In a recent speech to members of the white collar and securities enforcement bar, the SEC’s Director of Enforcement, Robert Khuzami, spoke out against what Khuzami labeled “questionable tactics” and “gamesmanship” by defense counsel. While disclaiming any intent to “chill a vigorous defense” or punish “zealous representation,” Khuzami stressed that the Commission will not “remain passive,” and emphasized the Commission’s willingness to take a negative view of the evidence and/or more punitive enforcement decisions where it believes such conduct has occurred.
While many of the examples discussed are extreme, some of the conduct noted suggests a new aggressiveness by the Staff, and serves to highlight the extent to which conflicts assertions historically used by the Justice Department are seeping into investigations conducted by the SEC.
Khuzami specifically highlighted five types of conduct that “concerns” the Commission:
- Multiple Representations: Particularly emphasizing the new Whistleblower and Cooperation Programs of the SEC, “there are numerous examples,” Khuzami said, of “defense counsel representing multiple individuals with seemingly divergent interests.” “[W]e are taking a closer look at such multiple, seemingly adverse, representations,” Khuzami noted, and “[y]ou will likely see an increase in concerns expressed by SEC staff in those situations.”
- Lack of Recollection: Khuzami noted the “lack of recollection by witnesses” as a “significant issue,” noting that witnesses who “display an apparent lack of recollection about nearly everything of any substance,” or “fail to acknowledge what is clear from the plain language of documents, the significance of the events under scrutiny, or the uniqueness of the circumstances under which the event occurred.” In these instances, Khuzami made clear that the Commission may “draw the most negative inferences from the evidence.”
- Signaling During Testimony: Highlighting a particularly “troubling episode” in which a witness answered “I don’t remember” each time his counsel tapped his foot, Khuzami warned that, “[a] witness who backtracks on a previous answer after her counsel’s long speaking objection, or who returns to the testimony room after a break and repudiates her earlier testimony on an important point, could suggest inappropriate conduct by counsel.”
- Problems with Documents: Khuzami expressed frustration with (a) productions on the “eve” of testimony, (b) large bodies of documents being held back for further privilege review, “resulting in last-minute supplemental production,” and (c) “extended delays in the production of a privilege log” and “sending preservation notices.” Each of these practices “deprive[s] us of documents when we need them,” Khuzami said, and may result in the Commission having to recall a witness.
- Internal Investigations: “[W]e are seeing . . . questionable investigation tactics, including interviewing multiple witnesses at once, aggressively promoting exculpatory evidence while dismissing clear and identifiable red flags, scape-goating lower-level employees and/or protecting senior management who have longstanding relationships with the counsel in question, and failing to acknowledge constraints placed on the scope of their inquiry.”
Noting the Commission’s willingness to use it’s “existing tools to deal with these areas of concern,” Khuzami warned that the conduct of counsel can and will cause “the evidence [to] be viewed in a harsher light.” “Our enforcement recommendations to the Commission are based not only on [the evidence], but also on staff’s view of the credibility of counsel.”
In light of this warning, counsel must consider how best to maximize their credibility in dealing with Director Khuzami and his senior staff. For example, careful consideration should be given to the timing of document productions and the volume of material withheld on the basis of privilege, and privilege logs should likely be created and produced without delay, rather than only when specifically requested. Additionally, clients and counsel should strategically analyze group representation, as the Staff in recent months has offered “cooperation credit” to clients who engage separate counsel where the Staff perceives problems in multiple representation—an apparent departure from the accepted view of cooperation credit as a reward for an individual voluntarily approaching the Commission.
Ultimately Khuzami’s speech makes clear that making record of timely document production and encouraging fulsome testimony, and extreme care in working through potential conflicts are now important tools in advocacy before the Commission.
The full text of Khuzami’s speech to the Criminal Law Group of the UJA-Federation of New York can be found here.