Last Updated on: 28th July 2023, 07:23 pm

SEC Enforcement Intensity: What You Must Know

Hey, have you been following the updates on our blog or website? Then you must’ve noticed the Securities and Exchange Commission (SEC) Enforcement Division is ramping up pressure on financial companies, investors, and issuers.

Now, if an SEC subpoena lands in your hands, let’s be frank, it’s not a pleasant experience. But guess what? You’ve gotta roll with the punches. Whether you’ve intentionally committed a securities law violation or not, a reaction to the subpoena is mandatory.

In my last piece, I titled ‘When the SEC Comes Knocking’, I discussed strategies to effectively respond to an SEC Subpoena. Now let’s delve into a slightly murkier scenario. What happens when you stamp a “return to sender” on an SEC subpoena? One word – ugly!

The ABC of an SEC Subpoena

To start with, an SEC subpoena is a formal demand by the SEC which necessitates an individual, a business, or an organization to produce certain documents or materials. These subpoenas are primarily part of an in-depth investigation into possible fraudulent behavior or financial misconduct.

Legally-speaking, SEC has the prerogative to issue subpoenas courtesy of the powers vested in them by federal laws, a prominent one being the Securities Exchange Act of 1934. The SEC hunts for potential transgressions of securities laws and regulations, and uses different tools, subpoenas being a prime example, to procure information.

Mind If We Talk About Ignoring Subpoenas?

Let’s be real here, you’re not gonna ignore the subpoena. It’s just not good business sense. Yet, hypothetically speaking, if you did give the cold shoulder to an SEC subpoena, the implications could be dire. Depending on the situation, the SEC could slap on civil or criminal penalties. Civil penalties could mean fines in the fat six-figure range and potentially up to five years in prison. The SEC can also issue you a cease and desist order or demand that you adhere to its requirements promptly.

If the SEC thinks you’ve purposely snubbed an SEC subpoena, you can be charged with obstruction of justice. This offense is no joke – you could face steep fines or jail time, again depending on the severity of the act. Apart from the money crunch, the deliberate disregard of a subpoena can tarnish one’s reputation in the securities market and might even lead to suspension or elimination of licenses.

Not All Things are in the Open

Remember, an SEC investigation, including its subpoenas, are confidential and not for public consumption. Meaning? The outside world, including your near and dear ones and competitors, are clueless about it, unless you have a legal obligation to reveal it.

However, suppose if you turn your back on the subpoena or reject its mandate, the SEC can walk into court to enforce the subpoena.

In case the SEC needs to use force to ensure your cooperation with its subpoena, it files an application in federal court. This application discloses the investigation’s cause & purpose, your role in it, and the actions underlying it. Since the federal laws designates these documents as public, anyone can access them. So, by not acknowledging the subpoena, you’ve gone live with allegations of your involvement in an SEC investigation.

Still not done. Suppose the SEC issues a press release about your subpoena refusal, or a reporter uncovers the complaint, now your confidentiality surrounding the subpoena and your role in an SEC investigation is simply a Google search away for anyone.

Repercussions of SEC Subpoena Enforcement

To better exemplify this issue, let’s refer to the case involving Terraform. The company’s CEO was served with an SEC subpoena. An argument broke between the SEC and Terraform revolving around the issuance of that investigative subpoena upon the company. Terraform not only decided to not comply, but it also mounted a lawsuit against the SEC for alleged violation of various statutes.

The intricacies of Terraform’s lawsuit are covered extensively in a Bloomberg article. Now, the revelation of this lawsuit against the SEC, disclosed the investigation but the main point to note here is the refusal to comply with the subpoena led to the SEC filing a charge to enforce the subpoena.

Following Terraform’s refusal to comply, the SEC issued a press release surrounding their formerly confidential investigation.

Consequences Be Aware, SEC Subpoenas are no Joke

With this move, the SEC expects the court to demand Terraform Labs and its CEO to justify why they shouldn’t be ordered to present the documents required by the subpoenas and ensure the CEO’s appearance for testimony.

Suddenly, the investigation is the talk of the town, the SEC decides to capitalize on this opportunity, and the subpoena enforcement case swiftly proceeds.

Terraform is now under a 10-day limit to react to this enforcement petition and is required to convince the court about the subpoena’s invalidity. Failure on their part to respond, or if the court rules against them, they must honor the subpoena without any opposition.

Non-compliance could lead to the court labeling Terraform as guilty of contempt of court, thereby levying fines, and in theory, potential jail time.

Strategize, Don’t Ignore

The smarter move? Have a security attorney, versed in SEC investigations, negotiate a response plan with SEC officials. Often, an SEC subpoena can be overly broad or searching for suitable documents might be overwhelming. A discussion facilitated by an experienced security attorney can effectively narrow the scope of the subpoena.

When the SEC sends over a subpoena, the recipient must undertake crucial steps to protect their interests. Chief amongst them is to contact a securities attorney who is experienced in defending witnesses amid SEC investigations and can guide you on the best course of action.

Additionally, ensure that you don’t discard any documents that might be relevant to the subpoena.

Once you have that subpoena in your hands, you’re obligated to maintain the documents mentioned in the subpoena, regardless of whether you finally present those documents. This mandate extends to your employees and associates.

Providing legal representation permits the attorney to advise the client on the appropriate statutes and regulations related to subpoenas and other orders issued by the SEC.

Let’s Wrap Up

In essence, while it might be cumbersome and costly to comply with a subpoena, it’s wiser to work your way around it than waiting for an order from the court. But, if you’re prepared to weather the ramifications of refusing to follow the court’s order along with the associated steep fines and potential jail time, feel free to disregard this article. With Todd Spodek and the Spodek Law Group on your side, you can navigate these choppy waters with confidence and ensure the best outcome possible.