ABA Section of Business Law

If "When the SEC comes knocking" in the May-June issue was meant to serve as a primer for lawyers confronting an SEC enforcement investigation, it ignored some fundamental issues. First — do you let your client talk at all without a formal "Order of Investigation"? Except for SEC-regulated industries, the SEC has no power to require your client to respond to any questions without the issuance of a formal order. Certainly there may be pros and cons as to whether to allow cooperation without forcing the issue — but advising the SEC staff that you would prefer to wait until an order is issued allows you to avoid (at least for a time, and maybe permanently) invoking the Fifth, with its attendant implications.

And there can be no dispute that counsel should always ask whether an order has been issued — and obtain a copy if one has been issued. While the order is generally drafted in the broadest possible terms, it will give you some idea as to where your client may fit into the objective of the investigation: Somewhere on the periphery (hopefully) — or maybe dead center. And that will guide your strategy.

A related question is whether to insist on a subpoena if documents are requested. A subpoena can be issued by the staff of the SEC only if they have an Order of Investigation — but even when they have one, they may try to obtain documents "informally." It is important for counsel to compare the subpoena carefully against the Order of Investigation; SEC staff (like all lawyers!) are often aggressive in their demands for documents, and you have every right to object to production of documents that are "beyond the scope" of the order. And yes, the staff can be made to back off when that happens — although you may have to go up the line to the branch chief (or higher) to get the staff to agree to tailor their demands to the order.

Finally — and in my experience, critically — comes the question of the role of counsel during a formal on-the-record examination. In my experience, lawyers who come to this process from a general litigation background do a terrible job. They are accustomed to "defending depositions," which means making every technical objection possible, and keeping the client from disclosing any of the great defenses he or she actually has to the claim. Your goal at an SEC examination of your client is the opposite: to have your client tell his or her story as convincingly and with as much persuasive detail as possible. That is because it is likely to be the only chance he or she gets to tell the story before you make your "Wells submission" — and you therefore want to create the most complete possible record from which to quote and argue. And the only way you can create that record is for you to commit the cardinal sin: questioning your own client at deposition!

The SEC rules absolutely permit you to do this — even though SEC staffers will grow restive as your examination of your client goes on and on. But I have had testimony where there was more questioning of my client by me than by the SEC — with generally excellent results.

Since the fate of your client may well be in the hands of a branch chief or assistant director who will be reading this transcript to decide how to proceed — it is very helpful to be able to jiggle his or her elbow at this point and say " Wait a minute — before you make up your mind on this, there is more to the story," even if the staff lawyer won’t let you examine at that point.

Now we can talk about the Fifth Amendment. . .

Barry Augenbraun

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