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Special thanks to SEC defense lawyer, Dr. Nick Oberheiden, for his help with this article.
Securities litigation presents substantial risks for companies, firms, and individuals accused of violating federal law, U.S. Securities and Exchange Commission (SEC) regulations, or Financial Industry Regulatory Authority (FINRA) rules. Avoiding unnecessary liability requires a strategic and forward-thinking defense, and it requires a thorough appreciation not only of the risks involved in the instant litigation, but in potential related lawsuits and enforcement proceedings as well.
When facing securities litigation, there are both steps defendants must take promptly and mistakes defendants must be careful to avoid. While it is possible to achieve favorable results even in highly unfavorable scenarios, doing so requires a steadfast commitment to success and a strategic approach backed by the advice and representation of experienced SEC defense counsel.
“There are several keys to winning securities litigation cases, one of which is understanding that there is no one-size-fits-all approach. Each case requires a custom-tailored defense strategy, and defendants and their counsel must be able to execute an effective defense in light of the specific facts and allegations at hand.” – Dr. Nick Oberheiden, Founding SEC Defense Attorney of Oberheiden P.C.
So, what do companies, firms, and individuals need to do when facing securities litigation? What do they need to avoid doing in order to make sure they preserve their available defenses? Here are 10 keys to winning securities litigation cases:
Key #1: Implementing a Legal Hold in Your Securities and Commodities Fraud Case
When facing securities litigation, one of the first steps to take is to implement a legal hold. This involves ensuring the preservation of all potentially relevant electronic and hardcopy files, and it serves two distinct—but equally important—purposes.
First, implementing a legal hold ensures compliance with your (or your company’s or firm’s) legal obligations. Allowing relevant files to be deleted or destroyed, even inadvertently, can lead to allegations of spoliation or impeding the government’s investigation (in the case of an SEC enforcement proceeding).
Second, implementing a legal hold ensures that you (or your company or firm) will have access to all files needed to present an effective defense. Documentation can play a central role in securities litigation for both parties, and ensuring that you have the documentation you need (while also ensuring that any potentially damaging documentation remains duly protected) can be critical to success.
Key #2: Identifying the Specific Allegations At Issue
Another key to successfully defending against securities litigation is to ensure that you have accurately identified the specific allegations at issue. Not only do defendants need to ensure that they are presenting all necessary defenses, but they also need to ensure that they are not wasting time and resources “defending” against allegations that are not on the table. Moreover, by making assumptions and defending against allegations that are not at issue, defendants can raise suspicions that can lead to additional claims or charges being filed.
Key #3: Assembling a Securities Litigation Team with Experienced SEC Fraud Defense Lawyers
Successfully defending against allegations of securities fraud or other securities law violations requires a knowledgeable and high-performing securities litigation team. This team should include appropriate internal personnel as well as outside consultants and counsel. Internal team members should be carefully selected not only to ensure that they have adequate subject matter expertise, but also to ensure that they are not personally implicated in the allegations at hand (unless this is simply unavoidable).
In addition to having a high-performing SEC defense lawyer, having an organized team is important as well. Each member of the securities litigation team should have clearly defined responsibilities and communication channels. Ultimately, all information should flow through counsel, who will prepare all necessary written external communications and filings, and who will communicate with the opposing party on the defendant’s behalf.
Key #4: Conducting a Comprehensive (and Privileged) Internal Audit
With a legal hold and SEC litigation firm in place, the next step is to conduct a comprehensive internal audit. It is imperative for outside counsel to be involved in this process, as this will ensure that any findings and any documentation generated during the audit are protected by the attorney-client privilege. Here too, a defendant’s priorities are twofold:
- Determining if the Plaintiff’s or SEC’s Allegations are Substantiated – The first goal when conducting an internal audit is to determine if the plaintiff’s or SEC’s allegations are substantiated. This determination will inform virtually all aspects of the litigation going forward, from communication and discovery tactics to weighing the benefits of settlement and the likelihood of success at trial.
- Determining What Favorable Documentation is Available – In addition to determining if the plaintiff’s or SEC’s complaint has merit, a defendant’s internal audit should also serve to identify all favorable documentation. In securities litigation, documentation can either be favorable on its face (i.e., a signed customer agreement that grants discretionary trading authority) or favorable by implication based on what it represents in the absence of other records (i.e., internal communications that lack any inference of a conspiracy to manipulate the market).
