Regardless of administration, the SEC Enforcement Division continues to set new enforcement records. Nothing suggests any changes for the current fiscal year. If you haven’t received the memo, it’s time to get your compliance house in order.
The Fifth Amendment to the U.S. Constitution states that no person “shall be compelled in any criminal case to be a witness against himself” (emphasis added). A court or an ALJ cannot make you testify if it would compromise your case in a parallel criminal action, but the judge can draw negative conclusions from invoking the Fifth. In other words, don’t invoke the Fifth Amendment just to be petulant in front of an ALJ. Consult your counsel to determine whether invoking the Fifth makes litigation sense given your civil and criminal predicament.
OUR TAKE: This decision opens the door to a re-hearing in every case decided by an ALJ not appointed by the SEC. Many industry observers and respondents have questioned the fairness of the ALJ process given that the SEC hardly ever loses a case.
An SEC Administrative Law Judge has ruled that once a respondent waives attorney-client privilege by raising reliance-on-counsel as an affirmative defense, the client also waives privilege with respect to successor counsel. The respondent claimed as an affirmative defense that it relied on outside counsel’s advice on the interpretation of state law, the main issue in the SEC case, and subsequently filed a malpractice action. The respondent then tried to assert privilege with respect to communications with successor counsel. The ALJ rejected the assertion of privilege because the affirmative defense constituted an implied privilege waiver that extended to “all communications with counsel relating to the same subject matter, even communications with other counsel.” To hold otherwise would allow the respondent to abuse the privilege by using it as a shield and a sword, depending on the circumstances. The ALJ also ordered the respondents to show cause why the successor counsel should not be disqualified because of its inherent conflict of interest as a potential defendant in another malpractice case.
OUR TAKE: The SEC does not particularly like the attorney-client privilege (See e.g. “SEC’s Enforcement Director Warns Defense Lawyers about Tactics.”) Respondents should know that the Enforcement Division and the ALJs will seek to pierce the privilege when possible, making the reliance-on-counsel defense very difficult.