Question 1

About Government Subpoenas for Auditors

Accepted Answer

We'll speak in the context of an SEC subpoena, but any subpoena issued by the government--whether by the SEC, DOJ, CFTC, or some other agency--will have similar considerations and parallel processes Before a Subpoena is Issued   Often (although by no means always) the first indication of the existence of an SEC investigation is a telephone call from SEC staff to the company's legal department. It is not unusual for the SEC to initially obtain information from a company voluntarily, before the staff has fully developed its focus. If the investigation continues, the staff will almost invariably issue a subpoena to ensure that documents and data (whether already obtained or still to be provided) relevant to the investigation are safeguarded and available.        How do I know that what I received is an SEC subpoena?   When the SEC sends a subpoena, it will usually comprise a relatively thick packet of material at least 12 pages in length. The components include:   • a two- to three-page cover letter;   • a single page which is the actual “subpoena,” in that it informs the recipient of the date, time, and location at which they are required to produce documents and/or appear and testify;   • an often lengthy list of definitions, instructions, and document requests attached to the subpoena;   • a few pages on how and in what format to produce electronically stored data; and    • Form 1662, which is an SEC document that explains the ways in which the SEC routinely uses the information provided.     What can the subpoena tell me?   To an experienced SEC enforcement attorney, the subpoena will provide insights into what issues the SEC is investigating, the nature of the violations the SEC suspects have taken place, the persons likely to have knowledge of the issues the SEC is interested in, and more.      What is a subpoena anyway?   A legal document, called a writ, which is created to command you to be present (or described documents to be produced) at the location it lists on the date and at the time it time states. A court or one of many governmental agencies, either a federal agency or a state agency, can complete and send you a subpoena. An “administrative subpoena” is a subpoena that an administrative agency (federal or state), not a court, creates. SEC subpoenas are administrative subpoenas.      What happens if I ignore a subpoena sent by the SEC?   You may ultimately be subjected to a penalty.  The word “subpoena” literally means “under” (sub) “penalty” (poena). This is never a recommended response. However, if you do ignore an SEC subpoena the SEC will have to undertake what is called a “subpoena enforcement action,” in which it immediately files a lawsuit in U.S. District Court with jurisdiction over you or your company, and requests the federal court to order compliance with the subpoena. Ignoring the federal court order can result in a contempt finding, which could land you, or the person responsible for blocking compliance with the court’s order, in jail and subject to monetary sanctions. The statutory authority for doing this can be found in Section 21(c) of the Exchange Act, 15 U.S.C. § 78u(c).      What should I do if get a subpoena from the SEC?   There are two things that you should not do: (1) ignore the subpoena (see above) or (2) destroy or delete any documents or data that the subpoena seeks to be produced. You should consider retaining counsel to assist you in negotiating the parameters of the subpoena with the SEC staff and begin the process of organizing a defense strategy. If the subpoena is directed to your company, you need to immediately put employees who may have responsive documents or data on notice not to destroy any such information. You should immediately notify your IT department to suspend the regular deletion of electronic data until you can isolate responsive documents; also, they should take steps to ensure that individual custodians of relevant data cannot delete responsive data.

Question 2

An Employee May Have Violated the Law

Accepted Answer

Preserve Information Does the company have an internal investigative function? Is there a process to engage with in-house legal and conduct a privileged investigation? Does the company have a process for collecting and preserving emails, electronic data, and other information? Should the company institute a legal hold to notify holders of relevant information to preserve it? Should the company immediately suspend the normal deletion of emails and other data for custodians with potentially relevant knowledge? Investigate Whether it's clear that something illegal has taken place or not, the company will want to make sure it has all the facts. Figure out what happened and why. In doing so, the company needs to plan for the potential that at some point, the government may come knocking and will want to review how the company handled the issue when it learned of it. It's not too early to think about whether outside counsel should assist. Notify Once the company knows the outlines of what happened, who needs to be informed? What format should that notification take? How does the company determine whether or not the event constitutes something that would be "material" under the securities laws? Should the company disclose what it has learned to the government? To investors? Who is going to make that decision? All of these questions should be answered with the assistance of competent counsel. Engaging Counsel If the SEC or DOJ (or, not infrequently, both agencies) begin an investigation, the lawyers and firms who usually handle a company’s legal affairs may or may not be who should handle such an investigation. Find out more about engaging counsel.

