sec investigations: common misconceptions and mistakes...

SEC Investigations: Common Misconceptions

and Mistakes, Designing a Successful Response

Strategy

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THURSDAY, MAY 21, 2020

Presenting a live 90-minute webinar with interactive Q&A

Daniel M. Hawke, Partner, Arnold & Porter, Washington, D.C

Arthur Luk, Partner, Arnold & Porter, Washington, D.C

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Responding to an SEC Investigation: Five Common Misconceptions

Daniel M. Hawke

Arthur Luk

May 21, 2020


Today’s Presenters

Daniel M. Hawke

• Chief, Market Abuse Unit, SEC Division of Enforcement (2010-15)• Director, SEC Philadelphia Regional Office (2006-14)• Counsels clients on all manner of SEC enforcement, examination and

regulatory policy matters

Arthur Luk

• Counsel to corporations; directors, officers, and executives; and “Big 4” accounting firms and individual auditors

• Represents clients in investigations conducted by the SEC, DOJ, and PCAOB.

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© Arnold & Porter Kaye Scholer LLP 2020 All rights reserved. This publication is intended as a general guide only. It does not contain a general legal analysis or constitute an opinion of Arnold & Porter

Kaye Scholer LLP or any member of the firm on the legal issues described. It is recommended that readers not rely on this general guide but that professional advice be sought in connection with

individual matters. Attorney Advertising: Prior results do not guarantee future outcomes.

Today’s Topics

• Overview of SEC Investigations

• Five Misconceptions about SEC investigations

. . . and how to avoid them

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Overview of SEC Investigations

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SEC Mission

“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and

facilitate capital formation”

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SEC Structure

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SEC Enforcement

• Criminal prosecutions in federal court

• Criminal remedies, including fines and prison

• Parallel investigations with SEC

SEC DOJ

• Civil enforcement actions in federal courts and administrative tribunals

• Civil remedies, including fines

• Primary enforcement body for securities laws

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• Key Statutes oSecurities Act of 1933

oSecurities Exchange Act of 1934

oInvestment Company Act of 1940

oInvestment Advisers Act of 1940

oSarbanes-Oxley Act of 2002

oDodd-Frank Act of 2010

• Rules & RegulationsoCodified in CFR Title 17,

Chapter II (Parts 200-399)

SEC Enforcement

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Each year, the SEC:

• Conducts thousands of investigations

• Initiates hundreds of enforcement actions (826 in FY 2019)

• Collects billions of dollars in fines and disgorgements ($3.2B in FY 2019)

SEC Enforcement

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• Misconduct that may cause investigation: o Misrepresenting or omitting

information about securities

o Market price manipulation

o Stealing customer funds or securities

o Violation of broker-dealer duties

o Insider trading

o Selling unregistered securities

o Accounting fraud

SEC Investigations

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Stages of Investigation

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Administrative Proceedings vs. Civil Actions

• Filed in U.S. District Court

• Orders are enforceable by contempt of court: additional fines, imprisonment

• Broader discovery (e.g., depositions); summary judgment available

• 30% of the SEC’s FY 2019 standalone matters

Administrative Proceedings

Civil Actions

• Instituted before an ALJ

• ALJ makes findings of fact and law; recommends sanction

• Any portion of decision is appealable to the Commission

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Administrative Proceedings vs. Civil Actions

Available Sanctions:

• Injunction prohibiting conduct, or requiring audits, accountings, or supervision

• Civil monetary penalties

• Bars from service as corporate officer or director


• Disgorgement

Administrative Proceedings

Civil Actions

Available sanctions:

• Cease & desist orders

• Suspension/removal of registration

• Censures

• Bars from associating with securities industry


• Disgorgement

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Monetary Sanctions

Monetary Sanctions FY 2015-19

Source: Enforcement Division Annual Report for FY 2019

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Non-Monetary Sanctions

Non-monetary sanctions in FY 2019

• “Undertakings” to encourage compliance and prevent future misconduct

• 595 bars and suspensions of officers, directors, and accredited securities professionals

• Suspended trading for 271 securities issuers

• 31 court-ordered asset freezes

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SEC Investigations:Five Common Misconceptions

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Misconception 1:

“Staff” = “Commission”

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Misconception 1: “Staff” = “Commission”

