The Impact Of COVID-19 On SEC Whistleblower Processes And SEC
Enforcement Investigations
[Updated on April 4, 2020 to reflect new developments.]
Since a national emergency was declared a little over a week
ago, there has been a lot of coverage of the novel coronavirus
known as COVID-19. However, very little if any of that
coverage has addressed the impact of COVID-19 on
SEC whistleblower processes
or its impact on parties involved in SEC investigations.
The SEC’s Home Office in Washington, D.C.
Government announcements and ordinances, media articles,
blogs, and social media posts, have been reporting
daily updates on COVID-19, with some outlets giving
updates multiple times each day. They have disseminated to
the public much information about the virus, “social
distancing” recommendations, state and local emergency orders
closing certain businesses and/or limiting their hours of
operation, restrictions on the size of public gatherings, and
other matters of concern to the general public.
Many law firms and legal journals have published memos and
articles describing steps that they suggest corporations and
businesses can, should, or must take not only with regard to
their physical operations, but also with regard to securities
disclosures, corporate regulatory filings, transactional
matters, employment-related issues, and more.
Far less guidance has been provided for
SEC whistleblowers,
SEC defendants,[1]
SEC whistleblower attorneys, securities defense lawyers,
and white collar lawyers. This lack of information has left
many clients and their lawyers in the dark as to whether and
how COVID-19 has impacted the United States Securities and
Exchange Commission Division of Enforcement’s investigatory
procedures and SEC whistleblower processes.
THE SEC’s PREPAREDNESS FOR COVID-19
Last week, the SEC
posted a document
titled “SEC Coronavirus (COVID-19) Response” on its website
(“SEC Coronavirus Response”).
The SEC Coronavirus Response
According to that document, for “weeks prior” to March 9,
2020, the SEC was already making preparations for its Staff to
work from their homes or “teleworking” in the event of a
COVID-19 outbreak in the United States. That preparation
included “conducting network capacity tests, and encouraging
all employees to test their remote connectivity”.
Unlike the dramatic upheavals caused at other agencies or
businesses by abruptly switching overnight to teleworking,
teleworking is not something new or unfamiliar to the SEC’s
Staff.
For years, SEC employees have been eligible to apply to
telework from home for one or more days per week. So
teleworking in response to COVID-19 has probably not been as
shocking or disruptive for the SEC as it has been for the many
businesses that never embraced teleworking before and were
suddenly forced to do so overnight.
The SEC’s readiness to deal with a COVID-19 outbreak was
tested on March 9, 2020. On that day, the SEC announced that
an employee working in its Washington, D.C. Home Office had
been diagnosed with COVID-19.
In response, SEC employees in the Home Office were told to
begin teleworking from their homes. The SEC posted a notice
at the top of its website’s
home page
called “SEC Operating Status”. That notice explained that:
Many SEC staff located in our Washington, DC headquarters are
currently teleworking. During this period, the SEC remains
fully operational and focused on fulfilling our mission on
behalf of America’s investors and our markets.
By so doing, the SEC became the first federal government
agency to respond to COVID-19 by sending its staff home to
telework. As of the date of this post, several other
government agencies have still not implemented teleworking in
response to the COVID-19 outbreak.
The SEC Operating Status Notice
By the end of that week, as a precaution the SEC was sending
employees in its other offices home to telework. Among those
SEC employees who began to telework were employees of the
Enforcement Division in the SEC’s New York Regional Office.
According to the SEC Coronavirus Response:
Our experience over the course of the week of March 9 [2020]
provides us confidence that the agency will continue to be
able to maintain operations in a full telework posture. As
with any large-scale operational shift, we expect adjustments
in certain functions, including with respect to information
technology, may be necessary or advisable.
Specifically with regard to the Division of Enforcement, the
SEC Coronavirus Response explained:
Like the rest of the agency, the Division of Enforcement and
the Office of Compliance Inspections and Examinations continue
to execute on their mission of protecting investors and remain
fully operational.
THE DIFFERENCE BETWEEN THIS CRISIS AND THE 2018-2019 SHUTDOWN
OF THE FEDERAL GOVERNMENT
During the federal budget crisis of 2018-2019, the U.S.
Congress was unable to pass a budget by the deadline to do so.
