This article is for the business executive or entrepreneur who receives a subpoena from the Securities and Exchange Commission (“SEC”) for testimony and/or documents. Often the subpoena is directed to the individual’s company or companies. Understanding the playing field on which the SEC conducts securities fraud investigations is critical to mapping out an effective defense strategy. The smallest tactical error can have devastating consequences down the line. Here are ten things to do that may help you avoid significant civil or criminal liability.

1. Do Hire an Attorney with Securities Fraud and White Collar Defense Experience.

Incredible as it sounds, many people who get subpoenaed by the SEC let their regular business attorney or transactional securities lawyer handle the subpoena response. Some don’t use an attorney at all. This is a serious mistake. Even though the SEC has no criminal jurisdiction, every SEC fraud inquiry has the potential to “go criminal” by being referred to the U.S. Department of Justice (“DOJ”) for criminal investigation. In fact, many SEC fraud investigations are conducted “parallel” to ongoing DOJ white collar criminal investigations. These parallel fraud inquiries may already be in place by the time you receive your SEC subpoena. In light of this reality, every response you provide or document you send to the SEC must be viewed with your potential criminal exposure in mind. It would be foolish under these circumstances to hire an attorney with no white collar expertise. You should hire an attorney with experience handling both SEC and DOJ fraud investigations. It is not enough to hire an attorney who only has SEC litigation experience. Some of the worst strategic mistakes I have seen in SEC proceedings have been made by attorneys who failed to consider the white collar crime consequences of what they were advising their clients to do.

2. Do Get A Copy of the SEC Formal Order of Investigation.

 Once you have been served with the SEC subpoena, you have the right to request a copy of the SEC’s formal Order of Investigation. The SEC typically provides this if your attorney agrees not to share it outside the defense team. The Order of Investigation is what gives the SEC’s attorneys the authority to issue subpoenas and take sworn testimony. The Order of Investigation will tell you which person or entity is the main focus of the SEC’s fraud investigation as well as the particular conduct that is under the SEC’s microscope. Although it is not exceedingly detailed in nature, the Order of Investigation, along with the background facts you fill in for your attorney, will give both of you a much better understanding of where the SEC’s investigation is headed.

3. Do Ask for More Time.

 The SEC’s subpoena may demand a mountain of evidence, but give you little time to produce it. You do not need to tolerate this. Don’t hesitate to ask for more time to produce the requested documents. SEC subpoenas are not self-enforcing. In other words, no matter how much an SEC attorney demands your documents and demands them right away, the SEC must go into a federal district court to compel your compliance. What if you get a massive records request that calls for the documents to be produced in 14 days? If the SEC’s attorneys go into court and try to compel production in such a short period of time, they will look ridiculous and the motion will be denied. So you have some leverage. You will want to comply in an expeditious manner, but you cannot be forced to accomplish the impossible. It is routine to have your lawyer ask the SEC for more time to produce the subpoenaed documents and the Commission routinely grants these requests. You will also usually be allowed to comply with the SEC subpoena through a “rolling production” in which you begin the production as soon as documents become available and thereafter periodically turn over documents until the production is complete. If you proceed in this fashion, you will be demonstrating your attempt to comply with the subpoena and the SEC will not waste its time in court trying to force a faster schedule.

4. Do Negotiate the Technical Format of the Production.

SEC subpoenas almost always contain detailed technological requirements, attached to the subpoena, instructing you on the required format for the production. These requirements are often expensive and onerous for smaller companies and entrepreneurs. In my experience, if the SEC wants the documents badly enough, they will excuse or ignore your failure to meet their technical requirements. It is not at all clear whether they can force compliance with these requirements in the first place. Similarly, the SEC will often number their requests and ask you to produce documents that specifically respond to each set of numbered requests. It is not clear that they have the power to do this either, and acquiescing to this method could increase your exposure. You should discuss how best to respond to such requests, and the risks involved, with your experienced securities fraud attorney.   

5. Don’t Automatically Sign A Tolling Agreement.

Tolling agreements allow the SEC to temporarily “toll” or stop the operation of statutes of limitation. The SEC only has a number of years in which it can bring a lawsuit against you, depending on which civil securities fraud statute it decides to use. The SEC also has its own internal rules on when it must bring an action once a formal Order of Investigation has been issued. When you sign a tolling agreement you are allowing the SEC to call a “time-out” and stop the statute of limitations clock from running while the tolling agreement is in effect. Why would you ever sign such an agreement? Often the SEC will threaten to sue you or your company right away if you refuse to sign a tolling agreement. If you want to avoid a very public SEC fraud filing against you at all costs, and think your attorney might ultimately be able to persuade the SEC not to file suit against you, it may be a wise move to sign a tolling agreement. But don’t rush into a tolling agreement without carefully considering the pros and cons.

6. Don’t Automatically Allow Your Attorney to Accept Service.

After you are served with the initial SEC subpoena for documents and/or testimony, the SEC will ask your attorney whether he/she will accept future service on your behalf via email. This is more efficient for the SEC, and it allows you to avoid the embarrassment of being publicly served. It is usually to your benefit to agree to this procedure. But not always. If you are a non-citizen living in a foreign jurisdiction and you agree to let your stateside attorney accept service of future SEC subpoenas on your behalf, you could end up waiving any potential jurisdictional defenses. I have had foreign clients served with SEC subpoenas while traveling internationally through U.S. airports. Although service of the subpoena compelled them to respond by producing the requested documents, this only applied to the one subpoena in question. If they had agreed to accept service of all future SEC subpoenas, they would have needlessly subjected themselves to the SEC’s jurisdiction with no effective ability to limit the scope and breadth of future SEC subpoenas.

