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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Remarks to Criminal Law Group of the UJA-Federation of New York


Robert S. Khuzami, Director, Division of Enforcement

U.S. Securities and Exchange Commission

New York City
June 1, 2011


I recall like it was yesterday those lunchtime trial advocacy training sessions at the U.S. Attorney's Office, where I first learned about the rule of primacy — start your jury addresses on a high note, with the big-impact stuff up front, really begin with a bang.

So, just to show you I haven't forgotten those lessons, let me start by saying that my comments here today are mine and mine alone, and do not represent the views of the SEC, the Commissioners or the staff.

Defining the Problem

I just finished reading James Stewart’s new book, “Tangled Web.” He details high-profile cases of lying, including those of Martha Stewart and Bernie Madoff. His conclusion?

There is an “epidemic of perjury and false statements occurring at the highest levels of business, politics, sports and culture.” Our own Jim Comey, former Deputy Attorney General, describes perjury and obstruction as “nearing crisis [levels].”

Stewart’s book caused me to think about some of the episodes of questionable tactics by defense counsel in SEC investigations that have crossed my desk, and whether they are on the rise as well.

I’m not sure if there has been an increase, but too frequently we see defense counsel behavior that is questionable, or worse.

This includes, in no particular order:

  • Multiple representations of witnesses with what appear to be adverse interests;
  • Multiple witnesses represented by the same counsel who all adopt the same implausible explanation of events;
  • Witnesses who answer “I don’t recall” dozens and dozens of times in testimony, sometimes hundreds of times, including in response to questions about basic and uncontroverted facts documented in their own writings;
  • Counsel signaling to clients during testimony; and
  • Questionable tactics in document productions and internal investigations.

Now, this might be a more serious topic than I would otherwise choose, given the number of familiar faces in the audience and the kind words directed my way. But because you represent some of the best and brightest of the white collar and securities enforcement defense bar, this is perhaps exactly the right audience for this issue.

None of you, I’m sure, would engage in the types of questionable conduct that I’ll describe tonight. But, as knowledgeable and experienced members of the white collar bar, I’d like to suggest that you carefully consider these issues so that you can, in the words of the immortal Obi Wan Kenobi, “use your powers for good, not evil.”

I am most decidedly not dismissive of the crucial role played by defense counsel. Counsel are obligated to zealously defend and promote the interests of their clients, particularly when faced with the life-altering consequences of an SEC enforcement proceeding.

The fact that there are many defense lawyers who are zealous and aggressive, yet also successful with the SEC on behalf of their clients, demonstrates that we value effective counsel. Indeed, the opposing narrative provided to us by good defense lawyers helps us to make fair and informed enforcement decisions.

There also is the view that, as sovereign, the SEC should not be distracted by questionable defense practices, even those perilously close to the line, but rather should focus only on the objective evidence regardless of the externalities like the conduct of counsel.

That we should, in short, stay above the fray. That may be true, up to a point.

But the Enforcement Division cannot remain passive when confronted with conduct that frustrates our investigations.

It’s difficult, and often impossible, for government to timely detect frauds perpetrated with management collusion, particularly in the early stages, and dilatory or obstructive conduct only increases that difficulty.

Such tactics also cause substantial delay and increased expense as our investigative plans must be altered or extended, and we have to seek other, more costly alternative ways to secure the evidence improperly denied to us.

More broadly, when the truth-seeking function of the investigative process is corrupted, the wrongdoers may not be held fully accountable for their unlawful conduct, and injustice results. Law-abiding citizens reconsider their own decisions to live within the law, or at a minimum become increasingly cynical and skeptical about the government’s ability to deliver on its obligations under the social compact.

And clearly the last thing anyone needs, especially now, is more cynicism about any of our institutions, be they business, legal or the SEC.

Multiple Representations

So what do we see in the Enforcement Division that concerns us?

Multiple representations remain fairly common, both involving the company and individual employees, as well as among groups of individuals.

In many cases, there is no problem presented by multiple representations — such as when one lawyer or one firm represents employees who are purely witnesses with no conflicting interests or material risk of legal exposure.

But we have seen cases where the same counsel represented both the company and over 30 employees, in another the company and over 20 individuals, all where there was a real potential that some of those persons faced material legal exposure.

There also are numerous examples of defense counsel representing multiple individuals with seemingly divergent interests.

We have seen counsel represent both the supervisor and the person he supervised in a “failure to supervise” case.

In another case, a lawyer represented himself, the alleged wrongdoer and the principal investor, who testified that he was not concerned that he had invested almost his whole net worth with an individual who had multiple felony convictions.

It is worth noting that the SEC’s new Cooperation Program raises the stakes in multiple representation situations. The Program, announced by the Commission in January 2010, provides for reduced sanctions, or even no sanctions, in exchange for truthful and substantial assistance in an SEC investigation.

This increases the likelihood that one counsel cannot serve the interests of multiple clients, given the real benefits that could result from cooperation, such as one client testifying against another client represented by the same counsel.

