Corrigan & Morris LLP
SAID WHAT TO THE SEC?!!!
get caught in a Securities and Exchange Commission ("SEC")
amubush. 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 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.
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 interviewer. This can
lead to more serious and penetrating investigations.
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.
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.
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 you and/or your company are represented by an attorney, the
SEC will not contact you and/or any of your employees directly without
including your attorney.
COME HITHER LETTER
"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 voluntarily to 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.
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 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
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 actions: (i) Offering fraudulent unregistered
securities; (ii) accounting deficiencies; (ii) insider trading;
(iv) broker-dealer sales practices; (v) failure to supervise; (vi)
"soft dollar" practices and (vi) disclosure problems.
Your lawyer should be able to limit the documents produced to those
that are relevant to the suspected violations.
the SEC has been forced to reveal some of its cards, your lawyer
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 upon receipt of a "come hither"
/ FORMAL INVESTIGATIONS
SEC has two categories of non-public investigations. The first and
generally less serious type is the informal investigation, sometimes
referred to as a "Matter Under Inquiry" or "MUI."
The second, and generally more serious is the formal investigation.
The Informal Investigation.
informal investigation is commenced at the sole discretion of a
staff attorney by simply completing a one-page SEC form. Often the
informal investigation is commenced with little information.
all investigations, regardless of how serious they may be, are initiated
as a nonpublic informal "Matter Under Inquiry" or "MUI."
Both in oral statements made at the beginning of an "ambush"
call and in the "come hither" letter, the SEC attorney
will tell you that the investigation is an "informal fact finding"
investigation. Don't be mislead by the description "informal
fact finding." If handled inappropriately, informal investigations
can quickly blossom into formal investigations or directly into
enforcement actions. Your admissions in the informal stage of the
investigation are binding in a formal proceeding and may lead directly
to an enforcement action resulting in a seven-figure judgment, an
asset freeze, criminal charges, an officer and director bar or a
bar from the securities industry.
the seriousness of an informal investigation, every effort should
be made to keep the investigation from escalating to a formal proceeding.
At the informal stage, the staff attorney does not have authority
to issue subpoenas for documents and testimony of witnesses. Instead,
except in the case of regulated entities such as broker-dealers,
the staff attorney must rely on voluntary cooperation. This gives
the defense attorney much more room to negotiate than in the case
of a subpoena.
obvious, but important reasons to keep the investigation at the
informal stage is that the informal investigation is much more likely
to be terminated quickly and without any adverse consequences than
a formal investigations. SEC procedures make it much easier to terminate
an informal investigation than a formal investigation. At the informal
stage, the SEC staff attorney has not invested a lot of time and
resources and can make a decision to terminate a case based on his
own discretion or after consultation with just one supervisor. This
underscores the importance of having an experienced SEC defense
counsel involved in your matter early to persuade the SEC staff
attorney through factual, legal and policy arguments to simply drop
the matter without any further action.
sometimes it is impossible to prevent the matter from escalating
to a formal investigation. Even if your defense attorney did everything
exactly right, the SEC attorney may decide that he or she needs
subpoena authority because an unrelated witness is not cooperating
on a voluntary bases or the SEC attorney needs subpoena authority
to obtain bank or phone records to proceed with the investigation.
Under those circumstances, the SEC attorney will escalate the investigation
to the formal stage to obtain authority to issue subpoenas.
The Formal Investigation
escalate the investigation from informal to formal the SEC staff
attorney must submit to the SEC Commissioners a written request
that a Formal Order of Investigation be entered in the matter. That
memo will detail the SEC attorney's belief about the facts and possible
securities law violations that have occurred. If the SEC Commissioners
approve the staff attorney's recommendation, and it is virtually
certain they will, the Commissioners enter a Formal Order of Investigation.
the Formal Order is entered, the burden on the subject of an investigation
increases precipitously. The SEC attorney will makes broad use of
his or her subpoena authority to compel the appearance of witnesses
at the SEC and the production of documents. Responding to subpoenas
can be onerous and is at the least very damaging to your reputation
regardless of the outcome.
