Question 1

Auditors&#8217; Section 10A Reporting Obligation

Accepted Answer

"Likely" illegal acts Section 10A of the U.S. Securities Exchange Act of 1934 requires that an auditor report to the Securities and Exchange Commission (SEC) when, during the course of a financial audit, an auditor detects likely illegal acts that have a material impact on the financial statements and appropriate remedial action is not being taken by management or the board of directors. The standard implies that the auditor must determine: (1) whether it is "likely" that an illegal act has occurred; (2) if so, whether or not that illegal act could have a material impact on the company's financial statements; (3) inform the appropriate level of company management about the issue--most likely including senior executives and the board of directors; (4) consider whether or not the company has taken appropriate remedial action; and (5) if not, report the issue to the SEC. Section 10A imposes reporting requirements on the auditor—specifically, to inform management of the possible illegal act and to ensure that the audit committee and/or board of directors are “adequately informed” of it. These reporting requirements are triggered unless the act is "clearly inconsequential.”  Auditors should consider whether or not to ask for an independent investigation into the issue and obtain the results of the investigation. Such an investigation would potentially address the appropriateness of the company's response and inform the auditor's views on whether or not a report to the SEC is required.  Should the company refuse to conduct an investigation, the auditor would then need to consider whether, in its judgment, a report to the SEC must be made.

Question 2

Company Sources of Information

Accepted Answer

Do you wonder how the government receives information that leads it to open an investigation? Good question. An investigation may be sparked in a myriad of ways. Years ago, it might have been from a Wall Street Journal or New York Times article in the morning paper that sparked the curiosity of a government attorney. Today, it might be a tweet or an Instagram post that causes someone to want to dig deeper.  There’s a famous story about how the Ivan Boesky insider trading scandal of the 1980s was initiated by a single telephone call late on a Friday afternoon to an SEC staff attorney who, realizing that he had stumbled into a huge case, immediately opened an investigation that eventually led to criminal indictments by the US Attorney’s Office and the exposure of very senior traders at the top of Drexel Burnham Lambert and Shearson Lehman Brothers (now long-gone, venerable names in the financial industry), among other securities firms.  But serendipity is unreliable and government agencies have tried to add some structure to organizing the information they receives that might lead to worthwhile investigations. Some of its information sources are described below.     Whistleblowers   Federal agencies' best information about potential illegal acts has always come from insiders with information to report. The SEC has a mandated program to receive information and reward whistleblowers who provide relevant information that results in employment action. Established under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s Office of the Whistleblower (https://www.sec.gov/whistleblower) was established to administer a program to provide monetary awards to eligible individuals (“whistleblowers”) who come forward with high-quality original information that lead to enforcement actions in which over $1,000,000 in sanctions is obtained by the SEC. The range for awards is between 10% and 30% of the money collected. Usually, but not always, individuals in possession of such information are current or former company employees. The monetary incentive is intended to encourage employees to make reports to the SEC that lead to significant awards against (primarily) companies who violate the securities laws. Tips and Complaints   The SEC’s online Tips, Complaints, and Referrals system can be used by anyone to submit a tip or complaint about potential securities law violations at https://www.sec.gov/whistleblower/submit-a-tip. The same online portal is used for whistleblower reports; the only difference between submitting a whistleblower claim or a tip or complaint in which no monetary reward is sought is that a whistleblower must answer "yes" to the question "Are you filing this tip under the SEC’s whistleblower program?" on the "About You" page of the online questionnaire and must also complete the whistleblower declaration at the end of the questionnaire. All others simply answer “no.” Once input into the system, a tip or complaint is reviewed and then routed to appropriate Enforcement staff (either in the SEC’s Washington DC headquarters or one of its regional offices) for further investigation, to other SEC Divisions (e.g., Market Regulation, Corporation Finance, Trading & Markets, etc.), to a different federal or state agency, or to the SEC’s Office of Investor Education and Advocacy (“OIEA”), based on the nature of the information and the potential violations provided or questions asked. SEC Enforcement staff members are required to periodically search the TCR system to see whether there are any new sources of information related to their ongoing matters.     Direct Contact   The time-honored “direct contact” route, when a member of the SEC staff receives information in person or on the phone from a member of the public regarding potential violations. Staff members who receive information this way may use the information to commence an investigation.     Referrals   Self-Regulatory Organizations   Self-Regulatory Organizations (“SROs”) include equity and option exchanges, such as the New York Stock Exchange, the Chicago Board of Options Exchange, or the Financial Industry Regulatory Authority. SROs monitor their own markets and regulate and enforce violations of their own exchange rules and regulations and the federal securities laws. If the SRO discovers potential violations and believes it does not have jurisdiction over the conduct or the party, it will refer the potential violations to the SEC for investigation.     Public Company Accounting Oversight Board   The Public Company Accounting Oversight Board (“PCAOB”) was established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies and the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws. The PCAOB also has its own enforcement department, which from time to time may forward tips it receives to the SEC’s enforcement staff. This is normally done through the Enforcement Chief Accountant’s office, which makes an initial assessment regarding whether future investigation is warranted.     Congress   The SEC may receive complaints from members of Congress on behalf of constituents. Most of these letters get to SEC enforcement staff via the SEC’s Office of Legislative Affairs or the Office of the Chairman and then assigned to the appropriate SEC division or regional office. As one might expect, the Chairman’s Office carefully tracks responses to congressional letters.     State Securities Regulators   State securities regulators, who enforce state securities laws (known as “blue sky laws”), may refer information to the SEC when they believe federal laws might be implicated or the information relates to multi-state issues (state regulators may also share information directly with one another and they often act together through the North American Securities Administrators Association, an organization that predates the creation of the SEC). Most state securities regulators have relationships with the SEC regional office covering the territory in which they are located and they will usually direct their referrals to that office. The SEC staff may share information in such cases with their state counterparts.