• Commission = the five commissioners

• Presidentially appointedo Five-year terms

o Principal “officer of the United States”

• Sitting as deliberative body, makes final decisions on enforcement actions and rules

The Staff The Commission

• Everyone at the SEC other than the commissioners

• 1400 enforcement staff: home office, 11 field offices

• Responsible for conducting investigations

• Make recommendations to commission

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The Staff:

• Investigates – it spends more time developing views on the facts, applicable law

• Presents enforcement recommendations to commissioners and their counsel o …but only two weeks before commission’s vote

• Before that time, does not know commissioners’ views of the matter

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The Commission:

• Usually approves Staff recommendations in routine cases

• But controversial or novel cases can produce departures from Staff recommendations

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Recommendations

• Know individual commissioner views o Speeches, dissents, writings

• Understand their economic, financial and political perspectives

• Enforcement staff know these things; you should too

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Misconception 2: The SEC is monolithic

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Certain commonalities do prevail:

• The Staff operates under the aegis of the Commission

• Common legal standards

• Common evidentiary rules


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But there are differences:

• Different enforcement groups, units, and regional offices

• Different dockets

• Different cultures

• Different priorities and approaches to investigations


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Five Specialized Units in the Enforcement Division

1. Asset Management Unit

2. Municipal Securities and Public Pensions Unit

3. Complex Financial Instruments Unit

4. Foreign Corrupt Practices Act Unit

5. Market Abuse Unit

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11 Regional Offices:

Atlanta, Boston, Chicago, Denver, Fort Worth, Los Angeles, Miami, New York, Philadelphia, Salt Lake City, and San Francisco

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Recommendations

• Hundreds of attorneys in enforcement division oKnow the one(s) handling your case

• Understand your Staff attorneyo Flexibility on deadlines and scheduling requests?

o Degree of diligence and thoughtfulness?

o Relevant background experiences?

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Misconception 3: “Let sleeping dogs lie”

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• Some may think:

o No news is good news

o Contact with Staff could reawaken interest in dormant case


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• But the reality is:

o Staff is accountable for cases

o Must provide periodic reports to superiors

o Most cases not actually dormant


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• Risks of the sleeping dog approach: o Delay in stopping bad conduct

o Overlook interest from criminal authorities

o Months of needless uncertainty (business and personal)


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Recommendations

• Maintain contact with Staff

• Staff cannot discuss specifics but might signal pending closureoIf so: request termination letter

• Understand if case has been deprioritized: chance to resolve

• If case seems inactive but open: prepare for possible criminal investigation

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Misconception 4: Whether to Escalate

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• The temptation: escalate to more senior Staff supervising the investigation

• Why do this?

o More favorable outcome

o Reduce charges

o Reduce penalties


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• Director of Enforcement DivisionoFinal approval of recommendations to Commission

• Requesting Director’s review: o High stakes; unpredictable

o Often only one shot

o Often at end of investigations


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• Consequences of escalationo Review by unit chief or associate director, but also…

o Further review by investigative and trial staff

• Two possibilitieso Good: Staff is more critical; sees weakness

o Bad: Staff sees additional theories, errors, topics for inquiry


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Recommendations

• Avoid reflexive escalation

• BUT understand when escalation is warrantedo Be tactical: understand goals of appeal; prospect of success

o Adopt correct tone

o Frame question that is specific, reasonable, and within authority

o Be prepared for consequences

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Misconception 5: “The Perils of Delay”

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• False hopes for delay: o Staff or Commission might lose

interest

o Other matters may demand attention

• Some delay is inevitable: o Investigation time

o Coordinating parallel proceedings

o Resource constraints


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• But intentional delay likely will backfireo Staff antagonized

o Loss of cooperation credit

o Potential for additional charges


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• Where enforcement action is certain or likely: don’t wait

• With time, Staff positions harden

• Settlement offer may not improve


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Recommendations

• Know that much of the timing is beyond your controlo Prepare for the duration

o 18-22 month average for investigations

o Up to four or five years

• So, be responsive; resolve as quickly as possibleo Seize any chance for early resolution

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Questions?

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Contacts

Daniel M. Hawke

[email protected]+1 202.942.6743

Arthur Luk

[email protected]+1 202.942.5393

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