Your Rights When Facing an SEC Investigation.

If you’re being targeted in an investigation by the Securities and Exchange Commission, a good question to ask is: what does it mean to be “under investigation”? Depending on the scope and nature of your investigation, this question can be answered in multiple ways.

Can the SEC Send You to Prison?

The SEC is a federal regulator that handles civil enforcement; it cannot impose imprisonment. That said, if the Justice Department uncovers evidence of criminal securities fraud as a result of the SEC’s investigation, prosecutors may pursue charges. As a result, individuals and businesses that become targets of SEC investigations can face both civil and criminal exposure.

Does the SEC Share Information with the Department of Justice?

The SEC does not hesitate to share information with the Justice Department and other government regulators when applicable. If you are facing an SEC investigation, you also need to be prepared for a parallel DOJ investigation. Both the SEC and DOJ will expect you to cooperate, and both have the tools to force compliance if necessary. However, both have procedural and constitutional limits that can be used to protect you and your business during the process.

Is an SEC Investigation Order Like a Grand Jury Indictment?

While an SEC investigation order does not operate like a grand jury indictment, it does establish that the SEC has determined sufficient grounds to proceed with an investigation (or it will be issued upon a subpoena in most cases). Once an SEC investigation is launched, you are eligible to demand access to the investigation order. Having access to your investigation order is one of the first steps toward understanding the scope of your investigation and determining your next steps.

What does an SEC investigation mean for your legal status?

The U.S. Securities and Exchange Commission (SEC) is the federal government’s securities enforcement agency. The SEC’s Division of Enforcement conducts all of the agency’s investigations, and it relies on a formal investigation order, which authorizes compulsory testimony and subpoenas, to gather evidence of suspected violations of federal securities laws and regulations. While conducting SEC investigations, SEC personnel also refer cases involving fraud, bribery, and various other crimes to prosecutors with the Justice Department.

What Does it Mean to Have a Subpoena from the SEC?

Receiving a subpoena from the SEC is what most people mean when they say they are “under investigation” (i.e., as subpoena recipients). Importantly, having a subpoena does not establish that any wrongdoing has taken place, nor does it dictate the length of time that the SEC will dedicate to the investigation. In most cases, the SEC will investigate potential violations for months or years, and investigators will frequently open their investigation to all potentially relevant matters, including matters outside the scope of the investigation’s original trigger.

Am I Being Investigated as a Witness?

Whether you are being investigated as a witness depends on the situation. An individual or entity that becomes a witness to SEC personnel early on will often find that the SEC personnel will eventually look at the witness’s own transactions as well. As a result, the individual or entity that originally thought it was only a witness may find it must fight to avoid personal liability. Also, remember, as aforementioned, that the SEC is the federal government’s securities enforcer. It refers cases involving potential criminal violations to prosecutors with the Justice Department, who will then proceed to seek criminal charges if warranted. These criminal charges will carry far more severe sanctions than any potential civil enforcement action brought by the SEC.

How Long Will the SEC Investigate Me?

There is no statute that imposes one uniform deadline for completing every SEC investigation. Some SEC investigations last mere weeks, others last several years, and some investigations appear to be never ending. We can provide more specific information about the investigation you are facing based on the scope and characteristics of that investigation after you have consulted with our experienced securities enforcement lawyers.

Am I the Target of an SEC Investigation?

If you are a subpoena recipient, you are the target of the SEC’s compulsory process for information, evidence, and testimony. However, being a subpoena recipient does not necessarily mean that SEC personnel view you as potentially culpable. In many cases, being a subpoena recipient just means that you have useful information, or that you have unique insight into your business transactions.

What is the Goal of a Securities Enforcement Defense?

The goal of your securities enforcement defense is the same as the goal of your defense in an SEC investigation, i.e., to avoid having to deal with civil enforcement action and potentially criminal charges. With the experience of senior former federal prosecutors, our securities enforcement lawyers work to ensure that the SEC ends its investigation without pursuing civil enforcement action or referring the case for criminal prosecution.

Can You Refuse an Interview or Challenge an SEC Subpoena?

