Can I Refuse to Comply With an SEC Subpoena??

An SEC investigative subpoena is administrative in nature. It is not a court order, and it is not self-enforcing. This means that while the SEC has the power to issue an investigative subpoena, the SEC does not have the power to enforce compliance with the subpoena on its own. The SEC may petition a federal district court to enforce compliance after a recipient fails to comply. However, failure to obey a federal compliance order may subject the recipient to contempt sanctions.

Recipients should preserve potentially relevant records upon receipt of a federal subpoena or other compulsory process. While noncompliance is often an option, destruction of records is a far more serious issue, and it can have severe consequences.

Receipt of an investigative subpoena confirms that the SEC has entered a formal investigation. While the scope of the investigation is not explicitly stated in the subpoena, recipients can often deduce the scope from the documents, testimony, or both, that the SEC has demanded.

Third-party witnesses receive subpoenas in federal cases far more frequently than they receive target letters, and they are an important source of evidence. If the subpoena requires a third-party witness’s involvement without indicating that the witness is being targeted for misconduct, this is not necessarily surprising.

The subpoena alone will not identify someone as a target. With this in mind, we have outlined five next steps for individuals and companies that receive SEC subpoenas.

1. Preserve all evidence and relevant records.

2. Engage experienced federal defense counsel to protect your interests.

3. Determine whether the SEC subpoena is actually enforceable.

4. Assert appropriate privileges and object to the SEC’s demands.

5. Negotiate or litigate the scope of the subpoena and the SEC’s demands.

What Happens if I Do Not Comply with an SEC Subpoena?

At 15 U.S.C. § 78u(c), a federal statute authorizes federal actions to enforce a noncompliant SEC subpoena. While missing an SEC subpoena deadline does not automatically create liability, it is a step toward enforcement. The Supreme Court has noted that, “ a witness whose failure to obey [the subpoena] does not put him in contempt… cannot be presumed to have been in contempt, but, if the subpoena, when served, required witness to produce documents in court, and he failed to do so, the evidence… is of the witness’s culpability.”

What are the SEC Subpoena Enforcement Options?

Contempt sanctions in criminal matters can be monetary, such as a fine or a penalty, or they can take the form of confinement in jail. Contempt sanctions can be either civil or criminal. In criminal cases, contempt sanctions must be predicated on proof beyond a reasonable doubt of willful noncompliance. In civil cases, contempt sanctions require clear and convincing proof that the recipient failed to comply with a clear and unambiguous court order, whether or not the noncompliance was willful.

What are the SEC’s Subpoena Enforcement Options?

The SEC may also file a petition to enforce a subpoena in federal district court. If you are the recipient of an investigative subpoena, the SEC’s filing will expose the otherwise nonpublic investigation to the public record. While your SEC counsel should attempt to limit the SEC’s ability to file, the SEC’s subpoena-enforcement filing has the potential to trigger adverse media coverage.

What Should I Do About an SEC Subpoena?

The SEC, similar to other federal enforcement agencies, generally offers limited remedies for objecting to an SEC investigative subpoena. The SEC’s enforcement manual provides for “administrative” appeals, and investigative-subpoena objections ordinarily only become judicially reviewable after the SEC files a federal enforcement action. This means that, while the recipient of an SEC subpoena may have the right to object to compliance, the recipient will rarely be able to exert the full weight of its legal defenses without some form of federal action.

What are the SEC Subpoena Enforcement Remedies?

When opposing the SEC’s federal enforcement petition, you can present all supported defenses, including those that may provide for exclusion of the evidence being sought. The subpoena’s enforcement may be all-or-nothing or it could lead to enforcement of undisputed demands and adjudication of objections to other subpoena provisions.

What are the SEC Subpoena Enforcement Consequences?

Destroying evidence requested in a subpoena is a serious issue, and in some cases it can lead to additional charges for obstruction of justice as well as potential liability for the underlying securities violations.

What Should I Do Before the SEC Subpoena Compliance Deadline?