Without a budget, there was no additional funding for federal
government agencies like the SEC. This forced federal agencies
first to scale back their operations, and then to either shut
down or limit their operations only to “essential” staff and
functions. The 2018-2019 federal budget crisis lasted for 35
days, resulting in the longest U.S. federal government
shutdown ever.
By contrast, today there is a budget in place and federal
agencies like the SEC have their funding. As of yet, no
federal law has been passed or Presidential order issued
shutting down federal government agencies like the SEC in
response to the COVID-19 pandemic.
Moreover, even during the 2018-2019 federal government
shutdown, the OWB continued to monitor its tips, complaints,
and referrals system (“TCR”) and continued to follow a
somewhat attenuated version of its SEC whistleblower
processes. For my post about submitting SEC whistleblower
tips to the SEC during the 2018-2019 government shutdown, see
here.
The SEC’s Office of the Whistleblower (“OWB”) is part of the
SEC’s Division of Enforcement. As the SEC Coronavirus
Response stated, the SEC’s Division of Enforcement is “fully
operational”.
IMPACT ON SEC WHISTLEBLOWER PROCESSES
However, “fully operational” does not necessarily mean
“identical to before”. One question is whether the Division
of Enforcement may make or has made any adjustments or
modifications to its investigatory and SEC whistleblower
processes as a result of the COVID-19 outbreak.
The OWB is located in the SEC’s Home Office in Washington,
D.C. Because the SEC’s Staff in its Home Office have been
teleworking from home, COVID-19 may impact SEC whistleblower
processes by delaying the OWB’s intake and review process for
hard-copy Form TCR submissions that are faxed or mailed to the
OWB.
This may not dramatically alter the SEC whistleblower
processes for filing Forms TCR, though. As set forth in the
SEC’s 2019 Annual Report to Congress
on its Whistleblower Program, the SEC’s OWB already encourages
whistleblowers and SEC
whistleblower attorneys to file their Forms TCR and any
additional information:
… electronically through the Commission’s online portal.
There are several advantages to using the online portal,
including the fact that individuals receive an immediate
acknowledgement of their submission along with a confirmation
number. The tip is also automatically populated in a queue
for staff who triage tips and complaints. For greater
efficiency and quicker review, OWB recommends electronic
submission over hard-copy submission.
After the SEC has received a whistleblower’s Form TCR, the
form and any supporting materials are given an initial review
by SEC Staff in the Division of Enforcement’s Office of Market
Intelligence (“OMI”). OMI already commonly requests
additional information from whistleblowers electronically by
e-mail, so while the SEC whistleblower processes relating to
OMI’s initial review of Form TCR submissions might be slowed
down a bit, at least in the short term those processes are
unlikely to be dramatically altered as a result of the SEC’s
OMI Staff teleworking in response to COVID-19.
The SEC’s Report to Congress
As part of the SEC whistleblower processes, after OMI reviews
a Form TCR it can refer the whistleblower’s submission to
other lawyers in the Division of Enforcement for further
investigation. The SEC’s Enforcement Staff already frequently
communicates with whistleblowers and SEC whistleblower
attorneys by telephone. Since the inception of the
SEC whistleblower program, it has been common for the SEC Staff to communicate one-off
questions to whistleblowers or their
SEC whistleblower lawyers
by e-mail or by telephone. Likewise, shorter meetings between
the SEC Staff, SEC whistleblowers, and their lawyers have also
frequently been conducted by telephone.
Until COVID-19 is brought under control, longer meetings, such
as all day meetings, between the Staff and SEC whistleblowers
may either need to be postponed or conducted telephonically or
by video rather than in person. But with these logistical
adjustments, the SEC whistleblower processes for Enforcement
Staff’s communications with whistleblowers will most likely
remain as it was before, at least for now.
Important Update: During the week of March 30, 2020, the Commission made
changes to its SEC whistleblower processes to facilitate the
Staff’s teleworking in response to the COVID-19 crisis.
According to those procedures, “Effective immediately and
until further notice”, all correspondence to the SEC’s OWB
should be “mailed” to a new address in Chantilly, Virginia.
Furthermore, the OWB “strongly encourage[s]” correspondence
and any SEC whistleblower award application to be submitted
by fax at (703) 813-9322. Until the OWB advises otherwise,
it is very important for any SEC whistleblower and SEC
whistleblower attorney to pay attention to these new SEC
whistleblower processes.
