated that selective waiver is recognized in the U.S. Court of Appeals for the Eighth Circuit. However, these cases predate the adoption of Federal Rule of Evidence 502 in 2008.

What is the effect of a nonwaiver agreement under Rule 502(e)? Under Rule 502(e), a nonwaiver agreement “does not protect against disclosure in other proceedings absent a court order.” In re Steinhardt Partners, L.P., 9 F.3d 230 (2d Cir. 1993) reaffirmed this rule, holding that while disclosing information to the SEC may not waive privilege for the pending SEC investigation, it waives protection in subsequent private securities litigation. However, if a party can obtain a Rule 502(d) order from a court, then the order will prevent subsequent waiver “to any extent beyond the scope of the pending federal litigation.”

What is the effect of an inadvertent disclosure under Rule 502(b)? In a Rule 502(b) situation, an inadvertent disclosure does not operate as a waiver if the holder of the privilege “took reasonable steps to prevent disclosure” and “promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26(b)(5)(B).” With this in mind, parties that seek to avoid any risk of subsequent waiver must be careful about inadvertently disclosing information to the SEC.

Is an intentional disclosure of privileged information to the SEC a “subject-matter waiver”? If so, the attorney-client privilege will be eliminated entirely with respect to the subject matter of the disclosure. However, a party that intentionally discloses privileged information “does not waive privilege with respect to other communications as to the same subject or a similar subject” unless the circumstances under Rule 502(a) meet the requirements of fairness in light of the client’s ability to protect the privilege in other proceedings.

Does Waiver of Attorney-Client Privilege Lead to SEC Cooperation Credit?

No. As the SEC clearly stated in its Seaboard Report, waiver of attorney-client privilege is not necessary to receive “cooperation credit.” This is consistent with Model Rule 1.6, and it means that an effective and effective defense counsel should advise his or her clients accordingly.

Can the SEC and DOJ conduct parallel investigations into the same conduct? Yes. The SEC and DOJ can conduct parallel investigations and seek parallel enforcement action. In fact, their investigations and enforcement matters can work in concert to the benefit of government enforcement. With this in mind, parties that face parallel SEC and DOJ investigations (and civil litigation as well) must make careful decisions with respect to what information to disclose to whom.

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 Auditors, Consultants, and Other Third Parties Receive Attorney-Client Privileged and Work-Product Protected Information?

If an independent auditor needs access to attorney-client privileged or work-product protected information, must the company waive its privilege to share the information? Yes. Generally speaking, independent auditors are third parties, and disclosure of attorney-client privileged information to third parties constitutes a waiver. However, there is a narrow exception in cases where the auditor’s services are necessary for counsel to provide effective legal advice. United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)

What is the scope of derivative privilege protection for communications between counsel and public-relations advisers? Generally, when corporate counsel communicates with public-relations advisers, the resulting communications do not enjoy attorney-client privilege unless the public-relations adviser’s services provide an additional “legal-advice function” for the corporation. This is based on the same reasoning set forth in Kovel, but as noted above, the exception to the attorney-client privilege is narrowly construed.

What is a common-interest privilege? As discussed, the common-interest privilege does not create privilege where no privilege exists. Instead, it preserves the privilege by avoiding waiver when communication occurs between parties with a common-interest that can withstand the SEC’s scrutiny.

What must be done to preserve the common-interest privilege? As discussed above, ensuring the preservation of the common-interest privilege requires: (i) a clear legal interest, not just an alignment of commercial interests; (ii) an agreement with respect to the use and control of the information; and, (iii) an understanding that disclosure is not attributable to any party that does not also maintain the privilege.

When are lawyers prohibited from joint representation? Model Rule 1.7(a) states, “[A] lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists 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.” Joint representation can be beneficial, but it cannot have the effect of which of the party’s privilege or interests would be negatively affected.

Are there any other issues relating to the attorney-client privilege in the context of SEC investigations? Yes. There are various other issues as well, such as:

• Whether counsel’s communications with former employees about information that the former employee learned while employed are protected, or whether former employees have a right to claim the privilege,
• Whether communications concerning an audit conducted by the Public Company Accounting Oversight Board (PCAOB), such as audit independence, partner rotation, and professional standards, are privileged.

