A Former Insider’s Guide To Successfully Managing SEC Investigations

A version of this article previously appeared in New England In-House

In more than six years investigating and prosecuting potential securities law violations as an SEC enforcement attorney, I frequently watched as companies and their lawyers made decisions in the spirit of zealous advocacy that the enforcement staff viewed as foolish, counter-productive, wrong-headed, hard-headed, incomprehensible, costly for management, and costly for shareholders. Mistakes in managing investigations were all too common and can lead the SEC to devote additional resources, involve very senior-level personnel and generally raise the profile of a matter within the agency. If your company or client receives a request for information from the SEC's enforcement staff, here are eight common mistakes to avoid:

1. Ignoring or Minimizing Staff Concerns. If the SEC staff raises an issue, address it -- especially if you believe their concerns are misplaced, misguided or misinformed. Avoid the temptation to be dismissive of staff concerns and spend time trying to understand the issue from their perspective. (Remember, they may have information you don't have.) Addressing the staff's concerns does not mean that a company ought merely to acquiesce. But it does mean that a company must tackle issues head-on and affirmatively provide the staff with the facts, law or other information necessary to understand the company's point of view.
2. Withholding Information. Companies should make sure that information provided to the agency is complete. Companies that withhold information, intentionally construe staff requests too narrowly, or redact documents for any reason other than privilege create the impression that they have something to hide. You should endeavor to demonstrate that you share the staff's interest in rooting out potential misconduct for the benefit of company shareholders.
3. Failing to Self-Report Misconduct. Self-reporting misconduct is an important part of company cooperation, and a company will be better off if it reports misconduct before the SEC staff discovers it themselves or hears about it from the newspaper, a whistleblower, or somewhere else. Determining when and what to self-report often present difficult issues for companies that may themselves have incomplete information. But the staff generally appreciates early notification, and they will continually be evaluating whether the company and its advisers can be relied upon to provide complete and timely updates. Although determining whether and when to self-report can raise thorny issues, there are at least two circumstances when companies should not hesitate. First, if the SEC has already opened an investigation, report potential misconduct at the earliest possible point, even if only to notify the staff that an investigation is being undertaken. Second, companies always should report misconduct before making a public disclosure.
4. Contradicting Yourself. Too often, company management or employees make statements to customers, business partners, analysts, reporters, investors, or others that are contrary to positions taken with the SEC. Staff attorneys speak with a lot of witnesses, read the press and listen to investor conference calls. If you are double-talking, chances are they will find out, and you will suffer the consequences.
5. Delaying in Producing Documents, Witnesses or Information Without Reasonable Explanation. Inadequately explained delays are often viewed with suspicion. If you believe the staff is insisting on an unreasonably expedited schedule, do your best to meet their demands where possible with rolling productions and informal updates. But also engage the staff in detailed discussions about any technological or logistical issues that you are facing. Most enforcement attorneys have personal experience with complex, large-scale, electronic investigative discovery, and if they believe that you are working in good faith to satisfy their requests, they will likely work with you to resolve logistical issues.
6. Failing to Stop Known Misconduct, Fix It, Re-Pay Victims and Prevent Recurrence. If you know of misconduct, the staff expects that you will act swiftly to stop it, to redress any harm, and to take steps to make sure it doesn't happen again. If there are reasons that you cannot do so, you should be prepared to explain and justify those reasons.
7. Overly Coaching Witnesses. Preparing witnesses to give testimony is more art than science, and the best approach for any particular witness will depend on many factors, including the witness's memory, his or her role in the transaction at issue and the nature of relevant documentary evidence. But the staff will get suspicious if testimony from company employees, who may share the same lawyer, appears contrived to fit a legal argument. Percipient witnesses should stick to what they saw, heard and know. Overly coached testimony loses credibility -- even if the witnesses are telling the truth.
8. Being Contentious, Belligerent, Argumentative, Eristic, or Just Difficult to Deal With. The SEC doesn't institute enforcement actions because lawyers are difficult to deal with -- but it certainly doesn't help a company's cause. Difficult lawyers undermine the staff's confidence in information provided by counsel. Worse yet, the staff may become concerned that the company doesn't intend to live up to its promise of full cooperation or that there is additional misconduct that hasn't been uncovered. Effective company cooperation includes being responsive to staff needs, returning calls promptly, providing information when requested, and being respectful, courteous and professional in all interactions with the staff.

The good news is that many SEC investigations are closed each year with no enforcement action taken. This is a sign of a well-functioning regulatory process, where the government investigates potential misconduct, companies participate in the process, and the staff concludes that no enforcement action is necessary or appropriate. If the SEC calls you, get advice from an experienced practitioner and avoid these common mistakes. It will increase your chances of a quick and successful resolution.

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This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.