The SEC obtains investigation leads from a wide variety of sources, including public complaints, company self-reports, the agency’s examination and filing
review programs, the press, and resourceful enforcement staff who seek out possible cases. The examination program examines investment-related institutions
registered with the Commission, including broker-dealers, investment advisers, investment companies, transfer agents, and stock exchanges.
SEC management assigns new matters to an enforcement branch, typically staffed by 4-6 attorneys and an accountant. Depending on the size of the investigation, a matter may be assigned to one or more attorneys.
The SEC can obtain vast amounts of information without a subpoena from regulated and cooperating parties, and from international sources. Indeed, business
entities and individuals subject to the SEC registration requirements, including securities brokers and dealers, investment advisers, transfer agents, and stock
exchanges, are generally required by statute to provide information upon request. Further, companies that issue publicly-registered securities generally seek to
cooperate with the SEC’s investigation and provide requested information without a subpoena to ensure that they have a record of cooperation. Finally, the SEC has
“Memoranda of Understanding” (MOUs) with numerous other jurisdictions to allow it to obtain information from overseas without having obtained a subpoena.
SEC investigations have two stages: inquiry and investigation. Further, the SEC has two types of investigations, one authorized by a formal order of investigation and one that is not.
First, the SEC staff opens a “Matter Under Inquiry” (MUI) to gather information without a subpoena. The staff may interview possible witnesses or targets via telephone or in person, but there will be no sworn and recorded testimony. These initial interviews can be very important. For example, Martha Stewart’s conviction stems from her statements to SEC staff in an unrecorded, unsworn interview.
Second, after 60 days, or earlier if required by the staff, the inquiry becomes an “informal” SEC investigation, which is a serious matter. “Informal” merely means that the SEC has not issued a “Formal Order of Investigation” authorizing the staff to issue subpoenas. As explained above, the SEC staff will still be able to obtain extensive information from cooperating companies and individuals, from registered entities, and from foreign sources. Unlike the inquiry stage, the staff will take sworn, recorded testimony.
Finally, the Commission can authorize its staff to issue subpoenas to compel testimony and document production through a “Formal Order of Investigation.” If subpoena recipients do not produce the required testimony and production the SEC can seek to enforce the subpoena in U.S. District Court. Subpoena recipients can assert rights and privileges, including refusing to provide self-incriminating testimony, and asserting attorney-client and spousal communication privileges.
The SEC does not conduct undercover operations, due to the SEC’s interpretation of the Federal Privacy Act and the policies related to that Act. However, other federal civil and criminal agencies do conduct their own undercover investigations. The SEC can obtain information from other federal and state agencies that perform undercover investigations and use that information for its own purposes.
The SEC staff typically asks for voluminous document or computer file production. Your attorney may be able to lessen the burden by negotiating with SEC staff to promptly produce what the staff “really” needs with the understanding that additional information may be “needed” in the future and by negotiating reasonable deadlines.
Documents should be page-labeled in sequential order so that the SEC staff and your attorney can easily refer to the same page. If any document contains privileged information, your attorney should redact that information and prepare a privilege log to the SEC staff specifying the privileges claimed.
Finally, document producers may want to ensure that their documents will not be released to the public under the Freedom of Information Act (FOIA). Each document and computer file produced must be stamped “Confidential Treatment Requested by [party]” with an accompanying page number and “FOIA Confidential Treatment Request” must appear at the top of the first page of the production. Finally, the confidential treatment requests must be separately sent to both the enforcement staff and SEC’s FOIA office. SEC FOIA information.
Providing SEC testimony can be a grueling experience. The Rules of Civil Procedure govern pre-trial testimony in litigation. The Federal Rules limit depositions to 7 hours or one day. See Rule 30(d)(2). The SEC has no such mandatory limits, although the staff will typically make reasonable accommodations. Further, in deposition, only one attorney per party asks questions. But, several SEC attorneys may ask questions in SEC testimonies. Your attorney will seek to persuade the SEC staff to ask questions in an orderly fashion, but be prepared for a double-barrel approach.
