Can I Review Documents Before SEC Testimony??

The SEC has six divisions, but only one of them, the Division of Enforcement, handles enforcement; the Division of Corporation Finance instead reviews public companies' filings and disclosures. Routine filing reviews, such as those prompted by Section 408 of the Sarbanes-Oxley Act, are very different from enforcement proceedings conducted by the SEC’s Division of Enforcement. The Division of Corporation Finance (CorpFin) is the division that conducts reviews of all public companies’ filings and disclosures. Routine filing reviews are conducted both in order to assist companies with SEC compliance and in order to target issuers with the ability to commit securities fraud.

The Sarbanes-Oxley Act (SOX) is a specific provision of federal law that requires the SEC to conduct a periodic review of the disclosures filed by all issuers. Specifically, under Section 408 of the Sarbanes-Oxley Act, the SEC must review all covered issuers’ disclosures at least every three years. The Division of Corporation Finance is the division that reviews the disclosures of all covered issuers under Section 408 of the Sarbanes-Oxley Act, and it also reviews the disclosures of all public

How should I review documents with my lawyer?

While the documents themselves may not be privileged, any legal advice you receive from your counsel during preparations for your testimony should remain protected by the attorney-client privilege. When you review your own documents with your defense attorney, the communications you exchange should be confidential. However, the SEC staff can (and often will) ask witnesses: “What materials, if any, did you review in preparing for this interview?” Witnesses must answer this question truthfully, but, provided that their counsel, advised them to do so, witnesses do not have to reveal the content of the legal advice they received.

When reviewing documents with counsel, witnesses should also be very careful about coordinating testimony with other witnesses. While witnesses must be prepared and ready to answer the SEC staff’s questions, they should never coordinate their testimony with other witnesses. In fact, this is one of the most common mistakes witnesses make during the course of an SEC investigation. Not only can SEC staff quickly determine if witnesses are coordinating, but coordinating can lead to unnecessary scrutiny (and it can even lead to a criminal referral for obstruction of justice).

During your testimony, the SEC staff may present you with records they have previously obtained during their investigative process. The SEC staff may then mark these records as exhibits, and ask you questions along the following lines:

• Did you write this document?
• Did you receive this document?
• Do you know who wrote this document?
• Do you know who is in possession of this document (or a copy of this document)?

Depending on your response to these questions, the SEC staff may then follow up by asking you to explain the meaning and purpose of the documents. If there are discrepancies between your testimony and the records produced by your employer or you, then the SEC staff will confront you with those discrepancies as well. This is why it is so critical for witnesses to be fully prepared and why thorough preparation for testimony is essential.

If you have not yet begun preparing for SEC testimony, get started now. With an SEC investigation, time is of the essence. The longer the investigation goes on, the more likely it is that you will be caught in a situation where you can no longer rely on your memory. The volume of evidence, the complexity of the issues involved, and the availability of witnesses can all contribute to the length of the investigative process, but not all of these factors are within your control. You cannot control the volume of evidence or the complexity of the investigation, but you can control how well-prepared you are to provide the testimony the SEC staff is looking for.

What SEC materials can I obtain before and after testimony?

Unlike civil litigation, which involves a broad discovery process governed by court rules, SEC enforcement proceedings offer witnesses significantly less access to the SEC’s information and evidence. Witnesses may find themselves wondering what they can (and cannot) obtain from the SEC staff before and after their testimony.

Pretestimony: No Right to SEC Records

The SEC’s enforcement process is designed to let SEC staff gain a clear, accurate, and firsthand account of the events under investigation. Because of this, the SEC has no obligation to disclose its evidence (or any part of its evidentiary file) to witnesses before testimony. It doesn’t have to provide the documents it obtained or the testimony it collected from other witnesses, and it cannot be forced to disclose why it is seeking testimony from a particular witness. Even if you believe you have substantial evidence to rebut the allegations in an investigative file or subpoena, the SEC staff is not required to disclose the details of its inquiry.

