Strategies for an Individual Involved an SEC Financial Reporting Investigation (Portfolio 5505)

BNA Tax and Accounting Portfolio 5505-2nd, Strategies for an Individual Involved in an SEC Financial Reporting Investigation (Accounting Policy and Practice Series), discusses the problems and issues confronting an officer, director, or employee of a public company under SEC investigation for potential financial reporting violations.

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BNA Tax and Accounting Portfolio 5505-2nd, Strategies for an Individual Involved in an SEC Financial Reporting Investigation (Accounting Policy and Practice Series), discusses the problems and issues confronting an officer, director, or employee of a public company under SEC investigation for potential financial reporting violations. The paramount consideration for any such individual is to focus on protecting his or her personal interests. Amidst the confusion and uncertainty of an investigation, the company will likely concentrate on protecting its corporate interests. As part of its efforts to defend itself, the company may subordinate the welfare of individual officers, directors, and employees to its corporate interests at a time when events could unfold quickly and significantly affect the fortunes of these individuals. The company's priorities and actions may be appropriate and well-intentioned from its standpoint, but officers, directors, and employees could find that their personal interests conflict with those of the company. Thus, individuals in a company under SEC investigation should look out for themselves.
The Portfolio discusses how the interests of individuals may differ from those of the company, and analyzes ways for individuals to endeavor to protect themselves. In particular, the Portfolio emphasizes the individual's need for a personal attorney who has the independence to offer undivided loyalty. The Portfolio discusses the investigative process as an individual would likely experience it. In particular, it analyzes whether or not to provide documentation to the government and testify or, conversely, assert the Fifth Amendment right against self-incrimination, and legal privileges that might allow an individual to reduce the amount of information he or she provides to the government. The possibility of becoming a cooperating witness for the government is also discussed, as it can significantly improve the outcome of the investigation for an individual. The Portfolio covers theories of liability, sanctions, and the settlement process. Finally, considerations for evaluating the ultimate question whether to litigate or settle are presented.
This Portfolio covers an enormous range of topics within the body of the federal securities laws, and the citation of cases and other authorities herein is illustrative, not comprehensive. This Portfolio is intended first and foremost to be a practical aide to the officers, directors, and employees of public companies, and not a traditional legal treatise. In the interest of making the issues discussed herein accessible to nonlawyers, this Portfolio is written in the vernacular, and gives preference to comprehensibility for the layperson over technical legal precision. A reader seeking a more detailed and technical discussion of relevant issues should refer to Accounting Policy and Practice Portfolios that address particular bodies of law or accounting rules. The author was personally involved as an SEC attorney in certain of the cases cited in this Portfolio. His comments herein about those cases are based upon matters within the public record.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5505-2nd, Wang, Strategies for an Individual Involved in an SEC Financial Reporting Investigation (Accounting Policy and Practice Series).


Leonard W. Wang, Esq.

Leonard W. Wang, B.A. (Economics and Political Science) and J.D., University of Wisconsin-Madison, elected to Phi Beta Kappa, Phi Kappa Phi, the Order of the Coif, and the editorial board of the Wisconsin Law Review; member, the District of Columbia Bar and the State Bar of Wisconsin.
Mr. Wang formerly served as Assistant Director, Division of Enforcement, U.S. Securities and Exchange Commission. During a 22-year career with the SEC, Mr. Wang received the Chairman's Award for Excellence, the Stanley Sporkin Award, the Capital Markets Award, and the Division of Enforcement Director's Award. Mr. Wang may be contacted at

