When the Securities and Exchange Commission commences an informal or formal investigation into corporate activities, the corporation and its officers, directors and employees, are often quick to cooperate. In many instances, this instinct towards cooperation is well-founded. The SEC practice standards place heavy emphasis on compliance with investigations. Moreover, corporate officers, directors and employees may need to cooperate with the Commission in order to safeguard their careers, particularly if they work in closely regulated industries.
Although the incentives to cooperate with the Commission are compelling, individuals must carefully balance the desire to preserve and further their careers with the need to maintain their liberty. Officers, directors and employees who face the possibility of criminal prosecution should avoid discussions with the SEC until they have engaged counsel to determine whether they should assert their Fifth Amendment privilege against self-incrimination. The decision to cooperate with the Commission's investigation or assert the Fifth Amendment cannot be undertaken lightly, and the ramifications of each alternative must be carefully considered at the earliest stage of the SEC investigation.
The SEC uses several methods to obtain information from officers, directors and employees. The Commission may formally subpoena individuals for testimony or request that they produce documents concerning the matters under investigation. Alternatively, the Commission simply may contact the individual to have an informal discussion.
Although corporations have no Fifth Amendment privilege against self-incrimination, the Fifth Amendment affords broad protections for individuals targeted by these investigatory tactics. Officers, directors and employees may assert the Fifth Amendment privilege in both civil and criminal proceedings to refuse to respond to questions eliciting information that either would incriminate them or provide a "link in the chain" of evidence needed to prosecute them. Individuals may also refuse to produce documents in response to a subpoena if the act of producing the documents would communicate incriminating facts, such as affirming that documents responsive to the subpoena exist and are in the possession of the witness.
An individual's response to the SEC's initial overtures can affect the scope of his or her Fifth Amendment privilege during the remainder of the SEC investigation and any enforcement proceeding. Further, although the SEC has no criminal enforcement power, the outcome of the SEC's investigation will significantly influence the chances of a criminal indictment. The SEC may flag certain investigative files for the Department of Justice, and the DOJ can obtain these files upon request. Therefore, information provided by witnesses during the SEC investigation will likely become the framework for a criminal indictment.
Whether to the assert the Fifth Amendment privilege depends greatly upon the facts of each case and is not susceptible to easy generalities. For example, consider the situation in which an individual employed in a closely regulated industry is aware of a pending criminal investigation or is fairly certain that a criminal investigation will be initiated. On the one hand, asserting the Fifth Amendment privilege may be highly advantageous to avoid providing inculpatory evidence to the Government. On the other hand, asserting the Fifth Amendment may jeopardize the individual's career, and if the individual's testimony would provide the Government with exculpatory or mitigating evidence, testifying may be the best course. Typically, it is difficult to accurately assess the odds of criminal prosecution at the onset of an SEC investigation. Therefore, each individual should be aware of both the positive and negative consequences associated with invoking his or her Fifth Amendment privilege. Listed below are just a few of the ramifications that must be considered.
Positive consequences associated with asserting the privilege
- Avoids providing the Government with probable cause for a criminal indictment: If an individual testifies to facts supporting a criminal charge, the DOJ will have access to that information. Accordingly, an individual must be aware of the criminal implications of his or her conduct before testifying on that matter.
- Avoids risk of exposure to additional charges: Sharing information with the SEC exposes an individual not only to prosecution for the conduct at issue in the SEC investigation, but it also creates the potential for charges of perjury, false statements and obstruction of justice. The DOJ has been prosecuting these "process violations" with increasing frequency.
- Avoids use of testimony in subsequent criminal case: Testimony provided by a witness during a civil investigation may be used in a subsequent criminal proceeding. Accordingly, if and when a criminal indictment issues, an individual will be bound to the testimony he provided to the SEC.
- Avoids the risk of waiver: A witness risks waiving the Fifth Amendment privilege as to some facts if that witness has already testified to related facts. Testimonial waiver is a nebulous concept, and therefore it is crucial that a witness retain counsel to negotiate the pitfalls of waiver.
Negative consequences associated with asserting the privilege
- May jeopardize an individual's career: A corporation is entitled to require its employees to disclose to the SEC any information they have concerning the business activities of the corporation. If an employee refuses to provide such information and instead asserts the Fifth Amendment, the corporation may lawfully sanction or terminate the employee. Corporations practicing in closely regulated industries are particularly likely to have no tolerance for employees unwilling to cooperate in an investigation. Asserting the privilege may also create negative publicity for the individual and the corporation involved, which could be personally or financially damaging.
- Prompts SEC enforcement: Asserting the Fifth Amendment will surely draw the SEC's attention, and the SEC will be more likely to flag the case for a DOJ referral. Nevertheless, if criminal prosecution is a possibility, prudence may dictate pleading the Fifth Amendment (particularly if the witness has no mitigating or exculpatory information to share.)
- Adverse inference drawn in favor of the SEC: In a civil proceeding, such as a case filed by the SEC, a court may draw an adverse inference on the merits of the case against a party who asserts the Fifth Amendment privilege. Courts have broadly interpreted what constitutes a "civil proceeding," and therefore an SEC investigation undertaken before a case is filed may also be covered by this principle. While silence alone is generally not sufficient to support the adverse inference, a witness's refusal to testify may be considered as one of several factors supporting the SEC's case.
The viability of asserting the Fifth Amendment privilege against self-incrimination and the consequences associated with that assertion will vary according to the circumstances of each case. It is crucial, however, that an individual facing the possibility of a criminal investigation thoroughly understand the scope of his or her rights before opening the door to the SEC.
The content of this update is general in nature and is not intended as legal advice related to individual situations. Counsel should be consulted for specific legal planning and advice.