Will My SEC Testimony Be Shared With Criminal Prosecutors??

Yes. SEC enforcement investigations are conducted in nonpublic proceedings. Pursuant to 17 C.F.R. § 203.5, the SEC maintains nonpublic formal and informal investigative proceedings. This does not, however, mean that information you provide to the SEC will not be shared.

Nonpublic investigations can still involve authorized disclosures to criminal prosecutors. This includes disclosures to DOJ, IRS, and state prosecutors. And, in most cases, authorized disclosures of information acquired by the SEC may be made without notice to you.

According to the SEC’s regulations:

“The Commissioners and the staff may also authorize disclosure of any information contained in such a file to the Department of Justice, the U.S. Department of the Treasury, the Internal Revenue Service or state securities or other law enforcement agencies, as they may deem necessary for the protection of the public interest.”

This means that the SEC has wide discretion with respect to sharing materials it acquires in its investigations with law enforcement. The DOJ and other agencies often have the authority to review a witness’s deposition transcript and other documents subpoenaed in the proceeding.

If you find out that the DOJ is also interested in your case, it is important to find out why and what is at stake. Our SEC defense lawyers can help you determine the scope of the U.S. Attorney’s involvement, and we can coordinate your defense with respect to both the SEC and the DOJ.

Does the SEC Share Testimony With Prosecutors?

Generally, yes. If the SEC decides to share your testimony, it is within its wide discretion to do so. However, there are limitations on who can access information contained in the SEC’s nonpublic files and what information can be shared.

Under 15 U.S.C. § 78x(b), only federal employees who need to know nonpublic information to “determine whether enforcement action is warranted” are authorized to have access to it. Access is also permitted for internal purposes and as otherwise authorized by the Securities Act of 1933 or the Securities Exchange Act of 1934.

The SEC’s confidentiality rules prohibit “unauthorized disclosure” to parties not entitled to access. However, it is important to note that the agency’s confidentiality rules do not themselves impose a gag on witnesses. This means that you can, in many cases, make informed decisions about when and how to disclose information about your investigation.

Is the SEC Investigation Really Secret?

Not entirely. The SEC’s investigations are nonpublic, and witnesses are encouraged to maintain the confidentiality of the investigative proceeding. However, the SEC’s rules do not restrict witnesses from discussing their investigations, and it is often in witnesses’ and targets’ best interests to discuss the investigation with outside counsel or to make their own disclosure when appropriate.

How Does the SEC Share Its Files With Criminal Prosecutors?

The SEC’s procedures for sharing its files with criminal prosecutors are relatively simple. According to 17 C.F.R. § 240.24c-1, “The Commission authorizes the issuance of copies of any record of any proceeding . .. of the Commission to any approved officer or employee of any Federal law enforcement agency as requested by such agency and as otherwise authorized by applicable law.” Forms 1661, “Notice of Production to the Commission,” and 1662, “Notice of Testimony,” both explicitly state: “All information received by the Commission shall be shared on a need-to-know basis with the U.S. Department of Justice and other appropriate federal authorities.”

For the SEC to release access to its files to federal prosecutors, DOJ must submit a written request signed by an appropriately senior official. The SEC, in turn, may then share access to its files with federal prosecutors. Importantly, this request is not a criminal referral. A criminal referral is an action on behalf of the SEC to provide information for purposes of prosecution and is an independent process from the DOJ’s request to review the SEC’s files and conduct its own independent investigation.

The SEC may also transfer its files for investigation to the DOJ at any time during the investigative process and, not only when it is completed. When this happens, DOJ takes over the investigation and determines whether to proceed with an indictment.

Criminal referrals and requests for access to the SEC’s investigative files have significant implications for the case, and targets need to find out as soon as possible which actions are at play. When you learn that DOJ is involved in the government’s inquiry, it is important to ascertain whether this is the result of a criminal referral or a request for access to the SEC’s files. With this information, we can advise you of your options and help you make an informed decision.

Do Privileged Materials, Work Product, and Other Materials Belong in the SEC’s Files?

The SEC’s records management rules state that files “shall not contain work product, attorney-client privileged materials, or other information that is otherwise privileged unless such materials are specifically authorized to be disclosed by the SEC.” These materials typically require the approval of the SEC’s Director of Enforcement for sharing with the DOJ.

However, it is a common mistake to assume that once the SEC has provided the DOJ with access to the investigative file, privileged materials, work product, and other non-public information will be protected in all instances. While DOJ will generally not rely on the SEC’s disclosures, if the SEC shares its investigative file with DOJ, this constitutes a waiver of the attorney-client privilege with respect to third parties. If DOJ can use the information for civil purposes, then others may be able to as well. Thus, when making the decision to disclose privileged communications and documents to the SEC, it is important to consult with experienced securities defense counsel.

How Can I Retain My Fifth Amendment Right Against Self-Incrimination?

Generally, the Fifth Amendment is your best bet if you do not want to voluntarily share information with federal prosecutors. However, if the SEC decides to share your information, then this privilege will not provide a shield. When the SEC shares its investigative file with federal prosecutors, the Fifth Amendment will not stop the U.S. Attorney’s Office or other criminal prosecutors from using that information for further investigation.