Question 3

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

Accepted Answer

The "right" lawyer depends on the context When it comes to representing the audit firm's interests in an SEC or DOJ investigation, it may be entirely appropriate that the lawyer or law firm that has previously represented the firm in other contexts also defend the audit firm'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 firm, is familiar with audits and the audit process, and has developed a solid rapport with 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 audit firm or audits. 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 firm with its government contracting issues in an SEC enforcement investigation into whether the auditor knew of should have known that its audit client's  financial statements were intentionally misstated. If the government contracts 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.   One fraught area can be the decision whether and when to secure separate counsel for individual audit partners or professionals. Separate counsel is required when the firm's and the individual’s interests materially diverge and the law firm representing the auditor cannot ethically represent the individual partner or 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 individual (or, sometimes, a group of individuals) 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 and the firm. No one is well-served if the lawyer taking on the representation is not qualified to do it.

Question 4

Phases of an SEC Investigation

Accepted Answer

SEC investigations begin and are tracked, completed, resolved, and ultimately closed in accordance with the SEC's processes and procedures. Accordingly, the progress of an investigation and the next steps in the process can be understood and anticipated. Matter Under Investigation SEC staff members, after receiving information about potential securities law violations from any of a number of potential sources (including, potentially, their own reaction to information disclosed in a news story), may log into the SEC’s tracking system and initiate a Matter Under Investigation (“MUI”). “Opening” a MUI does not mean that a formal investigation has begun—that happens in a subsequent step; it merely requires an Enforcement staff member, in consultation with or at the direction of his or her assistant director, to write a narrative justification for why an investigation is warranted, considering the threshold question of whether a sufficiently credible source or body of information suggests that an enforcement action would address conduct that violates the federal securities laws. The initial report is routed to the associate director, who must approve its opening. SEC senior officers (officials at or above the level of associate director or regional associate director) receive weekly reports on MUIs opened in the prior week. In theory, within 60 days, the SEC staff assigned to the MUI must, following the gathering of additional information, make a second threshold recommendation centered on whether the MUI should be converted into an investigation or closed. It should be noted that not every investigation begins with the MUI process—in some cases, the investigation is opened immediately. Converting a MUI to an actual investigation (or simply opening an investigation without going through the preliminary step of opening a MUI) requires the staff to assess whether it is an appropriate use of resources to open an investigation, which is answered in the affirmative if the information at hand suggests a possible violation of the federal securities laws involving fraud or other serious misconduct. The staff may interview witnesses and obtain documents on a voluntary basis in order to inform its recommendation about converting a MUI into an investigation. At this stage, staff members may reach out to a company’s internal legal department or general counsel, or contact individual executives or employees, in an attempt to evaluate whether it is worth pursuing an investigation. If the SEC Enforcement staff contacts me, should I hire legal counsel?If Enforcement staff contacts you or your company, you should consider retaining legal counsel with expertise in SEC investigations and Enforcement actions. Doing so early in the process can help you and/or the company address the SEC’s concerns using an operational strategy that hopes for the best and prepares for the worst. The Enforcement staff expects contacted individuals and companies to retain legal counsel, and it is entirely unremarkable. What is a “formal SEC investigation?” A formal investigation is an investigation in which the SEC has obtained a formal order of investigation by which the Commission grants the Enforcement staff its subpoena powers. What is a “formal order of investigation?” This is a document that the SEC’s secretary signs and that confirms that the Commission has delegated to the Enforcement staff the Commission’s authority “to investigate,” including through the use of subpoenas. Under the relevant securities laws (Securities Act § 19(c), Exchange Act § 21(b), Investment Advisers Act § 209(b), and Investment Company Act § 42(b)), SEC Commissioners or officers designated by them are authorized to issue subpoenas compelling the production of documents or the taking of witness testimony. The formal order of investigation loosely identifies the time period to be investigated and the possible securities law violations to be considered. It is often written broadly so that the scope of the Enforcement staff’s subpoenas for documents and testimony are within the authorized scope in time and topic. Assuming an investigation is warranted, the decision must (again) be routed to and authorized by the appropriate associate director in the SEC’s tracking system. Reports of opened investigations are also provided weekly to senior officers. The Commission has delegated authority to the Director of the Enforcement Division to issue formal orders and to designate officers, which may be supplemented or changed from time to time. (17 C.F.R. § 200.30-4(a)(1)). May I see or obtain the formal order of investigation? Although a copy of the formal order must be shown (if requested) to a person compelled to produce documents or provide testimony, that person does not have the right to retain a copy. There is a process for requesting a copy in writing, but the staff does not have to provide it if they conclude providing the copy would violate the privacy of persons involved in the investigation or would impede the investigation. If the staff refuses to provide the formal order