YOU SAID WHAT TO THE SEC?!!!
By Stanley C. Morris, Esq.
Don’t get caught in a Securities and Exchange Commission (“SEC”) ambush. If you receive a SEC enforcement ambush call, you may face catastrophic admissions that cannot be cured. That is why every organization or individual that may be subject to such a call must develop an effective plan of action before the SEC or some other regulatory or enforcement agency calls.
THE AMBUSH
In the early stages of an investigation, the SEC enforcement staff and other securities regulatory bodies frequently employ an investigative technique called the “ambush.” The “ambush” is the first phone call made to the subject of an investigation. It is made without warning.
During the call, the SEC staff attorney interrogates an individual or representative of an entity with the goal of obtaining critical admissions and/or catching the subject lying about facts already known to the SEC.
The enforcement staff is attempting to lock the subject into a particular story from which he or she cannot be extricated. Often, the subject mistakenly believes that he or she can talk their way out of the problem. He or she blabs every detail to the interrogator in an effort to “make friends” with the staff attorney. This can lead to more serious and penetrating investigations.
How do you prepare for this call? Prepare your responsive strategy with the advice of an experienced SEC enforcement defense attorney in advance and make sure all your employees know the proper response policy. Most importantly, make sure everyone representing you complies with that policy.
In short, you and your staff should be courteous to the SEC attorney, but never answer any questions until after you have discussed the matter with experienced SEC enforcement defense counsel.
Politely explain to the SEC attorney calling that it is your policy to cooperate fully with all governmental authorities, but that you must consult with an attorney before answering any questions. Refuse to engage in any further conversation, other than to get the caller’s name and telephone number. Immediately call an attorney experienced in dealing with SEC enforcement matters. Have that attorney call the SEC enforcement attorney on your behalf. Once the SEC attorney knows that an attorney represents you and/or your company, the SEC will not contact you and/or any of your employees directly without including your attorney.
THE COME HITHER LETTER
The “ambush” call usually is followed by a letter, known by the SEC staff as the “come hither” letter. The “come hither” letter requests the subject to voluntarily appear at the SEC to testify under oath and to produce an exhaustive list of documents.
A “come hither” letter will not, however, provide you with any information about who the targets of the investigation are or what violations the SEC suspects may have occurred.
The document request included as part of the SEC’s “come hither” letter casts a broad net as part of the SEC attorney’s “fishing expedition.” Fortunately, unless you are a registered broker-dealer, documents produced or testimony provided pursuant to a “come hither” letter is voluntary. This puts you in a relatively good position to negotiate with the SEC regarding the amount and type of documents you will produce. You must use this negotiating power skillfully to narrow the scope of the documents requested. Many unwary targets initially provide too much information in an effort to befriend the SEC staff member. This usually exposes the subject to broader inquiries into areas about which the SEC previously was unaware.
Based on the SEC attorney’s agreement to narrow the scope of the document production, your counsel may be able to detect what type of investigation the SEC is conducting and what violations the SEC suspects may have occurred. The bulk of SEC investigations can be lumped into one of the following types of charges: (i) offering fraudulent unregistered securities; (ii) accounting deficiencies; (iii) insider trading; (iv) broker-dealer sales practices; (v) failure to supervise; (vi) “soft dollar” practices and (vii) disclosure problems. Your attorney should be able to limit the documents produced to those that are relevant to the suspected violations.
Once the SEC has been forced to reveal some of its cards, your attorney can help you make an informed judgment on the extent to which voluntary cooperation with the SEC is in your best interest. In most types of investigations the SEC moves very slowly and conducts a protracted investigation. But, if the violation is ongoing, the SEC can move quickly for a stop trading order or an emergency injunctive action with a complete asset freeze. Accordingly, it is at this time that you will want to weigh the costs and benefits of taking immediate remedial action to correct any problems that exist and prevent the SEC from obtaining emergency relief. Regardless of the type of violation, it is essential that you call an experienced SEC enforcement attorney at the latest upon receipt of a “come hither” letter.
Stanley C. Morris is a former Senior SEC Enforcement attorney and his practice includes representation of public and private companies and individuals in investigations and civil lawsuits brought by the enforcement divisions of the SEC, NASD and California Department of Corporations. His practice also includes broker-dealer customer arbitrations, compliance matters, internal investigations and securities transactions. Mr. Morris serves as a member of the NASD Regulation, Inc. Board of Arbitrators |
