He’s Got 99 Problems — Is This Subpoena One?

This week, Shulman Rogers’ Courtney Schaefer interviews Allison Baker Shealy on Jay-Z and the SEC.

As a lawyer who consumes more pop culture than I care to admit, the recent media attention surrounding the refusal of Shawn Carter (better known as Jay-Z) to respond to a subpoena from the U.S. Securities and Exchange Commission has caught my attention.  By now, most of us know that Jay-Z has received multiple subpoenas from the SEC related to his involvement with Rocawear, but what does it all mean? Why did the SEC want to talk to Jay-Z?  What was the nature of the investigation into Rocawear and Iconix? Would Beyoncé and Blue Ivy be in court?  Armed with my PACER login, I looked through court documents and sat down with my colleague, securities enforcement attorney Allison Baker Shealy, to try to make sense of it all.

Allison, what is going on here?  How does Jay-Z factor into this?

According to pleadings filed by the SEC in federal court, the SEC is conducting an investigation of Iconix Brand Group, Inc., which is a publicly traded company that manages a variety of brands such as Cannon, Danskin, Ed Hardy, Mossimo and Umbro.

In 2007, Iconix bought Jay-Z’s fashion company Rocawear for $204 million and added Rocawear to its list of brands.  Following the sale, Jay-Z remained involved with the Rocawear line, and Jay-Z and Iconix entered into other related ventures.

So, why is the SEC investigating Iconix?

In March 2016, Iconix reported its earnings for the 2015 fiscal year and reported an impairment loss of $169 million related to the Rocawear brand.  Companies take an impairment loss when an asset is no longer making the amount of money the company had projected and the company estimates that the future cash flow from the asset is less than the value the company had been carrying the asset on its books.  In other words, Iconix realized that it was going to make $169 million less from the Rocawear brand than it previously thought.

In March 2018, Iconix reported another impairment loss of $34.6 million related to the Rocawear brand for the 2017 fiscal year.  Meaning that by the end of 2017, Iconix had written down $203.6 million of the $204 million it paid Jay-Z for Rocawear.

Why are such seemingly large impairment losses significant?

The impairments, especially impairments of this size, are important because they mean that the Rocawear brand had little or no value and that Iconix likely paid Jay-Z too much.  Iconix reported impairment losses related to other brands as well at these times.  Typically, when a company makes an announcement like this, the stock or share price will drop and investors in the company will also lose money.

What has been going on with the investigation leading up to this?

The SEC started investigating Iconix on or before November 23, 2015 – before Iconix first reported any of these losses and likely after a significant drop in the price of Iconix shares.  Iconix was trading at $16.28 on November 5, 2015, and dropped to $7.20 the next day on November 6, 2015.

The SEC obtained documents from a variety of sources and took investigative testimony on the record from witnesses.  But, they wanted to talk to Jay-Z personally.

What does the SEC want from Jay-Z?  Does he have anything to worry about?

Two years into the investigation, on November 16, 2017, the SEC served Jay-Z’s lawyer with a subpoena for Jay-Z’s testimony.  They also asked him to complete a very lengthy written background questionnaire seeking information about his education, his family, his electronic accounts and his investments.  These questionnaires are routine for witnesses being subpoenaed by the SEC, but they can also be a minefield – setting up the witness for a possible criminal charge for false statements to the government if the witness fails to tell the truth or fails to disclose everything requested.

In addition to this subpoena enforcement action, the SEC has indicated that it is investigating securities fraud.  It is possible that the SEC wants Jay-Z’s testimony in order to bring a civil enforcement action against him (i.e., sue him for a violation of the federal securities laws).  He could also be facing class actions by shareholders.  Private plaintiffs may attempt to get any SEC testimony to use in their case.

Why have Jay-Z’s lawyers and the SEC had such a difficult time moving forward with taking his testimony?