of investigation in a circumstance other than testimony, if is probably unwise to argue the point; the order rarely contains specific information to assist a witness. Enforcement staff’s investigative plan At some point early in the investigation, unless a decision has been made not to prepare one, Enforcement staff members conducting the investigation will prepare one or more written investigative plans, which can often be modified as the investigation proceeds. These plans are intended to map out the direction and distance an investigation must go to accomplish its objective of determining whether violations occurred and who was responsible. They are now also used to assist with "case tracking,” as discussed below. The investigative plan is revised from time to time and staff members need to keep it up to date so they have something to discuss with their supervisors during mandatory Quarterly Case Reviews. Quarterly Case Reviews There’s an entire administrative process behind SEC investigations and a tracking system in which the status of each investigation has to be updated and maintained. Arguably, this does more to bog down an investigation than it does to encourage progress. In this process, Enforcement staff reports up the chain of command on the progress of each investigation on a regular basis. Each quarter, Assistant Directors review each of their staff members’ matters, then report up to their Associate Directors (or Unit Chiefs) on “significant investigations.” Then each Associate Director/Unit Chief meets (also quarterly) with the Enforcement Division Director or Deputy Director (or the appropriate Regional Director, for Associate Directors in the Regions). At each level, significant issues are discussed, timing of investigation completion is updated, and administrative reporting is entered into the tracking system. Everyone in the chain of command is, at some level, busy supervising the staff members who actually conduct the investigation—a heavily bureaucratic process that does nothing to speed investigations along, even though that is supposed to be part of the purpose of all the scrutiny. Subpoenas Often, the first indication that an SEC investigation is underway—if the staff did not contact the company in the MUI process—is when a subpoena for the production of data and documents is served on the company involved in the investigation. This is usually done at an early stage so as to ensure that the company preserves the information relevant to the investigation. We’ve separately discussed what to do and what not to do when in receipt of a subpoena, but the subpoena will—to the trained eye—often provide a wealth of information about what the SEC is actually interested in investigating and what they may be thinking in terms of potential theories of liability. Usually, subsequent to a subpoena for documents, the SEC staff will issue subpoenas for individual testimony from individuals, employees and/or executives, who may have relevant knowledge about the underlying facts and circumstances that led to the events under investigation. The company’s outside auditors and other outside professionals used by the company may also receive subpoenas for both documents and, eventually, testimony. These third parties also have their own potential liability concerns under the securities laws. With respect to witnesses, the usual course will be for the SEC to seek testimony from lower-placed employees less likely to have been in decision-making roles before moving “up the chain” to higher-placed executives who the staff views as having greater responsibility (and hence liability) for making decisions and directing actions that may have violated, or caused the company to violate, the securities laws. Parallel Criminal Investigations A quick word about parallel criminal investigations. The SEC may, and often does, work together with the Department of Justice in cases where there is a view that a crime may have been committed (all securities law violations may also constitute crimes if committed with a criminal state of mind—i.e., if the violation was committed knowingly and intentionally; not all criminal violations of the securities laws are necessarily prosecuted, however). In fact, providing information to the DOJ for use in investigating potential criminal violations of the securities laws is explicitly contemplated in both the Securities Act (§ 20(b)) and the Exchange Act (§ 21(b)). If this happens, the relationship is often a one-way street: the SEC provides information to the DOJ, the DOJ does not provide information to the SEC. This is particularly true if the DOJ has begun to bring information about its investigation to a grand jury because of the “grand jury secrecy rule,” found in Rule 6(e) of the Federal Rules of Criminal Procedure, which prohibits disclosure of “matters occurring before the grand jury” (basically, materials provided to or testimony given before a grand jury), the violation of which could result in the disclosing prosecutor (or anyone who participated in the hearing except witnesses) being held in contempt. Although that rule is limited to grand jury proceedings, in practice it means that the DOJ prosecutors and agents, as a general rule, will not provide information to other government agencies in any investigations involving a grand jury (besides generalized information such as the status of the investigation and potential future steps). If asked by a witness or counsel for a witness whether a DOJ investigation is occurring in parallel, the SEC staff are supposed to make no representation and refer to the SEC’s Form 1662 (which will have been attached to the subpoena), a document that notes the “routine uses” to which information gathered by the SEC may be put—including sharing the information with other government agencies, among them the DOJ. Wells Process Once the SEC’s investigative staff reach a point where they feel they are ready to make a recommendation as to whether or not to recommend an enforcement action against any company or individual based on the investigation, the staff will typically provide notice of its decision to prospective respondents. This is the first step of what is informally known as the “Wells process” which, although generally followed by the SEC staff, is not mandatory. This process came into existence following a report to the SEC by an advisory committee chaired by John Wells, a lawyer and founder of the New York firm that became Rogers & Wells. The “Wells Committee” was charged by Chairman William Casey to review the SEC’s enforcement policies and practices and make recommendations. In 