How to Protect My Reputation During an SEC Investigation.

SEC investigations are generally confidential. While the SEC can and does issue subpoenas and seek court orders, it typically does not make enforcement charges public or disclose the details of an ongoing investigation until the inquiry concludes. Your defense counsel will maintain this confidence and may engage in voluntary or compelled disclosures with the SEC that are not available to the general public.

Counsel will also communicate with the SEC on your behalf. By limiting your interaction with federal investigators, counsel can reduce the risks associated with improvised responses, mischaracterizations, and other pitfalls that can heighten your personal liability exposure.

Do I Need to Preserve Evidence?

Once an SEC investigation is underway, or once litigation becomes reasonably anticipated, you have a duty to preserve potentially relevant evidence. This includes email, calendar entries, documents, electronic communications, and other records that could be at issue. Destroying documents or electronic records can lead to significant adverse consequences.

What Are the SEC’s Primary Investigative Priorities?

The SEC’s primary investigative focus is on fraud, insider trading, market manipulation, unregistered offerings, and other forms of unlawful trading and securities violations. The SEC’s SEC division of enforcement and its SEC office of the whistleblower work closely together to identify potential targets for investigation.

What Triggers an SEC Investigation?

SEC investigations can be triggered by investor complaints, whistleblower tips, referrals from other government agencies, and media reports.

Can an SEC Investigation Expand?

SEC investigations can, and frequently do, expand beyond the conduct that originally triggered the inquiry. Individuals and entities that are not within an investigation’s original scope can later be charged as a result of the SEC’s investigation.

Does an SEC Investigation Mean I Face Criminal Charges?

No. The SEC is a civil law enforcement agency and cannot bring criminal charges. However, federal prosecutors can bring criminal charges based on evidence uncovered during an SEC investigation.

Does the “80/20 Rule” Apply When Choosing a Lawyer for an SEC Investigation?

There is no SEC rule or professional standard establishing an “80/20 rule for lawyers.” In fact, the SEC doesn’t rank litigation firms by aggressiveness, success, or any other metric. Even so, some legal firms will attempt to convince potential clients that they have a special connection to the SEC that will enable them to make the SEC’s investigation go away.

Regardless of where they stand on the 80/20 spectrum, you should be aware of the following when choosing your defense counsel:

• The “most experienced” defense counsel will not necessarily be the best choice. Instead, your attorney should have experience and a success record that is specific to the issues at hand.
• Don’t choose a “conservative” defense firm that lets the SEC “take a bite out of you” or a “aggressive” defense firm that burns bridges with the SEC, either.
• Be prepared to fully disclose the facts to your defense counsel.

Should I Disclose All of the Facts to My SEC Investigation Defense Lawyer?

Yes, if you want effective and informed legal representation, you must not conceal material facts from your defense counsel. This includes both bad and good facts. If you don’t understand a fact, you may want to seek clarification, but you should not make any assumptions or give your attorney incorrect information.

Can I Assert Attorney-Client Privilege to Protect My Confidential Communications from Disclosure in an SEC Investigation?

Generally, yes. You can assert attorney-client privilege to protect your communications from the SEC, and the SEC cannot disclose your communications without violating your attorney’s ethical obligations.

While attorney-client privilege is subject to several exceptions (including the crime-fraud exception), it applies in the vast majority of cases.

Can the SEC Force My Defense Counsel to Disclose the Facts of My Situation if I Assert Attorney-Client Privilege?

No. The SEC cannot force your defense counsel to disclose the facts of your situation. While your attorney-client privilege protects your communications, it does not protect the facts of your situation from being disclosed. If the SEC or a federal prosecutor has already uncovered the facts, then your privilege will not prevent them from using the facts against you.

When Should I Disclose Confidential Communications to the SEC in an SEC Investigation?

You should disclose your confidential communications to the SEC only if your defense counsel determines that disclosure will be in your best interests. Your defense attorney is bound to protect your confidential communications under a court-enforceable duty unless you explicitly waive your privilege or your attorney’s privilege is defeated in the courtroom.

Can My Employer’s Lawyers Protect My Confidential Communications and Facts?

Typically, no. If you are an employee of a company or organization, your employer’s lawyers ordinarily represent your employer, not you. You should not speak with your employer’s lawyers in confidence if you do not want to risk disclosing both the communications and the facts involved.

