When Should I Hire an SEC Defense Attorney??

When Should I Get in Touch with the SEC Defense Team?

How Soon Should I Contact the SEC Defense Team?

When is it Necessary to Retain Counsel for an SEC Investigation?

At What Point Should I Hire an SEC Defense Lawyer?

When Should I Start Working With an SEC Defense Team?

At What Point Do I Need to Engage the Firm?

How Soon Should I Seek Counsel During a Securities Law Investigation?

When Is It Necessary to Engage Defense Counsel in Securities Law Enforcement Investigations?

When Do I Need to Get an SEC Defense Attorney Involved?

When is the Right Time to Seek Out Counsel During an SEC Enforcement Investigation?

When is it Necessary to Involve Counsel in an SEC Enforcement Matter?

When Should I Seek Defense Counsel for an SEC Examination?

When Should I Retain Counsel for SEC Enforcement Matters?

When Do I Contact an SEC Defense Team?

At What Stage Do I Retain Counsel in an SEC Enforcement Proceeding?

When Should I Work with an SEC Defense Attorney or Firm?

When Is it Time to Get Counsel Involved in an SEC Case?

When Should I Seek Counsel When Facing a Securities Law Investigation or Other Securities Enforcement Proceedings?

What does each kind of SEC contact mean?

SEC Inquiry

An SEC inquiry, by definition, is the lowest form of scrutiny. SEC staff can conduct an inquiry informally, meaning they can ask for documents and interviews on a voluntary basis. However, an inquiry can also become a formal investigation.

SEC Investigation

The SEC’s Division of Enforcement conducts investigations. An investigation begins after SEC staff asks the Commission to issue a “Formal Order of Investigation.” This order allows the Division to use subpoenas to compel the production of documents and the testimony of witnesses.

SEC Subpoena

An SEC subpoena is a legal demand for the production of documents, electronically stored information (ESI), or witness testimony. SEC staff can issue subpoenas only when acting under a Formal Order of Investigation.

On-the-Record (OTR) Testimony

The SEC calls these proceedings “on-the-record” testimony. Although they do not call it a deposition, it is one. Witnesses testify under oath in front of SEC attorneys, a court reporter, and occasionally a witness examiner.

Wells Notice

A Wells notice is the SEC’s preliminary intent to recommend enforcement action. It informs the recipient of the specific allegations and gives them an opportunity to respond in writing before formal charges are filed. This response is known as a “Wells response.” Following the submission of a Wells response, SEC staff may conduct a “Wells call” to discuss the matter further.

However, receiving a Wells notice does not constitute a filed charge.

SEC Staff vs. the SEC Commission

The SEC staff conducts the preliminary stages of an enforcement case. Once the staff concludes its investigation, it presents its findings and recommendations to the Commission. The Commission consists of five members appointed by the President, and the commissioners can authorize enforcement proceedings based on staff recommendations, or even initiate a case without a staff recommendation.

SEC Enforcement Action

An SEC enforcement action is an administrative or civil action seeking to establish liability and enforce penalties. Enforcement actions can be filed either in federal court or through an administrative proceeding. In both cases, the SEC initiates the action by filing its complaint or charging document.

SEC Examination

SEC examinations are conducted by the Division of Examinations. While an examination may be focused on regulatory compliance, it can also result in an enforcement referral if examiners uncover possible securities law violations.

When do I Need Counsel Separate from My Company?

The Basic Rule

In most cases, counsel retained by a company represents only that company. The ABA Model Rules of Professional Conduct clearly define the attorney-client relationship. Even if you are an employee or owner, you are not automatically represented by the firm that represents your company. However, if your company’s counsel explicitly represents you as an individual as well, this relationship must be formally established.

When Interets Diverge

In some SEC investigations, an individual’s interests may initially be aligned with their company’s interests. However, individual interests and company interests can diverge over time. As a general rule, if your interests diverge, you should engage separate counsel.

