SPEEDING UP SEC INVESTIGATIONS

The Commission took another step last week in its continuing efforts to speed up the investigative process. The SEC amended Rule 30-4(a)(14) concerning immunity requests. The summary section of Release 34-64649 states that the Commission is delegating “authority to the Director of the Division of Enforcement . . . to issue witness immunity orders to compel individuals to give testimony . . . “ The text of the rule clarifies the delegation by providing that the Division Director will now be empowered “[t]o submit witness immunity requests to the U.S. Attorney General pursuant to 18 U.S. C. Sections 6002 – 6002 [the immunity statutes] and, upon approval by the U.S. Attorney General, to . . . issue orders compelling the individual to give testimony . . .” The delegation is effective for an eighteen month period beginning June 17. It follows and earlier temporary one from January 2010.

This is one of a series of steps the SEC has taken in recent months in an effort to speed the investigative process while conserving scare resources. Other steps included flattening the management structure by eliminating the branch chief position to put “more boots on the ground,” creating specialty units to add expertise, delegating the authority to issue a formal order of investigation to senior staff and creating incentives for individuals and business organizations to cooperate with Commission investigations.

Speeding the Commission’s investigative process and increasing its efficiency is a worth while goal. By its nature the investigative process is deliberate, time consuming and difficult. This is particularly true in Commission investigations which tend to have complex and often novel issues. Sorting through what in many cases is hundreds of thousands if not millions of pages of documents, taking testimony from numerous witnesses about difficult matters that may have happened in the distant past and fully assessing what happened without missing key issues and facts is at best a daunting task. In these days of the 24/7 news cycle with congress and others second guessing every move it is even more difficult. Yet over the years the Commission has done an admirable job. That is not to say there have not been errors. No process is perfect. By and large however the SEC has been effective.

At the same time there is no doubt that the Commission’s investigative process is often far to slow and inefficient. That puts a strain on agency resources which is of particular concern in these days of tight budgets. It also imposes a huge burden on companies and individuals involved in the process. For companies the on-going investigation drains critical executive time and resources from operating the business to say nothing of the impact of the professional fees and expenses. Frequently, the fact that the investigation is continuing negatively impacts credit lines, customers and others who are essential to the successful operation of the business. For individuals it can put their career on hold for years while leaving them with no income or means of support in addition to causing what must feel like never ending angst.

For all of its recent efforts, the speed and efficiency of the Commission’s investigative process is little changed. It is still slow and inefficient. To be sure Commission officials have cited statistics suggesting that efficiency is improving. Yet overall it is still far to slow.

This is not to say that the steps taken to date are not useful. Creating specialty groups to focus expertise, flattening what had become a bloated management structure and creating incentives to foster cooperation may in the long run prove successful. On the other hand delegating the authority to issue formal orders, while perhaps increasing the number of formal investigations has also lead to predictable abuse as in the Morgan Asset Management proceeding (here). The delegation of authority on immunity, while perhaps aiding internal efficiency since the staff will now not have to formally seek Commission approval to approach the Attorney General, will likely have little overall effect.

In the end Commission investigations are about people gathering and analyzing information. The most effective way to speed those investigations is to “put more boots on the ground.” Not just any boots however. Experienced boots. The Commission staff has a wealth of bright, talented and experienced people. Yet far too often that experience is focused on management, making policy and crafting the direction of the program. All of these are important. The fundamental mission of the Enforcement Division however, is to conduct investigations, fret out the facts, halt violations and prevent their reoccurrence in the future. The difficulty of that task demands not just bright, talented people but also experience and expertise. In the end the only real way to speed the process is for the more experienced members of the staff to get out of the meetings and into the document and testimony rooms.

One final note on the investigative process involves the conduct of Commission investigators and defense counsel. This can have a significant impact on the investigative process. In some now well publicized remarks the Enforcement Director recently decried certain tactics employed by defense attorneys such as intentionally and improperly withholding documents and coaching and signaling witness during testimony. The examples in the Director’s remarks involve the type of conduct that everyone should recognize as improper if not unethical or more. Any defense counsel who employs such tactics should understand that not only are such tactics are improper but they also hurt the client he or she has an obligation to effectively represent (here).

At the same time Commission investigators must recognize that defense counsel has an obligation to zealously represent his or her client. Investigators also have to recognize that every time the response to a question is not what they expect or believe it does not mean the witness is lying or has been improperly coached. Rather, it may be that an inappropriate or in artful question has been asked. Many times, for example, an investigator who has spend hours pouring over documents about the details of a transaction from years ago will ask “What happened on June 16, 2006 at 3:00?” The witness, who probably can’t remember where he or she was last Tuesday at 3:00, will predictably say “I don’t recall.” Even if the witness is shown documents about the matter he or she may honestly not recall an event tied to a specific date and time. These responses are not lies, perjury or obstruction of justice. They are the product of poor questioning technique and human memory.

These and similar inappropriate investigative techniques such as trying to “build a record” to substantiate a theory rather than following the facts are repeated day in and day out in Commission investigations impeding the process. Collectively such techniques impede investigations. While defense counsel often leave the testimony room shaking their head and complaining about such techniques, the reality is they reflect inexperience, not bad faith. More experienced boots on the ground can help resolve some of these difficulties and add to the overall efficiency of the process. Improving the speed and efficiency of Commission investigations would clearly benefit everyone.