Can I Retain My Employer’s Lawyers for Joint Representation in an SEC Investigation?

You can retain your employer’s lawyers for joint representation, but this carries risks. If the interests of the organization diverge from the interests of an individual, then a conflict of interest will arise. If a conflict arises, your employer’s lawyers may be required to withdraw from the representation, which may require you to engage separate counsel.

Which Records Are at Issue in an SEC Investigation?

Broadly, any record that has any relevance to the investigation could be the subject of an investigation. This includes public statements, emails, social-media posts, and private messages. Even if you were previously able to keep these records confidential, the SEC may use subpoenas and court orders to seek them, and it may pursue civil and criminal penalties if they are relevant.

Are There Criminal Penalties for Destroying Records in an SEC Investigation?

Under 18 U.S.C. § 1519, destroying records is a crime if it is done knowingly, with intent to impede, obstruct, or influence an investigation or other matter within the jurisdiction of a federal department or agency, including an SEC investigation, or in relation to or contemplation of such a matter. This statute specifically addresses a broad range of records including electronically stored information.

Are Records Preserved for Regulatory Purposes subject to Disclosure?

Yes, if they are at issue in an SEC investigation. If you are a broker-dealer or an investment adviser (or employed by a broker-dealer or investment adviser), you have records preservation duties under Exchange Act Rule 17a-4 and Advisers Act Rule 204-2, respectively. If these records are at issue in an SEC investigation, then you cannot use these rules to prevent the SEC from obtaining the records.

What Are the Consequences of Spoliation in an SEC Investigation?

In civil cases, “spoliation” is the failure to preserve electronically stored information that should have been preserved. With respect to electronically stored information, Federal Rule 37(e) establishes the consequences of spoliation in federal civil litigation. These may include an adverse inference or other sanctions if the rule’s requirements are met. The SEC can seek civil charges based on electronically stored information spoliation in addition to enforcement charges.

Can the SEC Seek to Obtain Evidence from Third Parties?

Yes, and the SEC can issue subpoenas to banks, brokerages, and other third parties. If you have an SEC subpoena, then you will need to work with the SEC to determine whether you can access the records and evidence the SEC seeks from third parties.

The SEC Enforcement Division has the power to obtain account records and other information directly from brokerage firms and advisory firms. When the SEC issues subpoenas to brokerage firms and advisory firms, they are obligated to provide the information and records that are in their possession.

How Much Time Do I Have to Respond to an SEC Subpoena?

The SEC Enforcement staff typically will provide a window of approximately two weeks from when a party is served with an SEC subpoena until the party must respond. This includes the time it takes to compile and produce the records and documents as well as the time to file an SEC subpoena response.

How should I communicate publicly during a confidential SEC investigation?

What Is a Crisis Communications Protocol?

A crisis communications protocol is a detailed plan that establishes:

• Which individuals or representatives are authorized to communicate with the public.
• Who has approval authority for all public statements.
• Who will determine what information should be shared with the public.
• The audience(s) for public statements.
• The messaging to be used to engage with the public.
• How the company or organization will monitor its social-media presence.

What Is Regulation FD?

Regulation FD is a rule adopted by the SEC in 2000. It restricts selective disclosure of material nonpublic information by companies and organizations that are publicly traded in the United States. Regulation FD generally requires public disclosure when material nonpublic information is selectively disclosed to certain enumerated persons, subject to specified exclusions.

If you or your organization must comply with Regulation FD, then you need to work with your public relations consultant and defense counsel to implement an adequate crisis communications protocol to ensure full compliance with Regulation FD and other securities laws.

Will Regulation FD Apply During a Confidential SEC Investigation?

Yes. An investigation’s confidentiality does not suspend a public company’s separate securities-law disclosure obligations.

What Information Does a Public Company Need to Disclose During an SEC Investigation?

This is an important question for which you will need your public relations consultant and defense counsel to make informed determinations based on the facts and circumstances. Along with Regulation FD, Exchange Act Rule 12b-20 may require a public company to disclose information that is necessary to prevent any of its filed statements from being misleading.

How Can a Public Company Correct Factual Errors?

