Your Rights When Facing an SEC Investigation.

This one is for founders and CEOs who have just received an SEC subpoena for testimony and/or documents, whether addressed to you individually or to your company. How SEC investigations typically work should inform how you defend yours. A little procedural mistake at this stage can hurt you down the line, sometimes even resulting in civil or even criminal exposure. You’ve got rights. You have time to respond to the subpoena. You can take the Fifth. But you need to use those rights wisely and early.

First, you will need a lawyer. Not your regular business lawyer or the one you used on the last deal. As much as you love and trust them, that lawyer does not know the first thing about how to respond to the subpoena, and the last thing you need is their ignorance jeopardizing your interests. Corporate lawyers are fine people, but they are not trained to handle the SEC or the DOJ. The SEC cannot itself initiate criminal action, but it can refer cases to the DOJ for prosecution. It’s also not unheard of that the DOJ will already be running its own parallel investigation. You need a white collar lawyer who has experience with both the SEC and DOJ. A misstep before the SEC can end up in a criminal case. This is absolutely not a time to go it alone. So a lawyer that handles only SEC cases but not any criminal cases is not going to get you what you need, either. Get the right lawyer from the beginning.

Second, once served, ask the SEC for a copy of the formal Order of Investigation under which the subpoena and testimony was authorized. Not very detailed, but it will show the persons or entities and generally the conduct which is the subject of the inquiry. Read that Order in conjunction with the knowledge that you have of your business, and you will get an idea of where the investigation is headed. That will give you and your lawyer a head start on what is coming. Who is under investigation - the company, senior management, or both?

You can also ask for more time. SEC subpoenas are not self-enforcing; if they want you to comply, the SEC has to get an order enforcing the subpoena from a federal district court. There is no judge who is going to enforce an unreasonable request. They’re not going to be able to look a judge in the face and say “we need everything you have ever written down in 14 days.” You will usually be allowed a “rolling” production - ie one that goes on for some period of time - which also demonstrates cooperation. For example, if the subpoena calls for records going back years and they only give you 14 days to respond, you can say, fine, we’ll start now and we’ll turn over everything we have every week until we get through it. The staff usually doesn’t want to take you to court anyway. Still, you want to comply as promptly as you can.

The subpoena will almost always include the technical format for how documents should be produced. For a small company, this can be very expensive. Be aware the SEC has doubtful power to enforce its own technical specifications. You can negotiate. Ask the staff if another approach to a production would be acceptable. Moreover, as far as matching documents to each numbered request goes, you can probably do it, but you probably don’t want to. That’s their job. Doing it for them might increase your exposure.

Do I have to sign a tolling agreement with the SEC, pausing the statute of limitations clock to let the agency proceed at a later date? “Tolling” refers to the statute of limitations period for whatever civil fraud statute the SEC relies upon. Their tolling agreement means that they get to extend their deadline, and the clock is stopped. If the SEC threatens to sue you right away if you don’t sign the agreement, you might want to. But on the other hand, depending on your goals, you might not. If you’re trying to avoid a public lawsuit, you probably do want to. If you’re trying to avoid a suit altogether, less so. There are pros and cons to both sides here.

After the first subpoena, the SEC will ask your lawyer to accept all future subpoenas by email. They do that for convenience’s sake, and so as to spare you the embarrassment of having a process server at your office. Usually, you don’t mind. But a foreign national living overseas should beware accepting service in this manner, as it may operate as a waiver of jurisdictional defenses. And if you have any problems about jurisdiction, the decision to accept service by email might be one you regret later.

The Fifth Amendment Privilege Against Self-incrimination

Be prepared to invoke the Fifth Amendment. The SEC staff will almost certainly call you in for testimony. The first subpoena will likely be for documents and testimony. Even though the proceeding is civil, the Fifth Amendment privilege against self-incrimination applies if your answer could provide a link in a chain of evidence tending to incriminate you. It protects the guilty, as the Supreme Court says, and it protects the innocent as well. Invoke the privilege unless counsel is sure there is no criminal exposure. Don’t risk it, it’s not worth it. It is not to your advantage to roll the dice with the DOJ.