In light of the potential for cooperation, we are taking a closer look at such multiple, seemingly adverse, representations. You will likely see an increase in concerns expressed by SEC staff in those situations.

Lack of Recollection

The lack of recollection by witnesses in SEC testimony also is a significant issue. To be sure, a lawyer should discourage their clients from guessing in testimony, given the risk that a misstatement or speculation could be viewed as an admission.

Memories do fade over time, and sometimes the “I don’t recall” response may be an appropriate response to staff questions about a document or event about which the witness has no knowledge or involvement.

But sometimes, witnesses display an apparent lack of recollection about nearly everything of any substance, including even the most basic facts, such as their own job responsibilities, that the failure of recollection lacks credibility.

For example, a former vice president of a company in an FCPA investigation, who approved and processed at least two of a subsidiary’s requests for payments alleged to be bribes, had no recollection of his role or any of his responsibilities — to the point where he seemed unable to provide a credible description of the job he allegedly performed.

It is not unreasonable to draw the most negative inferences from the evidence when faced with this kind of implausible testimony.

In these situations, one is left to wonder whether witnesses are under instructions only to testify about those events that they recall with near certainty, even in response to questions inviting the witness to qualify the answer with whatever level of recollection the witness possesses. Under these circumstances, if the witness continues to insist that he or she has little or no recollection as to recent, significant events, the testimony is likely to be viewed with much skepticism.

Another fact pattern that makes us skeptical is when no amount of contemporaneous documents can refresh a witness’s absence of recollection on seemingly inculpatory points, but that same witness offers specific, detailed and consistent memories on most every point potentially helpful to his defenses, often down to minute details.

Other times, the skepticism arises from a failure to acknowledge what is clear from the plain language of documents, the significance of the events under scrutiny, or the uniqueness of the circumstances under which the event occurred.

For example, in one case the witness refused to confirm that a particular person performed certain audit procedures even where their initials appear on the audit work papers, and where the events surrounding the audit were surely memorable, since they resulted in significant accounting issues that prompted a restatement, internal investigations and litigation.

In another case, an intelligent, highly educated, and accomplished executive claimed more than 500 times over two days of SEC testimony not to remember significant, high-intensity events in which he played a key role. He persisted in claiming a lack of recollection despite reviewing and being questioned about over 50 contemporaneous documents that he either authored or received. He similarly claimed that his recollection was not refreshed by approximately 15 hours of preparation with his counsel.

Signaling During Testimony

Another source of concern is conduct during investigative testimony.

A witness who backtracks on a previous answer after her counsel’s long speaking objection, or who returns to the testimony room after a break and repudiates her earlier testimony on an important point, could suggest inappropriate conduct by counsel.

I will recount one troubling episode. During the testimony of a former Assistant Controller at a Fortune 100 company, the SEC staff noticed that the witness’s left foot was touching his counsel’s right foot, and that defense counsel would subtly tap his client’s foot with his own after certain questions were asked. 

When that happened, the witness would invariably and immediately answer “I don’t remember.”

When confronted during the break, defense counsel unequivocally denied any impropriety.

When testimony resumed, counsel placed both of his feet under his chair.  The witness — who had no idea what transpired during the break — returned his foot to the same place. 

Following a question, the witness noticed that his counsel’s foot wasn’t next to his, so the witness moved his foot further towards counsel by a couple of inches. 

Finding nothing, he moved it further still.  Still finding nothing, he then began sliding it over in the obvious hope of eventually finding his counsel’s guiding foot. 

After extending his leg completely, he realized the guiding foot wasn’t there to help him. 

At this point, with his foot extended so far that he was almost doing a split — I may be admitting my age, but it reminds me of those pictures offered by President Nixon, which showed his assistant, Rosemary Woods, sprawled out like a contortionist, in a failed attempt by him to suggest how she could have mistakenly erased 18 and one-half minutes from one of the Watergate tapes.

Several weeks later, with another witness — this time, the Vice Chairman of a Fortune 100 company — and with a different, but just as well-known, defense attorney, we saw the same foot-tapping strategy. 

Problems with Documents

Other suspicions derive from the handling and production of documents. Let me emphasize that we understand the burden and cost of responding to one of our subpoenas. And we have encouraged the use of targeted subpoenas with narrower categories of requests where appropriate.

But there are certain practices that cause us concern.

There are productions that are not made until the eve of the witness’s testimony, thus making full preparation for the testimony extremely difficult.

In addition, there seems to be an increasing phenomenon where lower-level associates or contract document reviewers are setting aside as potentially privileged an extremely large and over-inclusive group of documents, including anything that is sensitive, for review by senior reviewers. Those senior reviewers then apparently fail to review them in a timely fashion or defer producing them for a long time as they search for some slender basis for claiming privilege — resulting in a last-minute supplemental production long after many witnesses have already testified.

This practice has the effect of depriving us of documents when we need them and requiring us to make a decision about whether to recall a witness.

In my view, fear of waiving privilege does not entirely explain this practice.

