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, 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  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.
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.
 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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About the Pickholz Law Offices LLC
The Pickholz Law Offices LLC is a law firm that focuses on representing clients involved with investigations conducted by the U.S. Securities and Exchange Commission, FINRA, and other securities regulators.
The Pickholz Law Offices has represented employees, officers, and others in SEC whistleblower cases involving financial institutions and public companies listed in the Fortune Top 10, Top 20, Top 50, Top 100, Top 500, and the Forbes Global 2000. We were the first law firm ever to win an SEC whistleblower award for a client on appeal to the full Commission in Washington. Inside Counsel magazine named this achievement one of the five key events of the SEC whistleblower program. Examples of the Firm’s SEC whistleblower cases are available here.
In addition to representing SEC whistleblowers, since 1995 the Firm’s founder, Jason R. Pickholz, has also represented many clients in securities enforcement investigations conducted by the SEC, FINRA, the U.S. Department of Justice and US Attorney’s Offices, State authorities, and more. Examples of some of the many securities enforcement cases that Mr. Pickholz has been involved with are available here.
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How to Contact the Pickholz Law Offices LLC
If you would like to speak with a securities lawyer or SEC whistleblower attorney, please feel free to call Jason R. Pickholz at 347-746-1222.
The Pickholz Law Offices remains open and will be fully operational through teleworking while we all grapple with this terrible pandemic. We hope that all of our clients, colleagues, friends, and their families remain safe and healthy. Our thoughts and prayers go out to everyone who has been affected by COVID-19.