You can invoke the privilege for documents too, on the theory that the act of turning them over could incriminate you. This is called the act of production doctrine, and it is only applicable to subpoenas directed at you, not at your company. The contents of the records themselves may contain nothing incriminating, but the act of production - simply by handing over the records - may itself provide a critical piece of evidence if the Government is investigating a criminal case. So think about it and talk about it with counsel.

Of course, it’s not as easy as this, but taking the Fifth cannot be used against you in a criminal prosecution, but can be in a civil case, or an administrative proceeding. For example, if you take the Fifth at deposition or at trial in the SEC’s civil case, the finder of fact may draw a negative inference, i.e. conclude your answer would have been against your interests. And that can be fatal to your civil case. Also remember that the criminal and civil case are pulling you in different directions here. Silence will protect you from the DOJ but it can hurt you at the SEC. So check with your lawyer carefully before deciding whether to plead the Fifth.

Before You Testify

Prepare to testify. Smart executives often stumble when confronted with difficult questions. If you never took a deposition before you can end up surprised at the hammering you receive. Don’t underestimate the SEC’s lawyer’s skills. The SEC staff is not the idle do-nothings of legend. They are top-drawer attorneys from the best firms who happen to have a case where they have been deep-diving into every document and deposition for months, and who, for this purpose, are looking for the holes in your case. Do not assume that because you are smart and confident and have a good smile, the SEC’s lawyer will not cut you to ribbons. In fact, by the time you sit down to testify, the SEC’s staff lawyer will have read every email and document and know the timeline of the case a lot better than you. Not a time to wing it. Prepare, thoroughly.

First, the prep is itself a teaching experience: how to listen; how to only answer the question; where your memory is uncertain, how to hedge; e.g. “I don’t remember” or “I couldn’t speak to that during that time” rather than a flat denial; e.g. “I never said that” (since you might not recall what you said at that time, e.g. it was a blackout period). Second, the SEC usually goes through the whole substantive part of your testimony before showing you any documents. It’s an SEC trick, meant to freeze you in time. Let’s say the SEC staff asks you whether you ever talked about the stock during a blackout period. You have trouble remembering, so you answer “I never did.” When they bring you the email showing you did, you’re going to have a problem, because you already said you didn’t do that. Finally, without preparation you risk giving false testimony or making incriminating admissions. A good lawyer will walk you through all the relevant documents in the case before you testify.

After the testimony, do I order the transcript? Usually, yes. Check it for accuracy, correct mistakes. And you’d be surprised how many things are garbled. It is also best practice to review the transcript to remind yourself of the questions asked, to see what the SEC thought had happened. If you share it, do it with permission, under a joint defense agreement with the lawyers for other people involved. Of course, if you have invoked the Fifth, the transcript may read something like “I plead the Fifth” on page after page. But you do have to plead the Fifth on a question by question basis; the SEC’s lawyer is skilled and will ask questions to get the negative inference; so even if you’re taking the Fifth, a transcript of the invocation to subsequent questions will at least show you where the inquiry was headed. You’ll be able to see what facts matter to the staff, and what questions the testimony was going to include.

You Have to Comply

A subpoena is an official document, and an unprofessional response (or no response) is a recipe for disaster. Under the law, you have to comply. Unless a privilege applies. Figure out what the scope of the subpoena is, and then start responding to it. As long as you are making a good faith effort to comply, you can usually fight over the scope. But delay or ignore it at your peril. You could face sanctions, or a referral to the Justice Department for obstruction of justice.

When you produce documents, number each page in the corner - “Bates-stamp” it - so you can reference documents specifically. That way you and your lawyer will know where to find it later, should it come up as an issue. This way no one can second-guess what you have given, or not given.

So much more to say here, but I hope you get the point that an SEC subpoena is not to be taken lightly by a CEO or other senior executive. Remember, this isn’t a game, stakes are your company, your money and maybe your freedom. Every choice above has trade-offs; it is important that you make them with someone who has done this many times. There is no substitute for planning with an experienced white collar SEC lawyer.