Do I need a lawyer for possible SEC investigation?

July 14, 2008 4:40 PM

Earlier this year, as part of my 401K, I sold some of my investment in my company's stock (total value ~$2000). A couple of weeks later, my company released a press release that said that they would be restating earnings due to accounting irregularities. I'm now on the list being questioned about insider trading. Do I need my own lawyer?

I was contacted last week by a lawyer representing my company wanting to ask me about my trade. After some initial reluctance, I did talk to him and answered all of his questions. During that interview, the lawyer indicated that the SEC may or may not want to talk to me about the trade. (I made it clear to him that I did not have any information about the upcoming restatement, and that I only sold the stock as part of an ongoing process of occasionally selling the company stock to reduce my exposure to the wild swings of the stock).

I'm really reluctant to spend the money on a lawyer because it is only $2000 in my 401K, but I also don't want to lose anything else.

I guess I have two basic questions:

1. Does it seem like I need representation in this matter?

2. If I do, how do I find someone to represent me for a reasonable fee?

posted by anonymous to law & government (14 comments total)

Your local Bar Association should be able to refer you to a lawyer. Whether you need a lawyer depends on your exposure in the matter... which could vary wildly... say if you have a securities license. To determine this exposure you should talk to a lawyer... I know... a catch 22. But that should only take a couple of hours at most and might even be free. (Unless you do end up needing a lawyer.)
posted by Jahaza at 4:49 PM on July 14, 2008

how do I find someone to represent me for a reasonable fee?

If you are, in fact, someone being investigated for insider trading, shift your focus from "how do I find someone to represent me for a reasonable fee?" to "how do I find the right attorney to represent me?" The right attorney generally means knowledgeable, experienced, etc. And those things don't come at what the ordinary person considers a "reasonable fee."

Focusing on fees is really short-sighted. If you are in serious legal jeopardy (and I have no idea if you are) it is a huge mistake to be focusing on the fees. You should prepare to pay until it hurts ... and then you're just getting started. When the government is after you, you don't want to pinch pennies.
posted by jayder at 4:59 PM on July 14, 2008 [1 favorite has favorites]

You needed a lawyer the first time you talked to the company's lawyer -- who wasn't representing you, and was taking notes that in all likelihood will be handed over to the SEC and any other law enforcement agency that asks.

You now really need a lawyer. You will need to put down a serious retainer but you will get it back if you don't use the time. The time will be $500+ an hour if the lawyer is qualified. And worth every penny.
posted by MattD at 5:05 PM on July 14, 2008 [1 favorite has favorites]

You needed a lawyer the first time you talked to the company's lawyer -- who wasn't representing you, and was taking notes that in all likelihood will be handed over to the SEC and any other law enforcement agency that asks.

That is absurd. Nothing the company's lawyer finds out is discoverable for a variety of reasons.

In general, I'd always advise you to have your own attorney when facing potential prosecution. However, there are some litmus tests you can apply. Did you in fact have the ability to know about the "accounting irregularities" or planned restatement? The closer you are to those who knew, the most risk you have. Did you sell the stock in some usual and predictable way (as soon as it vested, for instance) or were the circumstances surrounding the sale unusual?

In general, the SEC's record of pursing legal remedies against individuals for insider trading is terrible. They rarely seem to be able to convict anyone even when it seems pretty clear that they did in fact engage in insider trading, so I'm not instantly that worried. In my own life, I faced a similar situation where I was notified by corporate counsel that I might be interviewed by the SEC and in fact I never was.

Assuming you are not a securities trader and not a listed "insider" I would personally wait until you are contacted to be interviewed by the SEC before I bothered getting my own counsel. Attorneys who focus on securities litigation tend to be pretty expensive big firm guys and you could eat through 2k in fees in literally no time.
posted by Lame_username at 5:16 PM on July 14, 2008 [1 favorite has favorites]

Assuming you are not a securities trader and not a listed "insider" I would personally wait until you are contacted to be interviewed by the SEC before I bothered getting my own counsel. Attorneys who focus on securities litigation tend to be pretty expensive big firm guys and you could eat through 2k in fees in literally no time.

