Can I Refuse to Answer SEC Questions??

A person may decline to participate in an interview with SEC staff if the SEC has not presented a formal request for cooperation backed by compelling process (i.e. An administrative subpoena). If a person declines to participate in an interview voluntarily, this does not by itself give rise to contempt liability, regardless of whether the interview was informal or voluntary in nature.

An SEC administrative subpoena is not itself a federal court order, and although the SEC is a federal agency, its staff does not have the authority to issue an administrative subpoena without formal investigative authority. When an SEC investigation is authorized, the staff may issue administrative subpoenas to individuals and entities; these subpoenas are used to compel testimony, production of documents, or both.

When targeting individuals and entities, an SEC subpoena may refer to the target as the suspected violator (subject) or merely as a third-party witness. The SEC may not disclose its investigation unless it is formally initiating an enforcement action, and even if it is formally initiating an enforcement action it will not necessarily disclose the nature of the investigation. Similarly, the SEC need not, and generally will not, volunteer that it is coordinating its administrative investigation with a parallel criminal investigation (whether the target or witness of the subpoena is the subject of the criminal investigation).

When targeting third-party witnesses for information, the SEC may not disclose the target’s third-party status and the existence of the witness’s potential criminal exposure. If a witness provides information in response to an SEC subpoena, this information may expose evidence of wrongdoing by the witness; as a result, witnesses frequently become subjects of civil and criminal liability during the course of an investigation.

What Happens If I Ignore an SEC Subpoena?

Pursuant to Section 21(c) of the Exchange Act (15 U.S.C. § 78u(c)), the SEC may seek enforcement of its administrative subpoenas in federal district court.

At this point, a federal court has entered an order enforcing the subpoena’s production or testimony demands. When a person or entity violates an enforcement order, they may be held in contempt of the federal court.

However, most SEC staff members are open to discussing reasonable subpoena compliance extensions or narrowed requests. They may accept a rolling production of documents, for example, or they may accept an extension that lasts only until a requested date.

Importantly, a request for an extension does not suspend a subpoena’s deadline. The SEC may seek subpoena enforcement in federal court without providing advance notice, so a timely response is critical.

Can I Object to an SEC Subpoena?

When enforcing an SEC subpoena, a federal court will evaluate the validity of the subpoena in light of the investigation’s (i) investigative purpose, (ii) procedural compliance, (iii) scope, and, (iv) relevance.

Federal courts generally accord broad deference to the SEC’s investigative authority, and subpoena recipients may be limited to seeking enforcement from a federal court for:

• Protection of Privileged Information: SEC subpoenas may not require production of privileged information, such as information protected by the attorney-client privilege or work-product doctrine.
• Overly Broad or Unduly Burdensome Demands: Subpoena recipients may also object to compliance demands that they deem overbroad, unduly burdensome, or seeking irrelevant documents or testimony.

If a subpoena recipient believes that one or more of its production demands must be challenged, it should reserve its specific objections to the subpoena in writing. Often, the SEC will negotiate with subpoena recipients about whether their objections are valid, and if the parties cannot reach an agreement about a specific objection, the subpoena recipient can move to quash or modify the subpoena and raise its objections if the SEC applies to a federal court for enforcement. The SEC’s investigative authority is broad, but it is not absolute, and a carefully structured and thoroughly-documented response to an SEC subpoena can resolve subpoena disputes without litigation.

What Is the Penalty for Contempt of a Federal Court?

Civil contempt can involve a variety of sanctions, including coercive fines or confinement. For example, a district court may order a third-party subpoena recipient to be imprisoned until the recipient produces the documents that the subpoena requires.

When Can I Invoke the Fifth Amendment With the SEC?

The Fifth Amendment to the United States Constitution, also known as the Amendment protecting the privilege against self-incrimination (or “ privilege against testifying self-incriminatingly”), is relevant in SEC investigations when the SEC issues an administrative subpoena. Importantly, however, this privilege applies only in cases involving compelled production or testimony. As a result, any person or entity that is facing voluntary SEC contact, which includes contact with the SEC’s Division of Trading and Markets or Division of Corporation Finance, has generally no meaningful right to decline participation based on the Fifth Amendment to the United States Constitution.

1. Invoking the Fifth Amendment to the United States Constitution at a Testimonial SEC Hearing

A subpoenaed witness generally cannot invoke the Fifth Amendment with respect to the entire duration of its testimony. A witness must instead invoke the Fifth Amendment on a question-by-question basis in order to prove that its responses would have tended to incriminate it for some offense. Additionally, invoking the Fifth Amendment typically will not excuse a subpoenaed witness’s appearance at the hearing, and civil factfinders may, in some circumstances, be entitled to draw adverse inferences based on the witness’s use of the privilege.