Post-Testimony: Obtaining a Transcript Copy

Once a witness has been interviewed by the SEC staff, there are rules that apply to obtaining a copy of the transcript. For witnesses in formal investigations, 17 C.F.R. § 203.6 governs. This provision states that:

“Transcripts, if any, of formal investigative proceedings shall be recorded solely by the official reporter, or by any other person or means designated by the officer conducting the investigation. A person who has submitted documentary evidence or testimony in a formal investigative proceeding shall be entitled, upon written request, to procure a copy of his documentary evidence or a transcript of his testimony on payment of the appropriate fees: Provided, however, That in a nonpublic formal investigative proceeding the Commission may for good cause deny such request.”

This provision allows witnesses in formal investigations to obtain a copy of the transcript produced during the proceeding, subject to paying the costs associated with its production. However, even if the witness requests and receives a copy, this is not a matter of right. In fact, the provision further states that for requests that fall within the purview of nonpublic formal investigations, the SEC staff may deny the request if the staff determines that “there is a good cause for so doing.”

Post-Testimony: Requesting the Formal Order

Additionally, witnesses in formal investigations can request a copy of the formal investigative order from the SEC staff. With that said, witnesses should not take for granted that the staff will honor this request. As is the case with requests to obtain transcript copies, the SEC staff may deny this request, and if it does honor the request, it may withhold information or present a redacted version of the formal order.

Post-Testimony: Right to Inspect the Official Transcript

As discussed, witnesses in nonpublic formal investigations may have the right to obtain a copy of their transcript denied for “good cause.” However, the right to inspect is distinct from the right to obtain a copy. Section 203.6 states, “In any event, any witness, upon proper identification, shall have the right to inspect the official transcript of the witness' own testimony.” As with transcript copies, the right to inspect the transcript is subject to certain restrictions, but the possibility of inspection remains even if a request for a copy is denied.

Difference Between SEC and Federal Court Proceedings

The difference between SEC investigations and civil litigation is a notable one. The SEC explains that while Federal Rule of Civil Procedure 30 provides the right for a witness to receive copies of deposition transcripts upon payment of transcript costs, this rule does not apply to enforcement proceedings. Instead, investigative testimony is governed by 17 C.F.R. Part 203. The SEC also notes that its investigative proceedings are administrative in nature, and that the rules of civil procedure adopted by the SEC in formal investigations are only generally analogous to the rules of procedure in district courts, which the SEC calls “judicial proceedings.”

If you are facing this situation, Spodek Law Group handles federal criminal defense matters nationwide, from offices in New York and Los Angeles.

Does company counsel represent me during SEC testimony preparation?

While 17 C.F.R. § 203.7 recognizes the right of witnesses in formal investigations to have a lawyer present to “advise such person before, during and after the conclusion of such examination,” company lawyers are not always appointed to act as witness counsel. As a general rule, employees are represented by their company’s legal counsel and receive assistance with respect to preparing and appearing for SEC testimony. However, when an employee is appointed as an investigative witness’s counsel, this attorney must represent that employee and serve the employee’s interests. But when an employee is represented by company counsel, this attorney must represent the company in an enforcement proceeding and can not represent the employee. When the company is an enforcement defendant or under investigation, the attorney is the company’s legal counsel. The employee may then choose whether to hire a different attorney for personal representation.

What Is the Role of Witness Counsel during Testimony?

Witness counsel generally only intervenes during testimony when a question by the SEC staff is unclear, requires a substantial correction, or poses a risk of exposing the witness to liability for criminal or civil violations. While a witness’s counsel can advise the witness before, during, and after the questioning process, witness counsel may not interfere with the line of questioning and must allow the SEC staff to conclude their questioning before asking any clarifying questions.

A witness’s attorney may also assist the witness with respect to preparing to answer the questions and interpreting the documents and records under review. The SEC staff, too, should be aware of the potential for misinterpretation of documentary evidence and should request additional explanation when required.

Does the Right to Representation Imply a Right to Competent Representation?

With regard to the need for a lawyer, federal law gives witnesses the right to be accompanied, represented, and advised by counsel at SEC investigative testimony under 5 U.S.C. § 555(b) and 17 C.F.R. § 203.7(b), though it does not provide counsel at government expense. For a conviction for criminal offenses, the Supreme Court established in the seminal case of Strickland v. Washington the following standard for ineffective assistance of counsel:

“To prevail on a claim of ineffective assistance of counsel, a defendant must make an adequate showing that: (1) Counsel’s performance was deficient; (2) The deficient performance prejudiced the defense.”