I second this comment. The SEC is only going to bother where they feel there's a reasonable chance of conviction. Their pockets aren't infinitely deep; they won't waste time and money on a simple joe who occasionally sells small amounts of stock.

I'd start familiarizing myself with the basic law about insider trading, and document everything! Wait to get a lawyer until you feel the SEC is actively investigating you.
posted by sbutler at 5:23 PM on July 14, 2008

In general, while the SEC is often sympathetic to people who appeare not to have made a lot of profit, they often continue keeping up the pressure against the "little guys" in the hope that they will "flip" and give up people that leaked the information or others who made greater profits. (Look up what happened to Roger Blackwell's associates.)

Your downside is a lot more than the $2,000 trade you made. And assessing the scope of that downside depends on things that you might have no way of knowing -- things like whether your drinking buddies also traded in the "window", or if you can be linked to a potential "leaker" of inside information.

There are simply too many unknowns here, compounded by the fact that you don't really know what stage the company's investigation is in. (Presumably, you haven't personally received a "target" letter yet, but that in and of itself doesn't mean you're not on the radar or will soon be.)

You should know that lawyers who defend civil and criminal insider trading claims are usually very, very expensive, and it sounds possible that your liability (and assets) can't support that kind of money. So unfortunately, it's likely that those laywers wouldn't really want to represent you (nor would you want to pay their fees).

But even a non-experienced SEC lawyer could seek information (from the comapny lawyer or otherwise) which would give you a hint as to what stage things are at. But as part of the "do I really want to hire you" dance of the potential client, you may be able to get a lot of good and fairly specific advice / prognostication out of lawyers which could map out where they think things are going.

Depending on your financial situation, a large firm may be willing to take your case pro bono (for free), in order to give their associates some experience negotiating with the SEC. You probably won't be able to swing this commitment until they are sure that they don't have any paying clients in the same area, or until it's clear how badly you need representation.

IAAL (and I've worked on insider trading cases), but nothing is this post is intended to serve as the provision of legal advice, and I do not intend to create any sort of attorney-client relationship with you (or anyone else) by posting this reply. Nothing you read in this thread should be used as a substitute for the advice of competent counsel.
posted by QuantumMeruit at 5:34 PM on July 14, 2008 [1 favorite has favorites]

Nothing the company's lawyer finds out is discoverable for a variety of reasons.

What does being discoverable have to do with whether or not that information will, in fact, end up with the authorities?

Assuming (for the sake of argument) that it's not discoverable, the company could still choose to hand over the information on its own, in hopes of staying in the SEC's good graces.
posted by toomuchpete at 5:55 PM on July 14, 2008

You are likely to be charged for something ONLY if you made a trade based on information gained in one of the following ways:
a. In the normal course of your job you were privy to the information that became public at the time of the earnings restatement, or to the fact that an earnings restatement was in the works.
b. Somebody in such a position tipped you off in any way that any negative news likely to affect the value of the stock was about to be announced. (You don't even have to be an employee to be hit for this one; it could be that your golf buddy mentioned something to you.)
c. You misappropriated information (stole it in some way) that allowed you to profit from a trade. (Here, too, you don't have to be an employee of the company being traded in order to be charged.)

Even if you qualify to be charged under one of the above, you would have an absolute defense if you had been selling the stock at fairly regular intervals and in fairly equal installments as part of a regular program to diversify your portfolio. This is something true insiders due all the time, but the regularity of the intervals and quantities absolves them of exposure to insider trading charges.

Your problem is that while you may be able to show (a), that you were not in a position to know, you don't know whether someone, for whatever reason (like saving their own ass), will claim (b), that he or she tipped you off, or (c) that you stole information.

