Corporate Securities Fraud Defense: Fending Off SEC and DOJ Enforcement Actions

Corporate securities issuers can face a wide range of allegations from the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). When facing scrutiny from the SEC or DOJ, executing an informed, strategic, and proactive defense is critical for fending off high-stakes enforcement actions. This includes not only administrative and civil enforcement actions, but also criminal enforcement actions that can carry even greater penalties.

Companies that sell securities on the US securities markets are subject to extensive statutory and regulatory compliance obligations. Effectively managing compliance is essential for mitigating corporate securities issuers’ risk, as allegations of noncompliance can lead to administrative, civil, and criminal enforcement.

When the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) have reason to believe that enforcement action may be warranted, they can conduct investigations using all of the various tools and resources they have at their disposal. As a result, responding promptly is essential, and fending off an SEC or DOJ enforcement action in this scenario requires an informed, strategic, and proactive defense.

What Are Some Examples of Potential Allegations in Corporate Securities Fraud Investigations?

Allegations in corporate securities fraud investigations can take numerous forms. Corporate securities issuers must strictly comply with the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (SOC), the SEC’s Rules, and various other sources of federal authority. Each of these sources of authority establishes different compliance obligations, and failure to comply with any of these allegations can potentially create significant exposure.

With this in mind, the following is just a small sampling of some of the allegations that could be on the table:

• Falsifying financial statements and other forms of corporate accounting fraud
• Providing misleading forward-looking statements, projections, or other guidance
• Failing to disclose risks related to the company’s financial, legal, or competitive standing
• Artificially inflating the company’s stock price through manipulative means
• Insider trading involving corporate personnel either conducting impermissible trades or providing information to third parties (tipping)

Each of these allegations has the potential to lead to administrative, civil, or criminal enforcement. As we discuss below, the risks involved in all three types of enforcement actions can be substantial, and the SEC and DOJ can pursue parallel enforcement proceedings in some cases. As a result, all corporate securities fraud investigations require an equally cautious approach, and targeted companies should work with experienced legal counsel to pursue a favorable resolution at the investigative stage that avoids formal charges.

What Should Companies Do When Facing Federal Securities Fraud Investigations?

Effectively responding to a federal securities fraud investigation requires a multi-faceted approach guided by a clear understanding of both the investigative process and the substantive issues that are (or may be) at hand. With this in mind, upon receiving a subpoena, target letter, or any other means of inquiry from the SEC or DOJ, it is important to take the following steps promptly:

1. Engage Experienced Securities Fraud Defense Counsel

The first step in this scenario is to engage experienced securities fraud defense counsel. Responding appropriately to an SEC or DOJ investigation requires experienced legal representation, and corporate executives and directors need to ensure that they are making sound decisions based on the advice of counsel. Mistakes in the early stages of an SEC or DOJ investigation can have knock-on effects later in the process, and some mistakes (i.e., inadvertently disclosing or improperly destroying relevant records) can lead to serious adverse consequences that could—and should—have been avoided.

2. Implement a Legal Hold

As with all federal investigations, when facing securities-related scrutiny from the SEC or DOJ, it is imperative to promptly implement an effective legal hold. To be effective, a legal hold must cover all areas of a company’s operations, and it must cover both on-site and off-site storage. With the technological tools that are available today, the SEC and DOJ will be suspect of any claims that document or data destruction was inadvertent once an investigation is underway.

3. Conduct an Internal Compliance and Risk Assessment

After implementing a legal hold, the next priority should be conducting an internal compliance and risk assessment. The purpose of this assessment is to gain a comprehensive and unbiased understanding of the enforcement risks posed by the SEC’s or DOJ’s inquiry. As a result, the focus should not be solely on gathering evidence that is favorable to the company’s defense. Engaging outside counsel to oversee this assessment helps ensure that all communications and any unfavorable findings will be protected by the attorney-client privilege.

