Fifth Amendment Rights in SEC Investigations.

Individuals who receive an SEC subpoena can, in some (but not all) circumstances, invoke their Fifth Amendment privilege against self-incrimination to avoid testifying.

Corporations, however, have no Fifth Amendment privilege against self-incrimination. If the SEC issues a subpoena to your company (or even if the SEC issues a subpoena to you in your capacity as a corporate officer), your company is generally required to respond without regard to whether the answers could be used against you in criminal or civil proceedings.

In civil enforcement proceedings, if an individual invokes their Fifth Amendment privilege in response to a question by SEC counsel, the SEC may be entitled to an adverse inference. This means the SEC can use a jury’s (or hearing officer’s) presumption that the defendant chose not to testify because the truth would have revealed evidence of liability.

The SEC has several means of conducting civil investigations. First, it may conduct inquiries informally. These inquiries can quickly become intrusive. Second, the SEC can use formal investigative authority. This includes, among other things, the ability to compel testimony under oath, the ability to issue subpoenas for records, and the ability to compel the production of documents.

As the result of an investigation, SEC staff may recommend that the SEC Commission or the SEC’s Enforcement Director close the case. This decision can lead to the staff issuing a termination letter to individuals and entities involved. In fact, some SEC investigations close with no enforcement action being filed. However, the lack of a termination letter does not mean that the SEC has decided not to take enforcement action. Conversely, a lack of recent contact from the SEC does not mean that an investigation has ended.

If the SEC decides to pursue enforcement action, it can either file a civil complaint in federal district court or commence proceedings within its own administrative system.

Must I comply with every SEC subpoena demand?

Does an SEC subpoena compel production of documents?

Yes, the SEC can use subpoenas to compel the production of documents (including, but not limited to, business records, bank statements, computer-generated data, and personal communications), the production of documents from electronically stored media, and testimonial evidence.

Whether the SEC has authority to issue a subpoena depends on the type of investigation it is conducting and how far the investigation has progressed. The SEC may conduct inquiries informally without issuing subpoenas; and the SEC can issue subpoenas only after a formal investigative order has been issued by the Commission. A formal investigative order is a formal order that authorizes SEC staff to issue subpoenas.

How can I challenge an SEC subpoena?

There are several ways to challenge an SEC subpoena. Depending on the circumstances, you may be able to negotiate the scope of the subpoena or otherwise challenge the subpoena in federal district court (such as by filing a motion to quash).

In negotiations with the SEC, you may be able to negotiate the scope of the subpoena and a more manageable schedule for compliance. You should also work with counsel to ensure that you preserve all possible objections to a subpoena while making a written agreement to produce the records requested.

Is the SEC able to enforce subpoenas?

Yes, the SEC can seek to enforce a subpoena in federal district court. This is a common step for the SEC to take if a witness or company ignores a subpoena.

Federal courts will generally review SEC subpoena-enforcement proceedings on an expedited basis. As a result, it will not take long for you to be in court in order to respond to the SEC’s demand to enforce.

However, if the SEC’s subpoena is irrelevant, unreasonable, unduly burdensome, or otherwise-invalid, your counsel should be able to make a strong argument against enforcement.

Can the SEC compel testimony?

Yes, the SEC can seek the testimony of witnesses through a subpoena. Some witness subpoenas are issued to individuals who have no other connection to the case, while others seek testimony from individuals who have some alleged involvement in the investigation.

Does the Fifth Amendment protect documents demanded by the SEC?

The scope of the Fifth Amendment’s protection in federal investigations is a complex subject, and one of the primary issues is the extent to which the Fifth Amendment protects against the compelled production of documents. The Supreme Court has clarified several key principles on this topic.

First, the Fifth Amendment protects the testimonial act of production, not necessarily the contents of the documents produced. As Justice Byron White wrote for the Court in Fisher v. United States, 425 U.S. 391 (1976): “the question in the case at hand is not whether the petitioner’s act of producing the records is ‘testimonial.’ . .. The question is whether the documents themselves ‘tell’ something, whether the content of the documents produced is what is sought to be protected against compelled disclosure under the Fifth Amendment.” In other words, while the privilege may protect a witness’s communication, it generally does not protect a witness from compelled production of records that were prepared independently of a government inquiry.