Still, it is hard to see the SEC bothering to go for the jugular on a $2000 sale. They prosecute only around 50 cases per year. My feeling is to be sure you keep all documentation, write yourself a memo of all the details of what you knew and didn't know, and what your thinking was in making this and all your other trades of company stock. Then sit tight, but certainly get a lawyer if you get questions directly from the SEC.
posted by beagle at 6:21 PM on July 14, 2008

You need an attorney. No doubt about it. You should have had one when the company attorney talked to you.
posted by Ironmouth at 7:11 PM on July 14, 2008 [1 favorite has favorites]

What is your position in the company? Are you a pencil-pusher, or are you a vice president? And, did you actually "inside trade", i.e., trade based on accounting irregularities (is your conscience clean)?

You ought to consult an attorney, absolutely. I don't know that you need to necessarily hire an attorney to represent you when you get interviewed by the SEC; but that's why you need to consult an attorney that deals with insider trading: to find out how deep of shit you are potentially in, and whether you actually need a lawyer to represent you. It may not be as serious (for you personally) as you think.

You should be able to ask your company's lawyer if she thinks you need your own personal lawyer, and if the company will help you find a suitable lawyer, without any problems.
posted by jabberjaw at 8:53 PM on July 14, 2008

While beagle talks about some of the elements and defenses to an insider trading claim, the ins and outs of defending against such a claim go beyond the black-letter law.

Not to scare the anonymous questioner, but to those who think at $2,000 trade is below some prosecutorial threshhold, think about this: In the SEC's complaint against Roger Blackwell, part of the evidence used against him was the fact that his assistant, Mary Hiser, who had never invested before, allegedly made a profit of $990.07 on his illegal tip. See here (SEC civil complaint); I believe that Hiser settled out before this complaint was filed. I agree that $2,000 is usually below the SEC's radar, but there are all kinds of ways that an eager government attorney could justify pursuing such a small claim (or at least making a big stink).

Also, there was a WSJ Law Blog post on "small time insider trading". Some very interesting comments in that thread.
posted by QuantumMeruit at 8:55 PM on July 14, 2008

who had never invested before

Which is why it seems pretty important, in the poster's case, to be able to document the "ongoing process of occasionally selling the company stock to reduce [his] exposure". Seems to me, the more it appears that this really was just an ordinary, regular transaction, the less it seems like you got tipped, and the less likely you'll need a lawyer.
posted by SuperNova at 10:53 PM on July 14, 2008

I wouldn't bother with a lawyer yet. Just document all of the circumstances around your trade, and what you knew and when you knew it. 401k-related investment activity for $2k as part of an ongoing process to divest ownership is a pretty solid defense, as long as you can show the existence of such a process and clear separation between you and the parties that made the accounting irregularity.

If the SEC decides to talk to you personally, then you should bring your own lawyer to that meeting. But from the question, it doesn't appear that they're even investigating the company yet, much less bringing you in for talks. So at this point, hiring a lawyer would just incur large fees, and the lawyer would tell you, over the course of several hours, to document everything and wait to talk to the SEC.

Assuming that everything you've said about the trade is correct, I might even ask the company lawyer to be in on that meeting and skip out on the personal lawyer. The company lawyer has interest in ensuring that the company is not dinged for an insider trading violation, so there's little incentive for them to throw you under the bus.

Disclaimer: I work in Compliance-related areas in the financial services industry.
posted by felix at 6:33 AM on July 15, 2008

That is absurd. Nothing the company's lawyer finds out is discoverable for a variety of reasons.

This is so very, very wrong. The company's lawyer represents the company, not anonymous. The communication between anonymous and the lawyer is therefore not privileged. If the company wants its lawyer to tell the SEC what anonymous said in the interview, the lawyer will do so. If the company's lawyer knew what she was doing, she told anonymous this at the beginning of the interview.

Anonymous: the value of the advice you are getting in this thread is worth about what you are paying for it.
posted by A Long and Troublesome Lameness at 11:03 AM on July 15, 2008