1972, the Wells Committee provided a report which, among over 40 other recommendations, recommended that “[e]xcept where the nature of the case precludes, a prospective defendant or respondent should be notified of the substance of the staff’s charges and probable recommendations in advance of the submission of the staff memorandum to the Commission recommending the commencement of an enforcement action and be accorded an opportunity to submit a written statement to the staff which would be forwarded to the Commission together with the staff memorandum.” Although the Commission did adopt the above recommendation, it also noted that “[w]hile it agrees that the objective is sound, it has concluded that it would not be in the public interest to adopt formal rules for that purpose," which had been another Wells Commission recommendation, "[r]ather, it believes it necessary and proper that the objective be attained, where practicable, on a strictly informal basis . . . .” Accordingly, there is no absolute right to the Wells process in all cases and its administration remains subject to a certain amount of discretion exercised by the staff. Wells Notice The “Wells Notice” is a letter from the SEC Enforcement staff (usually less than three pages, excluding attachments) which specifies exactly which charges the staff has preliminarily determined it will recommend to the Commission, notifies the recipient of the right to make a written or video submission to the Commission (along with timing, page or length limitations, etc.), explains the purpose of the “Wells Submission,” and informs the recipient as to where to direct it. The Wells Notice provides no particularly useful detail beyond what violations are to be recommended. Competent counsel in receipt of a Wells Notice to a client will not simply sit down and write the submission. Instead, they will seek additional information from the staff directly, asking questions geared to understanding what additional information the staff would need to come to a different conclusion, determining what troubled the staff about counsel’s client specifically, and what facts are leading the staff to the conclusion that the client violated the securities laws. In addition, competent counsel will seek to obtain portions of the investigative record not previously available, such as the investigative file, relevant documents and witness testimony, and other information that may not have been available earlier in the investigation or which came from third parties unavailable to the client or client’s counsel. The staff does not have to provide such access (except, with a few exceptions, to the transcript of the client’s own testimony) but often will provide at least some—even a telephone call with the staff can be very helpful in understanding what the Wells Submission should address. Wells Submission The Wells Submission is a final opportunity to convince the SEC staff who conducted the investigation about a variety of things: either (1) they are wrong about the involvement of a client in the alleged securities violations, (2) they are wrong about whether or not the conduct properly understood in fact constitutes a violation or violations of the securities laws, or (3) they should understand that the SEC will be unable to sustain its burden of proof if the case ever goes to trial. Although the Commission is going to see it if the staff recommends an action, the real audience for the Wells Submission is the investigation staff. Audience for the Wells submission If the real audience is the staff and not the Commission, then this dictates the tone, tenor, and message of the submission. So a fair question is, why is the audience the staff, after all, haven’t they already made up their minds? Yes and no. The staff’s perception of the case has been shaped over months (and, often, years) of reviewing emails, powerpoint slide decks, memoranda, letters, instant messages, and the testimony of many witnesses. They have synthesized their thinking to the point of being ready to make a recommendation—they may have drafted an action memorandum (discussed below). But the investigative staff's thinking so far has been geared toward demonstrating that a case should be brought. This singular focus of the investigation has the effect of shutting off alternative views of the evidence, the intentions of individuals involved, and contrary legal theories—all of these may have been disregarded or avoided in the quest to prove a violation; not because the staff members aren’t well-intentioned, but because it’s human nature. All that effort that went into the investigation must have been in the service of a positive result (addressing the misconduct of a wrongdoer). The message of the Wells Submission is: here are some things you haven’t taken into account or properly factored in. The benefit of this approach is that, without pounding the table or insulting the professionals who have spent significant time and resources on the investigation, a space is created where rational discussion can take place—if not with the staff who are making the recommendation, then with the more senior staff members at the Associate Director and Director level who must, ultimately, approve an enforcement recommendation. And, at the end of the day, if the Commission reviews the Wells Submission, they (and their staffs) will appreciate the underlying message and are more likely to pay attention to a well-reasoned, dispassionate analysis than to a self-righteous diatribe. Settlement discussions At some point between the transmission of a Wells Submission and the ultimate recommendation to the Commission (if not initiated at an earlier stage), there is the potential to enter into settlement discussions with the staff. These settlement discussions are usually (but not always) initiated by counsel for respondents. From the perspective of a settling company, the idea is to dispense with the issues, if possible, while avoiding the additional delays and uncertainty incident to going to trial. The existence of an SEC investigation will often have been disclosed to the securities markets and, for public companies, the uncertainty can be a drag on the company’s stock price (for private companies, it can delay or preclude a lucrative sale of the company). For individuals, the calculus is very different, more personal, and often not aligned with the company’s interests of moving forward and leaving the underlying events in the rear view mirror. Settled action or administrative proceeding If a settlement negotiation proves fruitful, then the staff’s enforcement recommendation will