SEC Investigations 101: Testimony

January 31, 2019

This post is the fifth in a series of posts for non-lawyers, or non-securities lawyers, who might suddenly find themselves on the wrong end of a Securities and Exchange Commission document request, subpoena or call from Enforcement division staff.

SEC HQ front.jpgBy  Dan Portnov

If the SEC has opened up a formal investigation or a MUI (Matter Under Inquiry) that involves you or your company, will you have to speak to Enforcement staff? That’s one of life’s great uncertainties but odds are that it will not resolve before you have.

What exactly does that mean? And how can you and your lawyer prepare?

“Talking” to the SEC can take place in a variety of ways:

  1. Ordinary check-in calls, usually made by your attorney or company’s compliance officer.
  2. Attorney proffers.
  3. Off-the-record meetings and interviews.
  4. On-the-record testimony.
  5. Charging/Wells discussions with staff and supervisors.

While all forms of communication are important for many different reasons, this post will focus on the last two categories. – your opportunity(ies) to answer the staff’s questions and, possibly, tell your side of the story.

           The Basics

No matter the type of meeting, you should be well prepared. That means reviewing all documents – produced or not, privileged or not, helpful… or not – that may be of interest to the staff. Your lawyer should go over these documents with you until they know what answers you will give and what, if any, follow up questions might arise. Like a good trial direct (or cross) exam, there should not be any surprises.

Tell the truth. Duh. Even where there is no court reporter recording every last one of your “ums” and “uhs,” you can still commit a felony by making false statements or obstruct the SEC investigation by lying to the staff.

           Off-the-record meetings and interviews

These are considered “voluntary” opportunities to speak to the staff without a court reporter and all of the pomp and circumstance that comes with subpoena for testimony. These conversations can occur on the phone, in person at your place of business or home, or at one of the SEC’s offices.

Just because these are voluntary, don’t think for a second that you should participate without a lawyer. Your answers could still sink you.

While less formal, you will still receive some warning from the staff. Here’s the gist of the warning:

  • The purpose of requesting information from you is to conduct an investigation to determine whether securities laws have been violated.
  • Routine uses of the information that you might provide, e., what the SEC will do with what you tell them.
  • You are not required to respond to questions and there is no direct sanctions or effects to you for not responding.

In some cases, the staff will also warn you about the consequences of lying or obstructing the investigation.

So why would you agree to a voluntary interview? Several reasons.

  1. The staff have assured you (or let slip) that you are squarely in the witness zone (even though they don’t use the target/subject/witness terminology like the Department of Justice does).
  2. You are certain you have nothing to worry about (Congratulations, you must sleep very well at night. Also, are you sure? Pretty much all of our clients start off by telling us that they had nothing to hide).
  3. You have much to worry about and want to get out in front of it by coming in before the staff learns of the extent of your misconduct from another source. This decision should only come after some difficult conversations with your counsel about the consequences of essentially confessing to wrongful conduct, including possible criminal consequences down the road.
  4. You fall somewhere between numbers 2 and 3 above and the subject matter of the investigation is complex enough to where both you and the staff would benefit from some education on the issues by you, an insider or expert. Again, this decision would come after conversations and preparation with your counsel, and the parameters of the discussion would be set ahead of time.

By agreeing to the voluntary interview, you are also making the Enforcement staff’s life easier and potentially winning cooperation credit. Still, if you are not ready to speak to the people who are potentially trying to curtail your livelihood and fine you thousands (or millions) of dollars, it is understandable. After all, the staff can just issue a subpoena if they really want to speak with you.

           On-the-record testimony

On-the-record testimony is exactly what it sounds like: you are sworn in and a court reporter records your answers to the Enforcement staff’s questions. You are appearing pursuant to a subpoena that has been issued to you, compelling your testimony. Some additional features of compelled testimony:

  • You will be issued a background questionnaire. Though “voluntary,” it requests background information (date and place of birth, education, employment history, etc.) that will likely be elicited during testimony anyway. Most witnesses fill it out… and are questioned on its contents anyway.
  • Right to counsel. The subpoena and accompanying notice of rights and uses will make clear that you may request and bring counsel with you to testimony. If you begin testimony without counsel (Why would you do this? WHY?!?) and you tell the staff that you suddenly don’t feel comfortable proceeding without counsel, they will adjourn.
  • The staff controls the record and will go “off the record” when the questioner decides. In reality, as long as you don’t request to go off record in the middle of a question, or every few minutes, the staff will be accommodating.
  • You are entitled to “take the Fifth” and decline to answer a question on the basis of the privilege against self-incrimination. Taking the Fifth can have consequences in a civil case, however – a topic we will discuss in a later post.
  • A transcript is prepared and, with the staff’s permission, you will be allowed to purchase a copy.

On the record testimony is a serious event and we cannot stress enough how one should not show up for testimony without significant preparation. The preparation should include practicing carefully listening to and only answering the questions asked.

For lawyers, the normal rules of evidence do not apply, so do not bother objecting to the staff’s questions. However, a deft lawyer will listen carefully and interject from time to time to make sure the staff’s questions are clear to their witness or, if the witness’ answer is unclear, seek to clarify it immediately or after a break. Finally, pay close attention to when your client is losing focus and take regular breaks. Testimony can be grueling, and most people break down after several hours of questioning.

And just in case we weren’t clear about this before: don’t lie to the SEC!

In our next SEC 101 installment, we will discuss the Wells process and submission.



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