SEC Investigations 101: Making Contact

SEC HQ front.jpgBy Dan Portnov

This post is the second in a series of posts for non-lawyers, or non-securities lawyers, who might suddenly find themselves on the wrong end of a Securities and Exchange Commission document request, subpoena or call from SEC’s Enforcement division staff.

Nobody ever expects the Spanish Inquisition call from SEC Enforcement. Still, when you find yourself on the line with Enforcement staff who have questions about a particular transaction or event, there is no need to panic. This post will walk through the basics, background and tips for dealing with that first call.

The Basics of the Initial Call

Before diving deeper, there are a few basics to know about when and how the SEC will call. First, the SEC calls during business hours. Unlike criminal regulators and what you might have seen on television, the SEC cannot do dawn raids, knock and talks, wire taps or board your yacht during a celebration.

Second, Enforcement staff will almost always have two people on an initial call, in order to have a note-taker and witness should a dispute arise later.  Calls may not be recorded without permission and you should feel free to decline the invitation to record the call

Third, SEC staff must clearly identify themselves and explain the nature of their call. They must also answer basic questions, as long as they are not asked to reveal confidential information or investigation strategy and tactics. Enforcement staff are not allowed to make misrepresentations or use clandestine tactics when speaking with third parties.

A call from an SEC telephone line will usually appear on caller ID as the main office line and not a blocked or unknown number (like DOJ/FBI). For instance, a call from the New York Regional Office (NYRO) will show up as (212) 336-1100.

Additionally, the SEC is not shy about calling office lines, cell phones and even home phones. If the Agency needs to get in touch, it will use all available information to find you.

Finally, and most important, the Enforcement staff do not use criminal terminology such as “Target,” “Subject,” or “Witness” in describing entities involved in their investigations. That means it can be a little bit harder to figure out your role in a case and whether you are the focus of the investigation or a collateral player.

Weeks or Months of Preparation

Contact from the staff typically follows much internal planning and strategy. These are not calls made on the fly because an SEC attorney is curious what you may say about an event or transaction. By the time you are called, the SEC attorneys have developed at least a rudimentary theory of the investigation as well as your participation in the conduct at issue.

Before calling the focus of its investigation or primary wrongdoer, the staff has likely reviewed some documents and interviewed the source of the complaint (if not anonymous). The staff will have also likely reached out to potential victims, witnesses and tangential participants.

Most important, the staff will have also considered possible reactions to their call because that call reveals that the SEC is looking into you (a/k/a “surfacing”). If there is any risk of witness tampering or destruction of evidence, the staff will have taken steps to preserve unvarnished testimony, documents and even websites (by having IT staff capture the website and swear out an affidavit).

Purpose of the Initial Call

If you are the focus of the investigation, the staff will anticipate that you will soon lawyer up (if you have not already) and ask for contact information for you (or your attorney) in order to send any document requests, subpoenas and instructions (e.g., Forms 1661 and 1662). In certain instances, where the misconduct is relatively minor and straightforward, the staff may attempt to ask substantive questions before following up with document requests.

By contrast, if you are a victim or witness, the staff will attempt to elicit as much information as possible in that first call. Initial calls to victims and witnesses are incredibly valuable for the staff’s information gathering and strategy; thus the staff will be more forthcoming about the nature and object of its investigation (or inquiry), and your role in it.

In either case, before the staff can ask you substantive questions, they must advise you of certain rights and uses of the information under the Privacy Act. They must also advise you that providing false information to them would be a separate, prosecutable offense.

At the end of the call, the staff will endeavor to set up next steps such as document requests or interviews and testimony.

What You Should Do If Called

Assuming that you are not screening calls and suddenly find yourself talking to Enforcement staff, there are several things your should do to put yourself in the best possible position going forward:

  1. Decline to answer any substantive questions.

Even where the staff have you convinced that you face no exposure, you may still invoke their wrath if you provide false statements or otherwise seem less than forthcoming. Let the staff know that you will consult a lawyer and get back to them. Even if you do not end up retaining a lawyer, it is important to let the staff know that you want to take some time to consider representation and prepare for any interview or testimony. Please do not assume—as many of our clients incorrectly do—that you “did nothing wrong” and “only want to help” the investigation. Those are fatal errors. You may not realize that you did something wrong, and your “help” may end up hurting you down the road.

  1. Ask your own questions, specifically:
    1. Is this an investigation or inquiry?
    2. Is there a Formal Order of investigation? If so, may I request a copy?
    3. Where do I fit into this investigation/inquiry?
    4. Could you spell your name and give me your contact information?

The status of the matter – investigation or inquiry – as well as the issuance of a Formal Order will tell you and your lawyer just how serious and advanced the matter may be. Questions about your role, even if not directly answered, will give you a hint of your perceived exposure. The more cagey and non-responsive the staff are, the closer you might be to the crosshairs.

  1. Do not destroy any documents that may be relevant.

You are presumed to be on notice as of the initial call that you might need to produce relevant documents and give testimony. Destruction of documents after the SEC surfaces, if discovered, may serve as the basis of separate charges (such as obstruction of justice) or used to show consciousness of misconduct later.

  1. Do not communicate substantively with other persons potentially involved in the investigation.

SEC staff will be upset to learn if you immediately contact another party involved and discuss the substance of the investigation. The SEC cannot stop certain communications, such as friendly conversation or sharing of logistical details. If your lawyer and a lawyer for another party enter into a joint defense or common interest agreement, you may be able to share substantive information that way. However, if you attempt to coordinate or influence the testimony or production of another party, the SEC may bring separate charges or, similar to #3 above, use your communications against you as evidence of consciousness of misconduct.

  1. Consult with a Lawyer

SEC Enforcement press releases and litigation releases are rife with charges brought against individuals who thought they could just explain themselves to the staff (or lie their way out of it). The Enforcement Division has substantial resources to investigate and relies on legions of lawyers to interpret and enforce securities laws. For example, a chief compliance officer attempting to explain his or her lay interpretation of, say, Reg FD, may just create more trouble for herself and her company. Consider consulting, however briefly, with a lawyer who knows how the Enforcement division investigates.

Being embroiled in an SEC investigation is unpleasant. However, taking the few simple steps described above can mitigate potential harm from the outset.

In our next SEC 101 installment, we will cover the beginnings of the actual investigation, and the decision to cooperate.

This entry was posted in SEC Investigation, SEC policy and practice. Bookmark the permalink.

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