If a public company determines that it has inadvertently made public factual errors, then it may want to promptly correct them before they gain traction in the media or are publicized by the SEC. It is possible to correct factual errors without disclosing a company’s defense counsel’s legal advice or other privileged communications.

Is a Public Company Required to Disclose Its Defense Counsel’s Legal Advice?

Generally, no. However, when a public company or organization decides to disclose legal advice or other information from its defense counsel, it must be prepared for the consequences of doing so. This include the possibility of waiving the company’s attorney-client privilege.

Is a Company’s Communications Protected Under the Attorney-Client Privilege?

Communications from a company’s defense counsel may be protected under attorney-client privilege, while communications from the company’s public relations advisers may not be. To avoid the risks of disclosing privileged information unnecessarily, you should have your public relations consultant work closely with your defense counsel, and vice versa, to ensure effective coordination.

Will My Public Company’s Outside Auditor be Protected?

Similar to communication with outside consultants and auditors, sharing information with your public company’s outside auditor can waive the company’s attorney-client privilege. As with other communications, you should consult with your defense counsel to determine whether, and how, to share relevant information with your public company’s outside auditor without adversely affecting the company’s attorney-client privilege.

If any of this describes your situation, it is worth talking it through with counsel. Spodek Law Group can be reached at 212-300-5196.

How Long Can an SEC Investigation Affect My Reputation?

Whether an SEC investigation will affect your reputation, and for how long, depends on how the SEC progresses in its investigative process. While most SEC investigations begin as informal inquiries, there is a risk that informal inquiries will escalate into formal investigations. The following is a summary of the basic steps involved in the SEC’s investigative process:

Step 1: Opening an Informal Inquiry

When the SEC opens an informal inquiry, it will engage its staff to review information and documents that may potentially become the subject of an SEC investigation.

It is important to make informed and educated decisions during this phase to help prevent a formal investigation.

Step 2: Establishing a Formal SEC Investigation

To establish a formal SEC investigation, the staff must request that the Commission issue a formal order of investigation, which designates staff members as officers empowered to issue subpoenas. When the SEC grants a formal investigation order, it grants the staff subpoena authority. Subpoenas are then used to compel testimony and the production of documents and other evidence.

Step 3: Conducting an SEC Investigation

When conducting SEC investigations, the SEC’s staff will focus on collecting and reviewing information and documents. They will also subpoena testimony from witnesses and other parties. The length of an SEC investigation can vary significantly from case to case. However, these are some of the factors that are likely to be at play.

For example, in 2020, the SEC reported that 65% of its investigations lasted between 6 and 24 months. But a wide variety of factors can affect the length of an investigation:

• Scope of the investigation (and any possible expansions)
• The amount of documentation and evidence involved
• The number and level of witnesses
• Parallel proceedings (federal prosecutors or state prosecutors)
• Negotiations with the SEC’s Enforcement Division, if applicable

Step 4: Reaching an Outcome

SEC investigations conclude without charges, but they can also result in an SEC enforcement action recommendation. If the SEC issues a public enforcement action, it will typically announce it in the news media. An enforcement action could also involve a Wells Notice, which advises a party that the SEC’s Enforcement Division staff intends to recommend enforcement action based on the evidence the staff collected.

How Do I Prepare to Respond to an SEC Inquiry or Investigation?

In the event of a potential SEC investigation, you should be prepared to respond to the SEC’s staff quickly and effectively. This is particularly important for public companies and public employees who can face additional risks, such as Regulation FD, in addition to risks associated with facing a confidential SEC inquiry.

Can the SEC Conduct Investigations for Multiple Law Violations Simultaneously?

Yes, and that is what the SEC is doing in most SEC investigations. Many investigations include parallel civil and criminal investigations by the Justice Department, and the Department of Homeland Security (DHS) frequently becomes involved when evidence of a criminal offense suggests the presence of a known or unknown criminal organization.

Furthermore, any statements made to the SEC’s staff can be used to support charges brought by any federal law enforcement agency.

How is Defense Counsel Paid for in an SEC Investigation?

Does D&O Insurance Cover Legal Representation?

If you have D&O insurance, the specific coverage that you have available will depend on the terms of your policy. This can include requirements regarding timely notice, the type of professional or personnel that is eligible for coverage, whether consent to engage defense counsel is required, and other requirements as well.

