Preparing to Testify in Response to an SEC Subpoena

When investigating companies, brokerage firms, investment advisors, and other entities and individuals, the U.S. Securities and Exchange Commission (SEC) relies heavily on its subpoena power. Once the SEC launches a formal investigation, it can issue administrative subpoenas to the company executives, brokers, and others. These subpoenas may be a subpoena duces tecum which compels the person to whom it is addressed to produce documents in his possession or control, or a subpoena ad testificandum which compels the person to whom it is addressed to appear at a specific time and place and testify under oath or affirmation. Crucially, while these subpoenas do not require judicial approval, they are subject to judicial enforcement.

With this in mind, receiving an SEC subpoena is not a matter to be taken lightly. Individuals who have been subpoenaed to testify must thoroughly prepare their testimony, and they need to make sure they know what to expect when the day arrives.

Testifying before the SEC is fraught with potential risks. It is imperative that subpoena recipients devote the necessary time to their preparations, and that they work with their counsel to proactively identify and address all potential areas of concern.

Understanding Why You Have Received an SEC Subpoena

When preparing to testify before the SEC, a key first step is to understand why you have been subpoenaed. Broadly speaking, the SEC focuses its enforcement efforts on two areas: (i) protecting U.S. investors, and (ii) preserving the integrity of U.S. capital markets. As a result, most SEC investigations target allegations of fraud, misrepresentation, conspiracy, and other offenses in one (or both) of these areas.

The SEC’s subpoena should provide at least some insight into the focus and scope of the SEC investigation. However, gathering the information you need to make informed decisions may require examination of other sources as well. For example, it will be helpful if you can identify anyone else who has received a subpoena or Wells Notice related to the investigation, and it may be prudent to conduct an internal compliance audit focused on uncovering any issues that could come to light.

Questions You Should Be Prepared to Answer During Your SEC Testimony

When preparing SEC testimony, it is important to keep in mind that you could easily be fielding questions for six hours or longer. While this can seem overwhelming, SEC subpoena recipients can generally expect to be asked questions in seven main categories. These main categories are:

• Preliminary Matters
• Background and Personal Information
• Your Role Within Your Company or Firm
• The Scope of Your Duties
• Investors
• Due Diligence
• Clarifying and Closing the Record

1. Questions Regarding Preliminary Matters

SEC subpoena recipients can initially expect a series of questions that are designed to provide the SEC with insight into the steps they took to prepare their testimony. While these questions are largely procedural, some can present traps for the unwary. At the beginning of the session, you should be prepared to succinctly and confidently answer questions such as:

• Did you get the opportunity to review the Formal Order associated with this matter?
• Do you have any questions regarding the Formal Order?
• Did you complete the Background Questionnaire by yourself?
• Are the contents within the Background Questionnaire truthful and accurate?
• Is there any information you wish to add to the Background Questionnaire?
• Do you understand the rules and procedures of the SEC testimony process?
• Do you have any questions on the rules and procedures of the SEC testimony process?

2. Questions Regarding Background and Personal Information

After dispatching these preliminary matters, the focus will shift to the SEC subpoena recipient’s background and personal information. Keep in mind that the SEC likely has much (if not all) of this information already—so if you omit information or provide misleading answers, this will not go unnoticed. During this phase of your testimony, you can expect to be asked questions such as:

• What is your educational background?
• Do you hold any professional or financial licenses?
• Have you ever worked for a financial firm or investment advisory firm?
• When did you first meet the other individual(s) involved in this matter?
• Who introduced you?
• What was the purpose of your first meeting (e.g., social meeting or business planning)?
• Do your families know each other?
• Where are you employed now?

3. Questions Regarding Your Role Within Your Company or Firm

If the SEC is investigating your company or firm (perhaps in addition to investigating you personally), you can expect several questions regarding your role within the organization. Depending on your position, the SEC’s investigators may ask you questions regarding the company or firm itself. Some examples of the questions you should be prepared to answer (as applicable) include:

• When did you start working at the company?
• What is your position at the company?
• Can you describe the company’s corporate structure?
• What are your title and position at the company?
• Have your title and position changed over time?
• What are the duties at the company?
• Have your duties changed over time?
• How is the company funded?
• What is your salary at the company?
• Who makes the majority of the decisions for the company?
• Does the company sell securities?
• Does the company pay dividends?
• Does the company have voting rights?