ABA Model Rule 1.7 (Concurrent Conflict of Interest)

ABA Model Rule 1.7, titled “Concurrent Conflict of Interest,” imposes restrictions on joint representation. Under Model Rule 1.7, a lawyer cannot represent a client if doing so involves a concurrent conflict of interest. A concurrent conflict of interest exists if the representation of one client will be “directly adverse” to another client, or if there is a significant risk that representation will be “materially limited” by responsibilities to another client or a third party. Model Rule 1.7 permits joint representation only in certain situations, and informed written consent from both parties is required. Joint representation is prohibited if the conflict is deemed “nonconsentable,” meaning it would be impossible for the lawyer to provide competent and diligent representation to both clients.

Privileged Communications in Joint Representation

Under ABA Model Rule 1.7, a privilege claim between joint clients is generally impermissible. This means that, in the event of a future dispute between joint clients, the clients cannot claim privilege against one another. This limitation is one of the primary reasons why individuals facing SEC enforcement action should seek separate counsel.

ABA Model Rule 1.8(f) (Conflicts of Interest)

ABA Model Rule 1.8(f) specifically addresses situations in which a lawyer may represent two or more clients in the same matter, provided that they comply with various conditions. These include obtaining informed written consent and ensuring that their independence is not compromised. Model Rule 1.8(f) is intended to preserve informed consent, preserve client confidentiality, and ensure that the lawyer remains independent.

Self-Incrimination and Cooperation

If an employee is facing potential self-incrimination and their company is cooperating with the SEC, then the employee’s interests will diverge from the company’s interests. In this situation, the employee needs a separate attorney to protect their rights.

Professional Responsibility and Joint Representation

Joint representation triggers a myriad of professional responsibility requirements. Lawyers who jointly represent companies and employees must comply with the rules regarding conflicts of interest, confidentiality, and informed consent.

What Records and Privileges Do I Need to Protect Immediately?

Preservation Obligations

When an investigation or litigation becomes reasonably foreseeable, you have a duty to preserve relevant records. With respect to electronically stored information (ESI), the duty to preserve is triggered by “reasonable anticipation of litigation.” If a party destroys or fails to preserve ESI, it may face consequences under Federal Rule 37(e).

Destroying or which otherwise alter or destroy documents or records with intent to impede a federal investigation can expose you to criminal prosecution under 18 U.S.C. § 1519.

Attorney-Client Privilege

The attorney-client privilege protects confidential legal communications, but it does not protect the underlying facts. Disclosing privileged communications to SEC staff during the investigative phase can waive the privilege and allow the use of those communications as evidence in future SEC litigation.

SEC Subpoenas to Third Parties

The SEC can subpoena third parties, including banks, brokerages, and other institutions, for records. These subpoena responses can present significant risk if the SEC attempts to interpret documents or communications to establish fraud.

Subpoena Response Dates

While it is critical to be responsive to the SEC’s deadlines, in many cases, it will be necessary to seek extensions to comply with the SEC’s demands. Sometimes SEC staff can agree to seek an extension.

Overly Broad Subpoenas

When responding to an SEC subpoena, you are often able to negotiate the scope of the SEC’s requests. In many cases, you can get the SEC staff to agree to narrow the scope of the subpoena and remove requests for documents that are irrelevant to the investigation or too difficult to gather.

Retaining an SEC Defense Attorney

If you have received an SEC subpoena, you may want to reach out to our SEC defense team immediately to discuss your situation.

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

Should I Agree to SEC Testimony or Remain Silent?

Voluntary Interviews

In a voluntary SEC interview, you generally have the right to decline to testify because no subpoena is compelling your attendance. However, if you choose to provide a statement, remember that any admissions you make can be used against you in future proceedings. The Fifth Amendment privilege protects you from incriminating yourself, but it is only available if your testimony presents a reasonable danger of criminal prosecution.