it is possible to challenge SEC subpoenas, rarely are such challenges
successful or advisable. Congress granted the SEC broad investigative
authority. In addition, a challenge to a subpoena must be made in
federal court, which is a public forum and would cause your previously
nonpublic investigation to become public.
consequence of a formal investigation is that the case takes on
a higher profile at the SEC and the staff attorney loses some of
his discretion to direct the outcome of a case. Not surprisingly,
fewer formal investigations are terminated without adverse action
being taken than informal investigations. Once a formal investigation
is commenced, several layers of supervisors and the commissioners
must approve the staff attorney's recommendation to terminate. Unlike
the informal investigation, at the formal investigative stage, your
defense attorney does not have an opportunity to speak to all the
necessary decisions makers. Instead, your counsel must convince
the SEC staff attorney to terminate and then rely on the SEC attorney
to persuade his supervisors and the Commissioners to terminate based
on all the factual, legal and policy arguments presented by way
of a written submission to the Commissioners.
the case of broker-dealers, it is often easy to spot the onset of
an investigation very quickly. Early signs of danger include the
presence of an enforcement attorney, more than two examiners or
a branch chief at a "routine" exam. If you see one of
those early danger signs, you should immediately contact experienced
SEC enforcement defense counsel. Get prepared for a possible "ambush"
of one or more of your employees.
non broker-dealer cases the early warning signs are less obvious.
But, if you receive any adverse media attention or are named in
a shareholder lawsuit, you should make sure all your employees are
prepared for a possible enforcement investigation. Accordingly,
you should also take seriously any threats by individuals to make
a report to the SEC. Experienced counsel should review all advertisements
or press releases to ensure that they are not overly optimistic.
The SEC regularly reviews press releases and advertisements that
trading cases frequently commence with the SEC or a self-regulatory
agency circulating a list of names of all the individuals who traded
in a security shortly before an announcement to the company officials
for identification. If you believe you may be on such a list, prepare
for the "ambush."
on the circumstances, the consequences of SEC investigations run
from a slap on the wrist to business crippling asset freezes, substantial
fines and criminal referrals of matters to the United States Attorney's
Office and/or other criminal law enforcement agencies.
lawsuits brought by the SEC generally seek injunctive relief against
further violations of the federal securities laws, an asset freeze,
an order for disgorgement of ill-gotten gains and large civil fines.
In insider trading cases, the usual remedy is a civil injunctive
action in federal court and a money judgment for three times the
profits made or losses avoided.
SEC also can bar you permanently from acting as an officer or director
of a public company or registered entity, such as a broker-dealer,
investment company and investment adviser.
even if exhonorated, the mere fact that SEC is investigating, can
damage the reputation of even the best companies and prompt shareholder
IMPORTANCE OF EXPERIENCED COUNSEL
the Department of Justice, which openly identifies its targets,
the SEC staff follows a long-standing policy against providing any
information to its targets. If a witness or target asks about the
focus, status or target of an investigation, the SEC staff is instructed
to disclose only that the investigation is a non-public fact finding
investigation and that the staff is prohibited from discussing the
status or any potential targets.
secrecy makes it all the more important that you have experienced
counsel who is able to indirectly gain valuable information through
informal meetings and conversations with the staff. An experienced
SEC defense attorney will be able to find clues about the nature
of your investigation and gage the intensity and disposition of
the staff member investigating the matter. With that information,
experienced SEC defense counsel may be able to direct the investigation
in such a way that the SEC attorney misses the mark.
important element is the importance of the SEC defense attorney's
prior relationship and dealings with the staff member conducting
the investigation. Although the rules governing SEC investigations
are set forth at 17 CFR 203, much of the success or failure of handling
your SEC defense cannot be found in a book, but comes from an unwritten
understanding of the SEC play book and the constraints under which
its attorneys must operate.
best defense is innocence. You should attempt to comply with the
SEC, NASD laws, rules and regulations. But mistakes can happen.
If it's too late for compliance, then you must have effective crisis
management in place. Developing and implementing an effective plan
of action before the SEC calls could save your career and economic
* The information contained in this
article should not be construed as legal advice and no attorney-client
relationship is created.
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.