7. Do Be Prepared to Discuss and Invoke your Fifth Amendment Testimonial Privilege.

At some point, after reviewing your documents and other materials they have gathered, SEC attorneys will almost certainly request to take your sworn testimony. In fact, the initial subpoena will typically be for your documents and testimony. Unless you and your white collar securities fraud defense attorney are convinced that you have no criminal exposure, you should be prepared to invoke your Fifth Amendment Privilege Against Self-Incrimination during your testimony. Even though SEC investigations are civil and/or administrative proceedings, you can still invoke your Privilege Against Self-Incrimination if a truthful answer to any question would furnish a link in a chain that might tend to incriminate you. The U.S. Supreme Court has made it clear that the Fifth Amendment Privilege Against Self-Incrimination protects the innocent as well as the guilty. As a practical matter, your invocation of the Privilege Against Self-Incrimination will not be challenged by the SEC. That is because the SEC lacks the power to grant you immunity from prosecution. (Recall that the SEC has no authority to bring a criminal action in the first place.)

Invoking the Privilege Against Self-Incrimination may also allow you to avoid producing certain documents to the SEC, if a documentary subpoena was issued to you in your personal capacity. Under the Act of Production Doctrine, which is part of the Privilege Against Self-Incrimination, if the very act of producing a document might tend to incriminate you, you can decline to produce it. However, this Act of Production Doctrine will not apply if the subpoena is issued to your company.

There is a serious downside, however, to invoking the Privilege Against Self-Incrimination in the context of an SEC inquiry or civil action. Although your invocation cannot be used against you in any criminal matter, it can be used against you in a civil or administrative matter. For example, if the SEC files a lawsuit against you and you invoke the Privilege Against Self-Incrimination during your trial or deposition testimony, the trier of fact is allowed to infer that your answer would have been harmful to your defense. This can have devastating consequences in the SEC’s civil action against you. So, none of these decisions should be taken lightly or without careful consultation with your securities fraud/white collar crime attorney.

8. Do Get Totally Prepped for Your SEC Testimony.

You would be amazed how many sophisticated business executives become blithering idiots during their sworn testimony at the SEC. Keep in mind that the SEC has an enormous staff of outstanding, well-trained attorneys who have been studying your case in minute detail, and mastering its facts, months before you even sit down. I assure you they are fully conversant with every single document in the file.  And don’t think for a moment that the SEC’s lawyers are lazy, clock-punching government types. A staff attorney position at the SEC is a plum job. The SEC picks from the best and the brightest at the most elite firms in the country. Most of these young SEC lawyers are on their way to future partnerships at major law firms. They may be punching their tickets, but they are not punching the clock. So you need to be completely prepped by your attorney, an attorney with securities fraud and white collar experience, before you answer the first question.

The kind of preparation I’m talking about does not involve merely reviewing every relevant fact and document. It also involves learning to listen to the SEC lawyer’s questions carefully before responding, and learning to respond in a way that does not come back to haunt you. You may be testifying about matters that occurred years ago. Nobody’s memory is infallible. If you are asked whether you ever said “X” to Mister Y during your company’s black-out period, it is one thing to testify: “Absolutely not. It never happened.” It is quite another to testify: “Gosh, I don’t remember saying that, but I’m not 100% sure. Do you have any documents that might refresh my recollection?” The SEC lawyers will usually question you for quite some time before showing you any documents. They are often doing this in an effort to lock down testimony. Then, if the documents don’t match your testimony, they will spring them on you relentlessly making you look like a dishonest fool. There are twin dangers involved in testifying at the SEC: 1) the danger that you may end up testifying falsely; or 2) the danger of admitting to damaging facts. That’s why it is critically important to be fully prepped in all facets of your testimony, the substance and the performance, before you go in.

9. Do Order the Transcript of Your Testimony.

As soon as possible, while you are at the SEC testifying or after you testify there, your attorney should order the transcript of your testimony. This can now be done on-line. Ordering the transcript of your testimony allows you to check it for accuracy and correct any errors that you may notice. Your attorney can also share the transcript, if you authorize it, with any other attorneys who may be part of a Joint Defense Agreement with your legal team. This can obviously help with the development of a coherent defense strategy. Even if your testimony consists of little more than invocations of your Fifth Amendment Privilege Against Self-Incrimination, reviewing the transcript is the best practice. Why is this so? As a witness, you cannot claim a blanket waiver of immunity. You must do it in response to each question posed to you. The SEC will ask you very specific questions in order to take advantage of the negative inference that may be drawn, in the civil SEC matter, by your refusal to answer. By reviewing the specific questions posed to you, and the documents shown to you, your attorney can get a good idea of where the SEC’s investigation is headed.

10. Do Take the Subpoena Seriously.

You must not respond an SEC subpoena in a careless or cavalier manner. That is a recipe for disaster.  This article has briefly touched on various strategies for minimizing your risk of exposure and protecting your rights in the face of an SEC subpoena. But at the end of the day you must comply, absent a valid privilege. Failure to make a good faith effort to comply with an SEC subpoena can subject you to costly sanctions or a prosecution for obstruction of justice.

You should also treat the subpoena seriously by producing documents in the safest manner possible. Maintain document control by numbering (“Bates Stamping”) each page of the production. Have your attorneys review each document prior to production in order to search for and withhold any and all documents that are subject to the attorney-client, doctor-patient, or marital privileges. Your attorneys will then produce a privilege log for the government, identifying in the briefest and most concise way possible, the documents being withheld.

Conclusion

SEC subpoenas for the production of documents and testimony are often a minefield for the untutored executive or entrepreneur. This article has touched upon some of the potential pitfalls of responding to an SEC subpoena, but it only scratches the surface. There is no substitute for mapping out a detailed strategy with a seasoned, experienced white collar lawyer who also has experience dealing with the SEC.