Key #5: Identifying All Viable Defenses
After gathering as much information as possible through the internal audit process, defendants facing securities litigation can conduct a preliminary assessment of the defenses they have available. The assessment is preliminary at this stage because it is possible that additional evidence could come to light in discovery, through the SEC’s investigative process, or through other means. This reflects another key aspect of successfully defending against securities litigation: While preparing thoroughly and anticipating potential issues are both critically important, defendants (and their SEC defense attorney) must be prepared to adapt to unforeseen circumstances and litigation strategies as well.
Key #6: Building a Comprehensive and Cohesive SEC Defense Strategy
Once defense counsel has identified all viable defense strategies, the next key to winning in securities litigation is to build a comprehensive and cohesive defense strategy. The defense strategy must be comprehensive in that it addresses all elements of all alleged statutory and regulatory violations—not necessarily in terms of taking a “kitchen sink” approach. Oftentimes, a streamlined approach will prove much more effective.
When relying on multiple defenses, it is critical to ensure that the defendant’s strategy is cohesive as well. All deployed defenses must work together, and they must offer a clear path toward a favorable resolution. The issues involved in securities litigation can be extremely complex, and focusing on one specific path to success will often facilitate an efficient and favorable resolution.
Key #7: Using the SEC’s Litigation Process to Your Advantage
There are several stages in the securities litigation process, and defendants should be prepared to leverage the opportunities presented at each stage to their advantage. This is equally true when facing allegations from an aggrieved investor and when facing SEC enforcement action.
For example, in private civil litigation, defendants can use discovery and pre-trial motions practice to set the stage for a favorable outcome—whether before trial or via verdict. In SEC enforcement actions, defendants can often leverage opportunities during the SEC’s investigative process and Well’s Notice procedures to achieve positive results without formal charges being filed. Ultimately, with as much as can be at stake in securities litigation, targeted companies, firms, and individuals need to take advantage of every available opportunity to shift the weight of the evidence and the balance of power in their direction.
Key #8: Avoiding Costly Miscues
As we mentioned in the introduction, companies, firms, and individuals targeted in securities litigation must not only take proactive steps to protect themselves, but they must be careful to avoid mistakes as well. When facing securities litigation, even seemingly minor miscues can prove incredibly costly, and they can thwart entire defense strategies in some cases.
What kinds of mistakes are we talking about? One common, and critical, mistake litigants often make is disclosing too much information. This can result from failing to adequately screen documents assembled for production; failing to effectively assert the attorney-client privilege; or, in the case of an SEC enforcement proceeding, trying to be overly cooperative. When facing securities litigation, defendants need to ensure that every decision they make is adequately informed, and they need to be able to rely on their SEC defense law firm to manage the litigation effectively on their behalf.
Key #9: Evaluating Related Securities Litigation Risks
Oftentimes, entities and individuals targeted in securities litigation in one forum will face risks in other forums as well. For example, publicized SEC investigations will often trigger a wave of litigation from aggrieved investors. Conversely, private civil litigation involving allegations of securities fraud can lead to SEC enforcement proceedings—and potentially even a referral to the U.S. Department of Justice (DOJ) for criminal prosecution by the DOJ’s Market Integrity and Major Frauds (MIMF) Unit.
Defendants facing securities litigation need to keep these risks in mind, and they need to structure their defense strategies accordingly. What serves as a defense in one forum won’t necessarily serve as a defense in another, and disclosing information as part of a defense strategy in one proceeding could potentially create exposure in another.
Key #10: Systematically Working Toward a Favorable Outcome
The final key to winning securities litigation cases that we’ll cover in this article is systematically working toward a favorable outcome. Even when litigation presents immediate and existential risks, targeted entities and individuals need to take a methodical and well thought out approach. Rushing and making uninformed decisions will lead to mistakes and failures, and they will often put defendants in jeopardy unnecessarily.
If your company has SEC defense needs, please contact securities litigation defense lawyer, Dr. Nick Oberheiden of Oberheiden P.C. today for a free consultation.