Jay-Z is a busy guy.  At first, he was on tour and unable to fit the testimony into his busy schedule.  The SEC proposed new dates, but those conflicted with his planned attendance at the Grammy Awards.

Jay-Z’s lawyer was insistent that Jay-Z wanted to cooperate and get the SEC all of the information that they wanted, but did not think that actual on-the-record, under-oath testimony was necessary.  The lawyer proposed alternatives to testimony, such as speaking with other witnesses first who were more directly involved in the dealings between Rocawear or that he could provide an attorney proffer.  During an attorney proffer, the lawyer meets with the government without her client and provides a hypothetical version of what the client would likely say if asked by the government.  The SEC was not interested in any of these alternatives and insisted on live, under-oath testimony by Jay-Z.

It issued a second subpoena for Jay-Z’s testimony on February 23, 2018.

Jay-Z’s lawyer again pushed back and argued that his client had little or no relevant information.  Given Jay-Z’s purported limited involvement, the lawyer suggested that two hours of testimony would be more than sufficient for the SEC to ask all of its questions of Jay-Z.  After rounds of negotiation, Jay-Z’s lawyer offered to make his client available for a maximum of four hours of testimony.

The SEC insists that Jay-Z is a “significant witness” and nothing less than “at least a full day” of live under-oath testimony will be sufficient.

This has been going on for a while—why all the recent media attention?

After five months of negotiations, with no agreement on a date for testimony nor the length of time for the testimony, the SEC filed a motion in federal court in the Southern District of New York seeking to compel Jay-Z’s testimony.  SEC investigations are private.  Just the fact of an investigation can cause significant harm to the people under investigation or asked to provide information.  Unless or until the SEC actually files an action against an entity or individual, the SEC and its staff are prohibited from even confirming the fact of an investigation.  So, this lawsuit to compel Jay-Z’s compliance with the subpoena is the first public mention of this investigation.

What will the court consider in evaluating the SEC’s motion?

In a motion to compel compliance with a subpoena, including administrative subpoenas, the party seeking to force compliance will have the burden of establishing that: 1) the investigation will be conducted pursuant to a legitimate purpose; 2) the inquiry may be relevant to the purpose; 3) the information sought is not already within the Commission’s possession; and 4) the administrative steps required have been followed.

The SEC argues that they need Jay-Z’s testimony regarding: the value of the Rocawear trademark and his involvement with that brand after the sale to Iconix; the Carter-affiliated companies that did business with Iconix; multiple transactions involving Carter, his affiliated companies, and Iconix; Carter’s knowledge and intent with respect to those transactions, and his awareness of the knowledge and intent of other people with respect to those transactions; and multiple emails, meetings and phone calls related to Iconix in which Carter was or may have been a participant.

It is likely that the court will find that the SEC has met its burden. Then, the burden will shift to Jay-Z to show that the subpoena seeks evidence that is not discoverable, is privileged, is overly broad or that it is unduly burdensome.

After hearing from both sides, what are the court’s options?

The court could find completely in the SEC’s favor.  If the SEC wins, Jay-Z will be given a fixed amount of time to comply and sit for testimony for a set length of time (usually eight hours) or be held in contempt of court.

The court could find completely in Jay-Z’s favor and quash the SEC’s subpoena, forcing them to get evidence from other sources.

The court could fashion a mixed remedy.  For example, the court could order Jay-Z to sit for testimony for up to a four-hour period and then require the SEC to come back to the court to seek permission to take additional testimony based on a specific proven need or evidence.  Alternatively, the court could require Jay-Z to provide written answers to the SEC’s questions and then require the SEC to seek permission from the court to proceed with testimony if it finds Jay-Z’s written answers insufficient or unsatisfactory.

Thanks Allison.  Jay-Z and Beyoncé are scheduled to kick off their On The Run II tour on June 6, 2018.  Let’s see if he’s still on the run from the SEC after the May 8th hearing.


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Courtney Schaefer, Shulman Rogers’ Financial Regulatory and Compliance Practice


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