change to recommend that the Commission adopt the settlement posture recommended by the Staff—which the Commission usually does (again, as with everything, there are (rare) exceptions when the Commission disagrees with the staff’s recommendation and either refuses to settle or pushes settlement on different terms). Among the benefits of settlement is the ability to negotiate the wording of the public documents that will be disclosed upon settlement. Enforcement does not want to sue: the termination noticeIf the Enforcement staff decides not to recommend any enforcement action to the Commission concerning a particular matter (or company or individual in a matter), Enforcement notifies that party of this decision by means of letter containing a termination notice. Who receives a termination notice? Enforcement staff send letters containing notice of the termination of a matter to any potential respondent (1) listed in the caption of the formal order of investigation; (2) that received a Wells Notice; (3) that requested such a notice; or (4) that could have a reasonable belief the staff had considered recommending an enforcement action against them. What is the effect of the termination notice? The termination notice contains a statement that the recipient ““must in no way” construe the notice as the SEC’s statement that the recipient “has been exonerated or that no action may ultimately result from the staff’s investigation of that particular matter.” The notice simply means that Enforcement staff have completed the investigation and, as of the date of the letter containing the notice, they will not recommend an Enforcement action against that individual or company to the Commission. This is a courtesy that the SEC had not always extended; when an investigation ceased, witnesses and potential defendants and respondents received no information about what the SEC might or would do. The practical effect of the termination notice in many instances is that the witnesses and potential defendants or respondents have the statute of limitations working for them. Even though Enforcement may (in very rare circumstances) reopen the investigation on the very same matter, the time remaining to commence an action or proceeding has been significantly depleted. Enforcement requests the Commission to sue If Enforcement believes that the Commission should institute a legal action in U.S. district court or an in-house administrative proceeding against one or more of the individuals and companies investigated, it must ask the Commission to act. Only the Commission has the authority to bring a lawsuit or an administrative proceeding against a proposed defendant or respondent, and the Commission acts by majority vote at a Closed Commission Meeting. Enforcement Action Memorandum Before the meeting, the Enforcement staff members prepare an Action Memorandum to the Commission, recommending and requesting that the Commission “act” against an alleged violator or violators and implicitly offering, of course, to continue doing the work as the agents of the Commission in prosecuting the case. This document contains the staff’s recitation of the relevant facts, analysis of the legal issues as applied to those facts, a conclusion as to the violations uncovered during the investigation, a response to the Wells Submissions of the various parties, and, ultimately, a recommendation about what violations should be alleged and in what forum the SEC should proceed to a lawsuit. The Action Memorandum, when fully completed and signed, is a recommendation and request that Enforcement submits to the Commission to have the Commission commence a legal action or administrative proceeding against certain defendants or respondents for specified violations for certain forms of relief. Buy-in to Enforcement’s action memorandum Typically, the Enforcement staff circulates its proposed Action Memorandum to other SEC divisions and offices for their input and buy-in before finalizing the document. For instance, in accounting matters, Enforcement will ask or consult with the SEC’s Office of the Chief Accountant (OCA) to provide input on Enforcement’s view of the relevant accounting principles, and in matters involving an investment adviser or a mutual fund, Enforcement offers the SEC's Division of Investment Management an opportunity to provide input on the recommendations pertaining to the enforcement of the Investment Advisers Act or Investment Company Act. Delivery of the Enforcement action memorandum Enforcement staff members deliver the completed Action Memorandum to the Commissioners in advance of the next scheduled Closed Commission meeting. Closed Commission Meeting Normally, the Commission considers and votes on Enforcement recommendations in “closed meetings.” Although the Sunshine Act requires access to governmental meetings, 5 U.S.C. § 552b and SEC regulations exempt meetings concerning Enforcement’s recommendations to institute, modify, or settle or otherwise resolve a legal action. 17 C.F.R. § 200.402(a). Enforcement staff orally present their recommendation about the disposition of an enforcement matter and answer any questions before the Commission votes on the recommendation. A majority vote is required to authorize the staff to proceed to filing any action or agreeing to any settlement. Alternatively, if consideration at a scheduled closed Commission meeting is impracticable for some reason, the Chairman may decide to route the decision via “seriatim” consideration. Here, each Commissioner reports their vote on the recommendation to the Secretary of the Commission, using a seriatim coversheet. The matter is not authorized until each Commissioner has recorded a vote (or indicated that they are not participating). Any Commissioner may pull a recommendation from the seriatim process and instead place it on a closed meeting agenda. Once the Commission authorizes an enforcement action, then the SEC’s trial unit will proceed with filing a Complaint in federal court and serving defendants or, in the case of an administrative proceeding, serving an Order Instituting Proceeding upon respondents. Closing an Investigation The staff should close an investigation as soon as it becomes apparent that no enforcement action will be recommended. Once a Termination Notice has been provided (if necessary), then the staff has to prepare a short memorandum which serves as the record summarizing what the staff did in the investigation and why it recommended closing the investigation. An investigation that entailed an enforcement action is closed only after all actions authorized by the Commission are completed