Table of Contents

Detailed Analysis

I. Introduction

A. The Individual's Dilemma

B. The Investigative Framework

1. The SEC Enforcement Process

a. Impetus

b. Informal Inquiries

c. Formal Investigations

2. Internal Investigations Triggered by the SEC Investigation

II. Starting Off on the Right Foot

Introductory Material

A. The Asymmetric Risk Profile of Breaking the Rules

B. Recognize That the Facts May Be Unclear

C. The Law May Be Unclear

D. The Risk of Getting Caught Cannot be Predicted

E. Unavailability of Good Soldier Defense

F. The Unique Risks of Law Enforcement

G. Minimizing Legal Risk From Law Enforcement

1. Follow the Rules Yourself

2. What to Do When One Is Ordered to Violate the Rules

3. What to Do When One Discovers Misconduct

III. The Dynamics of an SEC Financial Reporting Investigation

A. The Pressure on Public Companies to Self-Report Violations

1. Self-Reporting Under the Seaboard 21(a) Report

a. Impetus for the Seaboard 21(a) Report

b. The Seaboard Factors

c. Ramifications for Individuals

2. Impact of the Seaboard 21(a) Report

a. The Company's Priorities

b. Pressure From Criminal Investigations

c. Recognize the Need to Protect Oneself

d. The Application of the Seaboard 21(a) Report to Individuals

B. Summary of the Dynamics of an Investigation

IV. The Investigative Process

Introductory Material

A. Refrain From Meddling With the Evidence

1. Possible Obstruction of Justice Charges

a. Example

b. Legal Requirements

2. Minimizing Potential for Obstruction of Justice Charges

a. Preserve Relevant Records

b. Speak Only With Counsel

c. Anticipate Being Asked About Obstructive Conduct

d. Even Internal Investigations Raise Obstruction of Justice Risks

e. Be Alert to Regulatory Inquiries

3. SEC Recordkeeping Requirements

4. Civil Protective Orders

B. Retaining Counsel

1. General Considerations

2. Deciding Whether or Not to Retain Personal Counsel

a. Ability of Company Counsel Adequately to Represent the Individual's Interests

b. Scope and Extent of the Individual's Involvement

(1) A Person With Significant Involvement

(2) A Person Who Is a Mere Witness

(3) A Person Whose Involvement Is Uncertain

3. The Costs of Legal Representation

a. Potential Sources of Payment

b. Government Involvement in a Company's Payment for Counsel for Its Employees

(1) United States v. Stein

(2) Stein's Impact on SEC Investigations

c. The Importance of Retaining Counsel

C. Importance of Involving Counsel Early

1. Advisability of a Legal Checkup

2. The Risks of the Internal Investigation

D. Investigative Requests

1. Requests for Voluntary Cooperation

2. Subpoenas

a. Service of Subpoenas

b. Recommendations for Dealing With a Subpoena

c. Considerations for Whether to Notify the Company of the Subpoena

d. The SEC's Subpoena Power

e. Responding to Subpoenas

(1) Responding to the Corporate Subpoena

(2) Responding to a Personal Subpoena

(a) Search Thoroughly for Documents

(b) Testify Truthfully

f. Privileges: Rights Not to Provide Information

(1) The Fifth Amendment

(a) The Fifth Amendment in SEC Proceedings

(b) The Fifth Amendment and Documents

(c) Benefits and Costs of Asserting the Right Against Self-Incrimination

(i) Adverse Evidentiary Inference in Civil Cases

(ii) Preclusion From Presenting a Defense

(d) Compelled Testimony

(i) William Hale: A Reluctant Witness

(ii) Lisa Jones: a Defiant Witness

(e) Waiver of Fifth Amendment Right Against Self- Incrimination

(f) Summary of the Right Against Self-Incrimination

(i) The Benefits and Costs of Asserting the Right

(ii) Trying to Eat One's Cake and Have It, Too

(iii) Nongovernmental Impacts of Asserting the Right

(2) The Attorney-Client Privilege

(3) The Attorney Work Product Doctrine

(4) Waiver of Attorney-Client Privilege and Work Product Doctrine

(a) Consider if the Attorney's Advice Would Assist the Defense

(b) Disclosures Required to Use the Advice of an Attorney as a Defense

(c) All or Nothing Nature of the Waiver

(5) Other Privileges

3. How the SEC Staff Deals With Failure to Comply With Subpoenas

a. Subpoena Enforcement in Federal Court

b. Penalties for Lack of Cooperation

c. Outflanking Recalcitrant Parties

d. Summary of Subpoena Compliance

4. Third Party Access to Documents Provided to the SEC

a. Third Party Access Through the SEC

