Internal Investigations

In a recent blog by Chris Pogue (a digital forensic expert), he highlighted a handful of considerations for firms both pre and post data breach. After all, the issue is not really whether you will suffer a breach, but when and how bad will it be.

Those considerations bear repeating, and include the following:

  1. Retention of counsel to navigate the firm through the legal issues that arise from a breach.
  2. Retention of external forensic experts to triage when a breach takes place.19196909_s
  3. Notification of relevant law enforcement, such as the FBI regarding the breach.
  4. Designate one person in the company who will communicate in response to media inquiries; ensure the accuracy of whatever is said because you cannot take it back.
  5. Fully inform executives, investors, the board of directors and customers regarding the breach; i.e., what happened, why and what is being done to remediate.
  6. Should you pursue the hackers criminally/civilly, or focus on the remediation and prevention of future breaches.

Taken together, these considerations have one focus. You want to able to demonstrate to your constituents that you took immediate action to understand what happened, correct why it happened, and put yourself in the best position to avoid it from happening again.

In light of the highly sophisticated nature of the hackers, it may be impossible to prevent a breach of some kind. It is not impossible, however, to have an action plan to deploy in the event of the breach so that you can protect your company in your constituents’ minds. Prepare now or pay for it later.

Now that 2014 is here, it is a good idea to understand what the Enforcement Division might focus on this year.  In a recent article that appeared in the BNA, David Marder, a partner with Robins, Kaplan, Miller & Ciresi identified fifteen things to expect in the coming year. 

The fifteen things he noted to expect include: 

  1.             Increased use of whistle-blowers;
  2.             Increase requiring defendants admit guilt in settlements;
  3.             Increasing the use of available technology;
  4.             Increase the number of easier to prove cases;
  5.             Push self-reporting of securities violations;
  6.             Increased focus on microcaps;
  7.             Continued focus on gatekeepers;
  8.             An emphasis on financial reporting;
  9.             Protection of market structure and integrity;
  10.             Increase the activity of specialized SEC units;
  11.             Continue attacking insider trading;
  12.             Investigate misconduct at hedge funds, private equity funds and mutual funds;
  13.             Increase the size of the trial unit to avoid losing at trial;
  14.             To further leverage the exam program; and
  15.             Increase administrative proceedings.

 Although this certainly seems like a robust agenda, expect the SEC under the leadership of Chair Mary Jo White to pursue it with particular vigor.   

It seems like the SEC has a lot to prove; in part, to justify it budget.  The question is whether the industry is adequately prepared to deal with a bulked up and more aggressive SEC.  Time will tell . . . .

A firm faced with a regulatory investigation should hire outside counsel to bring objective analysis to the situation. Although it may seem simple, the question that must first be addressed is who the lawyer represents.

If the firm itself is the subject of the inquiry, then the firm needs representation. However, that same lawyer should not represent any individual employees who are subject to the review as well because there could be conflicts of interest between the firm and the employee.

In this situation, the company’s lawyer should advise the individual that they should retain their own counsel. Depending upon the situation, the firm should consider whether to pay for that separate counsel.

Similarly, the communications between the company lawyer and the firm should be limited to those in the firm who are part of what has been termed the “legal control” group. In other words, the group should comprise of individuals who are specifically designated to address the regulatory issue before the firm. By keeping the communications between the firm and its counsel limited, there is less likelihood of any attorney-client privilege being inadvertently

Although this may all seem to be promoting the legal profession, there is much more to the story. How a firm handles an investigation of a regulatory issue may say more about the firm than the issue itself. Will the firm portray the image that it is simply trying to sweep everything under the carpet by keeping the review in-house? Or, will the firm be able to meet the regulatory review and be able to say and demonstrate that it took an objective approach to address the situation.

How you decide this matter may have a large bearing on what happens as a result of the regulatory review. Think twice before you decide.

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In two recent posts, I highlighted the problems with incomplete account opening documents and those signed in blank.  Now that you know the problem, the important question to ask is how do you prevent the problem in the first place.

A robust supervision program and a culture of compliance are a start, but not the complete picture.  It is how you conduct the supervision of your advisors that counts the most.

Any regular review of your brokers and financial advisors must include a random file (both electronic and hard copy)  review.  By doing so, you may be able to find those instances of incomplete account opening documents, or even the dreaded documents signed in blank.

A few years ago, I defended a broker where the claimant alleged that he signed the account opening documents in blank.  To test this claim, we performed such a random file review and found quite a few account opening documents signed in blank for multiple clients.  We uncovered a bad broker, and he was terminated.

Maybe this bad broker would have done something else if there had been a more fulsome annual review process.  But the fact remains the same; regular supervision with a random file review is one way to avoid claims focused on deficiencies with account opening documents.  


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The SEC has been much more aggressive in policing a company’s internal investigations.

There has been a direct causal relationship to the SEC’s increased use of whistleblowers and its focus on a companies’ use of internal investigations.  We have seen that the SEC probably knows more about the matter before it begins its official inquiry or contacts the targeted company.  That is why it is essential for companies to permit their counsel to investigate a matter as soon as possible prior to speaking with the SEC.  Thus, the best defense to a regulatory investigation starts before it commences with a proper internal investigation.  Companies are reminded that, finding out what went on and addressing it before the regulators do, will only enhance a positive response from said regulators.

Accordingly, despite the presence of whistleblowers, companies should not “throw the baby out with the bathwater,” that is, internal investigations are still critical and must be pursued in a robust manner.

