Zealous advocacy can mean playing nice with the SEC

In more than six years investigating and prosecuting potential securities law violations as an enforcement attorney at the Securities and Exchange Commission, I frequently watched companies and their lawyers make decisions in the spirit of zealous advocacy that the enforcement staff viewed as foolish, counterproductive, incomprehensible, costly for management, and costly for shareholders.
Mistakes in managing investigations were all too common. They can lead the SEC to devote additional resources, involve very senior-level personnel and generally raise the profile of a matter within the agency.
The good news is that many SEC investigations are closed each year with no enforcement action taken. This is a sign of a well-functioning regulatory process, where the government investigates potential misconduct, companies participate in the process, and the staff concludes that no enforcement action is necessary or appropriate.
If your company or client receives a request for information from the SEC’s enforcement staff, below are eight common mistakes to avoid:
1. Ignoring or minimizing staff concerns. If the SEC staff raises an issue, address it – especially if you believe the SEC’s concerns are misplaced, misguided or misinformed. Avoid the temptation to be dismissive of staff concerns and spend time trying to understand the issue from their perspective. Remember, they may have information you don’t have.
Addressing the staff’s concerns does not mean that a company has to acquiesce. But it does mean that a company must tackle issues head-on, and provide the SEC with the facts, law or other information necessary to understand the company’s point of view.
2. Withholding information. Companies should make sure that information provided to the agency is complete. Companies that withhold information, intentionally construe staff requests too narrowly, or redact documents for any reason other than privilege create the impression they have something to hide. You should demonstrate that you share the staff’s interest in rooting out potential misconduct for the benefit of company shareholders.
3. Failing to self-report misconduct. Self-reporting misconduct is an important part of company cooperation, and a company will be better off if it reports misconduct before the SEC staff discovers it themselves or hears about it from the newspaper, a whistleblower, or somewhere else. Determining when and what to self-report often present difficult issues for companies that may themselves have incomplete information.
But the staff generally appreciates early notification, and they will continually evaluate whether the company and its advisers can be relied on to provide complete and timely updates. Although determining whether and when to self-report can raise thorny issues, at least two circumstances should compel companies to act without hesitation.
First, if the SEC has already opened an investigation, report potential misconduct at the earliest possible point, even if only to notify the staff that an investigation is being undertaken. Second, companies always should report misconduct before making a public disclosure.
4. Contradictory statements. Too often, company management or employees make statements to customers, business partners, analysts, reporters, investors, or others that are contrary to positions taken with the SEC. Staff attorneys speak with a lot of witnesses, read the press and listen to investor conference calls. If company employees are double-talking, chances are the SEC will find out, and your company will suffer the consequences.
5. Delays in producing documents, witnesses or information without reasonable explanation. Inadequately explained delays are often viewed with suspicion. If you believe the staff is insisting on an unreasonably expedited schedule, do your best to meet their demands where possible with rolling productions and informal updates. But also engage the staff in detailed discussions about any technological or logistical issues that you are facing. Most enforcement attorneys have personal experience with complex, large-scale, electronic investigative discovery, and if they believe that you are working in good faith to satisfy their requests, they will likely work with you to resolve logistical issues.
6. Failing to stop known misconduct, fix it, repay victims and prevent recurrence. If you know of misconduct, SEC staff attorneys expect that you will act swiftly to stop it, to redress any harm, and to take steps to make sure it doesn’t happen again. If there are reasons that you cannot do so, you should be prepared to explain and justify those reasons.
7. Overly coaching witnesses. Preparing witnesses to give testimony is more art than science, and the best approach for any particular witness will depend on many factors, including the witness’s memory, his or her role in the transaction at issue and the nature of relevant documentary evidence. But the staff will get suspicious if testimony from company employees, who may share the same lawyer, appears contrived to fit a legal argument. Percipient witnesses should stick to what they saw, heard and know. Overly coached testimony loses credibility – even if the witnesses are telling the truth.
8. Being contentious, belligerent, argumentative, or just plain difficult to deal with. The SEC doesn’t institute enforcement actions because lawyers are difficult to deal with – but it certainly doesn’t help a company’s cause. Difficult lawyers undermine the staff’s confidence in information provided by counsel.
Worse yet, the staff may become concerned that the company doesn’t intend to live up to its promise of full cooperation, or that there is additional misconduct that hasn’t been uncovered. Effective company cooperation includes being responsive to staff needs, returning calls promptly, providing information when requested, and being respectful, courteous and professional in all interactions with the staff.

Ian D. Roffman is a litigation partner at the Boston law firm of Nutter McClennen & Fish LLP and is a member of the firm’s securities and government enforcement practice groups. Mr. Roffman recently joined Nutter after six years as an enforcement attorney at the Securities and Exchange Commission, including four years serving as senior trial counsel in the Boston office.