On May 10, 2019, Charles Breyer, the federal district court judge overseeing the SEC’s securities fraud case against Volkswagen, ordered the SEC to file a declaration explaining why it didn’t file its case before March 14, 2019. To say that he did not seem particularly impressed by the length of the SEC’s investigation is an understatement. On July 8, 2018, in response to Judge Breyer’s demand, the SEC filed a declaration and memorandum with the court. These are remarkable documents, chock full of interesting and odd information about the SEC’s lengthy investigation.
Was the SEC investigation done expeditiously?
In its submission, the SEC claims that it was. But the submission shows that the staff’s investigation lasted more than forty-two months and wasn’t conducted with any particular urgency. The staff waited several months after opening the investigation to even obtain a formal order (granting it subpoena authority) and then did not exercise its subpoena power for more than a year. During its forty-two month investigation, the staff only managed to interview or take testimony from twenty people, which works out to one witness interview every other month. It asked for information from only eighteen parties and issued just forty requests for documents or information. Not exactly shock and awe.
In reading the SEC submission, you get the sense that the SEC got played by defense counsel. And not just once. Lots of promises made, few kept. Often months and months passed before requested documents were produced. Requested meetings were delayed for a variety of reasons. Over and over again, defense counsel asked for more time from the staff and almost always got a receptive response. In one instance, the SEC actually withdrew a subpoena it had sent to VW’s law firm after the law firm told the staff that VW did not want to be served with a subpoena. And this was after the SEC had threatened to subpoena records twice before. I guess that the SEC had some strategic reasons for holding back, and got something valuable in exchange for its numerous accommodations, but the filing suggests that it did not receive much.
One thing the SEC apparently did not get in exchange for all of the professional courtesies it extended to VW’s counsel was a tolling agreement. Somehow, while it was investigating, the staff allowed the five year statute of limitations period to expire for a number of relevant securities offerings. Oops. Why didn’t the staff get a tolling agreement? Don’t know, it’s not explained anywhere in the filings.
What seems equally bad is that the staff apparently unearthed some important materials concerning relevant VW bond offerings more than two years into its investigation. This information, however, was readily available to the staff from the get go. How and why this happened is unclear, though certainly this type of thing happens from time to time as staff investigations zig or zag into new areas and investigators think more about what might be relevant. But those facts certainly don’t put the SEC in a good light.
Shortcut
The submission makes it seem as if the SEC was hoping for a quick settlement, even before it had conducted a substantial investigation. Less than a year into its investigation, after doing limited investigative work, the SEC offered to settle the case, spelling out the details of its investigative efforts in a so called reverse proffer. According to its submission, the SEC offered to stop investigating VW’s conduct it VW agreed to settle. VW was apparently not impressed, not even willing to engage in settlement discussions after hearing what the staff had to say. As is often the case in such situations, the SEC hope for a quick settlement quickly evaporated.
Odds and Ends
The SEC’s investigation certainly wasn’t helped by the fact that a lot of potentially relevant documents and witnesses were located in Germany, outside of the SEC’s reach. This undoubtedly impeded the staff’s progress. The SEC investigation was further stalled when it sought assistance from the German securities regulator in obtaining documents and interviews but the regulator refused to help, citing ongoing criminal proceedings.
More troubling, the U.S. Department of Justice, with its enormous leverage over VW, chose not to help the SEC in any meaningful way, even while the SEC was taking pains not to interfere with DOJ’s investigation. Early in the SEC’s investigation, after asking for a briefing from VW’s counsel concerning its internal investigation, DOJ weighed in, requesting VW’s counsel not to give that information to the SEC. Later on, SEC staff sought assistance from DOJ to arrange interviews with witnesses in Germany though a treaty process. But DOJ decided not to help the SEC in its efforts and the request was never made. This is the type of problem that the SEC Enforcement Director should have been brought in to help resolve in a creative and constructive way. Did this not happen, or did she just not have the yank? And why wasn’t DOJ, normally a close ally of the SEC, willing to help in the first place? This mystery is not solved in the papers.
VW made multiple lengthy Wells submissions, totaling over 3500 pages. They submitted numerous white papers along the way. Needless to say, they received more due process than they were probably due. At the same time, you have to question whether a Wells submission of such length is an effective strategy or whether it just annoys the staffers and Commissioners it is trying to persuade (it’s also curious how such a lengthy submission complies with the Wells 40 page limit even if most of it is stuffed into an appendix). I’m pretty sure that virtually no one at the SEC wants to wade through such lengthy submissions or even finds them particularly useful or persuasive. But there does not seem to be any way to limit the length of such submissions under existing Commission rules.
What it all Means
Clearly SEC staff let VW counsel control the pace of the investigation more than it should have, affording them much more deference than deserved. At the same time, there were some legitimate obstacles that undoubtedly delayed the VW investigation. Perhaps the SEC disclosures will, one way or another, cause the SEC to review whether it is conducting complex investigations in most efficient and effective manner. Perhaps a review will support the view, that all of the issues pertain exclusively to this particular investigation. And perhaps it will raise broader questions about the most effective ways to deal with companies who drag their heels in response to SEC requests and whether there are more better ways to deal with foreign regulators and DOJ. Either way, it’s appropriate to kick the tires.
The SEC in Action 