Do I Have to Testify in an SEC Investigation??

A witness may generally decline to participate in a voluntary interview or provide voluntary records. However, an SEC subpoena is not self-enforcing; the SEC may seek a court order compelling compliance. Testimony provided to the SEC during its investigations can be used later in either enforcement or criminal proceedings.

Although the SEC’s investigations can last for an extended period, once it decides to file an enforcement action, this is usually not a long process. On average, an individual can expect to receive notification of an enforcement action within a few months of the SEC completing its investigation.

How Does the SEC Get the Authority to Issue a Subpoena?

The Securities Exchange Act gives the SEC broad investigative authority. This authority is essentially a power to issue subpoenas for records, bank records, and testimony in non-public investigations.

How Does the SEC Decide What Is Relevant?

The SEC’s investigations can start with whistleblower complaints, industry “tips,” analysis of trading data, SEC examinations, referrals from other agencies, or other leads. The SEC can seek testimony and documents that may be relevant to its investigation. This includes, but is not limited to, account records from brokerages, banks, and investment advisers.

How Long Does an SEC Investigation Take?

There is no deadline for the SEC to resolve an investigation. In fiscal 2020, the median time to investigate and then file an enforcement action was 21.6 months.

Why Do Witnesses in SEC Investigations Need Counsel?

SEC investigations carry several risks. Testimony you provide can expose you or others to civil or criminal liability. The SEC can gather extensive information about your transactions from third parties. Witness testimony can also lead to charges of obstruction of justice or other crimes.

Spodek Law Group attorneys are available to help witnesses:

• Preserve privilege, where applicable, and maintain control over confidential information;
• Challenge unnecessary and overly broad requests to avoid unwarranted scrutiny;
• Appropriately assess and mitigate criminal exposure; and,
• Communicate with the SEC on behalf of the client.

What happens during compelled SEC testimony?

On-the-record (OTR) testimony in an SEC investigation is typically given under oath and transcribed. However, unlike testimony at a trial, an investigation is not a formal trial. There is no judge or jury deciding liability. Instead, the investigation’s purpose is to determine what occurred and what charges, if any, the SEC should pursue.

Counsel’s Role

Under 17 C.F.R. § 203.7, witnesses have the right to have counsel present during their SEC examinations. Counsel may advise the witness before, during, and after the examination, and counsel can ask brief clarifying questions at its conclusion.

Our individual counsel can advise the witness about challenges to the scope of the SEC’s examination. If our lawyer finds that a witness is not required to answer a question or provide a document, we will intervene to help prevent the SEC’s investigators from obtaining information that they do not have a right to seek.

Transcripts

The transcription and copying of testimony are governed by 17 C.F.R. § 203.6. This provision allows a witness to purchase a transcript of its testimony, though the SEC may refuse this request if it finds “good cause” to do so.

Questioning and Documents

SEC staff members generally conduct questioning, and they may introduce documents that they have marked as exhibits to be discussed during the examination.

Confidentiality and Scope

Formal SEC investigative proceedings are generally non-public unless the Commission orders otherwise. This means that, unless they are specifically authorized to do so, SEC investigators and witnesses are not expected to disclose that an investigation is taking place. Again, the confidentiality of an investigation generally lasts until a formal enforcement action is filed or a settlement is reached.

The investigations themselves can take a long time to complete, and a substantial amount of information about the conduct involved could have come to light before an investigation is resolved. Additionally, investigations often expand from focusing on the conduct that originally triggered the SEC’s action, and the SEC can seek information from outside of the time period involved as well.

Again, these are the key facts of an SEC investigation. With this in mind, the most important questions for a witness in an SEC investigation are:

• Do I have to be involved in an SEC investigation?
• Do I have to testify in an SEC investigation?
• Should I hire individual counsel for an SEC investigation?

How do I invoke the Fifth Amendment during SEC testimony?

