Experts say the SEC is notorious for “regulating by enforcement” and pushing the envelope in close cases. If you are unlucky enough to be in the SEC's crosshairs, a recent Corporate Counsel article provides the following five tips to survive that fight:
(1) Set a good example for your employees by steering clear of practices that concern the SEC. A company's commitment to ethical conduct will facilitate employees reporting problems internally rather than making whistleblower complaints directly to the SEC. Moreover, employees who believe in the integrity of their company are likely to be valuable witnesses for the company.
(2) Train employees to exercise judgment when sending emails. Emails are the first item the SEC subpoenas in most investigations and are often portrayed as "smoking guns" in SEC enforcement actions. The SEC will interpret ambiguity in the worst possible light, and sarcasm will be treated as fact. For complicated matters, encourage employees to pick up the phone or have an in-person meeting.
(3) Get good insurance. SEC investigations can drag on for years and cost millions. Determine now whether your policy limits are high enough and whether your insurance carrier has a reputation for standing behind its insureds. If possible, upgrade to a policy that covers government investigations. A policy that gives individual officers and directors the right to coverage if a company cannot advance defense costs ("Side-A" coverage) is an excellent option.
(4) Don't just roll over. In the past, companies threatened with an SEC enforcement action have opted to settle rather than engage in litigation that could cost the company. But the SEC's settlement terms have become difficult to accept, including admission of wrongdoing, disgorgement, civil penalties, or a permanent injunction from working in the industry. Therefore, your attorneys should make the SEC explain why they believe the evidence proves a securities law violation - and then engage with the SEC's trial staff (who has not invested months or years in the investigative phase and may have an independent perspective) to point out weaknesses in the SEC's case that may force them to re-examine the inherent risks of litigation.
(5) Change your strategy when the SEC files a case. At the investigation stage, the best strategy is usually to cooperate and attempt to convince the SEC staff that an enforcement action is not warranted. But when the SEC files charges in court, though, that strategy changes because the SEC is just another civil plaintiff where the Federal Rules of Civil Procedure apply. You can be aggressive in discovery. You get to review the SEC's investigative file in discovery and, in some circumstances, you can demand to see agency documents outside the investigative file and depose relevant SEC employees. This discovery will be invaluable at trial.