What critical mistakes do I need to avoid in an SEC investigation?
In my many years of experience, I have seen that when an individual receives an SEC subpoena, there are certain mistakes that can be made that may be irreparable, meaning they may forever negatively affect the outcome of the investigation.
These are things you should never do.
Number one is speaking to the SEC unrepresented by counsel under the usually mistaken belief that through an innocent conversation you can explain everything away and the SEC will accept it, say thank you and you’ll never hear from them again. That is typically not the case.
It’s a big mistake. Every word you tell them can potentially be used against you later. And recall that, in that context, you’re not even sure what they’re investigating.
You should also not speak with others other than your counsel about the investigation. Why? Because you have no privilege with those individuals. Even your best friend from elementary school whom you trust—everything you say to that person can be discovered by the SEC later.
That is also true for putting anything in writing to individuals who are not your attorney—emails and text messages. It may make you feel better, but it just becomes potentially more evidence to be obtained by the SEC and used against you.
Additionally, you should never, after having received an SEC subpoena, delete, alter or destroy relevant documents. Doing so can constitute obstruction of justice, which is a criminal offense. Doing so can make what is otherwise a containable, defensible SEC civil matter escalate into a potential criminal matter.
Upon receiving an SEC subpoena, it is natural to panic. But the first thing that needs to be done to protect your interests, your reputation, your livelihood and your financial assets is to secure experienced SEC defense counsel.
It is SEC defense counsel who will navigate you through this complex process, which is unknown to you. So it is critical from the very beginning, before any self-inflicted mistakes are made that can forever change the trajectory of the investigation, to have a former SEC Enforcement attorney who knows the SEC’s playbook on your side advising you, counseling you, protecting you and navigating you through this potentially life-changing scenario.
Another mistake I see quite often is someone who has just received an SEC subpoena reaching out to an attorney who may have handled a real estate closing for them, a DUI matter, general commercial business litigation or even a criminal non-securities matter.
Your choice of counsel is absolutely critical. The SEC investigatory process centers on the federal securities laws. You need an attorney who knows the federal securities laws and who understands how the SEC operates, how it prosecutes and how it settles in order to have an effective defense.
It is a very niche, focused, specialized practice. Your choice of counsel is critical to ensuring a potentially successful result versus allowing an attorney who may have never handled an SEC investigation to do so for the first time.
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/.
