On April 5-6, 2019, the Securities and Exchange Commission (SEC) held its annual SEC Speaks Conference in Washington, D.C. Summarized below are several significant insights conveyed by SEC Staff that are instructive for counsel handling investigations by the SEC’s Enforcement Division.
Herrera and Waiver of Work Product Protections
The Staff recognized that companies under investigation remain wary of providing the SEC Staff summaries of witness interviews following the SEC v. Herrera decision (No. 17-2301, S.D. Fla. Dec. 5, 2017), in which Magistrate Judge Jonathan Goodman stated he was “not convinced” that “there is a meaningful distinction between the actual production of a witness interview note or memo and providing the same or similar information orally.” As a result, Judge Goodman ruled that a law firm had waived the work product protection over witness interview notes and memos by providing oral summaries of those interviews to the Enforcement Staff.
This opinion creates a dilemma for companies seeking cooperation credit from the SEC. Naturally, a company is more likely to gain cooperation credit by providing the Staff information learned during an internal investigation. But doing so risks waiving privilege protections. The Staff acknowledged being “mindful of the risks” involved in waiving the privilege in this context and observed that a waiver of privilege is not necessary to earn cooperation credit (and cooperation points would not be deducted for failing to waive privilege). The key question in assessing cooperation is whether the Staff receives salient facts in a timely manner that materially assists their investigation.
Further Insight on Cooperation Credit
The Staff confirmed that a full range of actions could garner cooperation credit. It could be beneficial to start a dialogue with the Enforcement lawyers early in an investigation and to provide “factual presentations” that could streamline the investigation. Other efforts to streamline the investigation can be viewed favorably with respect to cooperation credit, including being open to creative ideas with respect to documents reviews – for example, revising search terms and custodians to eliminate false positives triggered by document requests. Evidence of remediation and enhancements are important to cooperation credit, especially when undertaken early (rather than being used later as a bargaining chip), but these efforts will be credited only when there is objective data to demonstrate their effectiveness. Adequate remediation and cooperation efforts can result in reduced charges and penalties – “high-quality cooperation” can result in no fines/charges. In assessing penalties generally, the SEC attempts to craft an overall package that is fair and appropriate. The Staff is working to standardize their approach to penalties.
Effective Advocacy before the Enforcement Staff
When advocating before the Enforcement Staff, particularly during a Wells meeting, counsel should prioritize their arguments and focus on the facts actually in dispute. The Staff noted that while they will identify each statute potentially violated, counsel need not address every statute in the same depth. Though the Staff recognized the need for zealous advocacy, they advanced that focusing on arguing for a realistic outcome may be most effective, rather than arguing that the SEC has no legal or factual support for their position where such a basis clearly exists.
The Staff offered the following additional recommendations for counsel advocating on behalf of clients:
- Quoting what SEC Commissioners have said publicly is not persuasive.
- Pre-Wells submissions, such as white papers, can be effective, particularly if a litigant believes there is an unsettled point of law that could change the course of the investigation.
- Expert reports can be productive if they are of the type and quality that would be admissible in court. Conversely, expert reports that opine on legal standards and appropriate policy judgments are not effective.
- Consider skipping long explanations of settled areas of law – for example, the pleading standards for a Section 10(b) claim. Such explanations waste briefing space in lieu of arguments that could be more focused and persuasive.
Litigation in a Post-Lorenzo World
On March 27, 2019, in Lorenzo v. SEC (587 U.S. ___ (2019)), the U.S. Supreme Court upheld the SEC’s expansive view of liability under Rule 10b-5 of the Securities Exchange Act of 1934 for fraudulent actions in connection with the purchase or sale of a security. Previously, the Court had held, in Janus Capital Group, Inc. v. First Derivative Traders (564 U.S. 135 (2011)), that only the “maker” of a false statement could be subject to primary liability under Rule10b-5(b). However, uncertainty existed after Janus as to whether a person could be held liable under Rules 10b-5(a) and (c) solely for disseminating false statements without engaging in some additional deceptive conduct. In Lorenzo, the Court held that a person can be held liable under Rules 10b-5(a) and (c) for disseminating false or misleading statements even if the person did not “make” the statements.
SEC Staff acknowledged that it is difficult to square Lorenzo with pre-Lorenzo case law holding that additional deceptive conduct (beyond just misrepresentations and omissions) is necessary to establish a violation of 10b-5(a) and (c). The Staff expects to see significant motions practice in response to Lorenzo, with defense counsel arguing that the holding in Lorenzo is limited to defendants who disseminated a false statement. SEC Staff anticipate reiterating their position that Rule 10b-5 should be interpreted broadly and that Rule 10b-5 and the Lorenzo holding apply to defendants who make and direct the creation of false statements, as well as to disseminators of false statements.