Bring in the SEC Taint Team

businessman-burying-his-head-uner-a-laptop-asking-for-help-picture-id658516626

by Dan Portnov

Let’s say that you or your company find yourselves in the unfortunate position of receiving a document request by the Securities and Exchange Commission (SEC) with limited resources for representation. You’ve retained a moderately-priced, hyper-efficient securities enforcement lawyer (a “unicorn”). Still, the Commission’s initial document request demands every document, every draft, every e-mail created by you since the beginning of time.

You’ve got nothing to hide so your first instinct is to cooperate with the request.[1] Your lawyer informs you that she will need to engage a vendor to harvest data from your server(s), task junior lawyers to review each document for responsiveness and privilege, then produce the documents pursuant to the SEC’s exacting data delivery standards. This is going to cost a small fortune, but, once this arduous task is complete, the real preparation and advocacy can begin.

This is a frustrating position in which to find yourself – spending thousands or more just to put documents in the hands of the Commission. However, this is not the only option. Enter the Purposeful Production Without Privilege Review (PPWPR)…

The PPWPR puts the initial document review in the hands of the Commission staff, without waiving a producing party’s claims of privilege. Choosing this option requires serious thought but may be a cost-effective and expedient way to produce documents, in addition to providing secondary benefits. (And perhaps later, you can move for sanctions against the SEC for its overbroad and unyielding document requests.)

As a threshold matter, hiring an experienced securities lawyer and keeping control of your document production are priorities 1 and 1a here. Next, figuring out where you might stand in the eyes of the investigating staff is key. Be prepared to hear: “We don’t use the terms ‘target’ or ‘subject’ but…” In any event, the SEC may not be able to throw you in jail, but it can quickly shrink your bank account and bar you from working in or near the financial services world.

The purposeful production is rare because it is not well-advertised (see page 75 of the SEC Enforcement Manual) and because it creates more work for the staff. Although the onus appears to be on the producing party to request a PPWPR, if a general counsel or pro se party complains of time and costs and drags its feet sufficiently, Enforcement staff may gently nudge them in that direction.

PPWPR Con: Waiving Claim That the Investigation is Tainted

The purposeful production must be memorialized by written agreement, the Model Agreement for Purposeful Production Without Privilege Review. The model agreement is not negotiable, at least not without signoff from supervisors and the Commission’s Office of Chief Counsel. Though a current model agreement is tough to find, as of 2014, the relevant terms were:

  • No waiver of privilege.
  • The staff and producing party will review documents simultaneously, the staff for responsiveness and the producing party for privilege. The producing party must notify staff immediately of privileged docs which will then be segregated from the production set.
  • The staff will also remove and segregate documents that appear to be privileged on their face.
  • The producing party and its counsel waive all claims that the investigation has been tainted by the review or use of documents subsequently determined to be privileged.

(emphasis added).

It’s that last point that may be a sticking point for the client. You have to place a lot of trust in Commission staff that they will keep the review team separate from the investigating team. That is true in a regular DOJ taint team situation but DOJ does not require such a waiver.

PPWPR Con: Asserting Privilege

The model agreement clearly stacks the deck in favor of the staff. The producing party retains all responsibility for asserting privilege while waiving any arguments that the investigation is tainted by the results of the PPWPR. Further, Section 4.2 of the Manual sets out the procedure and considerations where a privileged document is produced inadvertently:

[B]efore determining how to proceed, staff should consult with his or her supervisor(s) and, if appropriate, the Regional Director, Unit Chief, Chief Counsel, Chief Litigation Counsel, and/or the Professional Responsibility Counsel in OGC.
. . . .
Whether the staff should return (or sequester) an inadvertently produced document or has a legally sound basis for using it is, in part, a function of applicable state professional responsibility rules, as well as, in many cases, the applicable law of privilege and rules of evidence. Under some states’ professional responsibility rules, the staff’s options may depend on whether he or she was made aware of the inadvertent production before or after reviewing the document.

Translation: good luck getting your privileged document back anytime soon.

PPWPR Pro: The Taint Team

Nevertheless, providing agreed upon privilege terms will force the staff, who almost always act in good faith, to assemble a taint team to find documents that are privileged on their face.

The taint team is comprised of Enforcement staff who are not part of the instant investigation. Usually these are junior staff or recent hires who mistakenly thought their priv-review were days behind them. Finding enough willing and available staff can take some time and, once the privilege hits are properly segregated, months may have passed.[2] One might have had the opportunity to do their own privilege review.

PPWPR Pro: Saving Money on Vendors

If one of your obstacles is a corrupted or difficult to access device, the SEC would be happy to put its forensics staff at your service. You will have to turn over the device, but once it is imaged, its files will be available to you on an internet-based no-frills document review platform. Anyone who has priced e-discovery and forensic recovery vendors will appreciate the savings.

PPWPR Con: You Still Have to Review Your Own Documents

At some point you or your counsel will have to conduct a document review. The staff is under no obligation to proactively apply nuanced privilege analysis to your documents, nor will the staff share with you documents critical to its investigation ahead of testimony. Absent the above scenario where the staff takes possession of your devices, it will generally not provide access to a document review platform.

PPWPR Con: The Staff Discovers New Violations Before You Do

SEC investigations are not limited in scope to the formal order of investigation or the staff’s initial request(s). Often, the investigation may evolve as the staff gains better understanding of the facts and circumstances. Charges and theories are liability may be added or dropped. Thus, should the staff find evidence of new, separate violations among your un-reviewed documents, it will happily tack them on to the initial focus.

This is one of the most significant risks of the PPWPR. First, evidence of potential securities law violation that is found in an otherwise unresponsive (or potentially privileged) document is truly a face-palming moment. Second, in this scenario you will likely lose any potential self-reporting/cooperation credit for the new alleged violations.

Final Considerations:

The PPWPR remains seldom used in the production of documents to the Commission. Oftentimes, losing control over privilege assertions is not worth several thousands of dollars saved. A party’s potential defenses, as well as its perceived position on the witness-target[3] spectrum, will likely determine its appetite for a PPWPR, more so than financial considerations.

Nevertheless, if the PPWPR is in play, a producing party might find that the staff is reasonable and more respectful of potential privilege than the rigid terms of the model agreement may imply. And with smaller, cost-conscious clients, the PPWPR is certainly an approach worth considering.

[1] There will be a later post about why thinking you have “nothing to hide” is a dangerous thing.

[2] Loading and preparing productions for review by Commission staff is generally done by IT government contractors. Depending on the budget and other factors, backlogs often arise.

[3] “We still don’t use those terms…”

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