Question 5

So you&#8217;ve received a subpoena or civil investigative demand

Accepted Answer

Now that the government has served a subpoena on you, what does it mean and what should you or your company do in response? 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 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 6

You&#8217;re an investor and you lost money

Accepted Answer

Have I been defrauded? Just because you've lost money in the markets does not mean that you've been defrauded. Markets go up, but they go down, too. The question is whether or not the investment professional who advised you placed you into investments that were not suitable for your profile as an investor, whether they engaged in unauthorized trades, too-frequent trades, or outright stole funds from your account. It may take some analysis to figure out why you lost money and whether or not you have a legal case to be made against the firm or the adviser. We can help you with that. What do I do now? This depends on the underlying facts. If your funds were invested in an account with a FINRA-regulated broker-dealer, then there's a very good chance that when you opened your account your contract with the firm requires you to submit your claim to binding arbitration with FINRA Dispute Resolution Services. If your funds were invested through a registered investment adviser, there is still a good chance that you have agreed to binding arbitration, but his may be before the American Arbitration Association (AAA) or a similar group, such as JAMS. Or there may not be an agreement to arbitrate, in which case you may file a lawsuit in the appropriate court. We have experience in all potential scenarios and can help you analyze what courses of action are available to you and how to address each option.  Is litigation the only option? Of course not--it is always possible that the firm or financial adviser will step up and do the right thing without needing to file a case. But in our experience, being ready, willing, and able to litigate serves only to increase the chances that you will be able to settle early. Of course, we can never guarantee whether the other side will be reasonable--which is why we're always getting ready to try the case. Get in touch Learn more about our investment disputes practice or get in touch with us to discuss your options.

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