2. Invoking the Fifth Amendment to the United States Constitution with Respect to Production of Records

a. Pre-Existing, Voluntarily Created Records

Generally, if documents were created voluntarily, then they will not be protected by the Fifth Amendment, and providing them to the SEC will not be considered a “compelled” production. Instead, a subpoenaed party (or third-party witness) will be required to produce documents in its own possession, custody, or control, regardless of whether providing these documents would tend to incriminate the witness in a potential criminal enforcement action.

b. Creating Records in Response to an SEC Subpoena

If a subpoena’s requests demand records that do not already exist, then the records created in response to the subpoena may be protected by the Fifth Amendment. As a result, subpoenaed parties (and witnesses) may sometimes successfully challenge demands to respond to the SEC’s queries on interrogatory sheets or other forms if producing the responses would violate the Fifth Amendment.

c. Producing Records and the Privilege Against Compelled Self-Incrimination

In addition to the act of creating records, producing records to the SEC in response to an SEC subpoena can also trigger the privilege against compelled self-incrimination, as producing records can communicate information about the existence, authenticity, and possession of the records that the witness produced. If this act is self-incriminating, the witness can decline to provide the records (at least to the extent that the act of production is self-incriminating).

d. Producing Corporate Records

Corporate records, unlike a business owner’s personal records, generally lack Fifth Amendment protection, even if they are produced in response to an SEC subpoena. Individuals cannot decline corporate production based on the Fifth Amendment to the United States Constitution, and there is little chance to successfully challenge the production of corporate records based on the Fifth Amendment.

3. Immunity and Invocation of the Fifth Amendment in SEC Proceedings

In some cases, the SEC may seek immunity for a subpoenaed witness from the Department of Justice, including after consulting with federal prosecutors about the scope of the witness’s testimony. With respect to “use and derivative-use immunity,” this means that neither the witness’s testimony nor information derived from it can be used against the witness in future criminal proceedings. If a witness is granted immunity in a civil SEC investigation, then the witness can no longer legitimately claim a Fifth Amendment right to silence.

What Can My Lawyer Do (and Not Do) During SEC Testimony?

Rule 7 of the SEC’s Rules Relating to Investigations, 17 C.F.R. § 203.7 (“Rights of witnesses”), gives any person who is compelled to appear, or who appears by request or permission of the Commission, at a formal investigative proceeding the right to be accompanied, represented, and advised by counsel.

Unlike trial practice, generally, the purpose of the administrative process, and SEC staff hearings in particular, is not to elicit evidence in support of a final decision but rather to seek information through questioning. The witness’s counsel may advise the witness before, during, and after the examination, and may question the witness briefly at the conclusion of the examination to clarify any answers given. However, ordinary evidentiary objections will generally not authorize counsel to halt questioning, and defense counsel cannot use improper means to stop the interview, such as by improperly coaching his client or by asserting a baseless attorney-client privilege. In addition, defense counsel cannot knowingly assist false testimony or assist in the destruction of documents in order to block the SEC’s investigation.

What Does “Lawyers’ 80/20 Rule” Mean?

The phrase “lawyers’ 80/20 rule” is not something that has a specific meaning in the context of SEC investigations. As a result, in these proceedings, it is not necessary to address this concept.

Who Owns the Privilege Between a Corporation and Its Company Counsel?

In SEC proceedings, when a corporation is the target of an investigation, generally, the corporation owns the privilege between itself and its company counsel. In other words, the corporation generally controls whether to assert (or waive) a privilege over communications between its counsel and other employees or officers. Generally, in the context of an SEC investigation, company counsel is not deemed to represent employees or officers.

Can One Lawyer Represent Multiple People in an SEC Investigation?

A single lawyer may represent multiple witnesses, employees, or officers who are all involved in an SEC investigation, but counsel must address any potential conflicts of interest before agreeing to represent them. If a single lawyer’s representation is not sustainable, then additional lawyers (i.e. Conflict counsel) may need to be retained as well.

Todd Spodek and the attorneys at Spodek Law Group handle federal cases of this kind from New York, Brooklyn, Queens and Los Angeles.

How Do Silence and Cooperation Affect SEC Charges?

When facing contact from the SEC (or any other federal agency, FBI, IRS, etc.), you have options available to you; and you may, and often should, take specific steps to avoid unnecessary risk. However, as you may see, some of these steps (i.e., lying to federal investigators, destroying responsive evidence) will create unnecessary risk. To avoid all forms of unnecessary risk, you should rely on your defense lawyer’s advice concerning how to respond (and in what way to respond) to the SEC.

1. Lying to Federal Investigators and Destroying Evidence

While witnesses in SEC investigations have the right to decline to participate in voluntary interviews and the right to invoke the privilege against self-incrimination when issued an administrative subpoena, witnesses who knowingly make material false representations to federal investigators may be subject to criminal liability under 18 U.S.C. § 1001. Similarly, witnesses who destroy responsive evidence may be subject to obstruction liability in addition to any civil or criminal securities fraud liability.

