Not all federal agencies deserve unconditional cooperation, says Kevin Evans. The SEC is a case in point.
Dealing with US federal agencies calls for a range of different approaches, depending on what agency you are dealing with and what the issue is. The Environmental Protection Agency (EPA) tends to be easier to deal with whilst the US Securities and Exchange Commission (SEC) requires a whole different and more aggressive strategy.
Take two different scenarios. One client has just received a “visit” from several armed federal agents executing a search warrant in connection with an environmental criminal investigation. Another client just received a subpoena to provide testimony in an investigation by the SEC.
Different agencies, different approaches
How would you defend these clients and what advice would you offer? After years of experience in dealing with numerous federal agencies, my advice is that your recommendation on how to proceed should depend not only on the facts, but also on the agency involved.
For instance, in a recently concluded grand jury investigation of an environmental laboratory client, no less than 30 armed EPA agents from across the country (several of whom I knew from a previous large criminal environmental matter) in October 2007 executed a search warrant at one of my client’s laboratories. The EPA was investigating allegations by two disgruntled former employees of lab fraud. My co-counsel (who brought me in to assist her) and I immediately conducted a thorough investigation and concluded that the branch managers needed to go; fortunately the client heeded our advice.
Co-operating with agencies
We then spent the next four-plus years working on improving lab operations and cooperating with the lead EPA case agent and the Department of Justice (DOJ) prosecutor, both in the production of requested information and in making numerous employees available for interviews.
As the statute of limitations deadline approached, we were told that a decision had been made to seek the indictment of our laboratory client. However, honouring their commitment to provide us with a chance to meet and explain why charges should not be brought against our client, the second in command of the Environmental Crimes Section at DOJ and the lead EPA case agent gave us an opportunity to submit a white paper and make a presentation explaining why under the DOJ guidelines our laboratory client should not be indicted. DOJ and EPA demonstrated thoughtful consideration of our positions and concern regarding the impact of an indictment on the lab employees, and noted our cooperation and positive steps taken during the investigation; following this effort, DOJ exercised its discretion and declined to indict.
I cannot say that my dealings with the SEC have been as positive, and colleagues who also deal with the SEC with a fair degree of regularity report similar experiences. For instance, unlike DOJ, the SEC will never share with you the status of your client, at least not until it tells you that it intends to sue.
Moreover,during investigative depositions, the SEC is notorious for examining from documents without providing those to your client for review (playing the proverbial “gotcha”), being overly authoritarian, aggressive and argumentative and taking extreme positions regarding the attorney-client privilege.
I also have found that enforcement attorneys, both at the regional level as well as at the SEC’s main office in DC tend to demonstrate a lack of appreciation for the “big picture.” For example, in a very large case recently concluded, the SEC sued the former CEO, CFOs, president, various other senior executives, and senior Director of Financial Reporting (my client) for alleged securities violations arising from purported accounting regularities; the company (Qwest Communications) settled with the SEC (neither admitting nor denying liability).
A game of chess
It was obvious to me from review of tens of thousands of pages of documents prior to the filing of the Complaint that the SEC should not sue my client. When I attempted to explain by providing such documentary evidence, the SEC essentially said that I did not know what I was talking about and, despite full cooperation by my client during the investigation, brought fraud and other claims against him.
As an aside, the SEC before doing so told me that if my client could provide testimony in support of fraud charges against the former CEO and CFOs, the SEC would allow my client to agree to settle for books and record charges. Because my client did not run in the senior executive circle and could not offer such evidence, he too was sued for fraud and other securities violations. Just after filing the Complaint, the then SEC head of litigation in that region, obviously in an effort to influence the public, was quoted in the local paper as saying that defense counsel were pathologically aggressive because they were not breast fed as infants! As discovery developed and at various stages during the course of the 69 depositions that were taken in the case (I took the lead for the defense team on most of those and thus had intimate familiarity with the facts), I submitted additional white papers updating my position that the SEC should do the right thing and dismiss the case against my client. On each occasion, the SEC turned a blind eye with no thoughtful consideration.
Fortunately for my client, although after six years of turmoil and being severed by the company because he was charged with fraud (to its credit the company did continue to indemnify), the court did not ignore the facts and evidence, and granted summary judgment in favour of my client on each claim. I also firmly believe that the SEC’s decision to overcharge by including my client had an impact on the court’s decision to grant summary judgment on numerous claims against other defendants.
Generally speaking, I would not hesitate in the future to advise a corporate client to try and work cooperatively with EPA (and various other agencies with which I have interacted) in an effort to resolve a matter. However, I will never again chart a strategic path in an SEC matter without advising clients of the above-described situation and the SEC’s conduct throughout the lengthy course of that case. Regardless of the strategy ultimately employed, and accepting the possibility that SEC counsel in a given matter could demonstrate appropriate judgment and discretion, I will always start by defending a client differently before the SEC than I will before any other federal agency.