April 27, 2020 Practice Points

A Guide to Representing Parties in SEC Investigations in the Time of Coronavirus

Enforcement actions are not slowing because of the coronavirus. Here's what to know and how to represent your clients during quarantine.

By Matthew Allen, Michael Dicke, Daniel Nathan, and Trace Schmeltz

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Introduction

As defense counsel sit home multitasking among obligations to their clients, their firms, their family, friends and community, the financial regulators and enforcers have given every indication that the quarantines required by the coronavirus pandemic will not slow their enforcement efforts. Enforcement staff continues to open new investigations and pursue existing ones. As practitioners know, investigative steps include requests for documents through voluntary requests, use of inspection powers as to regulated entities, or subpoenas, requests for voluntary interviews, and both formal and informal requests for on-the-record testimony. And defending or participating in an SEC enforcement investigation often demands an ongoing dialogue with staff, including meetings to advocate for a position, or to try to talk the staff out of a case through the Wells or pre-Wells process.

For counsel preparing to defend an investigation under the constraints of a quarantine, this Practice Point discusses what enforcement staff is doing and how counsel can best respond in order to protect his or her client’s legal position while also being mindful of personal and public health.   

The Regulators Speak

The enforcement arms of the financial regulators have made official statements strongly suggesting that they are not slowing their efforts under the coronavirus quarantine. On March 23, the co-heads of the SEC’s Division of Enforcement released a statement that mainly emphasizes “the importance of maintaining market integrity and following corporate controls and procedures,” and citing violations that they will be particularly on the lookout for. But they also indicate that “the Enforcement Division is committing substantial resources to ensuring that our Main Street investors are not victims of fraud or illegal practices in these unprecedented market and economic conditions.” FINRA’s enforcement head stated that in the midst of COVID-19, “FINRA’s commitment to protecting investors and market integrity” has not changed, and that, “[n]ow, more than ever, it is important that FINRA Enforcement act quickly and aggressively to stop those who would use these uncertain times to take advantage of vulnerable investors or to manipulate the markets.” (Also on March 23, the SEC’s Office of Compliance, Inspections and Examinations issued “OCIE Statement on Operations and Exams – Health, Safety, Investor Protection and Continued Operations are our Priorities,” in which it stated that it will be conducting examinations off-site through correspondence, unless it is absolutely necessary to be on-site.)

At the same time that they are making these aggressive public statements, it is evident that some investigations might be lagging behind others based on resource issues or prioritization. Moreover, individuals currently on enforcement staff have noted privately that they have been given common sense discretion in pursuing cases at this time. And, while members of the securities defense and related bars have seen a continued push for investigative activity by financial regulators, they also have experienced enforcement staff exercising their commonsense discretion in disparate ways. Whether staff has begun an investigation by issuing a subpoena or requesting voluntary cooperation, defense counsel must be alert to a new set of considerations and strategic options.

Considerations

Document Requests

A regulatory document request—whether propounded by subpoena or informal request for cooperation—requires counsel and client to preserve, review, and produce documents. It is almost without peradventure that preservation can be done remotely. Accordingly, a party from which enforcement staff seeks documents must issue a basic document preservation notice and turn off any type of auto-deletion or backup media rotation functions. In short, respondents must preserve potentially responsive data irrespective of the raging global pandemic.

With respect to the collection of data, because most responsive information is likely stored electronically, respondents may not be successful in interposing objections to collecting records during the quarantine. Of course, to the extent a request seeks physical documents, counsel may be able to successfully object on the grounds that potentially responsive hard copy documents are in an office in a municipality with “shelter in place” or similar access limitations.

Effective review of potentially responsive documents, on the other hand, seems more nuanced. Constraints on having unrelated people meet with one another could impede the type of in-depth communication between counsel and client that helps to ensure accurate assessment of the privileged or responsive nature of documents. Moreover, if a respondent must employ a technology or contract attorney review of voluminous or particularly sensitive data (health-related documents, inside information, etc.), or for data that otherwise would not be reviewed by remote means, there may be security and privacy issues and problems with the technology (software and hardware) used to facilitate such review. Considering these more nuanced issues, the authors have seen lawyers succeed in taking several approaches to tailor document reviews and productions that satisfy enforcement staff (one or more of which could be combined) and have set them out below.    

