If you have 99 problems, you should make sure that a Securities and Exchange Commission subpoena enforcement action
is not one. On 3rd May, 2018, the SEC announced that it was seeking an order requiring Shawn Carter, better known as Jay-Z, to comply with a subpoena to testify in an ongoing investigation.1 The SEC staff uses subpoena enforcement actions to obtain the information they deem necessary to an investigation, as well as to vindicate their subpoena authority as a matter of principle. The SEC's public announcements of such actions — through press releases — are likely designed to deter parties that might consider non-compliance as well as to show the public that the SEC is vigilant about asserting its authority. But the SEC does not always enforce subpoenas in instances of non-compliance and, when it does, it does not always announce subpoena enforcement actions; indeed, in the past it rarely did. The SEC's public announcement regarding the Jay-Z subpoena enforcement action is reflective of a more recent trend to publicise these actions and appears to have obtained the desired effect of compliance with the subpoena. Given the fame of the subject, the SEC also succeeded in receiving broad coverage of its message of deterrence after the press picked up on the news of the enforcement action. But what lessons does this recent trend hold for those of us less accustomed to the spotlight? This paper explores recent trends in the issuance and enforcement of SEC subpoenas, including the increase in enforcement action publicity, and discusses considerations when choosing between complying with a subpoena and, alternatively, facing a subpoena enforcement action.
SEC SUBPOENAS AND ENFORCEMENT THEREOF
To compel someone to provide documentary and testimonial evidence in an investigation, the Commission must first authorise its staff to issue subpoenas by entering a formal order of investigation. A formal order of investigation generally outlines the scope of the investigation that the Commission has authorised. It typically recites publicly available information about the people or entities involved in the investigation, identifies and quotes the relevant statutes and rules that might have been violated, and designates the staff members who are authorised to administer oaths and issue subpoenas.2
The federal securities laws give the SEC nationwide authority to issue a subpoena to compel the provision of documents or testimony. 3 A subpoena may be issued requiring the production of any records 'deemed relevant or material to the inquiry', according to the SEC Enforcement Manual, 4 which also provides that a subpoena should not be used to conduct discovery in a pending litigation. 5 According to established case law, the staff has substantial discretion to determine the scope of an investigation as well as the scope of a subpoena. 6 To enforce the subpoena, the SEC is not required to show that the subpoenaed documents are actually relevant to an investigation. All that is required is a good reason to investigate and a showing of a 'reasonable belief' that the records sought are relevant to the investigation, which means that anything that touches a matter under investigation is fair game to compel. 7
An SEC subpoena is not self-enforcing; the Commission must file an action in federal court to enforce it.8 In actions filed to enforce subpoenas, federal courts have almost always ruled in favour of the SEC; however, the very process required at the SEC to obtain approval of a subpoena enforcement action might affect the decision to bring such an action, since this process inevitably delays the investigation. First, the decision to enforce a subpoena — let alone actually take action — does not occur the minute a subpoena recipient fails to satisfy a due date. The parties often negotiate further deadlines and the staff typically gives the subpoenaed party several chances to comply. The staff may also take time to internally deliberate the strength of a subpoena enforcement action, the necessity of the documents being sought and the potential harm to the enforcement programme should the staff permit the dereliction to go unaddressed.9 This part of the delay, that is, the interval between the SEC's issuance of a subpoena and filing an enforcement action, is often about three months, based on our review of the procedural facts recited by the courts in a sampling of 15 decisions ordering subpoena enforcement over the last 18 years. And the process weeds out those potential actions with a lower possibility of success, given possible defects in the subpoena.
In 2009, the SEC attempted to streamline the subpoena enforcement process. Historically, approval to file subpoena enforcement actions had to be granted by the full Commission, as with any action to be filed in federal court. In an effort to be more efficient after the SEC failed to detect Bernie Madoff's Ponzi scheme in 2008, the Commission delegated authority to issue and enforce subpoenas to the four or five associate directors below the level of division director, instead of requiring the full Commission to approve of such filings. 10 As the statistics recited below demonstrate, 11 that expansion in personnel authorised to commence actions to enforce subpoenas was accompanied by a slight increase in use of that authority in the following years (although probably not to a statistically significant degree). Under the current administration, there appears to have been a slight retrenchment in that authority; at the beginning of 2017, the SEC placed the authority to issue and enforce subpoenas with the directors of the Division of Enforcement rather than with their direct reports.
Moreover, the SEC's enforcement staff cannot rely upon immediate action by a court to enforce the subpoena and enable the staff to keep the investigation moving forward. In cases in which the court has ordered subpoena enforcement (versus those matters in which the court denied the SEC relief or the respondents agreed to respond to the subpoena without a court order), on average the court ordered enforcement of the subpoena about three months after the action was filed, and sometimes the staff has had to wait for up to a year for a court to order compliance.12 The average time between issuing a subpoena and obtaining a court order enforcing it is six months.
A case in point is the subpoena enforcement action filed against Shawn Carter. The SEC commenced the action on 2nd May, 2018, by filing an application for an order to show cause and an order requiring compliance with a subpoena in United States District Court for the Southern District of New York. The application recites this chronology: the SEC issued the first subpoena to Mr Carter on 16th November, 2017, requiring his appearance for testimony over two months later, on 23rd January, 2018; after he refused to appear on that date, the SEC issued a second subpoena a month later on 23rd February, 2018, seeking his appearance on 21st March, 2018. (The reason for issuing a second subpoena is unclear.) When he again refused to appear, the Commission commenced the subpoena enforcement action six weeks later. At an 8th May hearing, the court ordered Mr Carter to testify on 15th May, and he did testify.13 Thus, the time between issuance of the initial subpoena and the order enforcing it was about six months, although the route to get there was a little different — issuance of two subpoenas, followed by a relatively quick decision to bring enforcement action and swift resolution of the matter by the court. The court's alacrity might have been influenced by the high visibility of Jay-Z and the somewhat unprecedented level of media coverage of the SEC's subpoena enforcement action.
