SEC compliance issues
Jan 22, 2015
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Kurt Reuss
Kurt Reuss
Kurt Reuss is a registered securities broker who has been specializing in EB-5 since 2012. He offers advice on investment structuring and market conditions related to EB-5 investments.

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What should I do if I get a 'Preservation Notice' from the SEC?

SEC investigation of an EB-5 Regional Center

An SEC investigation of an EB-5 Regional Center or Issuer often starts with a 'Preservation Letter' from the SEC saying that you may have documents they might be interested in and that you are put on notice to maintain the availability of the data items listed. This essentially buys the SEC time to begin a more thorough investigation which can often branch out to various other associated parties.

But this article talks specifically about the implications, disruptive costs and frankly the potential unfairness that a document preservation request from the SEC will have on your business.

In the Preservation Letter the SEC will list the subject matter of the documents and records an EB-5 regional center needs to preserve. You’re now on notice. The SEC may be in the process of getting documents from other people. Many times the SEC will send this letter to witnesses who they believe may have information relating to another investigation target.

A duty to preserve

Preservation requests include all emails as well as the meta-data associated to the emails, information you may have posted on social media sites and items on your website. The first thing you should do is send a memo to everyone in your company telling them to suspend document destruction policies and to keep all documents. You should also talk to your email service provider and archive everything so it can be downloaded when needed.

Cost of preserving data can be enormous

In one case involving General Electric Co., the bill for preservation in a single matter totaled $55.4 million, excluding legal review, all before any case was even filed. While most situations involve more modest costs, a preservation request is a disruptive force. Ongoing compliance obligations require employee attention and new employee processes, a significant business expense that requires a shift in focus from the company’s normal operations.

The unfairness of a Preservation Notice

In a regulatory investigation, the SEC lacks any incentive to craft a limited preservation notice. Moreover, a preservation notice is a signal of further investigations and few lawyers will advise on challenging the regulator’s retention requirements for fear of losing cooperation credit (its almost always better to cooperate with the SEC fully as we discuss later). This makes the usual give-and-take negotiations virtually impossible.

Consequences of not adhering to SEC EB-5 compliance are severe

The SEC (and state regulators) are empowered to impose monetary sanctions for noncompliance and the Sarbanes-Oxley Act provides criminal penalties of up to 20 years for anyone knowingly destroying, concealing or falsifying any record with the intent to impede an investigation.

‘Adverse Inference’

Another extremely powerful tool the SEC has is ‘Adverse Inference’ which allows a judge to instruct the jury to infer that information contained in destroyed documents was whatever the plaintiff suggests it was. This can have an absolutely devastating effect on any defense.

Panelist's conclusions

  1. Hire an attorney

  2. Cooperate fully with SEC

The SEC's powers are vast and their resources are inexhaustible. This should lead any firm or individual that receives a preservation notice to immediately seek outside counsel and cooperate fully with SEC staff . Here are some panelist quotes on this point:

Steven Kramer:  Anybody in this field that gets any SEC investigation inquiry should immediately retain separate outside counsel. If you don’t you’re making a big mistake because you don’t know where you may end up in the food chain. So I want to emphasize to absolutely get counsel and not try to do it on your own.

Its better to be cooperative with the SEC, certainly you have to know your legal rights and if you’re in a situation and you have to get a criminal lawyer, sometimes (you’ll) take the fifth, but … the government is an 800-pound gorilla. If they want to go after you, win, lose or draw, you’re going to spend a fortune defending the case. So its better to not get on their bad side and to work with the SEC and try to work out an agreement. Make sure they don’t take a view of you that causes them to just start pounding on you because you’re not cooperating. It’s important to have good rapport, be honest and truthful.

Lori Patterson: Get counsel. The SEC expects you to get counsel, and frankly you should. I would say the SEC’s idea of cooperation sometimes means waiving attorney-client privilege especially if … it would attach to the formation of the project, the offering document and things like that.”

Robert Cornish: The SEC definitely treats people differently, no matter what they say, who think that they can represent themselves on their own vs. having an attorney handle it. If you’re responding directly to anything with the regulator you are essentially a proverbial ‘fish in a barrel’.

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