While SEC staff are under no obligation to negotiate, our securities enforcement lawyers often serve as intermediaries to negotiate the scope of an SEC subpoena, the timing of document production, and the date of an SEC interview. The general rule that governs challenging an SEC subpoena is 17 C.F.R. § 203.8, which generally requires challenges to be made within six days after service. However, petitions to quash or modify a subpoena must be timely issued to avoid an SEC subpoena enforcement proceeding under 15 U.S.C. § 78u(c).

Does Filing a Petition to Quash a Subpoena Automatically Stay the Subpoena?

Unlike a subpoena challenging petition in a criminal case, a petition to quash or modify an SEC subpoena does not automatically stay the subpoena. As a result, parties challenging an SEC subpoena must quickly move forward with challenges or negotiations with the SEC in order to avoid unnecessary enforcement costs.

Can the SEC Seek Enforcement of Your Subpoena in Federal Court?

The SEC is authorized to seek enforcement of an SEC subpoena by federal court proceedings under 15 U.S.C. § 78u(c). If the federal court issues an order enforcing the SEC subpoena and you (or your business) are found to be in disobedience, you could face contempt sanctions for disobedience to a federal order.

Can You Refuse to Interview with the SEC?

Declining an SEC interview request will not, in and of itself, constitute contempt. However, if the SEC obtains compulsory authority to seek the information it is looking for, the interview request will be replaced by an SEC subpoena demanding your presence.

Will the SEC Negotiate Your Subpoena, Interview, and Production Timing?

While SEC staff are under no obligation to negotiate, our securities enforcement lawyers often serve as intermediaries to negotiate the scope of an SEC subpoena, the timing of document production, and the date of an SEC interview. This is often a necessary step in a securities enforcement defense as well as in the defense of an SEC investigation.

Will the SEC Quash or Modify Your Subpoena?

Again, while SEC staff are under no obligation to quash or modify an SEC subpoena, our securities enforcement lawyers will fight for this when all other options fail. We do not assume to have a relationship with the SEC, and we do not assume that they will be understanding in their enforcement proceedings, but we do not assume they will automatically reject requests to quash or modify an SEC subpoena, either.

Can You Invoke the Fifth Amendment During Sworn SEC Testimony?

Yes, you may generally invoke the Fifth Amendment during your SEC testimony. You will need to invoke your Fifth Amendment privilege in response to particular questions, and you (and your lawyer) will need to be prepared to do so.

What is the Role of the Interviewing Individual’s Lawyer During SEC Testimony?

The role of the interviewing individual’s lawyer during SEC testimony is defined by 17 C.F.R. § 203.7(c). It provides, in relevant part:

“The right to be accompanied, represented and advised by counsel shall mean the right of a person testifying to have an attorney present with him during any formal investigative proceeding and to have this attorney (1) advise such person before, during and after the conclusion of such examination; (2) question such person briefly at the conclusion of the examination to clarify any of the answers such person has given; and (3) make summary notes during such examination solely for the use of such person.”

Because 17 C.F.R. § 203.7(c) does not authorize counsel to object or make statements for the record, SEC staff typically do not allow counsel to interrupt SEC investigative testimony. However, it often proves useful for your lawyer to discuss specific aspects of the testimony with you during your testimony, which you can then refine upon request from the SEC.

Should You Invoke Your Fifth Amendment Privilege?

The question of whether to invoke your Fifth Amendment privilege (i.e., to refuse to answer a question or testify based on your Fifth Amendment privilege against self-incrimination) is complex. In the context of an SEC investigation, the risk of testifying (i.e., providing incriminating testimony) must be balanced against the risk of remaining silent. While no adverse inference may be drawn from a defendant’s silence in a criminal case, a civil factfinder may draw an adverse inference from a witness’s Fifth Amendment invocation in a civil enforcement proceeding. However, these inferences are subject to certain limits.

As mentioned previously, while invoking the Fifth Amendment during your SEC testimony may not prevent adverse findings, it also cannot prevent the SEC from pursuing civil remedies. At this point, this is true for a variety of reasons (i.e., civil enforcement is an inherently broad authority), and it remains true even if you successfully negotiate immunity from criminal prosecution.

Can the SEC Grant Immunity for Testimony and Production?