Requests for Interviews

Without question, the most difficult set of questions raised by the quarantine involve when, whether, and how to prepare and produce a client for voluntary or compelled, on-the-record testimony. The initial, fundamental, question is how one can realistically assess whether his or her client ought to testify at all. Assessing a client’s credibility (or assessing whether enforcement staff will find a client to be credible) requires face-to-face conversation and eye contact. Without the opportunity to carefully (and legally and safely) sit personally with a client to determine whether she ought to testify or invoke her freedom from self-incrimination, counsel—and, derivatively, the client—could be set up for failure.

Similarly, travel bans and shelter-in-place orders impede client and counsel from appearing together for testimony. Much is lost when counsel and client cannot sit side-by-side in an interview. For example, it is difficult for counsel to convey subtle nuance by video or to quietly caution a witness to slow down or stop talking altogether. And, of course, sitting next to a client allows counsel to more easily object, seek clarification, or ensure the client understands and is answering that question asked.

Finally, in certain instances it is important for a client being questioned to be in the same room as a questioner. For instance, some people evoke feelings of empathy in person that might not come through on video. Sometimes a witness can build a helpful rapport with a questioner in person, giving a witness the comfort needed to express his or her thoughts more clearly. Or, a witness may communicate more persuasively with the aid of nonverbal cues, something that occurs more effectively in person. Given these nuances, counsel ought to keep these issues in mind when determining whether, when, and how to present a client for testimony.

Possible Approaches

As the SEC enforcement staff and defense counsel continue to adapt to changed working conditions, it is likely that varied approaches to document production and witness testimony will be employed. In many cases where the staff wants to move an investigation forward while stay-at-home directives are in place, counsel will need to assess the risks and rewards of various approaches.

Documents

If appropriate, you can communicate to the staff that you need to delay production of documents until you are able to access and fully review all documents, including physical files. The staff, however, is likely to push for rolling production of responsive electronic documents, which can be produced remotely. Unless counsel has a particularly compelling argument regarding its inability to access documents, or the matter is low priority, this approach is not likely to be successful.  

You also can ask the staff to provide guidance on which documents from a request are “must have” in the short term and seek an agreement that the lower priority documents can wait until clients and counsel are back in the office regularly.

Testimony/Interviews

In most instances, defense counsel will have good arguments for declining to agree to conduct sworn, on-the-record witness testimony by videoconference. Not being able to prepare and participate with your client impedes your ability to effectively represent your client.

In lieu of on-the-record testimony, agree to a video interview, if the staff will give assurance that this will be in lieu of testimony (and not in addition to later testimony). Be sure to arrange a logistical means of consulting privately with your client during the interview, such as having a second room available where your client can take a break to call you on a separate phone to consult about a question or issue. Some court reporting services might offer a means of communicating with your client separately, but before using such a service, you should be certain that it is effective and private. Given some of the hiccups with even the best video conference technology, and the other shortcomings of not physically being with your client during testimony, some practitioners take the view that they will only agree to use the technology for capturing testimony of less important fact witnesses and seek to delay more important witnesses for in-person examination. If counsel is going to go forward with video testimony, there is some indication that staff might in some cases want to record such testimony; counsel ought to object to going forward with creating a permanent record that could be used (perhaps out of context) as impeachment in the future.

Offer to provide an attorney proffer in aid of understanding the documents and in lieu of present testimony. Depending on urgency, rolling agreements, etc., this may be a helpful alternative.

As an alternative to testimony or an interview, offer to have your client answer questions in writing.

Statute of Limitations 

Although many reports from the defense bar have characterized the staff’s approach to testimony as flexible, the staff may be less flexible if they believe there is a risk of the statute of limitations running on a potential claim.  Where there is a statute of limitations issue, expect the staff to ask defense counsel to sign a tolling agreement. (Indeed, even in the absence of a statute that is about to run, the staff might seek a tolling agreement to help them prioritize their investigations.) If the client and counsel decline to execute a tolling agreement, as is the client’s right, expect the staff to insist on moving forward immediately with testimony. Were the staff to seek to require in-person testimony in the short term, defense counsel may have good cause for seeking a protective order. Issues relevant to a court or ALJ’s determination of this issue may include how long the investigation has been pending without these particular witnesses being called. Courts would likely be looking closely at limitations on in-person testimony if it would violate stay-at-home orders or guidelines in the jurisdiction(s) of the witness and counsel.

Matthew Allen is a principal with Miller Canfield in Troy, Michigan. Michael Dicke is a partner with Fenwick & West in San Francisco, California. Daniel Nathan is a partner with Orrick in Washington, D.C., and New York City, New York. Trace Schmeltz is a partner with Barnes & Thornburg in Chicago, Illinois.


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