How Should We Assert the Attorney-Client Privilege and Work-Product Protection Against an SEC Subpoena?

As provided in Federal Rule of Civil Procedure 26(b)(5), a party asserting that it cannot disclose a piece of information “because it is privileged or otherwise protected from discovery” must “describe the nature of the documents or information that it is withholding without revealing the privileged information.” Redacting a piece of information to protect the attorney-client privilege or work-product protection does not, by itself, justify the withholding of a segregable nonprivileged piece of information.

How Should We Assert the Attorney-Client Privilege and Work-Product Protection in Response to an Inadvertent Disclosure?

As provided in Federal Rule of Evidence 502(b), “A claim of privilege or protection is not waived if the disclosure is inadvertent and under the circumstances:

(1) the disclosure was not made with the intent to waive the privilege or protection;

(2) the party that made the disclosure took reasonable steps to prevent the disclosure, and

(3) the party promptly took reasonable steps to rectify the error upon discovering it.”

When and to What Extent Can the SEC Issue Subpoenas for Documents and Testimony?

Pursuant to 15 U.S.C. § 78u(b), the SEC “shall designate one or more of its officers or employees to conduct this inquiry and may, upon notice to any person or entity, by subpoena, require the production of any books, papers, correspondence, memoranda and other records pertaining to such matter that are relevant to determining whether any violation of the securities laws has occurred.” Additionally, under 15 U.S.C. § 78u(c), “Any person or entity who has received a subpoena and fails or refuses to produce the required books, papers, correspondence, memoranda or other records, or to appear and testify may be compelled by the United States District Court for the District of Columbia or the United States District Court for the Southern District of New York to comply.”

In a formal investigation, counsel for a witness is entitled to advise the witness on privilege and work-product protection issues pursuant to 17 C.F.R. § 203.7. Also, the SEC’s testimony-taking procedures provide that “ counsel for a witness shall be entitled to communicate with the witness of his or her choice during the proceeding, and counsel shall be permitted to advise the witness about the attorney-client privilege and work product protection as discussed in the SEC Enforcement Manual.”

Can the SEC Issue a Subpoena for Work-Product Protected Documents?

While the SEC’s testimony-taking procedures provide for work-product protection, this protection is different from the protection afforded in federal civil litigation. In federal civil litigation, Federal Rule of Civil Procedure 26(b)(3) provides, “A party may not discover documents and tangible things that are prepared in anticipation of litigation or other proceeding in furtherance of the party’s or attorney’s claim or defense.”

How Do We Preserve the Attorney-Client Privilege Across Different Devices and Messaging Apps?

When employees communicate about securities matters through company-provided emails or messaging apps, employer monitoring can potentially undermine the confidentiality of those communications. As a result, employees need to be careful when using their company devices or messaging apps to communicate in support of their business activities. This is particularly important for personnel at broker-dealers and investment advisers, who have federal recordkeeping duties with respect to business communications sent through personal devices and messaging apps. For example, under Rule 17a-4, broker-dealers have recordkeeping obligations that include preserving communications that would be covered under the “books and records” definition of the Securities Exchange Act. Similarly, under the Investment Advisers Act, investment advisers’ recordkeeping obligations under Rule 204-2 include the preservation of certain business communications.

How Do We Preserve the Attorney-Client Privilege when Electronic Documents are Lost or Destroyed?

Under Federal Rule of Civil Procedure 37(e), if a party fails to preserve electronically stored information (ESI) from “a source that it had a reasonable obligation to preserve,” this can lead to various consequences. Notably, in an SEC investigation, ESI that must be preserved may be in the possession of a third party or an employer’s custodian, such as an IT department. Additionally, under 18 U.S.C. § 1519, it is a federal offense to destroy, alter, or falsify any record with the intent to obstruct, influence, or impede a pending or contemplated federal investigation or bankruptcy proceedings.

What Are Some Examples of Internal Control Issues That Can Lead to SEC Investigations?

Internal control matters can raise a variety of issues, from the internal-control over financial reporting (ICFR), financial statements, and auditor engagement letters to internal control over compliance and controls over accounting and technology. Cybersecurity incidents and compliance controls can also trigger inquiries. Additionally, social-media statements and investor disclosures made by the parties involved can raise concerns about transparency and compliance with securities laws.

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.