4. Questions Regarding the Scope of Your Duties

After gaining an understanding of your role within your company or firm, the questioning will likely shift toward examining the scope of your duties in greater detail. In most cases, this is where the questions asked will begin to focus more on the substance of the SEC’s investigation. During this phase of your testimony, potential questions may include:

• Can you describe your access to investor funds, financial statements and records, and investor details?
• Are you aware of or do you have access to the sources of the company´s income?
• What are the sources of the company´s revenue and projected revenue?
• Can you describe or do you have access to the sources of the company´s expenses?
• Who is responsible for preparing the company´s financial statements?
• Do you have any role in preparing or compiling the company´s financial statements?
• Who is responsible for preparing the company´s projected financial statements, including projected capital contributions, projected expenses, and projected revenues?
• Do you have any role in preparing or compiling the company´s projected financial statements?
• Does the company have its financial statements audited on an annual basis?
• Did you ever act as a point of contact or intermediary between the company and third parties, such as investors or banks?
• Do you ever serve as a representative of the company?
• Are you involved in any of the company’s promotional efforts to the public?
• Do you know or do you have access to details of the company’s anticipated monetization plans?
• Are you aware of any complaints against the company?

5. Questions Regarding Investors

Once the scope of your duties has been established, the SEC’s investigators may next focus on your company’s or firm’s communications and relationships with investors. Here too, the investigators’ questions are likely to be tailored to the specific allegations at issue—and you could get yourself into trouble if you aren’t careful. To the extent of your knowledge, you should be prepared to accurately answer questions such as:

• Does the company have investors?
• Who are the investors?
• What types of customers and/or investors do the company target or appeal to?
• Do you communicate with investors?
• How did the company attract capital contributions for its formation, project funding, and subsequent business plans?
• Does the company adopt targeted marketing strategies, or does the company engage in general advertising?
• What is the average contribution of the company’s investors?
• Did you create, or do you have access to, a cap table?
• Did you assist in the preparation of a cap table?
• Did the company issue stock certificates or provide any other proof of equity ownership to investors?
• Did the company register any of its investments?
• Did the company issue a private placement memorandum or file a Form D?
• Do you know if any investors already knew the company´s directors and officers before investing?
• Does the company solicit investors or advertise to the general public (e.g., retail investors)?
• Are you aware of what the company does with investor funds?
• Can you describe your role in preparing any promotional or marketing materials?
• Has the company distributed any investor documents or marketing/solicitation materials to the public?
• Does the company have any plan to show, or did it show, promotional documents to investors?
• Does the company hold regular investor calls?

6. Questions Regarding Due Diligence

Due diligence is often a key topic of discussion. SEC investigators are well aware that many company executives, brokers, and others are not sufficiently familiar with their companies’ and firms’ due diligence obligations, and charges arising out of due diligence violations are common. With this in mind, you should be prepared to carefully navigate inquiries such as:

• Does the company have any identity verification procedures in place?
• What kinds of identity verification procedures does the company use for its investors?
• Can you describe the company´s know-your-customer (“KYC”) policies?
• Do you assist with verifying investors or capital contributions?
• Does the company maintain a compliance program?

7. Questions to Clarify and Close the Record

Finally, at the end of the session, the SEC’s investigators will ask if you want to clarify or supplement any of the answers you have provided. It is important not to let your guard down at this stage. While your testimony is nearly over, you need to remain cognizant of the risk of providing unnecessary information (or omitting information) and exposing yourself to further scrutiny or prosecution. With this in mind, it is best to consult with your counsel before answering questions such as:

• Is there anything you wish to clarify from today´s testimony?
• Is there anything you wish to add to your testimony before we close and go off the record?

Practicing your answers to these questions (among others) in a mock interview with your legal counsel or SEC defense attorney will help ensure that you are prepared for the SEC as possible.

Oberheiden P.C. © 2022