Responding to an SEC Subpoena in a Crypto Investigation.

An SEC crypto subpoena will compel documents, electronic data, sworn testimony, or all three. Receiving a subpoena for an SEC crypto investigation does not establish that you violated federal securities laws in any respect. With that said, you should engage experienced SEC defense counsel promptly to help you respond to the subpoena appropriately and protect you as needed.

Do I Need to Preserve Documents and Data?

You may have legal duties to preserve documents and data as soon as litigation or an SEC crypto investigation is reasonably anticipated. You should promptly institute a legal hold to preserve all potentially responsive communications and other records, suspending routine deletion or other deletion as required by your organization’s records management policy.

When Can the SEC Issue a Crypto Subpoena?

SEC staff generally require a formal order of investigation before they can issue a subpoena in an SEC crypto investigation. The subpoena can issue against any person or entity that may have information relevant to the government’s investigation. You may be a witness rather than an investigative target in the SEC’s crypto investigation.

What Can the SEC Subpoena?

The SEC can subpoena anyone who has information, including banks, brokerages, investment advisers, third parties, and any other person who has possession or control of potentially responsive documents, electronic records, or other information.

The SEC can also subpoena:

• Cryptocurrency exchanges (centralized and decentralized);
• Market makers;
• Trading firms;
• Coin/token issuers;
• Crypto projects;
• Smart contract developers;
• Hedge funds;
• Private equity funds;
• Law firms;
• Accounting firms, and
• Other types of entities.

Is the SEC Crypto Investigation Public?

SEC investigations generally remain non-public unless the government files charges in court or with the SEC. Third-party subpoenas can often become public upon receipt, and firms may need to disclose information about subpoenas received in SEC crypto investigations.

Which Crypto Records and Communications Must I Preserve?

Many SEC crypto investigations involve communications conducted on Telegram, Signal, Discord, Slack, or through text messages and other mobile applications. If so, these records and communications should be preserved alongside all other potentially responsive documents and electronic data. Routine deletion of records, communications, and other potentially responsive information after the duty to preserve arises can create separate legal exposure. Depending on the circumstances, effective preservation may require disabling “disappearing-message” settings on relevant custodians’ accounts and messaging applications.

What Should I Do with a DAO’s Crypto Records and Communications?

If the SEC is conducting an investigation involving a decentralized autonomous organization (DAO), it may be possible to establish that the DAO is a legal entity. In that case, any crypto records and communications created or maintained by the DAO would be subject to preservation, and the DAO may be subject to the SEC’s subpoena. If the DAO is not a legal entity, the members of the DAO may have preservation obligations as a result of their involvement. In any case, when dealing with records and communications involving a DAO, individuals and organizations need to be careful to address the following issues:

• Who has the ability to execute a legal hold?
• Who (if anyone) has the ability to preserve communications sent or received within the DAO?
• To what extent can evidence of DAO activities, such as governance proposals and forum discussions, voting snapshots, wallet votes, and execution transactions, be preserved?
• Does the DAO’s structure allow for the segregation of DAO-related records and communications, or is the DAO members’ records and communications subject to preservation?

What Should I Do with the Crypto Records and Communications of a Smart Contract and Multisignature Wallet?

Many SEC crypto investigations also involve smart contracts and multisignature wallets. The SEC can subpoena the developers of smart contracts for a variety of different types of records. In most cases, however, the most relevant evidence will be found on the blockchain. The records that need to be preserved should generally include:

• Source code, bytecode, deployment transactions, and documentation and other evidence pertaining to the smart contract’s construction, testing, and deployment;
• Evidence of the smart contract’s upgrades and other forms of administrative activity;
• Metadata and other information showing how the smart contract was developed, deployed, and maintained; and
• Evidence pertaining to multisignature transactions such as proposed transactions, signer approvals, execution records, governing threshold settings, the identities of the wallet’s owners, and evidence pertaining to the wallet’s security practices.

Can I Preserve Records and Communications without Suspending My Company’s Use of a Data Retention Policy?

Generally, yes, but it is important to engage experienced SEC defense counsel immediately. A well-scoped legal hold may be sufficient to avoid routine deletion of potentially responsive records and communications without necessitating an overly intrusive approach. In addition, relying on native electronic files and communications rather than screenshots or printouts will preserve important metadata and other potentially responsive information.

Must I Give the SEC Private Keys or Seed Phrases?