b. Third Party Access From the Witness

E. Considerations for Responding to SEC Investigations

1. Keep the Tone Professional

2. Remember That Litigation Has Not Commenced

3. Use Care With Internal Lobbying

4. Refrain From Lobbying the Commissioners

5. Refrain From Lobbying the White House or Congress

a. The Administration

b. Congress

c. Summary Regarding Outside Lobbying

V. The End Game: Theories of Liability, Potential Sanctions, the Wells Process, and Settlement

A. Theories of Liability for an Individual

1. Fraud and Non-Fraud

2. Types of Liability

a. Direct Liability

b. Aiding and Abetting Liability

(1) Liability for Aiding and Abetting an Employer's Violations

(2) Aiding and Abetting Another Company's Violations

c. Liability for Causing Violations

B. Sanctions

1. The Choice of Forum

2. Sanctions in Federal Court

a. The Injunction

(1) Statutory Injunctions

(2) Additional Injunctive Relief

(3) Violation of an Injunction

b. Disgorgement

c. Civil Monetary Penalties

(1) General Civil Penalties

(a) How Are Penalties Determined?

(b) To Whom Are Penalties Paid?

(2) Civil Penalties for Insider Trading

(3) Civil Penalties for Anti-Bribery Violations

(4) Time Limitation on Penalties

d. Ancillary Relief

e. The Officer and Director Bar

f. Temporary Freeze Authority for Extraordinary Payments

3. Administrative Sanctions

a. Cease-and-Desist Orders

b. Accounting and Disgorgement

c. Administrative Officer and Director Bar

d. Sanctioning Professionals

4. Collateral Consequences of Sanctions

a. Disclosure of Sanctions

b. Potential Consequences for Professionals

5. An Alternative to Sanctions: The 21(a) Report

C. The Wells Process

1. The Basic Process

2. The Wells Notice May Be Disclosed

3. A Wells Submission Can Make a Difference

a. Try to Obtain All the Material Facts

b. Address the Staff's Proposed Case

c. Keep It Short

d. Make It Readable

e. Remember That Litigation Has Not Yet Commenced

4. Risks of a Wells Submission

a. A Wells Submission Is Not Confidential

b. Assume That a Wells Submission Can Be Used Against You

c. The Commission May Read the Wells Submission Even if One Wishes to Settle

5. Summary of Wells Submissions

6. Efforts to Pre-empt the Wells Process

D. Settlement

1. When to Start Discussing Settlement

2. Focus of Settlement Discussions

a. Look for Evidentiary Weaknesses

b. Analyze the Basis for the Proposed Sanctions

(1) The SEC Has the Burden of Proof

(2) Do Not Rely on Supposed Benchmarks

(3) The SEC Takes a Regulatory Perspective on Sanctions

c. Legal Arguments

d. Policy Arguments

3. Settlements Must Be Approved by the Commission

4. Settlement Without Admitting or Denying

a. The Policy

b. Use of an SEC Settlement as Evidence

c. Avoid Making Public Statements Denying Liability

5. Coordinate Settlements with Criminal Authorities

6. Additional Settlement Steps

a. Certification of Completion of Document Production

b. Placing Payments in Escrow

c. Relief From Monetary Obligations

d. The SEC Expects Penalties to Penalize in Full

e. Review of Charging Documents and Publicity

(1) Review the Charging Documents

(2) Review the SEC's Publicity

(3) Let the SEC Staff Review the Settling Party's Publicity

f. Press Conferences for Major Cases

7. Ramifications for Spouses and Family

VI. Planning Points: Strategic Considerations

Introductory Material

A. Rationality and Objectivity Pay Dividends

1. Have Your Own Independent Attorney

2. Expect Gray Terrain

3. Keep an Open Mind About Your Options

B. Think of Outcomes

1. The Company's Dilemma

2. Think for Yourself

a. Exposure in the Executive Suite

b. Midlevel Employees

c. A Company Settlement Does Not Resolve the Liability of Individuals

3. Do Your Interests Align With the Company's Interests?

C. Don't Get Mad, Get the Best Outcome

1. What if One Is at Substantial Risk of Enforcement Action?

a. Standing and Fighting

b. Keep the D& O Coverage in Mind

c. Negotiating a Resolution

(1) The Typical SEC Settlement

(2) Becoming a Cooperating Witness

(a) Offer the Government Something It Cannot Easily Get

(b) Be Prepared for Possible Charges

(c) Personal Considerations for Cooperating Witnesses

(d) Consider the Alternative

2. What If One Appears to Be Innocent?

a. Does One Have a Story the Government Should Hear?

