Being forced to participate in an SEC investigation, even as a witness, can be a harrowing experience, and this is true whether you are a market professional, the CEO of a regulated entity, or an investor. That investigation can have a serious effect on your business, or your career and has the risk of consuming a significant amount of time, and money, even if you have not engaged in any wrongful conduct. How you respond to the initial inquiry, and how you manage the events as the investigation continues often determines the outcome of that investigation.
SEC investigations can begin from a variety of sources, including anonymous tips, trading surveillance by the SEC, or the exchanges, customer complaints, or from information obtained by other government entities. Witnesses and even targets, often learn of the investigation by a simple telephone call from an investigator or staff attorney. That telephone call will be followed by a letter, which requests that you voluntarily provide information to the SEC Staff.
The first important step - do not have a discussion with the Staff, and should you ignore this step - do not give the Staff false information. Lying to the SEC can be the basis for a felony charge, and the last thing you want to do is to turn a defensible investigation into an indefensible criminal charge of obstruction. We have seen it happen in our own practice, and the world saw it happen -
Martha Stewart went to jail for lying to SEC investigators. She did not go to jail for insider trading, and she had a viable defense to that charge.
From this point forward, you need to be involved, and to be proactive, and you need an experienced
securities attorney. At this stage, the SEC undoubtedly does not have subpoena power, but that power is easily obtained. You must make a decision whether to voluntarily cooperate, and you should make that decision with an experienced securities attorney. Not only is a securities attorney knowledgeable about the law and the procedure involving investigations, the securities defense bar is small, and your attorney will have access to information and resources that you do not.
In addition, if there is any chance that you will become the subject of an investigation, or that any information you have may be damaging, you need to put an attorney between you, your employees and your company, and the SEC.
Your attorney will contact the Staff and attempt to determine what the nature and scope of the investigation. Unfortunately the Staff is not always forthcoming with that information, and you will have to prepare a response without knowing the scope of the investigation. Providing information on a voluntary basis is typically the better response, but not always, and you should keep in mind that some investigators can become quite vindictive if you do not voluntarily cooperate. Unfortunate, but true.
Together with your attorney you can manage that voluntary request to minimize the impact on your business. The SEC is notorious for asking for reams of documents, using demands that include "all documents relating to" an issue, and which can consume dozens of hours of time to identify, review and produce responsive documents. At this stage, you and your attorney can discuss the requests with the staff, seek clarification and modification of the requests to make that request manageable.
At this stage, you will also need to insure that documents, emails and notes, including electronic notes, are maintained and not destroyed. Employees need to be advised to preserve documents - no shredding, and no reformatting of hard drives. Again, being accused of destroying evidence after learning of an investigation can be worse than the outcome of the original investigation.
While the seriousness of the event is enough to cause concern, a large part of any
subpoenaed broker's concern is the fear of the unknown, including the procedure, what will be discussed and the target of the investigation.