If you’re a recipient of an SEC investigative subpoena, the first thing you should do is preserve all potentially relevant evidence. If the investigation is still at the subpoena stage, your counsel should ask the SEC for the formal order in order to gain a clear understanding of the scope of the investigation. Your counsel will also want to request an extension if your compliance date is soon and to determine if the SEC staff will accept rolling productions of documents and testimony. If the SEC staff agrees to rolling productions, your counsel can likely negotiate with the SEC staff to narrow its demands based on what records are most likely to be responsive, and you can also likely request confidential treatment for any sensitive information you produce to the SEC.

What Is the SEC Investigative Testimony Process?

When a recipient is subpoenaed to give testimony, SEC staff will examine the recipient under oath. Your counsel will be entitled to attend investigative testimony, and your counsel will be able to advise you of your rights and to protect any of your other interests. When you are subpoenaed to give testimony to the SEC, you should not attempt to resolve the SEC’s investigation by providing information to the SEC without counsel. Instead, the better strategy is to give testimony while letting your counsel manage the process. After complying with the SEC’s investigative testimony demand, you may not be done. The SEC can issue additional demands for records, testimony, or both.

What Is the Wells Process?

The Wells process occurs toward the end of the investigation, and it involves the SEC staff recommending enforcement action to the SEC Commissioners. Before the SEC staff makes this recommendation, a potential target is given the opportunity to make a written submission to the SEC staff. If the SEC staff’s recommendation is issued against you, the potential target can still try to persuade the SEC staff to amend the recommendation by arguing why the SEC staff’s proposed enforcement action is misguided. Similarly, you can also try to persuade the SEC staff to abandon enforcement action entirely. In certain cases, this may lead to a termination letter from the SEC, in which case the SEC’s investigation will end without charges being filed.

What Objections Can Actually Defeat or Narrow an SEC Subpoena?

In SEC v. Howatt, 525 F.2d 226 (1st Cir. 1975), the Supreme Court outlined the only two substantive grounds for objecting to an SEC investigative subpoena. The Supreme Court reasoned that, “ To get at the substantive grounds, the courts must first examine whether: (i) the subpoena was issued pursuant to a legitimate investigation; and, (ii) the subpoena requested information that is relevant to the investigation. If the answer to either question is no, then the subpoena was improperly issued and the answer to the issue at hand is affirmative.” With respect to administrative subpoenas, federal courts generally conduct a limited review. When considering motions to quash, courts “ generally afford agencies the discretion to manage their investigative processes and will not scrutinize the relevance and proportionality of an administrative subpoena unless challenging the agency’s presumption of regularity with “ clear evidence that the subpoena is unreasonably broad in scope, unusually intrusive, or otherwise improper . .. or a direct challenge . .. to the statute’s authority to require the requested documents.”, SEC v. Therefore, when assessing the validity of the administrative subpoena, the court will only scrutinize the subpoena if “ the evidence requested is so extensive . .. as to render the subpoena unreasonable.” - SEC v. Knopfler, 658 F.2d 25 (2d Cir. 1981)

While asserting “bad faith” is possible, bad-faith challenges are notoriously difficult to pursue. Unsupported allegations will not suffice. Instead, asserting bad faith requires “ substantial evidence of an investigative agency’s factual shortcomings . .. and evidence showing that the investigative agency acted with improper motive . .. and this evidence must be presented before the agency has a chance to execute the subpoena.”

The government noted that “ the recipient’s subpoena challenges are baseless and the recipient fails to demonstrate any good-faith basis for asserting them. . .. The party challenging the validity of a subpoena must show, at the very least, ‘a factual basis’ to warrant an evidentiary hearing on its assertions.”

• RNR Enterprises, Inc. v. SEC, 122 F.3d 93 (2d Cir. 1997)

Finally, “ a recipient of an administrative subpoena may not satisfy its burden by asserting mere conclusory claims that compliance will be unduly burdensome, but must show “ undue burden by showing what are the records’ custodians, what is the amount of data, how long it will take to retrieve the data, how much money it will take to retrieve the data, or what is the most efficient manner by which the data could be retrieved . . .. a conclusory assertion of undue burden is usually not enough to defeat the enforcement of an administrative subpoena.”

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

When Does the Fifth Amendment Protect Subpoenaed Testimony and Documents?

When Does the Fifth Amendment Protect Subpoenaed Testimony?

