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Troubling Trend

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Reuters published an article on January 16, 2013: “Defense lawyers balk as SEC makes play for hard drives.” http://www.reuters.com/article/2013/01/16/us-sec-enforcement-forensics-idUSBRE90F1EI20130116 The article notes that the SEC’s new emphasis on subpoenaing electronic storage devices (ESDs) arises because the SEC has a new, state-of-the-art computer forensics lab which enables the SEC to run massive amounts of data through sophisticated search tools.  And, of course, recover any files that may have been erased or otherwise hidden. The SEC’s definition of ESDs is broad enough to include laptops, hard drives, tablets, smartphones, and about any other electronic storage device that the SEC thinks might be useful.  


Defense lawyers must help their clients find strategies to successfully resist these overbroad requests for a whole filing cabinet, rather than for specific categories of documents. While the scope of an SEC subpoena may be broad: The Commission “may, in its discretion, make such formal investigations and authorize the use of process as its deems necessary to determine whether any person has violated,… any provision of the federal securities laws…  http://www.sec.gov/divisions/enforce/enforcementmanual.pdf   


The Commission’s power is not limitless.  Demanding the production of ESDs, which may contain the entire universe of the witness’s thoughts and actions in his personal and business life, goes far beyond asking for specific categories of documents, which might evidence the theory of liability set forth in the formal order.  The production of ESDs, rather than specific categories of documents, gives the SEC access to a broad range of information that is irrelevant to suspected violations of the federal securities laws and potentially damaging to the witnesses from whom it is compelled.  


Part of the SEC’s justification for requesting ESD lies in its abilities to discover erased files and other metadata with its computer forensics.  But in most routine cases, the SEC has no basis for believing that witnesses are destroying data or otherwise not fully complying with subpoenas.   Requiring production of ESDs amounts to applying a so-called cure before the need for it has been established.


The biggest problem is that witnesses resist at their peril.  Cooperation is at a premium in defending SEC investigations.  Consequently, witnesses often produce more than the law obligates them to provide for fear of being thought of as uncooperative, running the risk of being punished further for inconveniencing the staff.  Counsel for witnesses must interact with the staff to provide the information necessary without creating the impression that they are being unresponsive to the staff’s concerns.  Detailed conversations with the staff about the manner and completeness of the production can go a long way to preventing any issues with the staff may have about getting specific categories of documents rather a full ESD production which may have been demanded in the subpoena.


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