Senate Questions SEC Disclosure Policies

Author:Mr George Kostolampros, Geoffrey R. Garinther and Matthew L. Beville
Profession:Venable LLP

Last month, the ranking Republican on the Senate Judiciary Committee, Sen. Charles Grassley (R. Iowa), issued letters to Securities and Exchange Commission ("SEC") Chairman Mary Schapiro and Attorney General Eric Holder requesting information regarding how the agencies coordinate parallel civil and criminal investigations. Specifically, Sen. Grassley is interested in whether the SEC informs individuals it is investigating whether the Department of Justice ("DOJ") is conducting a parallel criminal investigation. While this information is undoubtedly useful for defense counsel deciding whether to cooperate with an SEC investigation, Sen. Grassley said in a press release that this practice could "sound the alarm" for anyone concerned that "the SEC [is] being overly cozy with those it should be investigating."

Sen. Grassley's letters were motivated by recent comments from the SEC's Director of Enforcement, Robert Khuzami. In a recent conference, Director Khuzami addressed how the SEC coordinates parallel investigations with DOJ. He said that as defense counsel are reluctant to cooperate "without knowing what the Justice Department is doing," the SEC was developing a process to provide defense counsel "answers whether or not there is a criminal interest in the case." However, Sen. Grassley pointed out that such a policy may conflict with the SEC's Enforcement Manual, which provides that SEC staff should direct such inquiries to DOJ without comment. Sen. Grassley also pointed out that recent comments from Assistant Attorney General Lanny Breuer also indicate that while DOJ and the SEC "collaborate," they do not seek each other's "guidance" when deciding to resolve investigations.

It is not clear, however, that Director Khuzami's comments are actually in conflict with the SEC's written policies. The Enforcement Manual itself expressly provides that SEC staff may disclose a criminal investigation if "authorized by the relevant criminal authorities." Director Khuzami's comments were in the context of the SEC expressly collaborating with criminal authorities. Therefore, it follows that the SEC would only disclose criminal interest if expressly authorized to do so.

Assistant Attorney General Breuer's comments regarding collaboration between the SEC and DOJ in resolving investigations are very brief, but do highlight that the SEC does not seek DOJ's guidance when deciding how to resolve a case. Senator Grassley commented that "[t]his suggests much less...

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