Ineffective assistance of counsel requires two elements to be proven: deficient performance and resulting prejudice. With regard to deficient performance, this is defined as failing “to exert reasonable effort to obtain the documents needed to advise the defendant, failing to file a brief, or simply failing to adequately prepare for trial.” The case also mentions failing to “inform himself of the case from the documents available and not bringing a witness who would have supported his theory of the case.” For an employee whose company attorney provided deficient assistance, he or she must show that “the attorney’s representation had some other effect on the attorney’s performance such that it impaired the attorney’s ability to effectively assist the witness in his or her defense.” With regard to prejudice, this means the deficient performance prejudiced the defense and there is “a reasonable probability that a result not unfavorable to the defendant would have been obtained had counsel’s performance been professional.”

Can reviewing documents increase my civil or criminal risk?

The SEC’s Division of Enforcement is the division of the SEC that is responsible for investigating and pursuing potential violations of federal securities law. When it determines there is “adequate basis for an enforcement action,” the SEC can seek injunctive relief, and it can pursue civil or criminal penalties. However, while the SEC can obtain injunctive relief and civil penalties directly, for enforcement of criminal violations of federal securities law, it relies on the Department of Justice (DOJ).

The SEC-DOJ Relationship

The SEC staff also has the authority to share evidence and other information with criminal and regulatory authorities, including the DOJ. Due to this close relationship, parallel investigations by the SEC and the DOJ can occur. This means that while you may be subject to a civil investigation by the SEC, you may also be subject to a parallel investigation by the DOJ. Both investigations may examine identical conduct, and any documents produced by a witness during the course of an SEC investigation could be shared with federal criminal investigators.

The Witness’s Fifth Amendment Right

While the Fifth Amendment gives witnesses the right to refuse to answer testimony if they believe the answers would be self-incriminating, this right is not absolute. For example, in a criminal case, prosecutors are prohibited from using a defendant’s silence to seek an adverse inference. However, this rule does not apply to civil enforcement proceedings. If you invoke the Fifth Amendment in a civil proceeding, a court can permit an adverse inference against you. The more important question for an investigative witness is whether there is a real threat of self-incrimination. If you face a threat of self-incrimination, you should make a strategic decision about invoking the Fifth Amendment in consultation with your defense counsel.

Materially False Testimony and the Witness’s Fifth Amendment Right

Testifying falsely to the SEC is a risky move that can have material consequences. If you give materially false testimony during an enforcement proceeding, this can lead to federal criminal liability. The materiality of a witness’s testimony will be one of the first issues raised in any proceeding regarding the witness’s statement to the SEC. Along with a witness’s Fifth Amendment rights, the witness’s truthfulness is one of the key factors that determine the witness’s exposure during an enforcement action. If a witness tells the truth, the witness’s defense will not have to account for any alleged attempts to obstruct an SEC investigation.

Witness Document Destruction and Concealment

When witnesses destroy or conceal subpoenaed evidence, they may also increase their civil and criminal liability. If witnesses get caught concealing evidence, then destroying the evidence may be pursued as a criminal offense, on top of any potential liability for securities violations. By this, if you believe that you have any documents or records that have been produced under a subpoena, do not destroy or hide them. Make sure you maintain these records. Even if the documents do not prove a securities law violation, destroying or hiding the documents can lead to a criminal referral to the DOJ for obstruction, and a criminal referral for obstruction may lead to an indictment.

Preparation to Witness Testimony

The issues discussed above are a few of the issues that should be resolved during a witness’s pre-testimony preparation. Witnesses need to make informed decisions regarding self-incrimination, be prepared to truthfully answer the SEC’s questions, and ensure that no attempt is made to destroy or conceal subpoenaed evidence. By making these informed decisions, you may not only be able to avoid civil and criminal liability, but, in some cases, you may avoid an enforcement proceeding altogether.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 212-300-5196.