Using the Fifth Amendment in an SEC Investigation

The Fifth Amendment protects individuals from being compelled to testify against themselves or produce self-incriminating documents or records. If you are facing SEC testimony, you may be able to invoke the privilege against self-incrimination to avoid testifying about certain aspects of the conduct that is under investigation. However, as a result of the specific application of the Fifth Amendment in SEC investigations, this means:

• Invoking the privilege does not automatically excuse you from complying with a subpoena that has been issued.
• If you want to rely on the privilege, you will generally have to do so in response to specific questions rather than before the examination begins.

When Can the Fifth Amendment Not Be Invoked in an SEC Investigation?

The privilege against self-incrimination is not absolute and cannot be invoked in all circumstances. Notably:

• The business entity that owns and controls a witness’s records may not assert the privilege.
• If a witness is not acting as a custodian of records and they refuse to answer a question, they cannot invoke the Fifth Amendment unless their answer will have the potential to expose them to criminal liability.
• If the entity that owns and controls records refuses to produce them, the SEC will not be able to compel a witness to produce documents to which they have no access.

What happens when a witness invokes the Fifth Amendment in an SEC investigation?

Invoking the Fifth Amendment during the investigative process can have several potential implications. In federal civil court, for instance, the court is entitled to draw an adverse inference if a witness refuses to answer a question because it would be self-incriminating. In parallel civil and criminal proceedings, a witness who invokes the privilege against self-incrimination may not be automatically entitled to a stay of the civil action. Here too, an affirmative demonstration of the need for a stay is typically necessary. At this stage, witness privilege and confidentiality should be maintained in regard to any documents and testimony provided to the SEC.

What is a Wells submission?

A Wells submission is a person’s response to a Wells notice. A Wells notice is a communication from the SEC stating that the enforcement staff recommends that the Commission bring enforcement action. A Wells submission provides witnesses the opportunity to argue against such a recommendation. At Spodek Law Group, we assist witnesses with their Wells submissions, as the statements contained in their submissions can be later used by regulators or other litigants.

How can providing SEC testimony present criminal exposure for witnesses?

Beyond the risk of self-incrimination, providing testimony during an SEC investigation also presents the risk of perjury charges. Under 18 U.S.C. § 1621, perjury is a federal crime that can result in substantial fines and up to five years of imprisonment. Witnesses who are called to give sworn testimony must be absolutely truthful. If false testimony is given under oath, a perjury charge will be a real possibility. Spodek Law Group, led by managing partner Todd Spodek, defends clients in federal criminal and white collar matters.

What happens if I refuse to comply with an SEC subpoena?

Do I have to follow an SEC subpoena?

An SEC administrative subpoena is not self-enforcing, and judicial enforcement is necessary before compliance is mandatory. However, if a witness refuses to comply, the SEC can enforce its subpoena by initiating subpoena-enforcement litigation in federal district court. If a witness is ordered to comply by the court and is found to be in violation of that order, sanctions including imprisonment may be imposed for contempt.

What are the risks of refusing to comply with an SEC subpoena?

If you have no doubts about your ability to resist a request to testify or produce records in an SEC investigation, then the best course of action is generally to comply. However, if there is a question about the validity of an SEC’s request to testify or produce records, then resisting the SEC’s request could be beneficial. This is especially true if you have privileged or confidential information to share with the SEC or if the cost of compliance would be undue. The key is to weigh the risk of the SEC initiating subpoena-enforcement litigation against the potential for unnecessary exposure to the SEC’s investigators.

When can the SEC enforce an SEC subpoena?

Under Section 21(c) of the Exchange Act and Section 209(c) of the Investment Advisers Act, the SEC can petition a federal district court to enforce a subpoena. The federal courts will generally uphold SEC subpoenas, if the subpoenas are authorized, relevant, definite, and procedurally proper.

What defenses can be raised in SEC subpoena enforcement proceedings?

Some examples of the defenses and objections that can be raised in SEC subpoena enforcement proceedings include:

• Seeking to assert the privilege against self-incrimination in response to questions that would expose the witness to criminal liability;
• Seeking to preserve attorney-client privilege, work product protection, or other relevant privileges;
• An undue burden related to the effort required to produce records;
• Challenging the request because it is overly broad, vague, or irrelevant.

