Monday, May 16, 2022

Director Grewal cautions defense bar on delaying tactics

By Mark S. Nelson, J.D.

SEC Enforcement Director Gurbir Grewal, speaking to an audience at the Securities Enforcement Forum West 2022, urged the defense bar to avoid engaging in litigation tactics that serve only to lengthen SEC investigations and which are unlikely to change the SEC's decision on whether or not to bring a case. Grewal also emphasized that cooperation credit requires more proactive conduct on the part of a potential respondent than merely not obstructing an SEC investigation.

Two sides to enforcement. Although much of Grewal’s remarks focused on litigation tactics by the defense bar, he began his remarks by briefly addressing a related concern that the SEC is not moving fast enough to bring enforcement cases. According to Grewal, he has sought to speed the pace at which the SEC pursues enforcement matters and cited the agency’s recent charges against Archegos Capital Management as an example. That case involved allegations that family office owner Sung Kook (Bill) Hwang and Archegos used margined total return swaps to manipulate the prices of the underlying securities and then misled investors about the scheme.

“The public needs to know when they read a news story about corporate malfeasance that we will move quickly to investigate what happened and hold wrongdoers accountable, even in the most complex cases,” said Grewal.

With respect to the pace of SEC investigations, Grewal spent much of his time remarking on how differently the defense bar and SEC staff approach investigations and litigations. While questioning some defense tactics, Grewal also noted that experienced defense counsel can sometimes persuade the SEC. Said Grewal: “That’s because one of the most valuable qualities an effective defense lawyer can have is credibility with the staff. We’ve all experienced this firsthand—that close call when it’s counsel’s credibility that carries the day and drives a fair and timely resolution.”

But with respect to perceived problematic defense tactics, Grewal emphasized ongoing issues with document production, investigative testimony, attorney conflicts, and assertions of attorney-client privilege.

Grewal said defense tactics regarding document production often lengthen investigations. “That said, too often, we see defense counsel—sometimes even including Enforcement alums—engage in conduct that seems to have little purpose other than to delay our investigations,” said Grewal.

On the topic of investigative testimony, Grewal suggested that defense counsel can bolster their credibility by acknowledging the inapplicability of the Federal Rules of Evidence. “When experienced counsel, who are well aware that the Federal Rules of Evidence do not apply in our investigative testimony, repeatedly interrupt testimony to lodge hearsay or other inapplicable objections, trust can be eroded,” said Grewal.

In the case of SEC staff, Grewal said “[i]n short, we will not play games during our investigations, negotiations, or litigations.” Grewal said this approach applied to Wells notices, “threatening potential charges to gain leverage in negotiations,” admissions (“Admissions are not a bargaining chip”), and settlement demands.

When speaking of Wells notice, Grewal elaborated: “If we tell you we plan to recommend charges, it means that we are prepared to litigate any resulting action, pending careful consideration of any Wells submission.”

Grewal also suggested that while there is some room for negotiations regarding settlement demands, there may not be all that much room. “This doesn’t mean that our opening offer is our final offer, but it does mean that our offer is the product of rigorous thought about the appropriate outcome,” said Grewal. “It’s calibrated to the case and the conduct. And while there may be some flexibility in certain aspects of it – and yes, on occasion, we may get our initial ask wrong, you should not assume that everything is subject to negotiation.”

Cooperation credit. Grewal observed that respondents to SEC investigations can take proactive, affirmative steps to obtain cooperation credit that may reduce or eliminate penalties. The Seaboard report, Grewal said, offers a framework for obtaining cooperation credit, but it does not offer an exhaustive list of all actions that may result in credit. Grewal then suggested a few ways in which credit may be obtained:
  • Provide documents or make witnesses available on an expedited basis.
  • Highlight “hot” documents or provide translations of key documents.
  • Identify documents the SEC likely would be interested in even if the documents would not be subject to a subpoena.
  • Make the most of presentations to SEC staff rather than merely engaging in advocacy.
If a client may have engaged in a violation tell the client to “own that violation and work in good faith to remedy it.”

Grewal noted, however, that in his view of cooperation credit the cooperation cannot be merely acting in a manner that does not obstruct an SEC investigation because more affirmative conduct is required to obtain credit.