The Securities and Exchange Commission is ready for battle.
In November, the agency announced filing a record number of enforcement actions and that amount keeps rising.
“They’re making a concerted effort to be more aggressive in the wake of the financial crisis and the Madoff scandal,” said Elizabeth Perkins, a partner with Quarles & Brady LLP, Milwaukee. “The SEC has taken the initiative to expand its resources, change their structure and really get busy with improving its enforcement efforts, which results in more investigations.”
In addition, Dodd-Frank whistleblower provisions took effect in August and tipsters now can go directly to the SEC. Should a tip result in a recovery of more than $1 million, eligible whistleblowers who provided new information will receive between 10 and 30 percent of the monetary sanction.
For in-house counsel, these changes should mean a renewed push for prevention, Perkins said. Now is the time to take a fresh look at the employee handbook, the company’s culture of corporate compliance and ethics, and any internal whistleblower programs or other resources.
The investigation process
When it’s too late for prevention, in-house counsel might learn of a “routine examination” via a phone call or letter from the SEC, said Helge Lee, a partner at Godfrey & Kahn SC, Milwaukee. These inquiries often stem from customer or competitor complaints, he said, or even as a result of documents the company has filed with the agency. Sometimes these issues can be put to rest in-house through a responsive call or letter.
Alternatively, in a “for cause” examination, the SEC has received a tip, deemed it to be meritorious and will show up on the company’s doorstep with a subpoena requesting access to the facility. Or the SEC could subpoena the legal document requesting documents.
By this point, a “formal order of investigation” has already been issued within the agency, listing laws that the company might have violated. Private counsel should request a copy of this order, though it’s usually “pretty vanilla,” said Ryan Stippich, a partner with Reinhart Boerner Van Deuren SC, Milwaukee.
Often, the subpoena is very broad. Outside counsel should negotiate its parameters – namely, how much electronic discovery will take place and who pays for it — while establishing a positive rapport with the SEC staff attorneys, Perkins said.
Issues regarding privileged communications often arise at this stage, Lee said, and that’s when outside counsel can be particularly helpful, given the SEC’s historically firm insistence that the company waive that privilege.
Another subpoena might also be issued, empowering SEC staff to take testimony. Counsel may be present when employees are questioned, but outsiders’ testimony typically remains confidential until the agency commences litigation.
Meanwhile, the company should be conducting its own internal investigation. Sometimes that means hiring independent investigators — lawyers who don’t regularly represent the company, who might hire forensic accountants. Occasionally the SEC will step back and allow that to run its course, Perkins said, with both sides ultimately agreeing to an outcome based on its findings. Other times, the SEC’s investigation proceeds concurrently.
In cases where problems are unearthed early on, cooperation with the SEC can mitigate losses.
Other times, contested proceedings take place. This is formalized in a “Wells notice,” an SEC document containing the facts and laws that have been violated that states whether the agency will seek administrative redress or file a federal court civil lawsuit. It might also state whether other agencies will prosecute criminal activity.
The company’s response, its “Wells submission,” advises the agency of factual or legal flaws with its position, Perkins said. Sometimes the best response is no response, but that’s a case-by-case determination, she said, as it can be another juncture for settlement.
Administrative remedies are rare, Perkins said, and most often pursued with financial services professionals, but they are gaining traction. More often, the case is headed for federal court.
Tips for tackling issues
When in-house counsel learns of an SEC inquiry, Perkins said it’s often best to refer the matter to private counsel.
“It might be your nature to just tell the story and explain that there’s nothing wrong,” she said. “But our advice to clients is always to be polite and say ‘I’m going to have counsel get back with you.’”
Denial is another common pitfall, Lee said.
“If something appears to be a problem,” he said, “the worst thing you can do is ignore it.”
When any issue arises, Lee said, that warrants an investigation by in-house counsel and compliance staff. If it’s subsequently determined to be a nonissue, document the concern and any actions taken.
Then, if and when regulators should question it, good faith efforts can be shown. If there is an issue, private counsel should immediately be retained.
For internal, nonindependent investigations, Stippich said, in-house counsel should assemble a team of private counsel, senior management and members of the legal, communications and IT departments, while putting a litigation hold in place.
In some cases, the company might want to advise key individuals to retain their own counsel, Stippich said.
“And when you’re talking to all employees,” he said, “you’ve got to be clear that you’re representing the company – you don’t represent the personal interests of the employees. Because it may be in the company’s interest, down the road, to disclose what you learn to the SEC.”
If the media gets wind of the situation, Lee said, “no comment” is appropriate at the early stages of an investigation because facts could develop over time. In the alternative, keep any public comments to a minimum and be absolutely truthful.
Finally, be prepared for a few sleepless nights, Lee said.
“Unfortunately, these types of actions take up lots of time,” he said. “They are anxiety producing.”
Though the natural reaction can be to get things over with as quickly as possible, that’s not the best course of action, Lee said.
“It is a process that needs to run its course,” he said. “Be patient and, in most cases, be cooperative and work toward a solution.”