This is particularly important when you receive an SEC subpoena. In addition to determining which records you may have to produce, you will need to make sure that you do not inadvertently disclose information that can put you at risk for civil or criminal liability. If you receive an SEC subpoena or are contacted by the SEC about a potential or active investigation, find out what is at stake and make an informed decision about how to proceed with the assistance of experienced counsel.

Will I Know If a Criminal Investigation Is Underway?

If you are informed that there is a parallel criminal investigation underway, the SEC will likely decline to confirm the existence or nature of that investigation. When you talk to your SEC defense lawyer about the possibility that the U.S. Attorney’s Office may have a parallel investigation, your lawyer can contact the SEC’s staff on your behalf. If the staff are authorized to divulge information regarding DOJ’s involvement, they will be able to inform your lawyer that there is a parallel criminal investigation underway.

Wait, can the SEC gather information for the benefit of DOJ? While generally the SEC staff is not allowed to gather information for DOJ’s benefit, United States v. Kordel, 397 U.S. 1 (1970), made clear that parallel civil and criminal investigations are permissible. While they are generally not supposed to have the same investigative tools, DOJ is able to use the information gathered by the SEC, and you do not have the right to know if a parallel investigation is being conducted.

How Long Do SEC Investigations Take?

There is no statutory timeframe for the completion of a civil or criminal enforcement investigation. Therefore, the time required to conduct an investigation is entirely dependent upon the SEC’s internal policies and the circumstances at hand.

For simple SEC investigations involving a handful of witnesses and target individuals, investigations may conclude within a few months. However, complex SEC investigations involving numerous witnesses, target individuals, and substantial amounts of voluminous information can take years.

There are several issues that can prolong investigations:

• Volume and Complexity: When there are numerous witnesses and voluminous records to review, this can result in investigations that are more time-consuming.
• Difficulty of Accessing Information: When an individual does not comply with the SEC’s request for records or for testimony or when the SEC must subpoena or seek a court order to obtain records from a foreign bank, investigations can last longer.

How Long Do I Have to Respond to an SEC Notice?

SEC enforcement investigations take an unusually long time for targets of an investigation. SEC investigations usually last much longer than other federal investigations. Generally, when a target of an investigation makes an informed decision about how to handle the matter, they will be able to conclude the case favorably.

The SEC may not always issue a Wells notice prior to filing enforcement action against target individuals. In many cases, the SEC may file the enforcement action unexpectedly, without warning. While rare, the SEC may file an enforcement action, when it has done so with the time for the target to prepare a defense, this gives targets more time to gather information and prepare a defense for the civil case.

Can the SEC Share Information With the Criminal Prosecution Team?

As discussed above, the SEC may share information with DOJ if it deems it necessary. When this happens, it is in your best interest to respond decisively to the request for records or testimony. By retaining an experienced SEC defense attorney, you can ensure that you will have the legal representation you need in the SEC investigation, and your attorney will have the ability to ascertain all available information so that you can make a decision about how to proceed.

Will an SEC Settlement Stop Criminal Prosecution?

Although generally, the SEC and the criminal prosecution team will target the same individuals in investigations, the results are not the same. An SEC settlement will not necessarily protect you from criminal prosecution, and you can still face criminal prosecution for violations. However, if you settle the criminal case with the U.S. Attorney’s Office and receive prosecutorial immunity, then you will be protected from criminal prosecution.

Even though the SEC and criminal prosecution team are separate agencies, they often collaborate closely. For example, on March 1, 2023, the DOJ charged Terren Peizer with securities fraud in a case that marked the first time insider-trading prosecution was exclusively based on a Rule 10b5-1 plan. This reflects the level of coordination between the SEC and criminal prosecution team, especially in cases involving insider trading and other federal crimes.

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.

Should I Invoke the Fifth Amendment During SEC Testimony?

You should consult with an experienced defense attorney regarding your circumstances. While broadly speaking, the Fifth Amendment is available as a shield against self-incrimination, the assertion of the privilege is not always appropriate or sufficient protection in the face of federal criminal allegations. With this in mind, you will want to make an informed decision with the assistance of experienced defense counsel.

When Should I Assert the Fifth Amendment?

Individuals testifying to the SEC should assert their Fifth Amendment privilege if any question leads to a response that could subject them to criminal exposure. However, you cannot assert the Fifth Amendment privilege at the outset of the proceeding and refuse to answer all questions. You can only refuse to respond to questions where the response could provide incriminating information. When you decide that the Fifth Amendment is the right strategy, it is critical to do so for the right reasons and with the guidance of experienced securities defense counsel.

Can Corporations Refuse to Answer Questions by Citing Their Fifth Amendment Rights?

No. Unlike individuals, corporations, other collective entities, and their employees acting on behalf of such entities possess no Fifth Amendment privilege. This is a key difference between the individuals and corporations that will be targeted by SEC investigations.

Can the Government Use My Silence Against Me?

