The SEC is bringing more enforcement actions and issuing more subpoenas than ever against public companies for improper financial reporting, fraud, audit failure and auditor independence violations.
Anecdotal evidence suggests that the Pennsylvania Securities Commission is also aggressively investigating complaints involving private companies’ securities offerings.
One of the first decisions a company faces after learning of an investigation is whether to cooperate with the government in the hope of avoiding prosecution or whether it should mount a defense. Conducting an internal investigation will help a company decide.
Ideally, the board or a committee of the board will be in charge of the investigation. If the suspected culprit is an executive, it must be.
An attorney, preferably an outside attorney specializing in securities law, should conduct the investigation. This will enable the company to rely on attorney-client privilege to keep information pertaining to its investigation out of the hands of government investigators and third-party plaintiffs such as stockholders.
The company should inform employees and instruct them not to talk about the investigation to third parties or government investigators unless the company attorney is present, to cooperate fully with the internal investigation and to preserve pertinent records. It should also assist the investigating attorney with coordinating employee interviews.
The company should request a report from the investigating attorney that includes only legal advice and discusses the company’s legal position — not business advice, which is not protected by attorney-client privilege.
Any document prepared in the course of an investigation, including the investigating attorney’s report, should be marked “Privileged and Confidential: Attorney-Client/Work Product,” and be disseminated to the fewest people possible.
If the investigation reveals misconduct, the company should consider disciplinary action against the responsible employee(s) and remedial actions, depending on the nature of the misconduct and the degree of harm it caused. A company seeking leniency from the government must take remedial action; for example, restate financial statements and compensate investors for losses attributable to the misconduct.
If the company decides to defend itself, it may take no disciplinary or remedial action.
Compliance with federal and state securities laws is the key to avoiding a government investigation.To ensure compliance, a company should confer with a qualified securities attorney any time it decides to offer or sell securities. Briar L. McNutt is an attorney with Eckert Seamans Cherin & Mellott LLC.