When you are served with an SEC subpoena, you know that they are not fun to deal with. But you must deal with it. Even if you don’t know or didn’t commit a securities law violation, you need to respond to that subpoena.
My previous article, When the SEC Comes Calling discusses how to respond to an SEC Subpoena. In this article, we review what happens when you ignore an SEC subpoena. Be warned, it is not pretty.
Understand the Penalties of Ignoring the Order
The reality is, you are not going to ignore the subpoena. It just doesn’t make any business or practical sense.
Keep in mind that an SEC investigation, and its subpoenas, are confidential, and non-public. So, unless you have a legal requirement to disclose the receipt of a subpoena, the outside world, your friends, family, and competitors, do not know anything about it.
However, if you do not respond to the subpoena, or refuse to comply, the SEC can ask a court to enforce the subpoena – to force you to comply.
And when they do that, when they file a complaint in federal court, the investigation, and your involvement becomes a public record. On top of that, the SEC issues a press release, or a reporter picks up on the complaint, and now your confidential subpoena and your involvement in an SEC investigation is not only public information, it is available to anyone doing a Google search on your name.
SEC Subpoena Enforcement
A real-time example of the issue of refusing to comply with a subpoena is a case involving Terraform. The SEC served a subpoena on the company’s CEO. A dispute arose between the SEC and Terraform regarding the service that investigative subpoena upon the company and the company not only refused to comply, but it sued the SEC for violation of various statutes.
Details of Terraform’s suit are discussed in a Bloomberg article.
Of course, the filing of that suit against the SEC revealed the existence of the investigation, but the point here is that the refusal to comply with the subpoena results in the SEC filing a complaint to enforce the subpoena.
And that is exactly what the SEC did. By refusing to comply with the subpoena, Terraform gave the SEC the opportunity to issue a press release regarding the previously confidential investigation.
And the SEC took full advantage, stating in the press release:
The Securities and Exchange Commission announced that it has filed an action against Terraform Labs PTE, Ltd., and its co-founder and CEO, Do Kwon, seeking an order directing them to comply with investigative subpoenas for documents and testimony. Terraform Labs launched the Mirror Protocol in 2020, through which users may create and trade digital assets referred to as mAssets that “mirror” the price of U.S. securities, and obtain Mirror’s “governance tokens” referred to as MIR tokens.
According to the SEC’s filing in U.S. District Court for the Southern District of New York, the SEC is investigating whether Terraform Labs, Kwon or others violated the federal securities laws by, among other things, not registering the offer or sale of securities, selling security-based- swaps outside of a national security exchange, acting as an unregistered broker or dealer, or engaging in securities transactions by an unregistered investment company. The filing states that, based on its ongoing investigation, the SEC has reason to believe that Terraform Labs and Kwon participated in the creation, promotion, and offer to sell mAssets and MIR tokens to U.S. investors. As stated in the filing, SEC staff served both Terraform Labs and Kwon with investigative subpoenas requiring the production of certain documents and compelling Kwon’s testimony. According to the filing, however, despite numerous attempts to negotiate with counsel, Terraform Labs and Kwon have refused to produce any documents and Kwon has failed to comply with the testimonial obligations.
Be Aware of the Potential Consequences
The SEC’s application seeks an order from the court directing Terraform Labs and its CEO to show cause why the court should not compel them to produce documents as required by the subpoenas and compel the CEO, who lives in Korea to appear for testimony.
Now the investigation is in the news, the SEC has taken the opportunity to tell the world about it, and the subpoena enforcement case is on a fast track.
Terraform has 10 days to respond to the enforcement petition and will need to demonstrate to the court that the subpoena is invalid. If Terraform does not file an objection, or if the Court rules against it, it will have to respond to the subpoena, without objection.
Failure to do so could result in a finding that Terraform is in contempt of court, resulting in possible fines, and in theory, jail.
Don’t Ignore The Subpoena, Hire a Securities Lawyer
The same series of events will occur if you ignore the subpoena. The better response is to have a securities attorney, who has experience in dealing with SEC investigations, to negotiate a response with the SEC attorneys. Many times an SEC subpoena is too broad, or a search for responsive documents will be too time-consuming. A discussion with the SEC by an experienced securities attorney will often narrow the scope of the subpoena.
While compliance with the subpoena will be a hassle and could be expensive, it makes more sense to deal with the subpoena, rather than wait for a court to order you to do so. Of course, if you are willing to deal with the ramifications of refusing to comply, and the fines and potential jail time, then ignore this article.
You might also be interested in reading – SEC Subpoena – Tips for Responding
Mark J. Astarita is a veteran securities attorney who represents investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at email@example.com or call his office at 212-509-6544.