In most cases, the government cannot use silence as a basis for an adverse inference in criminal cases, but this is not always the case for civil cases. In civil cases, the federal government can draw adverse inferences from an individual’s silence when the silence is a result of the invocation of the Fifth Amendment. In such cases, you will still need to be careful not to inadvertently disclose information to the SEC or DOJ that could put you at risk for criminal liability.

Does an Adverse Inference Apply in All Civil Cases?

No, not all civil cases involving an invocation of the Fifth Amendment will automatically lead to an adverse inference. While an adverse inference is permitted, it is not automatic.### Can I Get Out of Responding to Questions by Lying to the SEC?

Absolutely not, and you should not attempt to deceive the SEC in any regard. Knowingly and materially making false statements to the SEC can have criminal consequences, including federal criminal charges under 18 U.S.C. § 1001, which carries penalties of up to five years of federal incarceration. As we said above, you want to avoid making any information available to the SEC or DOJ that could subject you to federal criminal exposure. If your attorney decides that the Fifth Amendment is the right strategy to use, this should be your only option during the SEC’s investigative process.

Can I Obtain a Transcript of My SEC Testimony?

If you have the opportunity to obtain a transcript of your SEC testimony, you should obtain a copy as soon as possible. With that in mind, you will want to find out whether the SEC is sharing your testimony with criminal prosecutors, and you will want to ascertain your options for responding to an SEC subpoena.

Under 17 C.F.R. § 203.6, witnesses have the right to obtain transcripts of their SEC testimony, and this transcript is a critical component of their defense. However, the SEC may deny access if there is good cause. With this in mind, you will want to make an informed decision about how to protect yourself during an SEC investigation.

What happens if DOJ wants me to testify?

What Happens If Criminal Prosecutors Want Me to Testify?

Broadly speaking, a defendant in a federal criminal case cannot be compelled to testify at trial and cannot be forced to provide incriminating evidence in a criminal investigation. This is a principle of the American legal system. While this principle generally applies to target individuals of a federal criminal investigation, target individuals may still be required to testify in certain circumstances.

Can Grand Jury Targets Be Forced to Testify?

A potential defendant may still be subpoenaed to testify before a grand jury. However, as with other contexts in which you could give incriminating testimony, the potential defendant will still be entitled to assert their Fifth Amendment privilege, although grand jury proceedings are secret and conducted without a judge. If prosecutors obtain a court order to compel testimony, the witness may be required to testify.

Can a Court Order Force Me to Give Testimony in Spite of My Fifth Amendment Right?

Yes. In order for a court to grant a request for an order to compel testimony, a federal prosecutor must convince the judge that the witness’s testimony is necessary for the prosecution of another individual. When a prosecutor obtains immunity, the witness is then required to testify. An immunity order can force a witness to testify notwithstanding their Fifth Amendment privilege. An immunity order, also known as a grant of immunity, can include several aspects.

• Transactional Immunity: The most-reaching immunity for criminal proceedings, transactional immunity extends protections against any prosecution for federal crimes based on the testimony or any information derived therefrom. It prohibits the government from prosecuting a witness for a federal crime for which the witness could be prosecuted as a result of their testimony.
• Use Immunity: While less expansive, use immunity prohibits the use of a witness’s testimony or information derived therefrom for the purpose of prosecuting the witness for any federal crimes. Although a witness cannot be used to substantiate evidence against themselves, they can still be prosecuted using information obtained independently of the witness’s testimony.
• Derivative Use Immunity: Derivative use immunity prohibits the use of a witness’s immunized testimony to independently derive new evidence against them. This is one of the most restrictive types of immunity, and, as a result, many witnesses who receive derivative use immunity are more likely to face prosecution in the future.

In order for transactional or use immunity to be effective, the federal government may also grant immunity from both state and federal criminal prosecution. While the federal government has the authority to grant immunity from prosecution in some circumstances, the SEC cannot grant immunity on its own. The SEC must seek authorization from the DOJ’s Criminal Division to grant immunity.

Does an Immunity Order Bar the Government from Prosecuting an Immunized Witness?

Generally, yes. An immunity order bars the government from prosecuting a witness for federal crimes. U.S.C. § 6002 states, “No information, testimony, or materials obtained pursuant to the implementation of the provisions of this section shall be used, directly or indirectly, against the testifying person in any federal criminal case.” In many cases, however, federal prosecutors will be able to work around the immunity order by showing that they acquired the information through independent means.

Can Prosecutors Speak to Witnesses Outside of the Grand Jury and the Trial?

Yes. Prosecutors often interview witnesses who were called to testify at the grand jury or trial. Witnesses are under no obligation to continue providing information to federal criminal prosecutors outside of the grand jury or trial. If you’ve been targeted by a federal investigation, it is important to speak with your defense attorney about the options for handling interactions with federal prosecutors.

Can I Have My Lawyer Intervene if I Am Being Compelled to Give False Testimony?

No. Defense attorneys are prohibited by ABA Model Rule 3.4(b) from assisting their clients in the delivery of false testimony. Although you will want to negotiate a plea deal if you are facing federal charges, doing so involves cooperating with the federal government and disclosing facts about your activities. When negotiating a plea deal with criminal prosecutors, you will want to do so with an experienced defense lawyer so that you will make decisions based on information about your and others’ potential exposures.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.