b. Seek a Disposition When the Company Settles

3. What if One Is in the Gray Area?

D. Summary of Strategic Considerations


Working Papers

Working Papers


Worksheet 1 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Securities Exchange Act Release No. 44969 (October 23, 2001) (the "Seaboard 21(a) Report")

Worksheet 2 In the Matter of Gisela de Leon-Meredith, Securities Exchange Act Release No. 44970 (October 23, 2001)

Worksheet 3 Press Release, U.S. Department of Justice, Former Computer Associates Executives Indicted on Securities Fraud, Obstruction Charges, Former General Counsel Pleads Guilty, Company Enters Into Cooperation Agreement (September 22, 2004)

Worksheet 4 In the Matter of James W. Barge, Pascal Desroches, and Wayne H. Pace, Securities Exchange Act Release No. 51400 (March 21, 2005)

Worksheet 5 Press Release, U.S. Department of Justice, Three Former General Re and One Former AIG Senior Executives Charged in Connection With Fraud Scheme (February 2, 2006)

Worksheet 6 Litigation Release, U.S. Securities and Exchange Commission, Former General Counsel of Inso Corp. Convicted of Perjury in Testimony Before the Securities and Exchange Commission, Litigation Release No. 19253 (June 7, 2005)

Worksheet 7 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Motorola Inc. Securities Exchange Act Release No. 46898 (November 25, 2002)

Worksheet 8 Press Release, Office of the United States Attorney for the Southern District of New York, Adelphia Communications Agrees to Pay $715 Million to Government Victim Compensation Fund; Rigas Family to Forfeit Nearly All Family Assets (April 25, 2005)

Worksheet 9 Press Release, U.S. Securities and Exchange Commission, SEC and U.S. Attorney Settle Massive Financial Fraud Case Against Adelphia and Rigas Family for $715 Million, Release No. 2005-63 (April 25, 2005)

Worksheet 10 Litigation Release, U.S. Securities and Exchange Commission, SEC v. Sam M. Antar et al., Litigation Release No. 16544 (May 9, 2000)

Worksheet 11 Litigation Release, U.S. Securities and Exchange Commission, Waste Management Inc. Founder and Three Other Former Top Officers Settle SEC Fraud Action for $30.8 Million, Litigation Release No. 19351 (August 29, 2005)

Worksheet 12 In the Matter of Audre Recognition Systems Inc., Beverly E. Johnston, and Nick R. Avila, Securities Exchange Act Release No. 40446 (September 17, 1998)

Worksheet 13 Press Release, U.S. Securities and Exchange Commission, Andrew S. Fastow, Former Enron Chief Financial Officer, Pleads Guilty, Settles Civil Fraud Charges and Agrees to Cooperate With Ongoing Investigation, Release No. 2004-6 (January 14, 2004)

Worksheet 14 Litigation Release, U.S. Securities and Exchange Commission, SEC Settles Enforcement Action Against Victor J. Menezes, Litigation Release No. 19549 (January 31, 2006)

Worksheet 15 Litigation Release, U.S. Securities and Exchange Commission, Teresa Fernandez Sentenced to 41 Months in Prison for Making False Statements to the SEC and Probation Offices, Litigation Release No. 19545 (January 27, 2006)



U.S. Constitution


Securities Act of 1933

Securities Exchange Act of 1934

Investment Advisers Act of 1940

Sarbanes Oxley Act of 2002

State Statutes:



Securities and Exchange Commission:

SEC Administrative Proceedings

SEC Forms


SEC Reports

SEC Staff Bulletins

SEC Releases

SEC Litigation Releases

SEC Press Releases

SEC Speeches

Court Cases

SEC Pleadings

Federal Rules

U.S. Department of Justice Materials:

U. S. Attorney's Manual

DOJ Memoranda

DOJ Pleadings

DOJ Press Releases


Bureau of Labor Statistics


New York Stock Exchange

National Association of Securities Dealers Inc.

American Institute of Certified Public Accountants

American Stock Exchange

Bar Association Rules



Corporate Materials

News Media:

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Bloomberg News

CFO Magazine


The New York Times

Time Magazine

The Wall Street Journal

The Washington Lawyer

The Washington Post