When compelled to give testimony, you may invoke your Fifth Amendment rights if responding to a specific question could expose you to criminal liability. Instead of refusing to answer, you can assert your Fifth Amendment rights on a question-by-question basis. While the Fifth Amendment prohibits the government from compels you to testify against yourself during criminal proceedings, it can be invoked in an investigation. In fact, in administrative cases, factfinders can draw adverse inferences from a witness’s invocation of the Fifth Amendment.

How Can Compelled Testimony Be Obtained?

If an investigative authority can present adequate evidence of criminal charges, it can seek immunity. If the investigative authority offers proper immunity, your testimony may be compelled despite your Fifth Amendment claim. However, if you are facing criminal allegations, your counsel can attempt to negotiate with the prosecutors who are seeking to prove you are guilty as charged.

Can the SEC Share Documents and Testimony with the Department of Justice?

Yes, the SEC may share investigative-subpoena results with federal prosecutors. If federal prosecutors decide to pursue criminal charges, you will have to prepare a criminal defense to protect yourself in criminal court.

When Does the Fifth Amendment Protect Documents?

In general, the Fifth Amendment does not protect you from having to produce documents. The privilege against self-incrimination generally protects the act of speaking rather than the content of the speaking. It generally does not apply to the content of documents that were created before you received the subpoena. Instead, document production is protected when it is deemed a “testimonial act.”

The Supreme Court notes:

• Testimonial act: The act of compelled production of records is testimonial “ if the compelled production of documents themselves (or, more specifically, the act of compelled production of documents) is testimonial in nature.” - Fifth Amendment, 3-2 (3rd Edition, 2017)

The act of document production is testimonial if the act “ has the effect of communicating a statement to the prosecutor that is incriminating on its face.” - Fifth Amendment, 3-2 (3rd Edition, 2017)

For example, if you are asked to produce records from your home address in order to prove that you live there, but the act of doing so could prove that you are engaged in illegal conduct. In this situation, you can seek Fifth Amendment protection for the act of producing the records.

What If Someone is Being Compelled to Produce Documents for Their Employer?

The act of compiling and producing records on behalf of a collective entity (such as a corporation or company) is not testimonial. If you have a duty to produce records on behalf of your company, your Fifth Amendment privilege may not be available to refuse to produce the records.

• U.S. Department of Justice, Criminal Resource Manual 1-94.00 (May 1, 2004)

How Should I Protect Privileged and Confidential Documents During Production?

How Can I Assert the Attorney-Client Privilege?

If you are subpoenaed to produce documents, the attorney-client privilege may justify withholding particular responsive communications between you and your attorney. If you assert the attorney-client privilege, you must provide a privilege log that identifies the dates, authors, recipients, and other information pertaining to the communication. While you can generally withhold a whole document for claiming the attorney-client privilege, any nonprivileged portions that can be reasonably segregated remain producible.

How Can I Protect Confidential Business Information?

Confidential business information is not automatically exempt from an SEC investigative subpoena. Instead, seek confidential treatment from the SEC. While you cannot unilaterally refuse to produce records, you can request that the SEC treat the information as confidential.

If you need to share the information with your business partner, customer, or employee to determine whether information is responsive, you must ensure that the recipient will comply with any reasonable confidentiality restrictions that the SEC staff may impose.

What is a Privilege Log?

A privilege log is a list that identifies relevant documents that the recipient will withhold from the SEC on the grounds of attorney-client privilege, work-product doctrine, or other privilege. Each entry in a privilege log typically includes:

• Date of document;
• Author of document;
• Recipient of document;
• Type of document;
• Privilege or protection asserted; and
• Factual basis for privilege or protection.

If you assert the attorney-client privilege or work-product protection, any nonprivileged portions of the communication that can be reasonably segregated remain producible.

What Should I Do if I Inadvertently Disclose Documents Protected by the Attorney-Client Privilege?

If you inadvertently disclose documents protected by the attorney-client privilege during an SEC investigation, you may be entitled to a clawback under Federal Rule of Evidence 502(b), if you can prove that the disclosure was inadvertent and that you have taken reasonable steps to prevent the disclosure. In many cases, you may also be able to protect your interests through a clawback agreement under Rule 502(e), provided that you are able to enter a clawback agreement with the SEC.

