Disclosures to the SEC Can Carry Confidentiality Risks

With the Securities and Exchange Commission’s (SEC) more aggressive enforcement approach, companies need to be aware that, when they turn documents over to the SEC after obtaining a signed confidentiality agreement, they are not getting the SEC’s agreement to refuse to provide to third parties these confidential documents.

In fact, these agreements usually provide less than meaningful protection for the confidentiality of the turned over documents because there is usually a provision granting the SEC the discretion to disclose the submitted materials whenever it chose to do so.

The risks took center stage in Gruss v. Zwirn, which was decided this summer in the Southern District of New York. The case involved allegations of financial improprieties against Daniel Zwirn, the former chief financial officer of hedge fund company Zwirn Entities. After conducting two internal investigations, Zwirn Entities voluntarily turned over information to the SEC, which had launched its own probe.

In a subsequent defamation and breach of contract lawsuit against his former company, Zwirn sought to compel the disclosure of supporting documents from the internal investigation, including notes and summaries of witness interviews. Excerpts of these interviews were provided to the SEC under an agreement that the agency would maintain their confidentiality. Nonetheless, Zwirn Entities maintained that the documents were protected by the attorney-client privilege and work-product doctrine.

In his decision, Judge Paul Gardephe held that waiver did occur when the Zwirn Entities disclosed portions of the witness statements to the SEC, overruling a prior ruing by a magistrate judge. As explained by Gardephe, “[t]he confidentiality agreement at issue here provides no meaningful protection to Defendants because – in essence – it grants the SEC discretion to disclose the submitted materials whenever it chooses.”

The bottom-line is that companies must recognize that disclosing the results of an internal investigation to the SEC carries potential risks. Therefore, it is imperative to work with experienced counsel to determine how best to balance confidentiality interests with the need to defend the company of wrongdoing.

If you have any questions about the this case or would like to discuss how it may affect your business, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.