SEC On-the-Record Testimony

SEC on-the-record (OTR) testimony is sworn and transcribed. Testimony given under oath can be used against witnesses in later SEC proceedings. The SEC can issue subpoenas to compel testimony, and if a subpoena is ignored, the SEC can seek judicial enforcement under 15 U.S.C. § 78u(c). In most cases, it is not advisable to ignore a subpoena, and you should engage defense counsel as soon as you learn of a federal investigation in which you may be at risk.

Fifth Amendment Privilege

The Fifth Amendment privilege protects witnesses from disclosing information that could lead to criminal prosecution. When testifying under oath, the Fifth Amendment privilege is available on a case-by-case basis. This means that witnesses must assert the privilege question by question. With this in mind, witnesses who need to rely on the privilege during their testimony should work with their defense counsel to prepare responses beforehand.

Adverse Inference

In some cases, witnesses who rely on their Fifth Amendment privilege may face adverse inferences. In Baxter v. Palmigiano, 425 U.S. 308 (1976), the Supreme Court of the United States ruled that civil factfinders can draw adverse inferences from a witness’s refusal to testify. While this is limited, it is possible that an adverse inference could lead to a federal court finding against an individual in an SEC enforcement action.

Corporate Records

The Fifth Amendment privilege is available only to natural persons. Corporations do not have the right to rely on the privilege in order to protect corporate records. If the SEC issues a subpoena for documents produced during corporate operations, the corporation cannot refuse to produce those documents by relying on the Fifth Amendment.

Seeking Counsel

Engaging the services of experienced defense counsel is critical in these situations. Whether you are facing an inquiry, investigation, or litigation with the SEC, our firm can help you understand the risks you face and communicate with the SEC on your behalf.

Who Investigates SEC Violations? Who Brings Criminal Charges?

Who Conducts Securities Law Enforcement Investigations?

The SEC’s Division of Enforcement investigates alleged violations of the federal securities laws. If the SEC investigates you, you will need to hire defense counsel to protect your interests. Other federal authorities can investigate alleged securities violations as well:

• The Financial Industry Regulatory Authority (FINRA) investigates alleged violations of securities laws committed by FINRA-member firms, brokers, or investment advisors.
• The Public Company Accounting Oversight Board (PCAOB) investigates alleged securities violations involving registered accounting firms, public auditing standards, and auditors.
• The Department of Justice (DOJ) and United States Attorneys investigate allegations of criminal securities fraud, insider trading, accounting violations, financial statement fraud, and other criminal securities law violations. If you are facing scrutiny from federal criminal authorities, you will need to engage experienced white-collar defense counsel to represent you.
• The SEC itself does not have the authority to prosecute criminal violations. Instead, the SEC investigates potential civil violations and brings civil enforcement cases.

What is the Difference Between Civil and Criminal Liability?

With civil liability, there are various types of relief that the SEC can seek in court. In contrast, with criminal liability, the government may pursue criminal penalties including:

• Fines and financial penalties
• Incarceration, probation, and probation with home monitoring
• Restitution for the harm suffered by the victim(s) of the crime
• Forfeiture of the proceeds of the crime

What are the Consequences of Facing an SEC Enforcement Investigation?

An SEC enforcement investigation can have serious consequences. The SEC can impose administrative fines and civil money penalties, which can quickly add up to thousands and tens of thousands of dollars. The SEC can also seek injunctions or cease-and-desist orders, which prohibit defendants from engaging in alleged fraudulent or otherwise unlawful activities.

If you receive an SEC subpoena or learn of an SEC investigation involving your company or another person or entity, you should contact the firm’s securities defense team immediately.

Does the CFTC Have Jurisdiction Over Securities Violations?

While there is overlap between the SEC’s and the CFTC’s jurisdictions in cases involving trading and derivatives, they are different regulators. The CFTC enforces violations involving commodity futures, options, and swaps markets.

Can the SEC Share Information with Other Regulators?

Yes, information obtained by the SEC during its investigation can be shared with criminal authorities and other regulators. In most cases, this means that engaging experienced defense counsel in the early stages of an enforcement investigation is critical.