Private keys and seed phrases may confer control over cryptocurrency assets and, so they may provide evidence of both (i) financial transactions and (ii) access to cryptocurrency accounts. While producing wallet addresses, which can provide evidence of financial transactions, differs from surrendering private keys or seed phrases, both can be very important in the SEC’s crypto investigations. In cryptocurrency investigations involving custodial exchanges, the exchanges themselves will have account, transaction, and access records. They will likely have access records for cryptocurrency exchange accounts that include Know Your Customer (KYC) information. In cryptocurrency investigations involving self-hosted wallets, the SEC may be able to gather information from devices, applications, backups, and hardware wallets, while the cryptocurrency assets themselves may be stored on a central server.

Private keys and seed phrases present unique risks in SEC crypto investigations. They must be handled in a very limited environment, and access should be restricted to those who have no ability to authorize transfers out of a wallet or cryptocurrency account.

Which Countries’ Cryptocurrency Transactions are Protected by Data Protection Laws?

With more and more cryptocurrency transactions taking place around the world, the SEC will increasingly need to collect cryptocurrency records from individuals and entities in countries outside the United States. This presents a significant issue because some foreign data protection laws may protect information that the SEC seeks to collect or obtain evidence of. However, such information may be subject to disclosure under the SEC’s subpoena regardless of the applicable foreign law. Importantly, a data protection law does not necessarily nullify a United States subpoena, and it cannot prevent the SEC from pursuing an SEC cryptocurrency fraud investigation.

Do I Have Fifth Amendment Protection Against Compelled Self-Incrimination?

The Fifth Amendment to the United States Constitution protects individuals against compelled self-incrimination. With that said, corporations do not have Fifth Amendment protections. Under Braswell v. United States, a corporate custodian cannot assert the Fifth Amendment to withhold documents or electronic records from a corporation’s ownership. This remains true even if the corporate custodian himself or herself would be incriminating if he or she testified to the content of corporate records. Even in cryptocurrency investigations, the government can overcome a self-incrimination privilege in a variety of circumstances.

How Should I Collect and Authenticate Blockchain Transaction Evidence?

A public blockchain maintains a cryptographically secure record of all transactions conducted on the blockchain. While blockchain transactions can be proven to have happened and when they happened, they do not, per se, identify the parties and wallet addresses involved. However, for cryptocurrency transactions conducted on centralized exchanges, the exchanges’ KYC records can help identify the account holder who controls each exchange-hosted address. When collecting blockchain transaction evidence, identifying wallet addresses will, in many cases, require a combination of collection methods.

Blockchain transactions can also involve self-hosted addresses, which may belong to individuals and entities. When collecting and preserving blockchain records, it is important to include transaction hashes, block numbers, timestamps, source URLs, and other identifiers that can help demonstrate how they were collected from the blockchain.

SEC crypto investigations will eventually need to resolve whether a cryptocurrency exchange, market maker, decentralized autonomous organization (DAO), project, or smart contract developer is subject to securities law. If so, these entities (or their members) will need to offer testimony or provide records in federal court. Under Federal Rule of Evidence 901, the SEC will need to authenticate all records and communications. When collecting wallet and exchange records, entities should:

• Collect blockchain-related records and communications in their native format; and,
• Retain native fields, timestamps, transaction identifiers, and account identifiers.

While cryptographic message signing allows an address controller to prove control of a private key, this provides no evidence of the beneficial ownership of the address. In the SEC’s crypto fraud investigations and other federal crypto cryptocurrency fraud investigations, blockchain forensics software and other tools are frequently used to attempt to attribute crypto addresses to the SEC’s investigative targets. Both parties need to be prepared to preserve all analytics methodology, query settings, and related software tools to allow later reproduction of analytics and attribution results.

For individuals and entities, it is important to keep this in mind when collecting and preserving blockchain records. In these cases, it is not enough to just identify which blockchain address corresponds to each cryptocurrency transaction or entity. Instead, one needs to preserve all relevant records, communications, and other blockchain-related materials to build a robust evidence record.

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

What If the Subpoena Deadline or Scope is Unreasonable?

SEC staff will frequently consider timely requests to extend the deadline for producing records and communications or providing testimony. If you need to request an extension for your response to an SEC crypto subpoena, you should engage experienced SEC defense counsel promptly and clearly. If you have informal discussions with the SEC, you need to have any agreed extension confirmed in writing.