While the SEC cannot unilaterally grant statutory immunity, it can (with the approval of the Attorney General) grant statutory immunity under 18 U.S.C. § 6002. When statutory immunity is granted under 18 U.S.C. § 6002, SEC personnel will compel you to testify; and, the government cannot use your testimony or a derivative of your testimony to help prove a case in court. However, SEC personnel can still use any evidence they independently gather from other sources, and this means that statutory immunity may still leave you facing potential civil enforcement action or criminal prosecution.

Can You Refuse to Produce Documents Based on Your Fifth Amendment Privilege?

In general, once the government has established that you are in possession of a subpoenaed record, you cannot assert your Fifth Amendment privilege. This is true for government investigations, and, this is true to the fullest extent of the law. When you are facing an SEC investigation, it is imperative to retain independent counsel as soon as possible.

The earlier you retain independent counsel, the more likely you (and your business) will be able to avoid paying unnecessary civil enforcement fines. When necessary, an experienced securities enforcement lawyer can protect your procedural and constitutional rights throughout the SEC’s investigation.

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

How Do You Protect Documents Without Waiving Legal Privilege?

The attorney-client privilege protects confidential communications with your lawyer made for the purpose of obtaining legal advice. It does not protect the underlying facts or preexisting documents. The federal work-product doctrine generally protects materials created during an attorney’s representation in anticipation of litigation. The Supreme Court of the United States has noted that while the attorney-client privilege is narrowly applied, the Attorney Client Privilege is “fundamental to the American system of justice.”

Can the SEC Assert Against Your Fifth Amendment Privilege for Records in Your Possession?

Yes. With certain very specific exceptions, once the government has established that you are in possession of a subpoenaed record, you cannot assert your Fifth Amendment privilege. The following is a breakdown of some of the additional protections that are available to individuals and businesses in the context of an SEC investigation:

• Attorney-client privilege.
• Federal work-product doctrine.
• Federal Rule of Evidence 502(b).
• Common-interest agreements.

Will Voluntarily Disclosing Documents to the SEC Waive Your Attorney-Client Privilege?

Voluntarily disclosing documents to the SEC can establish a waiver of the attorney-client privilege. While the disclosure may be limited to the SEC, you may be compelled to produce those documents (i.e., and even the waiver cannot be revoked) to third parties in the future.

Does Federal Rule of Evidence 502(b) Protect You From Waiving Your Attorney-Client Privilege Inadvertently?

Federal Rule of Evidence 502(b) protects individuals and businesses from unintentionally waiving the attorney-client privilege and from other privileges. It prohibits the waiver of a privilege when the disclosure:

• “is made in accordance with, or is subject to, the disclosure requirements of the applicable court or body; or is unintentional, but only if the disclosure was made by the party or a party’s representative who:
• (i) took reasonable steps to prevent inadvertent disclosure; and
• (ii) promptly took reasonable steps to rectify the error after learning of it.”

Does a Common-Interest Agreement Independently Protect Confidential Documents?

While a common-interest agreement can help preserve qualifying privileges, it doesn’t independently create protection from disclosure.

Do You Have a Duty to Preserve Documents That Affect Your SEC Investigation?

Whether you have a duty to preserve documents that could affect your SEC investigation depends on the specific circumstances at hand. Generally, your duty to preserve records attaches when litigation is reasonably foreseeable, even before you receive a subpoena from the SEC or other government agency. If this is the case, then you could face serious legal consequences for destroying a subpoenaed document. Under 18 U.S.C. § 1519, individuals and businesses that destroy documents in order to obstruct a federal investigation can face up to 20 years’ imprisonment.

How Should You Choose and Pay for Independent SEC Counsel?

When faced with an SEC investigation, whether you should choose a law firm known for its “fearless” reputation is debatable. There are multiple law firms with strong securities enforcement practices, and there are no objective criteria to establish which firm is the single most feared. Similarly, legal rankings only measure recognition, and there is no definitive link between recognition and the amount of fear an opposing party has.

Should You Choose Independent SEC Counsel?

When faced with an SEC investigation, you should generally choose independent counsel if you are an executive at a publicly traded company and you (and potentially your company) are being targeted for an SEC enforcement action, if you have already received a subpoena from the SEC, or if you believe that your company’s securities enforcement lawyers are not truly representing you.

When Do You Need Independent SEC Counsel?

