When you are served with an SEC subpoena, you know that they are not fun to deal with. But you must deal with it. Even if you don’t know or didn’t commit a securities law violation, you need to respond to that subpoena.
My previous article, When the SEC Comes Calling discusses how to respond to an SEC Subpoena. In this article, we review what happens when you ignore an SEC subpoena. Be warned, it is not pretty.
What is an SEC Subpoena?
An SEC subpoena is a formal demand issued by the Securities and Exchange Commission (SEC) which requires a person, business, or organization to provide certain documents or other materials. SEC subpoenas are usually issued as part of an investigation into potential fraud or other financial crimes.
The SEC has the authority to issue subpoenas as part of its investigative powers. The SEC is empowered by federal laws, including the Securities Exchange Act of 1934, to investigate potential violations of securities laws and regulations. During an investigation, the SEC may use various tools, including subpoenas, to gather information and evidence.
Ignoring the Subpoena
The reality is, you are not going to ignore the subpoena. It just doesn’t make any business or practical sense.
If you ignore an SEC subpoena, the consequences can be severe. The SEC may pursue civil or criminal penalties against you depending on the circumstances. Civil penalties can include mid-six-figure fines and jail time of up to five years. The SEC may also issue a cease and desist order, or require you to comply with its requests in a timely manner.
If you are found to have willfully ignored an SEC subpoena, it could be counted as an obstruction of justice charge. Obstruction of justice is a serious offense that can result in fines or jail time, depending on the severity of the act. In addition to monetary consequences, willful disregard of a subpoena may also damage one’s reputation in the securities community and lead to the suspension or revocation of licenses.
Lack of Confidentiality
Keep in mind that an SEC investigation, and its subpoenas, are confidential, and non-public. So, unless you have a legal requirement to disclose the receipt of a subpoena, the outside world, your friends, family, and competitors, do not know anything about it.
However, if you do not respond to the subpoena, or refuse to comply, the SEC can ask a court to enforce the subpoena – to force you to comply.
When the SEC needs to enforce its subpoena because you are refusing to cooperate, it files an application in federal court. That application will detail the nature and purpose of their investigation and your involvement in the investigation, and the underlying conduct. Documents in federal lawsuits are public and available to anyone with a computer. So, congratulations, by refusing to respond to the subpoena, you just made the allegations of your involvement in an SEC investigation public.
On top of that, the SEC issues a press release, or a reporter picks up on the complaint, and now your confidential subpoena and your involvement in an SEC investigation is not only public information, but it is also available to anyone doing a Google search on your name.
SEC Subpoena Enforcement
A real-time example of the issue of refusing to comply with a subpoena is a case involving Terraform. The SEC served a subpoena on the company’s CEO. A dispute arose between the SEC and Terraform regarding the service that investigative subpoena upon the company and the company not only refused to comply, but it sued the SEC for violation of various statutes.
Details of Terraform’s suit are discussed in a Bloomberg article.
Of course, the filing of that suit against the SEC revealed the existence of the investigation, but the point here is that the refusal to comply with the subpoena results in the SEC filing a complaint to enforce the subpoena.
And that is exactly what the SEC did. By refusing to comply with the subpoena, Terraform allowed the SEC to issue a press release regarding the previously confidential investigation.
And the SEC took full advantage, stating in the press release:
The Securities and Exchange Commission announced that it has filed an action against Terraform Labs PTE, Ltd., and its co-founder and CEO, Do Kwon, seeking an order directing them to comply with investigative subpoenas for documents and testimony. Terraform Labs launched the Mirror Protocol in 2020, through which users may create and trade digital assets referred to as mAssets that “mirror” the price of U.S. securities, and obtain Mirror’s “governance tokens” referred to as MIR tokens.
According to the SEC’s filing in U.S. District Court for the Southern District of New York, the SEC is investigating whether Terraform Labs, Kwon or others violated the federal securities laws by, among other things, not registering the offer or sale of securities, selling security-based- swaps outside of a national security exchange, acting as an unregistered broker or dealer, or engaging in securities transactions by an unregistered investment company. The filing states that, based on its ongoing investigation, the SEC has reason to believe that Terraform Labs and Kwon participated in the creation, promotion, and offer to sell mAssets and MIR tokens to U.S. investors. As stated in the filing, SEC staff served both Terraform Labs and Kwon with investigative subpoenas requiring the production of certain documents and compelling Kwon’s testimony. According to the filing, however, despite numerous attempts to negotiate with counsel, Terraform Labs and Kwon have refused to produce any documents and Kwon has failed to comply with the testimonial obligations.
Not only did the subpoena become public, but so did the investigation, and the target had no meaningful way to respond to the SEC’s press release.
Be Aware of the Potential Consequences
The SEC’s application seeks an order from the court directing Terraform Labs and its CEO to show cause why the court should not compel them to produce documents as required by the subpoenas and compel the CEO, who lives in Korea, to appear for testimony.
Now the investigation is in the news, the SEC has taken the opportunity to tell the world about it, and the subpoena enforcement case is on a fast track.
Terraform has 10 days to respond to the enforcement petition and must demonstrate to the court that the subpoena is invalid. If Terraform does not file an objection, or if the Court rules against it, it will have to respond to the subpoena, without objection.
Failure to do so could result in a finding that Terraform is in contempt of court, resulting in possible fines, and in theory, jail.
Don’t Ignore The Subpoena, Hire a Securities Lawyer
The better response is to have a securities attorney, who has experience in dealing with SEC investigations, negotiate a response with the SEC attorneys. Many times an SEC subpoena is too broad, or a search for responsive documents will be too time-consuming. A discussion with the SEC by an experienced securities attorney will often narrow the subpoena’s scope.
When a subpoena is sent from the SEC, the recipient should take several important steps to ensure their best interest are taken into account. First and foremost, contact an experienced securities attorney with experience in defending witnesses in SEC investigations who can advise you on the proper action to take.
Next, ensure that any documents that might be responsive to the subpoena are not erased or destroyed.
Once you have that subpoena, you must maintain the documents called for in the subpoena, regardless of whether you ultimately produce those documents. This requirement extends to your employees and affiliates.
Once legal representation is retained, the attorney can counsel their client on the applicable statutes and regulations related to subpoenas, and other orders issued by the SEC
While compliance with the subpoena will be a hassle and expensive, it makes more sense to deal with the subpoena, rather than wait for a court to order you to do so. Of course, if you are willing to deal with the ramifications of refusing to comply, and the fines and potential jail time, then ignore this article.
You might also be interested in reading – SEC Subpoena – Tips for Responding
Mark J. Astarita is a veteran securities attorney representing investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at email@example.com, call his office at 212-509-6544, or visit The Securities Lawyer
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.