How much time does a witness have to respond to an SEC subpoena?

The Exchange Act and Investment Advisers Act do not specify any deadline for witnesses to respond to the SEC’s requests. However, the SEC Enforcement staff has traditionally allowed two weeks for witnesses to provide documents in response to its subpoenas. This custom-based deadline is, however, not binding. Our lawyers at Spodek Law Group can help witnesses negotiate a compliance deadline that is manageable while avoiding unnecessary scrutiny.

Why do I need my own lawyer before testifying?

Do I need an attorney if I have not been charged with a crime?

If you’re receiving an SEC subpoena for documents, that doesn’t mean that you’re a target of the SEC’s investigation. However, it does mean that your records are relevant to the SEC’s investigation, which could have significant implications. If the SEC is taking a close look at your dealings, it will only be a matter of time before it starts asking questions about your involvement in the transactions. At this point, it will not matter what charges (if any) the SEC files. Rather, you will need to assess your risks and protect your best interests, and for this to happen, you need an attorney.

Do I need an individual lawyer if I have one from my employer?

You have to make sure that you have an attorney whose best interests are your own. This is because your company’s lawyer does not represent you personally unless you have a written agreement that sets this up as an individual representation relationship. Instead, your company’s lawyer represents your company, and your company’s lawyer’s loyalty will be to your company. This means that, in some situations, your company’s lawyer may be forced to use information that is privileged to your company’s benefit, and this can lead to you facing individual liability in an SEC enforcement proceeding.

What are the attorney-client privilege protections afforded to an individual?

The attorney-client privilege protects all qualifying communications and documents sent between an attorney and their client. However, this does not extend to protect the nonprivileged facts disclosed during those communications. For instance, you can’t use the attorney-client privilege to keep the SEC from learning about an allegedly fraudulent transaction involving you and a third party. But you can use the attorney-client privilege to prevent the SEC from learning what your lawyer said about the transaction, or what you told your lawyer about it.

What attorney-client privilege protections apply to a business entity?

The organization that owns and controls the records that are relevant to an SEC investigation ordinarily controls the attorney-client privilege over the communication with its lawyers. If the organization wants to waive the privilege and share its lawyers’ communications with the SEC, it is entitled to do so. For an individual involved in an investigation, this can lead to unintended criminal exposure.

What are the risks involved in responding to an SEC investigation?

The potential for SEC enforcement action is only one of several risks. Another risk is that the SEC may share information with the Department of Justice (DOJ) or another state or federal regulator. In parallel investigations involving the SEC and DOJ, individual counsel will need to consider whether to pursue an independent investigation with a law firm that has experience at the DOJ and within the federal courts, since the DOJ has the sole authority to bring criminal charges. Again, with DOJ in the investigation, additional risks are at stake.

Are SEC investigations usually civil or criminal in nature?

As a federal administrative agency, the SEC is authorized to bring civil proceedings. On the other hand, the DOJ has the sole authority to bring criminal cases. While the SEC generally focuses its investigative efforts on civil enforcement, it can still find reason to bring civil charges, and it can refer cases to the DOJ as well. As a result, it is possible to face both criminal and civil charges, and you will need an individual attorney to defend your interests in either case.

Can an SEC investigation’s status change?

Yes, and the time between receiving an SEC subpoena and having an appearance before SEC staff can last for many months. During this time, your status could change from witnessing an SEC investigation to being the subject of one as the investigators obtain additional evidence. Once this is established, the focus of the investigation can shift toward determining whether you are criminally liable.

What is the risk of providing false information to the SEC?

Knowingly and willfully making a materially false statement during an SEC investigation can lead to charges under 18 U.S.C. § 1001. A violation of this federal statute can lead to fine or imprisonment for up to five years. Along with these, any other allegations that may arise during an investigation can lead to civil or criminal enforcement proceedings as well.

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.