While your company’s lawyers are available when you receive an interview request from the SEC and in several other situations, there are multiple scenarios that call for independent SEC defense. The following is a breakdown of some of the most common reasons for retaining a law firm to protect your company or yourself during an SEC investigation.

Who Represents You During an SEC Interview?

If you have been interviewed as a witness in an SEC investigation, the lawyer who asks the interview questions will be your company’s counsel. However, there are important exceptions, and it is imperative you do not mistake your company’s legal obligations for your own. Under 17 C.F.R. § 203.7(c), counsel may represent you during an SEC interview, and you may generally rely on a written engagement letter from your company’s law firm if it is entitled to do so.

Can You Choose Your Lawyer for an SEC Defense?

If you need to choose a lawyer for your SEC defense, there are multiple factors you need to keep in mind. The most important of these factors is to assess whether your prospective securities enforcement lawyers are a good fit for your investigation. For this reason, you should interview multiple law firms, and you should choose the law firm that makes you feel the most confident that it can resolve your SEC investigation.

Who pays for your independent SEC counsel?

While you may need to retain independent SEC counsel, this does not necessarily mean that you have to pay for them out of your own pocket.

• Advancement and indemnification.
• D&O insurance.
• Joint representation.

Do You Have the Right to Advancement or Indemnification?

The right to have your company advance or indemnify your legal expenses for an SEC investigation is a relatively common right that may apply under the law of the state where your company is incorporated. Under the Delaware General Corporation Law, however, this is a statutory right that only applies to directors and officers who have the authority to advance. If you have this right, then you should use it, and you should use it to retain a law firm with an experienced SEC defense practice.

Can Your Company Pay for Your Independent SEC Counsel via D&O Coverage?

In most cases, yes. Depending on how it defines “costs,” “defense costs,” “legal fees,” and “other expenses,” your company’s D&O policy may cover the cost of your independent SEC counsel. This could be in either the first-party coverage or under the reimbursement provision of the policy.

What happens when the SEC decides to bring charges?

If the SEC is contemplating filing charges in your case, then you might receive what is called a Wells notice. The purpose of a Wells notice is to inform you that the SEC staff is contemplating filing charges; however, this notice is not guaranteed, nor does it represent a final decision. If you receive a Wells notice, then you can work with your securities enforcement lawyer to file a Wells submission in an effort to persuade the SEC not to file charges.

What if the SEC concludes its investigation without bringing charges?

The SEC concludes many investigations without bringing charges against individual or corporate targets. If this is the case in your investigation, then you will likely close the matter with an investigative “no action” letter from the SEC. This represents a favorable outcome, as it means that you (and your company) will avoid civil enforcement action and the potentially ruinous sanctions of a securities fraud conviction.

Can the SEC file a civil lawsuit against me?

If the SEC determines that there is sufficient evidence of wrongdoing, then it may file a civil lawsuit against you or your company in federal district court. Alternatively, it could seek penalties in administrative proceedings within the SEC’s internal administrative system.

What if the SEC files a lawsuit in federal court?

A federal SEC lawsuit is a civil litigation matter subject to the Federal Rules of Civil Procedure. A lawsuit at the federal level presents the possibility of a jury trial, and it also means that the litigation will be open to public scrutiny. Our securities litigation lawyers can help you respond to an SEC lawsuit, and we can handle your case at all levels of the federal judicial system. If the SEC files a lawsuit in federal court, it also means that the case is unlikely to settle without some effort on your part to resolve it efficiently.

What if the SEC initiates an administrative proceeding?

On the other hand, an SEC administrative proceeding will follow the SEC’s Rules of Practice, not the Federal Rules of Civil Procedure. Administrative proceedings are typically less formal than federal court litigation, and they typically resolve without public disclosure. However, they present the prospect of a non-public adjudication that could potentially lead to fines, disgorgement, or other penalties.

What is a Jarkesy-covered case?

Importantly, the U.S. Supreme Court’s ruling in SEC v. Jarkesy recently modified the SEC’s ability to use administrative proceedings in certain enforcement cases. Specifically, the Court has held that in cases seeking civil penalties for securities fraud, a jury trial is necessary. This decision has implications for any business facing an SEC investigation, and it may force the SEC to bring its enforcement cases in federal court rather than in administrative proceedings in the future.

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.