However, the Supreme Court recognized in United States v. Hubbell, 530 U.S. 27, 33, 35 n.5 (2000), that the act of producing records may, in itself, convey information that the Fifth Amendment protects. Specifically, as Justice Stevens wrote for the Court in Hubbell, “[t]he Fifth Amendment privilege prohibits the government from using the testimonial act of producing records to ‘expose the custodian’s relationship to the documents.’” While “the custodian’s possession, custody, or control of the documents, and their authenticity” can be implicated by the act of producing records, this alone generally does not remove a document’s content from the scope of the privilege.

The foregone-conclusion doctrine is an exception that applies in certain cases. The doctrine applies when the government can establish that “the documents themselves are not created in response to a request by the government . .. but the government already knows that the documents exist, who has possession or control of them, and that they are authentic.” Hubbell, 530 U.S. at 33. In other words, unless the SEC’s inquiry has reached a stage where they can prove that the facts implicated by the act of production are a foregone conclusion, the privilege should protect a witness from being forced to produce records that are incriminating.

The required-records doctrine is another exception. It applies when “the records in question were prepared in anticipation of a required record to be kept under a valid regulatory scheme.” Hubbell, 530 U.S. at 33.

Finally, there is the rule regarding corporate records. In Braswell v. United States, 487 U.S. 99, 104 (1988), the Supreme Court held that “a custodian of corporate records does not have a Fifth Amendment privilege to withhold records from a grand jury request on the ground that the records themselves, or the act of producing them, would incriminate him.” This means that an individual cannot withhold corporate documents on the grounds of self-incrimination. However, the Supreme Court also noted that “the government may not use the custodian’s individual act of production to provide evidence against him.” Braswell, 487 U.S. at 104.

Regardless of whether you (or your company) can invoke the Fifth Amendment privilege to avoid producing records, you must still preserve all relevant records. This is a critical first step in many federal investigations.

Todd Spodek is the managing partner of Spodek Law Group, a second generation criminal defense firm that has been practicing since 1976.

How do I invoke the Fifth Amendment during SEC testimony?

A witness who wants to invoke the Fifth Amendment privilege during SEC testimony may do so on a question-by-question basis. That is, for each question, the witness must consider whether answering could expose him or her to criminal charges. With each question, the witness can make a statement similar to: “I decline to answer that question based on my Fifth Amendment privilege.”

In Hoffman v. United States, 341 U.S. 479 (1951), the Supreme Court clarified that witnesses may also invoke the privilege if their answer could help the government complete a “chain of evidence” that could lead to criminal prosecution. This applies even if the answer itself is not incriminating.

Does invoking my Fifth Amendment privilege mean that I have committed a violation of federal securities laws?

No, the act of invoking your Fifth Amendment privilege is not an admission that you have violated any federal securities laws or committed any other wrongdoing. However, in civil enforcement proceedings, this can carry other consequences. In Baxter v. Palmigiano, 425 U.S. 308 (1976), the Supreme Court held that an adverse inference can be drawn from a defendant’s silence, noting that “a defendant’s decision to remain silent when called to testify at his own civil trial may be used in determining his liability.”

Still, an adverse inference based on a defendant’s silence is not conclusive. For silence to be used to establish liability, there must be other, supporting evidence. Similarly, while a court is permitted to draw an adverse inference, it must weigh this against other factors, and it should not punish a defendant for exercising a constitutional right. In *SEC v. Graystone Nash, Inc., 25 F.3d 187, 190 (3d Cir. 1994), the U.S. Court of Appeals for the Third Circuit held that when determining whether to permit an adverse inference, the “court must weigh the prejudice of the adverse inference” against “competing interests.”

Wait, what is the difference between an adverse inference and an SEC enforcement recommendation?

An adverse inference is a judicial determination. An SEC enforcement recommendation is a determination made by an enforcement officer (or the SEC Commission). While an SEC enforcement recommendation can take into account an individual’s silence, it is not an official court ruling and it is not an official determination of the individual’s guilt.

Will I have to testify under oath?

Yes, if you are subpoenaed to testify by the SEC’s staff, your testimony will be taken under oath with a court reporter present. This will be conducted at an SEC office, and the transcript will be shared with the enforcement personnel who are handling the case.

What changes if the SEC investigation could become criminal?

If you have been contacted by the SEC, you must also be concerned about any potential criminal liability. All forms required to be submitted during an SEC investigation include a reference to SEC Form 1662. In SEC Form 1662, the SEC warns: “Any information submitted to the SEC may be shared with other federal agencies and self-regulatory organizations (SROs). Information received by the SEC in relation to any investigation may be shared with other federal agencies and SROs for enforcement purposes.”

