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Just Anti-Corruption SECs Use of Rare Forthwith Subpoena Raises Red Flags for Defense Counsel Print

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SECs Use of Rare Forthwith Subpoena Raises Red Flags for Defense Counsel
Posted By Stephen Dockery On November 7, 2013 @ 2:07 pm In Uncategorized | Comments Disabled

A recent incident in which the Securities and Exchange Commission used a subpoena to immediately seize digital devices is raising concerns among some defense lawyers about what they say is the commissions over-broad and aggressive use of subpoenas. SEC officials recently seized a computer, phone and tablet using a so-called forthwith subpoena for immediate seizure of information, according to several lawyers who asked not to be identified. The devices were seized from someone giving administrative testimony to the SECs Enforcement Division, the lawyers said. The commissions digital forensics team then copied and prepared to comb through the devices content, according to the people familiar with the case. Forthwith subpoenas are intended to be used in situations where documents are at risk for destruction or a person is a flight risk. The seizure that occurred during testimony in an SEC conference room caused a stir among attorneys, although commission officials say such subpoenas are used sparingly. Even if that incident is isolated, defense lawyers warn that the SECs increasing use of broad and detailed subpoenas may be overstepping legal bounds. The practice is creating unnecessary costs and risks for individuals caught up in securities investigations, they say, and may require legal challenges to rein in.


John Reed Stark

From the SECs perspective, the more information investigators can obtain and analyze at their sophisticated digital forensics lab, the better chance they have to put together a solid investigation. Since the creation of the forensics unit several years ago, the SEC has begun to subpoena whole devices rather than specific information and offer ways for the commission to analyze an entire device, even when access to it was obtained with a subpoena of narrower scope. I dont want to criticize the SEC for being creative, innovative and technologically advanced, said John Reed Stark a lawyer and data expert at Stroz Friedberg LLC [2]. Sometimes they are going to push a little too far. Stark recently wrote a paper [3] giving lawyers guidance for how to fortify a digital defense to counter an unreasonable, unnecessary or arguably unlawful SEC investigatory assault.
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Just Anti-Corruption SECs Use of Rare Forthwith Subpoena Raises Red Flags for Defense Counsel Print

Digital devices are a huge source of information for the commission when investigating securities violations. Emails, texts and other digital files can be stored on hard drives around the world and be brought under the SECs review to piece together evidence in a investigation. When the SEC seeks not just information but entire electronic storage devices, as it did recently with the forthwith subpoena and in other cases, some lawyers say the commission may be beyond the scope of its subpoena powers outlined in the Securities and Exchange Act of 1934. At issue is section 21(b) [4] of the act that says the Commission is empowered to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, or other records. Stark argues that records does not include the equivalent of an entire digital filing cabinet of information such as laptops and smart phones. Were not aware of any legal proceedings challenging our ability to seek electronic devices, SEC spokesman John Nester said.

Free forensics?
Of similar concern to some lawyers is the SEC Enforcement Divisions offer to comb through devices to save money and time for people required to produce information under subpoena. It often costs tens of thousands of dollars to produce even a small amount of information under the SECs subpoenas that have very specific digital handling requirements, lawyers who work on SEC cases say. The SEC says its in-house analysis at its digital forensics lab will return the analyzed information for attorneys to vet for privilege or relevance before producing the required information. But the process potentially gives the commission access to other inculpatory evidence that investigators may be legally required to turn over to other authorities. Information on devices such as illegal pornography may be flagged by the SECs digital lab, for example. That information could be turned over to authorities using

Scott Friestad

forms 1662 [6]and 1661 [7]in the commissions Routine Uses of Information code that allow reporting of such evidence. Youre turning over data to the government before a lawyer has reviewed it, Stark said. I dont think offering the free forensic service is appropriate. Scott Friestad, Associate Director and Special Advisor to the Director in the SECs Division of Enforcement, defended the practice at a panel on securities enforcement last month sponsored by the website Securities Docket [8] in Washington, D.C. I think what you have to do is take a step back and remember that what we are looking for is information in those devices, he said.
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Just Anti-Corruption SECs Use of Rare Forthwith Subpoena Raises Red Flags for Defense Counsel Print

Is it perfect? No, but what we are trying to do is to create a situation where its sort of win-win, it gets the information we are looking for more quickly to conduct our investigations effectively and efficiently but at the same time trying to save the recipient money if thats a consideration for them, Friestad said during the panel discussion.

Path to subpoena
The digital devices and forensics lab issue is part of the SECs enforcement divisions increasing reliance on broadly defined subpoenas instead of informal information requests over the past decade. That reliance on subpoenas, which dont compel mandatory compliance can be traced back to the Enron scandal and the indictment of accounting firm Arthur Andersen for destroying relevant files after the SEC issued document requests. Since then the commission has sought to put more muscle behind their information requests. You can date the change to the days of Arthur Anderson and Enron. After that, the default was to put everything under subpoena, said Thomas A. Sporkin from BuckleySandler LLP. And today those subpoenas are often very broad. The commission now typically issues very broad requests for information and then multiple page standards for how the information should be preserved. Those detailed demands drive up the cost for combing through massive amounts of information and producing relevant material, lawyers say.


Thomas A. Sporkin

Sporkin said even third parties not under investigation but who played a part in the overall regulatory practice under scrutiny often have to pay at least $25,000 to produce documents that meet SEC standards. Attorneys speaking to Main Justice said the requests often border on being unreasonable. But chances to push back and force the commission to make a subpoena enforcement action are few because non-compliance often brings negative attention to a client that counsel typically wants to avoid. Paul Huey-Burns from Shulman, Rogers, Gandal, Pordy & Ecker PA said clients arent well served by such a challenge, and attorneys can often negotiate with the SEC more favorable data collection terms. But Huey-Burns added the issue of over-broad subpoenas may need to be brought to court if the SEC continues on its current course. This may need to be challenged because the SEC is getting more sophisticated, he said.

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Just Anti-Corruption SECs Use of Rare Forthwith Subpoena Raises Red Flags for Defense Counsel Print

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