The SEC, recently, sued a private equity fund adviser for, among other things, allegedly violating Investment Advisers Act of 1940 Rule 206(4)-7, for failing to have procedures requiring verification of client signatures and instructions by a second person.  See


The SEC stated that the RIA and its principal made certain unauthorized transactions and used clients’ funds to pay off debt owed by the principal.  The specific violations related to Rule 206(4)-7, involved the RIA’s failure in not having a second set of eyes review client signatures and other instructions.  The SEC believed this would have prevented these defalcations.  Essentially, the SEC argues that a “shadow” is necessary to avoid these unlawful acts.  Interestingly, however, this type of illegal activity alleged seems to take place even with the best of compliance programs.

Nonetheless, RIAs must be vigilant in ensuring that more than one person reviews both client signatures as well as instructions, and, who knows, the “shadow” may just save the firm.

money.jpgNever, under any circumstances, should you have your client sign an account opening document in blank, for you to complete at some later time.  To most of you, this is not much of a secret, but I have seen it enough in my practice of defending brokers to know that it happens all too often.

So what is the problem with taking this shortcut?  After all you are just going to use your notes to fill in the gaps.  What gives?

For one, having account forms signed in blank is worse than submitting incomplete forms.  By controlling the ultimate content, you expose yourself to a claim that you exercised control over all of the customer’s accounts.  The greater control that you have, the greater your duties become to that client.

Having your client sign forms in blank also opens you up to fraud claims.  What do you say when the client alleges that his account was miscoded as aggressive, when he was a conservative investor where you completed the forms without client participation.  In short, there is not much to say other than to ask for a settlement demand.

If the circumstances dictate that you need to complete an account document at a later date, then do so, but without the client pre-signing the blank form.  This way, you can send the completed form to the client with a covering letter/email explaining what you did and then have the client sign off on how you completed the form.  By doing so, you can avoid the fraud claim associated with a form signed in blank.

Not having clients sign forms in blank is not a “best practice”.  Rather, it is the only way that you should complete account forms.


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idea.jpgIn our hyper-fast world, financial advisors, like many in the service sector, have become lazy.  Let me be clear, I think financial advisors are working harder than ever to service their clients in these challenging times for which they should be commended.

The laziness to which I refer is that I see financial advisors taking too many shortcuts in the race to secure clients and open accounts.  In particular, financial advisors have all too often taken the easy way out when it comes to account and investment opening forms.

For example, I have seen incomplete accredited investor questionnaires and account opening documents that do not have the tolerance for risk or investment objectives completed.  By failing to take the time to complete these forms, you expose yourself to unnecessary risk.

One of my partners tells a story about a line his high school football coach used to say when a player questioned being criticized; the coach would always respond, “The film don’t lie.”  Similarly, account/investment opening documents do not lie.

When I defend financial advisors, the very first thing I look for are these documents.  Completed documents, signed by the client are a sure fire step in the right direction when it comes to formulating the defense. 

Although there are times when the completed forms do not match reality, having completed forms, signed by the client, make your defense much easier.  In other words, having these forms places the burden on the complaining investor to overcome the presumption that the forms (and the investments) were consistent with the client’s desires expressed in those completed documents.

The converse is also true.  Incomplete forms may give rise to a presumption that the financial advisor was not looking out for his clients’ best interests.  Don’t be one of those advisors.  Take your time and protect yourself; make sure all forms are completed and signed by your clients.


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I previously wrote about how the Food and Drug Administration and Department of Justice used the responsible corporate officer doctrine to charge former Purdue Pharma executives and in-house counsel with criminal liability and career-ending debarment for “off-label” drug marketing, even though the charged parties did not personally participate in the conduct or even know about it.  Recent court activity may significantly reduce such exposure for similarly-situated individuals, with ripple effects spreading through many legal sectors, including shareholder suits.

In a game-changing decision released on December 3, 2012, the Second Circuit Court of Appeals reversed the conviction of Alfred Caronia, a pharmaceutical sales representative who had been convicted of conspiring to introduce a misbranded drug into interstate commerce.  The evidence at trial included recordings of Mr. Caronia’s statements to doctors that Xyrem, a drug that the FDA approved for narcolepsy, could also be used to treat various other conditions for which the FDA had not approved the drug.

Mr. Caronia argued that the prosecution violated his First Amendment right to free speech.  The Second Circuit agreed, and in reversing his conviction narrowly read the scope of the Food, Drug, and Cosmetic Act “as not criminalizing the simple promotion of a drug’s off-label use because such a construction would raise First Amendment concerns.”  Mr. Caronia’s conviction relied on off-label promotion, and was therefore invalid.

Depending on one’s perspective, pharmaceutical representatives promoting off-label uses for their products are either modern snake oil salesmen or critical conduits of information to medical treatment providers regarding cutting-edge therapies.

Setting this debate aside, the Caronia decision could upend the current FDA regulatory and enforcement regime regarding off-label marketing, with wide-ranging effects.  In addition to the government’s revitalization of the responsible corporate officer doctrine, recent years have witnessed:  (1) the government attempt to prosecute in-house counsel for obstructing an off-label marketing investigation; (2) the government require, in settlement of misbranding charges, corporate integrity agreements that prohibit compensation of the sales force based on sales goals; and (3) scores of whistleblower lawsuits, False Claims Act actions, and the follow-on class-action shareholder lawsuits involving off-label marketing.

This could all change if the Supreme Court affirms the Second Circuit or if other appellate courts agree that prosecutions for “off label” marketing violate free speech rights.