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(1) SEC v. Shawn Carter, Litigation Release No. 24131, available at: https://www.sec.gov/litigation/ litreleases/2018/lr24131.htm (accessed 5th December, 2018).
(2) Securities and Exchange Commission Division of Enforcement: Enforcement Manual (2017) 'Enforcement manual', at 18. SEC Enforcement does not have to use subpoena authority to conduct an investigation. Staff can seek voluntary cooperation, which many established and reputable entities and people will willingly provide. In addition, to compel information from a registered entity, such as a broker-dealer, staff can use the SEC's examination authority.
(3) This is a greater geographical sweep than the subpoena power granted to federal district courts in civil litigation by the Federal Rules of Civil Procedure. Securities Act § 19(b), 15 U.S.C. § 77s(b) (1994 & Supp. 1997); see also Ferrara, R. C. and Khinda, P. S. (1999) 'SEC Enforcement Proceedings: Strategic considerations for when the agency comes calling', (FNaa1), Administrative Law Review, Vol. 51, No. 1, pp. 1143–1195.
(4) SEC Enforcement Manual, §3.2.6 (28th November, 2017).
(6) 17 C.F.R. § 202.5; Gewerter v. Sec. & Exch. Comm'n, No. CV-16-02556-PHX-DLR, 2016 WL 4074117, at *2 (D. Ariz. Aug. 1, 2016); Jerry T. O'Brien, Inc. v. S.E.C., 704 F.2d 1065, 1066 (9th Cir. 1983).
(7) Feiner v. U.S. S.E.C., 914 F. Supp. 2d 474, 478 (S.D.N.Y. 2012).
(8) SEC Enforcement Manual, §3.2.8 (28th November, 2017). ('If a person or entity refuses to comply with a subpoena issued by the staff pursuant to a formal order of investigation, the Commission may file a subpoena enforcement action in federal district court, seeking an order compelling compliance. See Section 21(c) of the Exchange Act.')
(9) As one example of these considerations, the staff might conclude that because the investigation is close to completion and their record is sufficient without the subpoenaed documents, investor protection will be better served by bringing a substantive enforcement action without waiting for the results of subpoena enforcement.
(10) Lynch, S. N. (2017) 'SEC's acting chair scales back enforcement unit's subpoena powers', Reuters Business News, 16th February.
(11) See Figure 1.
(12) S.E.C. v. Stilwell, No. 1:14-MC-257 ALC, 2014 WL 4631915, at *1 (S.D.N.Y. Sept. 11, 2014); Matter of Application to Enforce Admin. Subpoenas of the Sec. & Exch. Comm'n v. Jones, No. CV 13-08314 DDP (EX), 2013 WL 12114776, at *1 (C.D. Cal. Dec. 16, 2013); S.E.C. v. Nicita, No. CIV 07CV0772WQHAJB, 2008 WL 170010, at *1 (S.D. Cal. Jan. 16, 2008); Sec. & Exch. Comm'n v. Andrew Farmer & Iridium Capital, Ltd., Civil Action No. 4:13-Mc-00014-Y (N.D. Tex.), Litigation Release No. 22680 (Apr. 18, 2013); S.E.C. v. Obioha, No. C 12-80109 WHA, at *1 (N.D. Cal. Oct. 12, 2012); S.E.C. v. Shanahan, 504 F. Supp. 2d 680, 681 (E.D. Mo. 2007); S.E.C. v. Sears, No. CIV. 05-728-JE, 2005 WL 5885548, at *1 (D. Or. July 28, 2005); S.E.C. v. Caramadre, 717 F.Supp.2d 217, 218 (D. RI. June 10, 2010); U.S. S.E.C. v. LovesLines Overseas Mgmt., Ltd., No. MISC. 04-302RWRAK, 2007 WL 581909, at *1 (D.D.C. Feb. 21, 2007); United States Sec. & Exch. Comm'n v. Sandberg, No. 17-MC-62 (JRT/TNL), 2018 WL 987685, at *2 (D. Minn. Feb. 1, 2018); United States Sec. & Exch. Comm'n v. Gustafson, No. 17-MC-55 (WMW/SER), 2018 WL 1629205, at *2 (D. Minn. Jan. 9, 2018); U.S. Securities and Exchange Commission, Movant, v. Steve H. Karroum, and FX & BEYOND CORPORATION, Respondents., 2015 WL 11571029 (D.D.C.); S.E.C. v. Finazzo, 543 F. Supp. 2d 224, 226 (S.D.N.Y. 2008), aff'd, 360 F. App'x 169 (2d Cir. 2009); Sec. & Exch. Comm'n v. Kaplan, 397 F. Supp. 564, 567 (E.D.N.Y. 1975); Sec. & Exch. Comm'n v. OKC Corp., 474 F. Supp. 1031, 1034 (N.D. Tex. 1979).
(13) The Associated Press (2018) 'Jay-Z questioned by SEC in New York', Bloomberg Business, 15th May, available at: https://www.bloomberg.com/news/ articles/2018-05-15/jay-z-questioned-by-sec-innew-york (accessed 5th December, 2018).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.