Can State Securities Regulators Conduct Investigations?

While the SEC and other federal regulators have primary jurisdiction in securities enforcement matters, state securities regulators also have authority. State securities regulators can investigate alleged violations along with their federal counterparts.

What is the First Step in a Securities Enforcement Investigation?

The first step in a securities enforcement investigation is usually to hire an experienced defense lawyer or team to represent you. With your consent, your lawyer or team will engage with the SEC and other relevant authorities on your behalf, while working toward a favorable resolution without formal charges being filed.

How Do I Choose and Pay for SEC Defense Counsel?

Paying for SEC Defense Counsel

Paying for SEC Defense Counsel in Delaware

The Delaware General Corporation Law (DGCL) permits corporations to advance defense costs, including those for investigations, under DGCL § 145(e). However, advancement is only permitted upon an undertaking by the recipient to repay the advances, which triggers potential clawback if criminal culpability or civil liability are determined.

Directors and officers (D&O) and other insurers generally provide investigative defense coverage as well. However, the specific language of a D&O policy determines whether coverage for investigative defense costs exists, and whether those costs receive coverage or advancement.

Choosing SEC Defense Counsel

When choosing defense counsel, it is essential to consider the type of assistance you need for your specific circumstances. You will want to prioritize the following:

• Experience with SEC testimony, Wells, and SEC litigation (or all three)
• Experience with parallel investigations
• Experience with parallel criminal cases, if applicable

Attorney-Client Privilege and Third-Party Fee Payment

It is important to remember that if a third party (such as a company or insurance company) pays for your SEC defense, this fact alone does not establish an attorney-client relationship between the paying party and your lawyer. The attorney-client privilege will still protect your confidential communications with your attorney.

Fee Agreements and Defense Budgets

Under ABA Model Rule 1.5(b), attorneys are required to communicate the fee basis, the rate, the scope of the engagement, and the extent to which a client will be responsible for legal fees and expenses. Our SEC defense lawyers will answer any questions you have regarding our fee structure and the potential cost of your defense.

SEC defense budgets vary depending on the facts and circumstances involved. With respect to the volume of documents to be reviewed, the number of witnesses, the types of proceedings, and the potential for parallel investigations, budgets can range from tens of thousands to hundreds of thousands of dollars.

Can I Defend an SEC Matter Without a Lawyer?

Can an Individual Represent Themselves Pro Se?

Under 28 U.S.C. § 1654, individuals have a statutory right to represent themselves in federal courts. If you are facing an SEC enforcement action, you can refuse to hire defense counsel. However, given the high-stakes nature of these proceedings and the vast experience and resources of the SEC staff and the other authorities involved, this is generally a risky option.

Can a Corporation Represent Itself Pro Se?

Generally, corporations and other unincorporated business entities cannot represent themselves in federal court. If the SEC initiates an SEC enforcement action against your corporation, the corporation will need to retain counsel to represent it.

Is There an Official Percentage of Pro Se Successes?

No official nationwide statistics exist for the percentage of pro se defendants who succeed. This means it is not possible to compare those who hire lawyers with those who don’t.

What Is the 80/20 Principle (Pareto Principle)?

The 80/20 principle (or Pareto principle) refers to the concept that roughly 80% of outcomes are attributed to 20% of causes. In other words, a small percentage of factors have a significant impact on an individual’s success in an SEC investigation or SEC litigation.

While this principle can apply, it is not an SEC procedural or evidentiary rule. There are no SEC rules that provide an “80/20 percentage” when it comes to defense in a federal securities enforcement proceeding.

Do Most Individuals Hire Defense Counsel for SEC Investigations?

Yes, the vast majority of individuals hire experienced defense counsel for SEC investigations. With the resources and experience at the SEC staff’s disposal, there is too much at stake to rely on pro se representation. If you face scrutiny in a federal securities enforcement matter, the surest way to protect your interests is to engage an SEC defense lawyer or team that has experience and a proven track record of success.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.