Question 3

Firm with an Adviser Issue

Accepted Answer

Customer claim or regulatory issue? Whether a Financial Adviser has been accused of impropriety by a customer or a regulator has begun asking questions, you will want to retain experienced counsel to address the relevant issues. We have handled both sides of customer claims and disputes with FAs, as well as  investigations by the SEC, FINRA Enforcement, and the DOJ. Industry expertise doesn't have to come with the trappings (and high hourly rates) of global law firms. Contact us to discuss what we can do for you. Customer claims come in different flavors Sometimes the customer has a valid case and it's a bad idea to litigate the claim. In such matters, an early settlement may be the best outcome for the firm. At other times, the claim has no merit and the firm will want to pursue every available litigation avenue available. In either event, it helps to enlist the assistance of experienced external counsel who can provide an impartial read of the relative merits of the case and solid recommendations about how to proceed. What if the FA has commenced an action? Sometimes employees file actions against firms. If the firm is a FINRA registrant and the employee is a registered rep, the suit must be adjudicated via FINRA arbitration. It helps to retain counsel with deep experience in a wide variety of litigation contexts to assess the merits, come up with the appropriate recommendation, and then execute on the game plan. What if the issue involves an SEC investigation? SEC investigations usually proceed in predictable phases, the SEC staff must report periodically to supervisors on their progress, and you need to know what to expect as this process plays out.  Click here to learn more about the phases of an SEC Investigation.