Witnesses in SEC testimonies may feel sandbagged because the SEC staff can present them with documents or e-mails that they have never seen or not seen in years. In litigation, both sides must produce documents and you and your attorney have the opportunity to review those documents before the deposition. The SEC, however, can obtain information and documents from third parties nationally and internationally and the staff will not tell you beforehand what they have obtained and from whom. Expect surprises and discuss with your attorney how to deal with surprises before the testimony.
After the SEC staff completes its investigation, the staff must seek authority from the Commission to sue or sanction a defendant. Before seeking that authority, the staff provides prospective defendants with a “Wells Notice” identifying the alleged violations that it intends to present to the Commission in very general terms. Wells Notice recipients may then respond to the allegations in a filing to the Commission called a “Wells Submission.” The most effective Wells Submissions argue that the staff is misinterpreting the law and offer an alternate interpretation. Wells Submissions that argue the facts rarely succeed because the SEC staff typically has access to factual information far beyond what an individual defendant may know and can edit its recommendation to deal with any facts the prospective defendant raises.
If a prospective defendant and counsel recognize that the Wells Submission will not deter the Commission from authorizing an action, they should consider not submitting it. The Wells Submission provides the SEC staff a free preview of the defendant’s litigation defenses and can be used against the defendant as a prior statement.
The Wells Notice can start settlement negotiations with the SEC staff. The staff has no authority to approve a settlement, only the Commission can do that. The staff, however, can recommend a settlement to the Commission. The Commission strives to have consistent remedies historically and geographically. So, before sitting down with the SEC staff, familiarize yourself with settlements that the Commission has previously approved that may be similar to the case at hand and be able to explain why the case is different from other cases with more severe sanctions.
The Commission does not always follow its previous sanctions history. The Commission may decide that sanctions for particular offenses can be enhanced or diminished as a matter of enforcement policy. Indeed, the Commission has dramatically increased its required sanctions for settlements in recent years, particularly in corporate fraud, investment adviser, and broker-dealer cases. But, on January 6, 2006, the SEC reconsidered its penalty policies and published a list of 9 factors that it considers in evaluating the appropriate penalties.
Finally, before the staff presents any proposed settlement to the Commission, the defendant must execute a certification that it has provided the staff all the documents and information that the staff requested. For a corporate defendant, this will require a certification by a high-ranking executive, and sub-certifications to the high-ranking executive by lower-level managers who were asked to look for relevant documents and files.
SEC investigations interest investors and the press. Officially, the SEC is notoriously close-lipped about investigations. Nonetheless, leaks often happen, especially in Washington. Indeed, SEC management has reminded to the staff not to leak confidential information. So, be prepared for leaks, and plan your response.
But, don’t say it yourself. Statements to the press will be used against you in investigative and trial testimony and in deposition. Any press contacts should be handled through your attorney and all statements to the press on matters that may impact the investigation should be reviewed by your attorney.
Finally, SEC settlements always include a provision that the defendant cannot subsequently publicly criticize the basis for the SEC action in a manner inconsistent with the conclusions in the settlement orders. So, don’t sign settlement papers and then publicly claim that the case was a miscarriage of justice. The SEC may come after you for it.
An SEC investigation may be a material event that needs to be disclosed to investors. This is a very fact-specific evaluation that should be made after consulting with your attorney. Public companies typically disclose this information via press release or SEC filing. Issuers of private securities typically disclose via letter to their investors.
If the company receives a Wells Notice indicating that the staff will recommend action, a decision not to disclose should be reconsidered due to the greater likelihood that the SEC will file a case.
The company’s attorneys represent the company, not individual employees. Indeed, an individual’s interest may differ from the company’s interest in responding to a SEC investigation. The company may be interested in demonstrating its cooperation with the SEC investigation while an individual may be interested in not waiving his constitutional rights. Recently, AIG Chairman Maurice Greenberg was ousted after running the company for decades because of a conflict in how to deal with regulators and prosecutors. Moreover, the SEC has said that it will consider whether the employees responsible are still with the company in considering the proper sanction for the company. See Seaboard 21(a) Report.
Consequently, individual employees may want to hire their own legal counsel to fully advise them of their options. Their careers may be at stake. At the same time, companies often choose not to retain employees who assert their right against self-incrimination when questioned by regulators.
For more information, or to obtain legal advice about SEC investigations, call John Fahy at (817) 878-0574 or e-mail him at .