You may also be able to negotiate the scope of the SEC’s subpoena. This involves arguing for narrowing the subpoenas based on the issues at hand. You will need to negotiate relevant custodians, date ranges, search terms, and any other issues pertinent to the scope of the subpoenaed records and communications. If your entity has a significant amount of records and communications, the SEC staff may accept rolling productions of responsive records and communications and rolling testimony, but only if the schedule for rolling productions and testimony is agreed upon in advance.

What Is the Window for Filing a Motion to Quash an SEC Crypto Subpoena?

Under 17 C.F.R. § 202.5(e), a party may move to quash an administrative subpoena within ten days. However, SEC staff can issue investigative subpoenas that do not fall within the category of administrative subpoenas. The SEC does not appear to have promulgated any other rule with respect to the period for seeking a court order to quash investigative subpoenas, and there is no generally applicable rule that requires the SEC to show up for a hearing within fourteen days of receipt of a motion to quash an investigative subpoena. However, courts sometimes hold an investigative subpoena to be an administrative subpoena for purposes of deciding when a party should seek to quash it.

Does the Statute of Limitations Apply in SEC Investigations?

In SEC crypto investigations, the statute of limitations can be a compelling factor. Under 28 U.S.C. § 2462, the government can only bring SEC crypto fraud charges (such as civil penalty claims) within five years after the date of the underlying claim. However, 15 U.S.C. § 78u(d)(8) allows the SEC to seek disgorgement for scienter-based violations within ten years. While the statute of limitations generally does not apply to civil investigations, it does limit the government’s substantive authority in many contexts, and this does raise issues for enforcement in SEC crypto investigations.

Who Does Company Counsel Represent During the SEC Investigation?

When is Attorney-Client Privilege and Work-Product Protection Available?

Attorney-client privilege covers communications between an attorney and a client made for the purpose of obtaining or providing legal advice. By contrast, communications that do not relate to the purpose of obtaining or providing legal advice do not generally warrant attorney-client privilege. Similarly, the work-product doctrine covers documents, records, communications, and other aformentioned items prepared in anticipation of litigation. The aformentioned privilege and work-product protection may not be available to shield certain records and communications from the SEC. For example, in certain circumstances, SEC subpoenas may specifically request privileged communications. Additionally, sharing a privileged communication with someone outside of the attorney-client relationship may waive attorney-client privilege or work-product protection in some circumstances.

Who Does the Company’s Counsel Represent?

Is the company’s counsel also the custodian’s counsel? Generally, the company’s counsel represents the organization as the client, and not individual custodians. You should speak with the company’s counsel as soon as possible to understand his or her role and, if necessary, retain separate counsel to protect your interests. While the interests of the organization and the interests of the individual(s) involved may align in some cases, individuals and organizations need to be prepared to manage their interests separately when their interests diverge.

What Is a Privilege Log?

When responding to a subpoena, companies and other organizations may be required to provide the SEC with a privilege log. In most cases, companies and other organizations need to engage counsel to determine whether to include a privilege log as part of their response. Privilege logs ordinarily identify the documents and communications that are subject to attorney-client privilege or work-product protection. They also identify participants, dates, the privilege or protection being asserted, and other relevant grounds for withholding the documents, records, or communications.

Can the Company Advance the Individual’s Legal Fees?

If you need to engage separate counsel, the first question to address is whether the company is required or permitted to advance the individual’s legal fees. Advancement of individual legal fees will depend on applicable law, relevant organizational documents, the individual’s employment contract, the company’s insurance coverage, and the terms and conditions of any agreement regarding legal representation.

How Should I Prepare for SEC Testimony about Crypto?

Do I Need to Invent the Fifth Amendment When Giving Testimony in the SEC’s Crypto Investigation?

A witness can invoke the Fifth Amendment to U.S. Constitution during a cryptocurrency enforcement investigation if the answer to a particular question can incriminate him or her in any way. Testimony is generally taken question by question, so the assertion may need to be made multiple times throughout the testimony. If an individual’s testimony would expose him or her to the possibility of criminal prosecution, it will be important to assert the Fifth Amendment privilege appropriately and defend your assertion in the case that the SEC challenges the privilege.

How is Testimony Conducted in the SEC’s Crypto Investigation?

Testimony is generally taken under oath, with a court reporter creating a verbatim record of the testimony. The transcript will be subject to review and correction, and the corrected transcript may be made available to any party who is entitled to it. This includes the witness, but not other witnesses to the SEC’s cryptocurrency fraud investigation.

Can Statements to SEC Staff be Used Against Me in SEC Enforcement Proceedings?