Question 4

How to Determine the &#8220;Right&#8221; Lawyer for Companies

Accepted Answer

Audit Committee/Board-led Independent Investigation Where a company’s audit committee wishes to conduct an investigation into potential violations (this may happen before any government investigation starts), they should probably not use a law firm that regularly does work for the company. There are a few, related reasons for this.      First, any such investigation should be independent in order to be credible. It’s not independent if the firm conducting the investigation has other ongoing work for the company or frequently does work for the company and expects to continue doing work for the company.      Second, it may represent an actual conflict of interest for the law firm if issues the company consulted with the firm on in earlier periods become (or should become) subjects of the investigation.      Third, after the investigation concludes, the audit committee or the company may wish to present the results of the investigation to government regulators such as the SEC or DOJ; if the law firm that conducted the investigation is found to have a prior or ongoing relationship with the company, the government may worry that the investigation “pulled punches” as to the issues it covered or the involvement of company officers or directors in a position to award legal work to the firm.      Fourth, the audit committee and the Board have duties to the shareholders to ensure that any members of company management that were involved in directing or allowing violations to take place are properly dealt with, which might be more difficult to ascertain if the lawyer or firm making recommendations about company managers has had extensive, friendly relationships with the individuals being evaluated.   Finally, and we’ve seen this principle violated in the past with not-so-great results, the law firm that represents the company in the government investigation should not be the same firm that conducted the investigation. This is because the law firm would be put in the position of urging the government to rely on the firm’s own work (the “independent” investigation that the same firm just completed) at a time when the firm is charged with defending the company’s interests. This puts the law firm in the position of vouching for the integrity of its own investigation at a time when the government knows that the firm’s actual job is to minimize liability and protect the company’s interests—which could (and probably should) cause the government to question the impartiality and reliability of the investigation the law firm (and company) wants the government to take seriously.     Company Representation When it comes to representing the company’s interests in an SEC or DOJ investigation, it may be entirely appropriate that the lawyer or law firm that has previously represented the company in other contexts also defend the company’s interests in what may be a protracted, years-long investigative process with potential litigation at the end.      Choosing a law firm that has done work for the company, is familiar with the business model, and has developed a solid rapport with the business executives and in-house counsel is often a very good idea and can cut down on the costs associated with bringing in lawyers who know nothing of the company or its industry. This must always be subject, however, to making sure that the law firm has the necessary expertise with the relevant agencies. It seldom makes sense to use the lawyer who regularly assists the company in its FDA labeling and advertising issues in an SEC enforcement investigation into whether the company’s financial statements were intentionally misstated. If the FDA lawyer doesn’t have colleagues at the firm with the SEC or DOJ backgrounds necessary to handle such an investigation, the company needs to find a new firm that does have such expertise; this is no time for on-the-job learning.     If a different law firm has completed an independent investigation, the law firm charged with the company’s defense will want to point to the findings and recommendations of the internal investigation and persuade the government that the company has figured out what went wrong, taken appropriate remedial action in reliance on the investigation conducted by an independent firm, and should therefore not be excessively penalized for problems that have already been exposed, investigated, and properly addressed.    Insurance—Directors & Officers (“D&O”) Insurance Most companies of any size will have considered purchasing a D&O insurance policy and most corporate insurers will suggest such a policy as a prudent investment. As discussed further below, most corporate by-laws require the company to indemnify and advance to its directors and officers legal costs incurred in a lawsuit or investigation related to their service as corporate board members or executives. A D&O policy is one way for the company to offset or mitigate its liability for the costs of defense of these individuals if and when a lawsuit is filed or an investigation commenced.     General Counsel and those responsible with dealing with the company’s risks should consider retaining counsel with expertise in coverage issues in evaluating D&O policies and should also make sure the insurance company has the necessary depth and experience in D&O coverage to adequately address the company’s needs. In our experience, this is not an area in which it pays to have taken out “bare bones” coverage.      The costs of defending against a securities class action lawsuit or a government investigation into potential securities fraud at the company escalate very quickly. Adequate coverage can save tens of millions of dollars in the long run.      As with most insurance, a company with a D&O policy must pay careful attention to its notice obligations under the policy. Insurance companies are very happy to take premiums in on the front end, but each and every excuse to delay payment or to invoke an exclusion can and will be exercised. Accordingly, at the first indication of a potential issue where D&O coverage may be needed (for example, a subpoena received from a government agency), the company must notify its insurance carrier in accordance with the policy’s requirements.      Employee Representation One fraught area can be the decision whether and when to secure separate counsel for individual company employees. Separate counsel is required when the company’s and the individual’s interests materially diverge and the firm representing the company cannot ethically represent the employee as well. Sometimes this is apparent right away and at other times this only becomes apparent later during the course of an investigation. In either event, the lawyer that ends up representing an employee (or, sometimes, a group of employees) must be as qualified and well-versed in the relevant legal issues and have experience with investigations of the same type, or there could be serious missteps, to the detriment of both the individual employee and the company. No one is well-served if the lawyer taking on the representation is not qualified to do it.

Question 5

Your firm has accused you of something improper.

Accepted Answer

Your firm says you did something wrong You've worked hard to build your reputation in the industry, and it doesn't take much to tarnish everything you've built. Sometimes a customer will make a complaint and the firm will react defensively, blaming the financial adviser for something beyond their ability to control. Sometimes, someone else within the firm takes it upon themselves to make a false accusation. We've even seen occasions where the firm itself decide to part ways with an FA, either because of a perceived problem or for an improper, discriminatory reason. Can I do anything about this? The answer, of course, is "yes." What and how you go about addressing the issue depends on a number of factors. If you're a registered representative at a FINRA member firm, you will be required to arbitrate using FINRA's Dispute Resolution Services. If you are with an RIA, you may have an arbitration clause in your contract (or, if you and the firm agree, you can use FINRA's arbitration services, but FINRA would be unable to enforce any award against a non-member). What you do next and how to go about achieving the outcome you want will be the subject of a discussion with an attorney--hopefully one of us. What if the issues involves a FINRA Enforcement investigation? Or the SEC? We have plenty of experience dealing with investigations led by FINRA's Enforcement department. We also have experience dealing with SEC investigations or criminal matters led by the DOJ. Whatever the. underlying issue may be, the first step will involve gathering facts about the conduct at issue and then determining what the best next steps are. We handle issues like this all around the country--pick up the phone or send us an email and let's talk.

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