CREDIBILITY AND DEFENDING SEC INVESTIGATIONS

Defending a company or an individual in an SEC investigation is, like representing a client in court, more often than not about credibility. The approach and tactics must be credible. Counsel and the client must be credible. Good, well prepared and forceful advocacy should fortify credibility and ultimately the position of the client. Unscrupulous and improper tactics do not. Credibility can help win a point or a case. When credibility is compromised the case is lost whether it is in court or in an SEC investigation.

SEC Enforcement Director Robert Khuzami recently made this point in Remarks to Criminal Law Group of the UJA-Federation of New York (June 1, 2011)(here). This should be an obvious point to any experienced practitioner. Yet the Director’s remarks are replete with examples of tactics which are in inappropriate and compromise credibility.

Good advocacy facilitates the investigative process Mr. Khuzami noted. Inappropriate tactics do not. These include:

• Multiple representations: This can present difficulties where there is a significant potential for conflicts or actual conflicts exist. When representing those who may be culpable, the Commission’s recently adopted cooperation procedures can enhance the difficulties here.

• Lack of recollection: Witnesses who repeatedly claim a lack of recollection to even basic facts, repeatedly refuse to permit their recollection to be refreshed with documents or who have detailed memories of all matters except those where there may be culpability raise questions about their credibility and the manner in which they were prepared for testimony by counsel.

• Signaling: Repeatedly signaling or coaching the witness during testimony is inappropriate. This includes repeatedly having a witness recant or qualify testimony after a break.

• Problems with documents: Producing documents on the eve of testimony and withholding large groups of material under the guise of a privilege review and then producing that material toward the end of an investigation after key witnesses have testified can only serve to unnecessarily delay the investigation.

• Internal investigations: Improper investigative techniques such as interviewing multiple witnesses at once, aggressively promoting exculpatory evidence while ignoring obvious red flags, throwing lower level employees under the bus to protect senior executives and not acknowledging limitations on the scope of the inquiry compromises the investigation.

The staff has a number of tools to deal with these issues according to the Director. They range from pointing out the conflicts to referring possible obstruction and perjury to the Department of Justice.

Nobody can argue that representing clients where there are clear conflicts, playing games with a document production or ignoring red flags while conducting an internal investigation is inappropriate and compromises the client and counsel. Mr. Khuzami’s conclusion seems equally apparent: “Counsel serves as a kind of prism through which the staff invariably assesses certain evidence developed in the investigation, including that based on representations of counsel.” When the tactic used to defend the investigation are more than questionable and become inappropriate – and that does not mean hard fought advocacy – it can compromise credibility. At that point counsel has failed the client who is the ultimate loser.