4. Proactively Engage with the SEC or DOJ Through Legal Counsel

When taking steps internally in response to a corporate securities fraud investigation, it is important not to overlook the need to remain in close contact with the SEC or DOJ as the investigation progresses. Targeted companies should rely on their legal counsel to engage with the federal personnel handling the investigation with a focus on both: (i) managing the scope of the investigation and raising any issues related to improper investigative practices or overreach; and, (ii) determining the focus of the investigation and whether the investigation is administrative, civil, or criminal in nature.

5. Assess Potential Defense Strategies Based on the Circumstances

After conducting an internal compliance and risk assessment and determining the focus and scope of the government’s investigation, the next step is to assess potential defense strategies. It will not be possible to assess potential defense strategies until this stage—and this is one of several reasons why it is important to respond immediately upon learning that an investigation is underway. Until you know what the government is investigating and whether your company is in compliance, you will have no way of knowing what you need to do to protect your company’s interests during the investigation.

6. Identify and Target a Specific Favorable Resolution

Companies that are facing corporate securities fraud investigations should identify and target a specific favorable resolution. Whether this involves affirmatively demonstrating compliance, focusing on negotiating a settlement with the SEC or DOJ, or seeking a favorable resolution in federal court will depend on the circumstances at hand. The outcome a company chooses to target will determine the specific steps that need to be taken as the government’s investigation progresses.

7. Continue to Monitor the Investigation and Be Prepared to Adapt as Necessary

While companies that are facing corporate securities fraud investigations need to build and execute a comprehensive and cohesive defense strategy, they also need to be prepared to adapt as necessary. For example, if the focus of the government’s investigation shifts or expands, if witnesses unexpectedly come forward, or if the DOJ unexpectedly seeks a grand jury indictment, it will be important to be prepared to react immediately.

What Are the Risks Involved in Facing an SEC or DOJ Corporate Securities Fraud Enforcement Action?

While all corporate securities fraud investigations pose substantial risks, the specific risks at hand depend on the allegations at issue and whether the investigation is administrative, civil, or criminal in nature. With this in mind, potential penalties generally include:

• Administrative Enforcement Actions – In administrative enforcement actions involving violations of the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (SOX), and the SEC’s rules, potential penalties can include stop orders, cease-and-desist orders, trading suspensions, and registration suspensions and revocations, among others.  
• Civil Enforcement Actions – In civil enforcement actions, the SEC can work with the DOJ to pursue injunctive remedies as well as civil monetary penalties and restitution. Civil monetary penalties can often be imposed on a per-violation basis, and it is not unusual for corporate securities fraud investigations to involve numerous potential violations.
• Criminal Enforcement Actions – In criminal enforcement actions under SOX, Section 32 of the Securities Exchange Act of 1934, and other pertinent federal statutes, corporate securities issuers can face substantial fines. The government can also pursue parallel administrative and civil enforcement actions in these cases. Individuals accused of federal securities fraud (including insider trading) can face fines and prison time.

While monetary penalties for corporate securities fraud can vary widely, they can easily reach into the millions—and potentially tens of millions or hundreds of millions—of dollars. Even when companies can afford to pay these penalties, avoiding unnecessary liability is critical for protecting shareholders’ interests and mitigating the risk of facing additional SEC or DOJ scrutiny in the future.

In all cases, facing scrutiny from the SEC or DOJ (or both) presents substantial risks for corporate securities issuers. If your company is under investigation for corporate securities fraud, we strongly recommend engaging experienced defense counsel right away.

Speak with a Corporate Securities Fraud Defense Attorney in Strict Confidence

Our firm has extensive experience defending clients in high-stakes federal securities fraud investigations. If your company is facing scrutiny from the SEC or DOJ (or both), we encourage you to contact us promptly for more information. To speak with one of our senior corporate securities fraud defense attorneys in strict confidence as soon as possible, call us at 888-680-1745 or tell us how we can reach you online now.