2. SEC Testimony and Parallel Criminal Investigations

As noted above, the SEC does not ordinarily volunteer that it is coordinating its administrative investigation with a parallel criminal investigation. Testimony and documents obtained by the SEC in a subpoenaed proceeding, however, may be shared with criminal prosecutors, so individuals and entities who are facing SEC inquiries may need to take steps to protect against potential criminal exposure as well.

What is a Wells Notice?

A Wells notice is a notification sent by SEC staff to an individual or entity, informing them that the staff is contemplating recommending an enforcement action against them. The notice informs the recipient of the nature and basis for the recommended enforcement action, but it does not constitute formal charges. If you receive a Wells notice, this is the right time to speak with a defense lawyer about potential next steps.

Do I “Get” Cooperation Credit for Providing Cooperation (i.e. From the SEC)?

There are no guaranteed “rewards” for providing information to the SEC. Obtaining cooperation credit remains entirely within the discretion of the SEC; and while completing all steps that you are asked to take does not guarantee that you will receive “substantial assistance” credit, avoiding all forms of unnecessary risk will not help you to get “substantial assistance” credit. An informed and proactive defense strategy focused on facilitating the SEC’s investigation while protecting your interests, both civilly and criminally, may lead to cooperation credit, but it is not guaranteed.

Do I Have to File a Wells Submission?

No, witnesses and other entities can decline to file a Wells submission in response to a Wells notice. While filing a Wells submission does not guarantee that the SEC will decline to pursue enforcement charges, filing no Wells submission doesn’t necessarily facilitate SEC enforcement. Rather, the lauding of “doing nothing” simply will not stop the SEC from pursuing enforcement actions; as a result, witnesses and others who receive a Wells notice should carefully assess their next steps with their defense lawyers.

A Wells submission serves a purpose, and sometimes that purpose is simply to explain a witness’s or entity’s actions in a way that makes them look less suspect, even if the witness or entity is unlikely to avoid the charges on the table.

Does Cooperation and Invoking the Fifth Amendment Affect SEC Charging Decisions?

Cooperation and invoking the Fifth Amendment can both affect an SEC investigation, and they can also affect charging decisions and the remedies requested by the SEC. Cooperation can potentially dissuade the SEC’s staff from pursuing a witness, and the privilege against self-incrimination can shield a witness from exposure as the case for pursuit develops.

Can Refusing to Answer Questions Cost My Job or Professional License?

While the Fifth Amendment and the privilege against self-incrimination protect employees and contractors from the governmental compulsion of testimony, they do not protect from the questioning of ordinary private-sector employers. For example, the Fifth Amendment generally will not shield an employer’s interviewed employees or independent contractors from losing their job or contract if the employee or contractor declines to answer their employer’s questions. Whether you can lose your job or professional license as a result of refusing to answer questions posed by your private employer is determined by your individual circumstances, including:

• The contractual obligations between you and your employer (if any),
• Any statutory obligations,
• Company policies and procedures, and
• Relevant state law.

Can Refusing to Cooperate with FINRA Lead to Professional Discipline?

Similar to how it’s possible to lose a job or professional license, it is possible to lose an investment advisor license or have other similar consequences as a result of failing to cooperate with FINRA.

• FINRA Rule 8210, “Request for Information”: Finra Rule 8210 requires an individual or member firm to respond to a request for information or testimony promptly. As stated in FINRA’s FAQ, “Failure to promptly provide a complete and truthful response may result in disciplinary action that includes, but is not limited to, suspension or a permanent bar.”
• Invoking the Fifth Amendment, Invoking the Fifth Amendment is not an automatic excuse from disclosing information to FINRA. As FINRA states in its FAQ, “A failure to respond that is attributable to the assertion of a constitutional privilege is not by itself a grounds for an instantaneous bar.”
• FINRA’s Role, FINRA is a non-governmental self-regulatory organization (SRO) in the securities industry, and is generally overseen by the SEC. If FINRA takes disciplinary action, this may lead to penalties from the SEC as well.

Can I Be Retaliated Against for Providing Information to the SEC?

The SEC requires registered broker-dealers, advisors, and other securities industry firms to maintain strict confidentiality regarding the SEC’s enforcement proceedings.

• SEC Whistleblower Program, However, the SEC Whistleblower Program provides certain protections to qualifying whistleblowers for information provided to the SEC. Specifically, Exchange Act § 21F(h) prohibits employers and other entities from retaliating against qualifying whistleblowers in exchange for information provided to the SEC.
• SEC Enforcement Action, If the SEC believes a whistleblower was retaliated against, then it may seek an injunction or other restriction on the retaliated person’s ability to participate in the securities industry.

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.