The Securities and Exchange Commission is a formidable federal agency charged with the authority to investigate various instances of securities fraud and misconduct by entities, executives, and investors in order to protect U.S. investors and preserve the integrity of U.S. capital markets.
To uphold this mission, one of the tools at its disposal is the federal subpoena. The subpoena is a powerful instrument relied extensively by federal agencies to request extensive amounts of information from companies and executives, sometimes spanning multiple years. Because of the large quantity of information that is processed and stored online—electronically stored information (“ESI”)—these requests can seem daunting.
If you received a subpoena from the SEC, time is of the essence. There are strict deadlines that must be followed—whether pertaining to document production or testimony. Failure to precisely adhere to these deadlines can lead to contempt and obstruction of justice charges. Simply ignoring the subpoena or superficially satisfying some obligations will not suffice. This article explains the subpoena power of the SEC and, most importantly, what to do if you received an SEC subpoena.
The Vast Reach of the SEC’s Authority
The SEC aggressively enforces various federal statutes under its jurisdiction including the Securities Act of 1933, the Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, and the Foreign Corrupt Practices Act (“FCPA”). SEC proceedings can involve (1) civil actions where the Commission asks the court for a sanction from the violation or a remedy or (2) administrative actions where the Commission seeks sanctions before an administrative law judge ("ALJ"). If the securities law violation involves criminal conduct, the SEC often refers the case to the Department of Justice (“DOJ”) or the Federal Bureau of Investigation (“FBI”).
SEC Subpoena Power
The SEC is granted broad authority to investigate companies and executives suspected of violating the federal securities laws. It relies on issuing subpoenas in order to compel the production of numerous documents as well as demand testimony. Generally, a subpoena is a court-issued order that commands the recipient to provide requested information on a certain subject matter. There are two types of subpoenas:
- Subpoena ad testificandum: This subpoena is a demand for the recipient to provide testimony. The request may order either written or verbal testimony and will state the date and time the recipient is to appear and provide such testimony.
- Subpoena duces tecum: This subpoena is a demand for the recipient to produce documents, records, or other evidence by the date outlined in the subpoena.
Many individuals wonder why they received a subpoena. Receiving a subpoena typically means that the SEC has reason to believe that your conduct is relevant to a current or impending SEC investigation. However, the nature of the investigation and the recipient’s role is usually unknown at this stage. For instance, the subpoena will not mention whether the investigation involves civil versus criminal charges or whether the recipient is deemed a target of the investigation or a mere witness.
“The SEC has increased its use of the federal subpoena power to compel the production of documents and compel testimony in recent years to combat widespread securities fraud, putting companies and executives at risk. These demands are complex, time-consuming, and multi-faceted. It can also be challenging to ascertain your role in the SEC’s investigation or assess your ability to challenge the subpoena. Receiving a subpoena necessitates that prompt action be taken. The first step is to hire a securities law defense attorney.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
Failure to Comply with the Terms of the SEC Subpoena
SEC subpoenas are drafted in broad language. A subpoena requests extensive amounts of information covering many years. It informs the recipient that the SEC is conducting an investigation and that you must comply with its demands. Despite this uncertainty, the failure to respond to an SEC subpoena can have devastating consequences such as contempt of court charges.
Additionally, if the recipient lies to the federal agency during the course of its internal investigation, the recipient could face criminal prosecution and imprisonment. U.S. Code § 1001 generally states that whoever knowingly and willfully falsifies, conceals, covers up a material fact; makes a false or fraudulent statement; or makes or uses a document that contains false information “shall be fined under this title, imprisoned not more than 5 years . . . or both.”
The best advice is never to lie to a federal agency. In the next section, we offer advice on what to do after receiving a subpoena from the SEC.
Six Things to Do After Receiving an SEC Subpoena
It is crucial to be proactive when it comes to SEC investigations. Below is a list of key steps to take after receiving a subpoena from the SEC:
- Hire a securities law defense attorney. Your attorney should have ample experience in the federal subpoena process as well as SEC internal investigations. Retaining an attorney is critical because you need to ensure that your response is appropriately tailored to your case. An attorney can help you determine how to respond and what information to provide as well as what information to withhold due to privilege. It is sometimes possible to challenge the validity of the subpoena.
- Understand the concept of “privileged” information. Certain information is privileged including conversations between you and your attorney under the attorney-client privilege or information that could incriminate you under the Fifth Amendment right against self-incrimination. These privileges prevent such information from being compelled by the terms of the subpoena. Your attorney will be able to assess the viability of a privilege claim.
- Read the terms of the subpoena carefully. The subpoena will state the dates and procedures to follow when submitting document requests and appearing to provide testimony. It is your responsibility—with the assistance of your attorney—to ensure that all deadlines are strictly adhered to. The SEC has a zero-tolerance policy for failing to comply with deadlines. If you do not comply with your subpoena or if you provide fraudulent documents or testimony, you could face criminal penalties and jail time. It is also important to remember that if you have not received a subpoena, you are under no obligation to answer questions.
- Start thinking about the requests outlined in the subpoena. The SEC drafts its document requests broadly, some of which span multiple years. If ESI is involved, these requests can quickly become overwhelming. It is good practice to begin accumulating the requested information right away as well as information that may be useful down the road such as names of witnesses. This will help your attorney with drafting your individualized defense strategy as early in the investigative process as possible.
- Do not discuss the details of your case with anyone. This includes posting on social media or casual conversations with friends. Law enforcement and federal agencies may try to question you regarding the investigation and have no qualms about doing so. However, this can be detrimental to your case in the long run since anything you say is likely to be used against you. Always request for your attorney to be present before divulging any information to the SEC staff or law enforcement.
- Assess your internal working environment. Many companies and executives find it useful to have an internal audit conducted to see if there are any weaknesses uncovered. If so, your attorney can help you prepare a response strategy to correct the problem. This step is important because it shows the SEC that you have a cooperative attitude and are willing to make amends as soon as possible.
The SEC is a powerful agency responsible for investigating companies, executives, and investors for violations of the federal securities laws. It has increased its investigative efforts in recent years to root out instances of fraud and misconduct that harms U.S. investors and U.S. capital markets. It accomplishes this mission through its broad federal subpoena power.
The SEC will subpoena companies and executives who are either targets of a forthcoming investigation or who may have knowledge of the matter at issue. It is important to be proactive when responding to an SEC subpoena since the failure to do so could lead to criminal charges and jail time. Hiring a securities fraud defense attorney can help you guard against these risks, cooperate with the SEC, and reduce your liability exposure.