Statements made to the SEC staff, including statements that qualify for attorney-client privilege or work-product protection, will generally remain confidential unless it is not possible to preserve confidentiality. However, statements to the SEC staff can also be made available for use by the SEC in enforcement proceedings, if necessary. While SEC testimony generally does not directly inform SEC enforcement proceedings, any incorrect or incomplete answers can have implications in the future.

Can the SEC Share Information with Criminal and Regulatory Authorities?

The SEC can share information obtained during cryptocurrency investigations with other criminal and regulatory authorities. This is particularly common when the SEC is conducting a cryptocurrency investigation in coordination with other federal authorities. In this case, the SEC may share information collected during its cryptocurrency investigation with the authorities who are conducting an investigation or enforcement proceedings.

Can a Civil SEC Investigation Yield Evidence That Federal Prosecutors Can Use to Pursue a Criminal Prosecution?

While a civil SEC cryptocurrency investigation is separate from an SEC enforcement proceeding, information obtained during a civil investigation can generate evidence that may be admissible in civil and criminal proceedings. This is why it is important to address the following aspects of the SEC cryptocurrency investigation:

• Identification of cryptocurrency addresses and other cryptocurrency records;
• Ability to execute transactions or to demonstrate control of a private key or seed phrase;
• Ability to transfer cryptocurrency assets to a custodial exchange or other wallet;
• Ability to maintain, modify, or execute smart contracts and other cryptocurrency blockchain transactions;
• Participation in governance, token staking, and token issuance;
• Use of centralized exchanges versus utilizing self-hosted wallets;
• Token functions;
• Decentralization of a blockchain transaction, smart contract, or cryptocurrency asset; and
• Ability to demonstrate any relevant compliance or security practices.

Can I Refuse to Answer Questions During the SEC’s Crypto Investigation, or Can the SEC Assume That I Have Something to Hide?

When deciding whether to refuse to answer questions during a cryptocurrency fraud investigation, Baxter v. Palmigiano, 425 U.S. 308 (1976). Baxter v. Palmigiano, 425 U.S. 308 (1976), holds that a factfinder in a civil proceeding may draw an adverse inference from a party’s refusal to testify, even though the Fifth Amendment privilege still applies. While you can make a mistake and not invoke your privilege against self-incrimination in certain circumstances, in other circumstances it will be permissible for the SEC to assume that an assertion of the Fifth Amendment privilege or silence is an admission of fault.

What Happens if I Challenge or Resist the Subpoena?

Can the SEC Pursue Charges in Federal Court or an Administrative Proceeding?

The SEC can pursue charges in federal court or through an SEC administrative proceeding. The U.S. Supreme Court in SEC v. Jarkesy has recently addressed the issue of whether civil-penalty claims should be decided by a jury. For most securities-fraud claims, such claims must be tried before a jury. However, in cryptocurrency investigations, a civil-penalty claim might involve a claim for a different type of securities-related violation. In this case, a jury trial may not be required.

Is an SEC Crypto Subpoena Self-Enforcing?

SEC investigative subpoenas are not self-enforcing. If the SEC’s target or witness fails to comply with the SEC’s investigative subpoena, the SEC must seek judicial enforcement by initiating a court action against the targeted person or entity. This is different from an administrative subpoena, which allows the agency to pursue contempt of court only after a court enforcement order is violated. A party that receives an investigative subpoena does not become subject to contempt once it receives the subpoena, but only once it has had the opportunity to challenge and resist the subpoena and it has disobeyed the SEC’s enforcement order.

Will the Court Enforce the SEC’s Crypto Subpoena?

The general rule is that the SEC only needs to show that the subpoena is within the scope of its authority, it serves a legitimate purpose, and it seeks relevant information. While the SEC generally has broad authority to issue subpoenas during crypto investigations, its authority to issue subpoenas can be challenged under 15 U.S.C. § 78u(c). While district courts are authorized to enforce SEC subpoenas, they may not enforce subpoenas that go beyond the limits of statutory authority, those that violate constitutional or legal privileges, or those that are unduly burdensome. A subpoena recipient that alleges a subpoena is issued in bad faith will generally bear a demanding evidentiary burden to prove that the SEC acted in bad faith.

Can FINRA Pursue Sanctions if I Fail to Comply with a FINRA Subpoena?

FINRA Rule 8210 gives FINRA broad authority to seek information, and FINRA can impose disciplinary sanctions for noncooperation. These sanctions can include bars and suspensions as well as other disciplinary measures.

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.