We have similar concerns about extended delays in the production of a privilege log, which thwarts our ability to assess the validity of privilege claims in a timely fashion, as well as long delays in sending preservation notices, such that relevant documents and back-up tapes are destroyed in the interim.

Internal Investigations

Similar concerns arise in internal investigations.

Most defense counsel take seriously the role for which they are hired and perform thorough, deliberate, and wide-ranging independent investigations.

But we are seeing some that engage in questionable investigative tactics, including interviewing multiple witnesses at once, aggressively promoting exculpatory evidence while dismissing clear and identifiable red flags, scape-goating lower-level employees and/or protecting senior management who have longstanding relationships with the counsel in question, and failing to acknowledge constraints placed on the scope of their inquiry.

In one investigation, counsel interviewed together the two senior executives with exposure in the investigation, and let one serve as document custodian with full and unsupervised access to all documents related to the investigation and the ability to destroy them. The company dismissed the senior executives on the eve of the report being made public, giving them large severance payments with unenforceable cooperation agreements, making documents in their possession unobtainable without lengthy MLAT procedures.

SEC Response — Existing Tools

What is the appropriate response for the SEC to situations where counsel appears to cross the line from aggressive practice to unethical or obstructive behavior?

Regardless of one’s view of the frequency of this behavior, there is good reason for us to use fully the tools we have, in situations where the misconduct is clear.

Where we view multiple representations of adverse witnesses as creating an incurable conflict, and counsel does not take these concerns seriously, we can and will request that witnesses specifically confirm that they have been informed of the counsel’s potential conflict of interest, and have willingly chosen to proceed with the engagement.

Where conflicts we raised later come to pass, we can and will decline to extend courtesies — for example, if counsel chooses to wait until the Wells notice to secure independent counsel for a client whose interests diverged from those of other clients, requests for extensions of time to respond may be cut back or denied.

We can and will do more to get senior supervisors involved when obstructive practices in testimony cannot be resolved by counsel and the examining SEC staff attorney.

We can and will increase the number of referrals under Rule 7(e) of the SEC Rules Relating to Investigations (17 CFR Sect. 203.7(e)) where appropriate. That section authorizes the Enforcement staff to report dilatory, obstructionist or contumacious conduct to the Commission, which in practice means a referral to the SEC’s Office of General Counsel, who conducts an investigation.

If the Commission finds unethical or improper professional conduct, as was found in at least one recent case, SEC v. Altman, counsel may be suspended or barred from practice before the Commission, excluded from participation in the particular investigation, or censured.

We can and will increase referrals to the Department of Justice for witnesses who engage in obstruction and perjury, including false claims of a lack of recollection.  We can and will also increase referrals to state bar associations, and to the Department of Justice where appropriate, of attorneys who participate or assist in such misconduct.

And to be fair, we recognize our own obligations — where defense counsel behavior is a reaction to shortcomings in the taking of testimony or the conduct of investigations, we can and will improve training and take other steps to insure that Enforcement Division staff is acting appropriately.


But beyond these “hard” responses, there is a larger and more important lesson here —

less stick and more carrot — that is my true purpose in raising this issue today.

Our enforcement recommendations to the Commission are based not only on testimony and documents gathered in the investigation, but also on staff’s view of the credibility of counsel.

Counsel serves as a kind of prism through which the staff invariably assesses certain evidence developed in the investigation, including that based on representations of counsel.

If counsel has chosen to be obstructive, to disregard the fundamental tenets of professionalism, ethics and integrity, the evidence could be viewed in a harsher light.

For that reason, counsel should consider whether having witness after witness come in and profess, “I have no specific recollection” in response to many, many questions from the staff, regardless of the documents placed before them, is a good tactic.

Similarly, defense counsel should ask themselves whether it really constitutes good lawyering to have one’s client testify to objectively far-fetched and implausible explanations of incriminating documents.

Conceding nothing may appear to be a “win,” but that may prove to be short-lived if others in the Enforcement Division, as well as any reasonable trier of fact, would find it transparently self-serving and unbelievable.

Obstructive tactics are also a higher-risk proposition these days.

Our new Whistleblower Program, which rewards persons who voluntarily provide original information that leads to a successful enforcement action, together with our new Cooperation Program, only increases the chances that an insider with intimate knowledge of the wrongdoing may well emerge, and reveal the client’s testimony to be implausible or worse.

We also encourage open communications within the Enforcement Division.

The staff shares with each other their experiences with certain lawyers or firms. Senior managers also listen closely to staff who bear the brunt of the tactics I’ve described. Lawyers contemplating sharp practices should ask themselves what kind of reputation, and what level of credibility, they want to have with the staff, and whether that matters to them — and to their clients.

My purpose in talking about this topic tonight is not to chill a vigorous defense, or to retaliate against “disobedient” defense counsel. Indeed, we think the process only benefits from strong and zealous representation.

But taken too far, to get caught up in the kind of tactics and gamesmanship I’ve discussed will only diminish credibility of counsel and damage your client’s interests. And that is in no one’s interest, not yours, not ours.

Thank you.



Modified: 06/07/2011