Academic journal article Defense Counsel Journal

Responding to SEC Subpoenas: Cooperation through Credible Assurances of Complete Production

Academic journal article Defense Counsel Journal

Responding to SEC Subpoenas: Cooperation through Credible Assurances of Complete Production

Article excerpt

"[T]he Commission is bringing more cases for failures to preserve or produce required documents and records ... What such cases illustrate is that, no matter how bad the underlying conduct, you can always make things worse." (1)

RESPONDING to a subpoena from the Securities and Exchange Commission ("SEC") for documents can be a difficult, expensive, and time-consuming task. Locating and collecting all of the responsive paper documents from central files, offices at one or more sites, off-site storage facilities, individual desks, and personal briefcases can be a daunting task. Retrieving the responsive electronic material from central servers, individual computers, personal laptops, and handheld devices used by various executives can be even more difficult than compiling the responsive paper documents. (2)

Nevertheless, full and expeditious compliance with an SEC subpoena may be critical to successfully resolving the inquiry. At a minimum, certification by the company that it has produced all documents sought by a subpoena will be a condition of any settlement. (3)

Perhaps more important, however, is the question of cooperation. If the company can successfully claim that it has fully cooperated with the inquiry, (4) it may be able to obtain a closing letter (5) without receiving any sanction or at least minimum penalties. (6) In contrast, when a company fails to fully comply, it may face not only an enforcement action, but increased sanctions and penalties.

Cooperation and the beginning of a favorable resolution of an SEC inquiry usually starts with fully and expeditiously producing the documents typically sought at the beginning of any investigation. (7) If a company fails to produce all documents, or if, as often happens during investigations, responsive materials are "discovered" as the staff studies materials produced or takes testimony, a company's claim of cooperation may be undercut or destroyed regardless of the reasons for not initially producing the material. This failure can also result in increased penalties and fines as many companies have recently learned. (8)

In egregious situations, the SEC may refer the matter to the Department of Justice for criminal prosecution, as some companies have unfortunately learned. Perhaps the most well-known incident involved former accounting giant Arthur Andersen, which had a poorly administered document management program that was not comprehensive and not kept up to date. Although it should have halted the destruction of documents when the firm learned of various government inquiries, its continued document destruction eventually resulted in an indictment for obstruction of justice and the subsequent demise of the firm. (9)

Companies that want to be in a position to claim cooperation and opt for a more favorable resolution of an SEC inquiry or at least be in a position to complete a settlement by being able to execute a certification of full compliance as to the document subpoenas--may find that a standard business tool, a document management system, assists them. (10) A properly constructed and maintained system acts at once as a tool which can be used by to facilitate the use of its information and as an effective compliance mechanism for responding to an SEC subpoena or any other request for documents. A comprehensive system assists a company halt the destruction of materials once it receives notice of the materials which may be sought, quickly locate the responsive documents, and provide the SEC with credible assurances of full compliance. At the same time, in the event that materials are overlooked, the system should afford the company a ready explanation for the omission which may preserve its claim of cooperation.

Many companies opt not to create document management systems. Not only does this decision impede a company's ability to use its own information, it leaves it at risk in SEC and other government investigations and even in private litigation. …

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