What is the Difference Between Advancement and Indemnification?

The key difference between advancement and indemnification is the timing of the payment. With advancement, the individual’s defense costs are paid out-of-pocket as the investigation or litigation progresses. With indemnification, the individual’s qualifying liabilities are reimbursed after the investigation or litigation’s final resolution.

Does an Organization Pay for Separate Counsel for Individuals?

This is a complex issue, and in many cases, it will depend on the language of the organization’s Bylaws, employment agreements, contracts with third parties, pertinent state law, and other factors such as D&O insurance coverage.

How Does an SEC Investigation Affect the Reputation of an Individual or Organization?

In many cases, the risk of an SEC investigation is not just a risk of civil and criminal penalties, but a risk of reputational damage as well. Investigations can affect (i) customers, (ii) competitors, (iii) licensing, (iv) debarment, and, (v) insurance coverage.

When conducting investigations, the SEC will typically conduct its inquiry in confidence. However, that is not always the case. If you or your organization is under investigation, you will need to plan ahead for the possibility that information regarding your investigation may get out.

What Communications Are Necessary During an SEC Investigation?

During an SEC investigation, companies and organizations will often need to communicate with:

• Insurers
• Outside auditors
• Corporate decision-makers
• Shareholders, customers, and other third parties

If you are an individual, you will need to decide whether you are prepared to engage separate counsel.

• Does your employer’s or organization’s counsel represent you?
• Who controls the attorney-client privilege?
• What additional risks are involved in working with the organization’s counsel?

Does An Organization’s Company Counsel Represent the Organization’s Directors and Officers?

In most cases, an organization’s representation of its company does not automatically extend to the organization’s directors or officers as well. If you are an individual executive or owner, then you should speak with an independent defense lawyer about engaging separate counsel for yourself.

Who Controls Attorney-Client Privilege with an Organization’s Company Counsel?

If you speak with an organization’s company counsel, then you may have a risk that the organization will be able to waive your attorney-client privilege. In most cases, the organization ordinarily controls the privilege, and that means the organization could potentially make disclosures about your situation without your consent.

Should Individuals Decide to Cooperate with an SEC Investigation?

If you are considering cooperation with the SEC, you will need to speak with your defense counsel in order to determine whether cooperation is in your best interest. If you decide to cooperate, then you will need to decide what information to share with the SEC. If the SEC investigation is parallel with parallel criminal enforcement proceedings, you will need to determine whether to assert the Fifth Amendment privilege and what statements, if any, to make to federal law enforcement authorities, civil prosecutors, or other third parties.

How Can I Rebuild My Reputation After the SEC Matter Ends?

What Is an SEC Closing Letter?

An SEC closing letter is a letter from the SEC confirming that its staff has ended its investigation of you or your organization without recommending enforcement action to the SEC commission. While an SEC closing letter is not a formal finding of exoneration, it can confirm the lack of enforcement action based on the information available at the time.

When Should I Make Post-Resolution Remediation Claims?

If you or your organization’s reputation suffered negative consequences because of an SEC investigation, then it may be necessary to make remediation claims to identify the positive actions that you have taken to address the situation. This could include:

• Updating or revising compliance manuals
• Updating or revising governance protocols
• Personnel changes
• Strengthening internal controls
• Implementing improved technology or systems

With this in mind, you should work with your defense counsel and public relations consultant to determine if and when a post-resolution remediation claim is in your best interest.

What Are SEC Remedies?

SEC remedies include civil penalties, disgorgement, interest, bars, and bars for acting as a director or officer of a publicly traded company.

What Are the SEC’s Industry Bars?

If the SEC imposes a bar against an individual, that individual cannot work in the securities industry and cannot be affiliated with any broker-dealer or investment adviser.

What Are the SEC’s Officer-and-Director Bars?

The SEC can bar individuals from acting as an officer or director of any publicly traded company.

When Are Monetary SEC Remedies Imposed?

Monetary SEC remedies can be imposed by federal courts, by SEC administrative judges, and through settlements between the individual or company and the SEC. These penalties can include:

• Civil penalties for insider trading that can reach up to three times the illicit profits obtained or losses avoided
• Disgorgement of illicit profits and prejudgment interest
• Prejudgment interest on insider trading violations and other securities violations

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.