If the SEC’s investigation involves evidence of a suspected criminal offense, it can refer the matter to the Department of Justice (DOJ). In this case, it is possible that you will be subject to a parallel SEC and DOJ investigation. If you are facing a parallel investigation, it is crucial that you work with counsel who is familiar with both the SEC and the DOJ.

If you are subpoenaed to testify in an SEC investigation that has been referred to the DOJ, this can present issues with your Fifth Amendment privilege as well. Specifically, under 18 U.S.C. § 6004, the SEC must obtain the Attorney General’s approval to compel immunized testimony from a witness. If the SEC compels testimony from a witness under 18 U.S.C. § 6002, this grants the witness “use and derivative use immunity.” However, the statute also makes clear that this is not “transactional immunity,” so if you provide testimony under a grant of immunity under 18 U.S.C. § 6002, it may still be possible to be criminally charged.

If you are facing civil enforcement proceedings with the SEC, these proceedings will generally not be stayed, even if you are also facing parallel criminal proceedings. This is true regardless of the type of enforcement proceedings the SEC is pursuing. When considering a stay request in a parallel criminal proceeding, courts are typically required to weigh the potential prejudice to the defendant, the SEC’s burdens, and the public interest in pursuing enforcement. In practice, the SEC is very successful in resisting efforts to have it stay an enforcement action.

What about making voluntary statements?

The Fifth Amendment only protects against compelled self-incrimination. That is, if you make statements voluntarily, these statements do not have to be protected by the Fifth Amendment. Voluntary statements made to the SEC may later be used as evidence in criminal proceedings. Voluntary statements made to the DOJ may later be used in civil proceedings. If you have been subpoenaed by the SEC or DOJ, it is critical that you discuss your options with experienced counsel before making any voluntary statements.

When will I learn if I am facing criminal charges?

As discussed above, if the SEC refers a matter to the DOJ, it is possible that you could be subject to criminal charges. If you are subject to criminal charges, you will learn about these charges once the government files a complaint in federal district court or otherwise reveals its criminal-prosecutorial intent.

Can my company punish or override my Fifth Amendment decision?

When facing internal investigations, one of the primary challenges is that company investigation counsel represents the company and not the company’s employees, directors, or officers. This means that company investigation counsel generally is not responsible for protecting individual employees’ interests, and conflicting interests may require individual employees, officers, or directors (and their respective companies) to retain separate counsel.

What about company counsel’s attorney-client privilege?

While the Fifth Amendment is a relevant consideration in both company and individual investigations, company counsel’s attorney-client privilege is separate from an individual employee’s Fifth Amendment rights. If an individual decides to invoke the Fifth Amendment, this should have little bearing on how an individual’s company determines whether to assert its attorney-client privilege. The attorney-client privilege belongs to the company, and authorized corporate management has the ability to determine whether the company should waive the privilege. In most cases, the decision to waive the privilege can be made regardless of whether an employee objects.

Can a company discipline an employee who invokes the Fifth Amendment?

Generally speaking, the Fifth Amendment does not apply to private companies. If a company’s employee invokes the Fifth Amendment during an SEC or DOJ investigation, and if this individual’s company believes that this prevents a successful internal investigation or a successful defense to a civil or criminal matter, it may discipline or discharge that employee. This is true regardless of whether the employee’s choice to invoke the Fifth Amendment was warranted by the circumstances involved.

What is the difference between indemnification and advancement?

The SEC frequently takes enforcement action against individual employees, officers, and directors of corporations, and it may do so in tandem with enforcement action against the individuals’ companies. As a result, individuals may face significant costs associated with civil enforcement proceedings.

Under Delaware General Corporation Law Section 145, companies have the ability to both advance and indemnify the expenses that company personnel incur as a result of legal actions. These are two separate (and related) concepts:

• Advancement: Indemnification applies to the actual costs associated with a legal proceeding, while advancement provides for these costs to be paid prior to a final judgment.
• Indemnification: Indemnification applies regardless of whether a final judgment is rendered.

While companies may indemnify and advance employee costs as a result of SEC investigations, the extent to which they are required to indemnify and advance these costs depends on the company’s bylaws and charter. This means that, in many cases, company counsel should be very cautious about discussing the costs of defending against an SEC investigation with the company’s executives and board members.

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.