• Is The SEC about to Freeze Your Client's Assets? Detecting and Preventing Temporary Restraining Orders
  • April 1, 2009
  • Law Firm: Holland & Hart LLP - Denver Office
  • Thus far in 2009, the SEC has filed an unprecedented number of emergency civil actions in which it sought temporary restraining orders (TROs) from U.S. District Courts around the country. Since these orders usually contain asset freeze provisions, they have draconian “game over” consequences for defendants who find themselves unable to pay for their living expenses or fund their attorney fees.  This article discusses how to recognize when the SEC staff is contemplating a TRO and how to prevent it from pursuing this remedy.

    TROs are appropriate where there is ongoing fraudulent conduct and investor funds are in danger of being transferred offshore or otherwise lost.   Historically, TROs are most prevalent in “off-market” cases involving the sale of securities such as promissory notes and investment contracts by persons not registered as brokers.  The SEC often alleges that these offerings involve securities that are completely fictitious, as in the case of debt obligations issued by “prime banks” or involve "Ponzi scheme" characteristics.

    If the staff insists on adhering to short-term subpoena deadlines for the production of documents and the sworn testimony of witnesses, this is a warning sign that a TRO is imminent.  The staff usually is willing to accommodate opposing counsel’s schedule and is receptive to recently hired counsel’s need to “get up to speed” on the facts. The staff’s refusal to negotiate extending tight subpoena deadlines suggests that a TRO may be imminent.   Other  warning signs are the staff’s scheduling of several witnesses within a short time period or onducting investor interviews, sometimes followed by preparation of affidavits, in lien of sworn testimony.

    The existence of one or more of these warning signs should prompt defense lawyers to take proactive steps intended to prevent the TRO.  Lawyers should thoroughly interview their clients and, if possible, independently investigate whether the offering is ongoing.  Clients should be instructed to cease all solicitation of investors.  Websites relating to the offering should be taken down after being printed out and downloaded.  Lawyers should also look for evidence of dissipation of investor funds.  They should seek to learn where investor funds are held and who has control over them.  Clients should be instructed to stop transferring or spending such funds.  Counsel should ask the staff whether the staff has concern about these issues and whether they are considering taking emergency action.  Counsel’s relationship with the staff and degree of mutual trust (or lack thereof) will likely influence the staff’s willingness to answer such questions.

    If all signs indicate that the staff is about to freeze your client’s assets, more aggressive steps may be appropriate.  You may wish to consider writing a letter to the staff requesting that you be given advance notice of any motions for TRO, which the SEC usually seeks on an ex parte basis, and that any asset freeze be limited to funds traceable to the violative conduct.  You may also consider producing evidence of the steps your client has taken to stop the offering and cease activities relating to investor funds.   Client or third-party affidavits may be helpful in proving to the staff that seeking a TRO would be unjustified.  Attorneys may also wish to consider putting investor funds in escrow pending resolution of the investigation and/or future court proceedings.   Finally, if your client’s liability is clear and a TRO appears imminent, submitting an unsolicited offer of settlement may be the last, best chance to avoid the dire consequences of an asset freeze.