Do I Have a Duty of Confidentiality Regarding an SEC Investigation?

Generally, you have no duty of confidentiality regarding an SEC investigation. However, the marital-communications privilege protects confidential communications made during a marriage, even if the parties divorce. The privilege typically protects both spouses from being compelled to disclose the confidential communications.

What Limits Apply to Preserving and Producing Hard-to-Access Records?

Can Foreign Privacy Restrictions Excuse Noncompliance With an SEC Subpoena?

While you can assert the Fifth Amendment and other privileges, foreign privacy laws may not excuse noncompliance with a United States subpoena. If you are being asked to produce documents, if there are no significant foreign privacy laws that forbid access to the documents, you will need to preserve and produce the responsive documents and communications.

What If the Requested Documents are Held by a Third Party or Encrypted?

If you have the legal right to obtain records or communications from a third party, you will have to produce the records or communications regardless of where they are located. Similarly, encryption does not excuse you from complying with an SEC investigative subpoena. If you have access to encryption keys or other means by which you can decrypt documents or information that are responsive to an SEC investigative subpoena, you will have to produce the responsive documents or information in unencrypted format.

What if I Perform a Partial Production?

If you perform a partial production, you will have to identify all documents and communications that you have withheld based on the attorney-client privilege or any other privilege. If you will not produce all the documents or communications demanded in the subpoena, partial production will not moot enforcement of any of the SEC’s unresolved demands.

Are there Any Issues with Preservation Instructions?

If your preservation instructions prohibit destruction of evidence but otherwise do not restrict voluntary communications with the SEC staff, you will probably not have issue with noncompliance with an SEC investigative subpoena. However, if your preservation instructions prohibit a witness’s lawyer or the witness himself or herself from disclosing information to the SEC, this may be interpreted as impeding reporting of a possible violation of the law. As a result, the SEC may initiate enforcement action under Rule 21F-17(a) of the Exchange Act.

Rule 21F-17(a) prohibits individuals and entities from impeding the report of any “ possible violation to the Commission . . .. of securities laws, or any other violation which is subject to Commission’s jurisdiction. . .. ” - 17 C.F.R. § 21F-17(a).

Which Objection Deadline Applies to My SEC Subpoena?

Does Federal Rule 45’s 14-Day Objection Deadline Apply to an SEC Investigative Subpoena?

No. The 14-day objection period in Federal Rule 45 governs a subpoena that is issued under the authority of a federal district court. An SEC investigative subpoena is an administrative subpoena that does not fall under Federal Rule 45.

Do Administrative Law Judges (ALJs) Issue SEC Investigative Subpoenas?

SEC administrative law judges issue subpoenas only after an administrative proceeding has been filed. An investigative subpoena is issued during an SEC investigation, whereas an administrative proceeding is commenced after the investigation has concluded. C.F.R. § 201.232 governs subpoenas issued during administrative proceedings.

Under Rule 232, “ the party subject to the subpoena may, within 10 days of receipt and before the period of compliance expires, request quashing or modifying the subpoena on the grounds of that it is unreasonable or overly burdensome . .. or if it, based on an undue burden to the party subject to the subpoena, requires the production of documents that already have been produced during the proceeding. . . .. a request to quash or modify the subpoena does not stay compliance. ” - 17 C.F.R. § 201.232

Although Rule 232 contains an objection procedure, this does not apply to pre-proceeding investigative subpoenas issued during the SEC’s investigative process. As explained above, in most cases, the SEC’s investigative-subpoena recipients will not face any objections to compliance until they face potential enforcement action.

What is the SEC Investigative Process?

The SEC’s investigative process is distinct from its administrative process. SEC investigative examinations are conducted under oath before a designated SEC officer, such as an examiner, a special agent with the FBI, or a legal professional from the SEC’s Division of Enforcement. Investigative examinations can lead to administrative proceedings in some cases, and they can lead to civil enforcement actions filed in federal district court in other cases. In cases of apparent criminal misconduct, investigative examinations can also lead to referral to a federal prosecutors’ office for criminal prosecution.

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.