A Former SEC Enforcement Attorney Explains How to Avoid Common, Yet Potentially Costly, Errors
Receiving a SEC subpoena, a voluntary document request for information, or a cold call from aggressive lawyers at the U.S. Securities and Exchange Commission (SEC) is no doubt a highly stressful event often triggering confusion, panic and fear. Regardless of whether you are an experienced corporate executive, investment adviser, or an individual investor, your actions (or inaction) during the first hours of an SEC investigation may determine whether you are charged or walk away unscathed.
Having served as Senior Counsel in the SEC’s Division of Enforcement for several years, I have seen firsthand how seemingly small mistakes can needlessly complicate an investigation, create “self-inflicted wounds” and otherwise significantly limit opportunities for a favorable resolution. While every matter is unique, after over thirty years as a sec defense lawyer, I have seen the same mistakes repeatedly made.
Here are five of the most common, but dangerous, mistakes to avoid.
- Waiting Too Long (Procrastinating) to Hire an Experienced SEC Defense Attorney
Many individuals believe they can “explain everything” to the SEC or just handle the investigation on their own. Wrong. That approach can be, and almost always is, highly costly and irreparably damaging.
The earliest stages of an SEC investigation are often the most critical, typically shaping the strategic direction of the entire matter. Decisions regarding document production and providing sworn testimony, privilege issues, and communications with SEC investigators should be made strategically from the outset. Making such assessments down the investigatory road is often too late.
Early assessment can identify potential exposure, its scope and allow for a strategic defense strategy to be put in place to defend critical rights with the objective of avoiding charges or, in the alternative, mitigating the damage.
- Failing to Preserve — or Deleting — Relevant Documents and Electronic Evidence
One of the first obligations after learning that you are under SEC investigation is to preserve relevant evidence.
This includes, but is not limited to:
- Emails
- Text messages (regardless of whether they are encrypted)
- Instant messaging applications
- Internal chat platforms
- Calendars (hard copy and electronic)
- Trading records
- Financial spreadsheets
- Personal written notes
Intentionally deleting information after having received a SEC Subpoena can constitute obstruction of justice, a serious, criminal offense.
- Speaking with SEC Lawyers Without Legal Representation
This can be fatal to an investigation.
Every word, phrase or innuendo uttered by you to the SEC can, and will be, potentially be used against you in a SEC civil prosecution and/or a criminal prosecution if the SEC refers the matter to the Department of Justice (“DOJ”). Seemingly easy, friendly questions may not be so “innocent”, in fact, they may be of critical importance, answers to which may provide the Government incriminating evidence against you it may never have otherwise obtained.
Don’t go at it alone – the stakes are potentially life-changing. Before agreeing to speak with the SEC, engage SEC defense counsel so that a deep-dive analysis can be made on your case, and so that you fully understand:
- Your legal rights
- The potential scope of the investigation,
- Your potential liability (even if you don’t believe you did anything wrong, you may simply not understand why and how you may have engaged in illegal conduct), and
- Your potential legal defenses to avoid being prosecuted.
- Assuming the Investigation Is “Just a Civil Matter”
While it is true the SEC possesses only civil enforcement authority (it can’t put you in jail), its investigations may spawn a related, parallel criminal investigation, which can land you in jail.
In my experience, certain SEC cases can lead to a referral to the DOJ, particularly if: (1) the evidence of the securities fraud is clear and compelling, (2) the victims have lost substantial monies and are vulnerable (elderly and/or unsophisticated), (3) the fraudulent conduct was systemic, and (4) the target has a history of prior securities law violations (a recidivist).
The takeaway – defending a SEC investigation necessarily requires an early analysis of the likelihood of a criminal referral and, as a result, the strategic measures to be put in place up front to reduce that possibility.
- Contacting Potential Witnesses
I often learn after-the-fact that my client, immediately upon receiving a SEC subpoena, began contacting involved individuals (coworkers, clients, former employees, etc.), whether by phone, in person, email or text. It is a natural reaction but can prove fatal to a successful defense.
Although these conversations may seem harmless, and often feel cathartic, they can create a new body of damaging evidence that may be used by the SEC, or DOJ, to prove its case, and/or may be viewed as attempts to improperly influence witness testimony or interfere with the investigation – a possible criminal offense.
Generally speaking, in the early stage of the investigation when little is known, the best approach is to retain counsel, stop talking, writing, e-mailing, and texting. Hunker down until the facts can be sorted by a seasoned securities defense lawyer.
Frequently Asked Questions
Does receiving an SEC subpoena mean I will be charged?
No. The SEC conducts hundreds of investigations each year, with many never resulting in charges. A subpoena is merely a tool used by the SEC to conduct its fact-finding inquiry to determine, after a review of the evidence, whether you, and/or others, violated the federal securities laws.
Should I cooperate with the SEC?
It depends. While cooperation can be a valuable strategy, it is not appropriate in every situation. The particular facts of your situation need to be carefully assessed and vetted to determine if it is the most effective defense strategy.
Can deleting emails after receiving an SEC subpoena create additional problems?
Yes, as explained above. Once an investigation is reasonably anticipated or a preservation obligation arises, destroying potentially relevant evidence may have serious legal consequences, including potential criminal consequences.
When should I contact an SEC defense attorney?
Immediately after receiving a SEC subpoena or being contacted by SEC investigators. Time is of the essence. Every step you take after this point without legal counsel, you risk sabotaging your potential successful defense.
Final Thoughts
SEC investigation outcomes are often shaped by the decisions made very early in the process.
Avoiding the five common mistakes outlined above can best protect your legal interests, reduce unnecessary, potentially grave mistakes, and best position you to avoid prosecution.
As a former SEC Prosecutor, I saw first-hand how the process works. As a SEC defense lawyer for over the last twenty-five years, I have represented executives, investment professionals, hedge funds, public companies, and individuals facing complex regulatory investigations throughout the United States. These investigations are potentially life-changing and must be treated as such.
If you are under SEC or DOJ investigation for securities fraud, including insider trading, call me immediately for a free and confidential consultation at: (800) 760-0912. You can learn more about my background, experience and expertise at: https://www.securitiesfrauddefense.net/.