Changes to the SEC’s whistleblower processes (week of
March 30, 2020)
IMPLICATIONS FOR SEC DEFENDANTS
SEC defendants should not expect their investigations to
simply go away due to COVID-19. However, as with the SEC
whistleblower processes, the SEC’s usual investigatory
procedures may be modified in certain instances until the
virus has been brought under control and things return to
normal.
For instance, the SEC is likely to be more flexible in
granting requests to extend deadlines to respond to
investigatory subpoenas where compliance by the deadline is
impeded as a result of staffing or document retrieval and
production issues related to COVID-19.
Document productions in response to SEC investigatory
subpoenas are usually transmitted to the SEC’s ENF-CPU
department in its Washington, D.C. office. Because most if
not all of the SEC’s Washington, D.C. Staff are teleworking,
the SEC’s document intake and review process may be slowed
down.
Not only due to the SEC’s teleworking, but also in reliance on
governmental and the medical community’s “social distancing”
recommendations, the normal procedures for the taking of
on-the-record investigatory testimony (“OTR”) from
SEC witnesses may also be
impacted.
In lieu of in-person testimony, one option might be for a
defense lawyer to request a postponement of certain OTRs until
after the current period of social distancing is rescinded.
However, this might depend in part on whether the SEC has
enough time to reschedule and complete those OTRs before its
applicable statute of limitations runs out. For example,
under the U.S. Supreme Court’s 2017 ruling in a case called
Kokesh v. Securities and Exchange Commission, there
is a five-year statute of limitations on SEC disgorgement
actions. I discussed the Kokesh case and legislation
that is currently pending in the U.S. Congress to address that
case in a prior post, which can be found
here.
Another option could be for the SEC’s Staff, the witness, and
the witness’s
securities attorney to
attend the OTR either telephonically or by video.
CONCLUSION
The impact of COVID-19 and the SEC’s response measures to it
appear to be having more of a logistical and less of a
substantive effect on SEC whistleblower processes, at least
for now. Before the COVID-19 outbreak, the OWB already
preferred for Forms TCR to be filed electronically online.
Likewise, OWB, OMI, and Division of Enforcement Staff were
already accustomed to communicating with whistleblowers and
their SEC whistleblower attorneys by e-mail and
telephonically.
SEC investigatory defendants should not rely on COVID-19
making their investigations magically disappear. The
short-term impact of COVID-19 on the SEC’s investigatory
procedures is more likely to involve logistical
considerations, such as adjourning deadlines; adjusting the
mechanics and/or timing of document productions and reviews;
and either postponing or conducting OTRs by video or
teleconference.
Of course, a national emergency was only declared a little
more than a week ago, and no one yet knows how long it may
take for the government and medical communities to get the
COVID-19 virus under control. Things could change, possibly
dramatically, depending on how long the crisis continues, how
many people become infected, and whatever else may occur in
the meantime.
Interested parties should continue to monitor the SEC’s
website, other governmental websites, and other reliable news
sources for further developments.
For additional discussion about COVID-19’s impact on SEC
whistleblower processes and SEC enforcement investigations,
please see The Pickholz Law Offices’ recent Securities Law
Update here.
[1] The SEC’s position is that it does not have “defendants”
in its investigations. However, white collar and securities
lawyers do frequently use terms such as “defendant” to help
distinguish between parties, how each of them stands in
relation to the subject matter of a particular SEC
investigation, and their different levels of exposure to
potential liability.
* * *
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The Pickholz Law Offices LLC is a law firm that focuses on
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If you would like to speak with a securities lawyer or SEC
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been affected by COVID-19.
The Pickholz Law Offices represents U.S. and international clients in securities and white collar cases. The Firm has helped whistleblowers report frauds to the SEC, CFTC, and IRS, and has defended clients in investigations by the SEC, CFTC, DOJ, FINRA, and other financial and securities enforcement regulators.
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Mr. Pickholz has been counsel in many high-profile cases. He was the first attorney ever to win an SEC whistleblower award on appeal to the Commission, which Inside Counsel magazine called one of the five key events in the history of the SEC whistleblower program. On the defense side, Mr. Pickholz has defended clients in the SEC’s COVID-19 investigations, the CFTC’s cryptocurrency cases, and a former US Senator, among others.
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