SEC Investigation Process - Federal Lawyer
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SEC Investigation Process

The U.S. Securities and Exchange Commission (SEC) investigates companies and individuals for a broad range of securities-related offenses. The SEC can directly pursue administrative and civil penalties as a result of its investigations, and it can also refer cases to the U.S. Department of Justice (DOJ) for criminal prosecution when warranted. As a result, SEC investigations can present substantial risks, and companies and individuals targeted in these investigations must be prepared to protect themselves by all means available.

An SEC investigation can be either “formal” or “informal.” It is also possible, and not uncommon, for an informal inquiry to lead to a formal one. In fact, as the SEC explains, in most cases, “[f]acts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods.” If these efforts produce evidence which indicates that additional investigative measures are necessary, the SEC will then continue its investigation through formal means.

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Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Michael Koslow
Michael Koslow

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

What Happens During an Informal SEC Investigation?

While an “informal” SEC investigation may seem relatively low-risk in comparison to a “formal” investigation, this is not the case. As we have just explained, the SEC’s informal investigative efforts are often a precursor to the launch of a formal inquiry. As a result, companies and individuals must treat all SEC investigations with equal seriousness and concern, and they must immediately focus their efforts on achieving a favorable resolution. The major steps in an informal SEC investigation include:

1. Identifying a Possible Securities Law Violation

The SEC’s Enforcement Division identifies possible securities law violations through a variety of different means. These include, “market surveillance activities, investor tips and complaints, other Divisions and Offices of the SEC, . . . self-regulatory organizations[,] other securities industry sources, and media reports.” Once the Enforcement Division identifies a possible securities law violation, it then begins the process of conducting an informal investigation. The purpose of this informal investigation is to determine whether the devotion of additional agency resources is warranted—and ultimately to determine whether the SEC (or the DOJ) should pursue charges against the targeted company or individual.

2. Interviewing Witnesses

One of the SEC’s primary informal means of gathering evidence is by interviewing witnesses. These witnesses may include investors, co-workers, employees, and employees of other companies, among others. While potential witnesses are not required to voluntarily provide information to the SEC’s Enforcement Division, many do so—usually because they either don’t realize that they have the right to refuse or they believe it is in their own best interests to cooperate with the SEC.

3. Examining Brokerage Records, Trading Data, and Other Documentation

In addition to interviewing witnesses, SEC personnel will also examine brokerage records, trading data, and any other documentation that they can acquire without issuing an SEC subpoena (more on this below). Again, many witnesses will voluntarily comply with the SEC’s requests; and, in many cases, the SEC can obtain much of the information it needs from public sources. EDGAR filings, press releases, and even social media posts can all assist with the SEC’s informal investigative efforts—and in some instances they will be enough on their own to trigger a formal investigation.

4. Evaluating the Evidence and the Target’s Defenses

After gathering sufficient evidence through informal means, SEC Enforcement Division personnel will evaluate the evidence in light of the pertinent statutory and regulatory authority. If the target has engaged defense counsel to intervene in the investigative process, Enforcement Division personnel will generally consider the target’s defenses at this stage as well.

5. Determining Whether to Open a Formal Investigation

Based on their evaluation of the evidence and any defenses the target has put forward, SEC Enforcement Division personnel will decide whether to recommend moving forward with a formal investigation. If Enforcement Division personnel do not recommend opening a formal investigation, the process will be over. However, if they do recommend opening a formal investigation, then the target will need to begin preparing immediately for the next steps in the SEC’s investigative process.

The informal investigation process can take anywhere from weeks to months, and in some cases it can take a year or longer. Upon learning of an informal investigation, a target must engage defense counsel immediately. Experienced federal securities fraud defense counsel will be able to intervene in the investigative process, work with the Enforcement Division’s personnel, and seek to shepherd the matter toward a quick and positive outcome.

What Happens During a Formal SEC Investigation?

While a formal SEC investigation is often an extension of an informal investigation, the procedures involved are very different—and targets must approach formal SEC investigations accordingly. The major steps in a formal SEC investigation include:

1. Issuance of an SEC Subpoena

One of the most significant implications of the SEC deciding to initiate a formal investigation is that it gains the ability to issue subpoenas. The SEC has administrative subpoena power, which means that it can issue subpoenas on its own accord (i.e. without judicial approval). SEC subpoenas can request extraordinary amounts of data, and they can also compel sworn testimony. Responding to an SEC subpoena is a process of its own, and SEC subpoena recipients must begin working on their responses immediately.

2. Assess Potential Charges

After completing its investigative efforts, the SEC will evaluate all of the evidence obtained and assess potential charges. As identified by the SEC, some of the most-common charges to flow from Enforcement Division investigations include:

  • Misrepresentation or omission of material information
  • Market manipulation
  • Theft of customers’ assets
  • Violation of broker-dealer rules
  • Insider trading
  • Sale of unregistered securities

3. Issuance of a Wells Notice

In some cases, the SEC’s preliminary determination regarding potential charges will be followed by the issuance of a Wells Notice. This is a formal letter that summarizes the Enforcement Division’s findings and indicates the SEC’s intent to pursue charges. Wells Notice recipients have the option (but not the obligation) to respond—setting forth their own position and arguments as to why the proposed charges are unwarranted.

4. Settlement Negotiations Between the SEC and the Target Company or Individual

In addition to or in lieu of issuing a Wells Notice, SEC Enforcement Division personnel may also enter into settlement negotiations with the target company or individual. Many SEC investigations are resolved through the settlement process. Of course, targets are under no obligation to settle; and, if a target believes that the SEC’s allegations are without merit, the target can choose to fight the allegations in subsequent enforcement litigation.

5. Decision Regarding Administrative, Civil, or Criminal Enforcement

Following the investigative process and any efforts at informal dispute resolution, Enforcement Division personnel will present their findings and recommendations to the SEC Commissioner for review. The SEC Commissioner can elect to pursue civil or administrative enforcement action (or both), and the Commissioner can also choose to refer the matter to the DOJ for criminal prosecution.

What Can (and Should) Targets Do During SEC Investigations?

When facing SEC investigations, targeted companies and individuals must take proactive measures to defend themselves, and they must work diligently to avoid facing charges. With this in mind, upon learning of an SEC investigation (informal or formal), a targeted company or individual should:

  • Engage Federal Securities Fraud Defense Counsel – Companies and individuals targeted in SEC investigations should engage federal securities fraud defense counsel immediately. It is extremely important to choose a law firm with attorneys who have specific (and extensive) experience in SEC enforcement matters.
  • Intervene in the SEC’s Investigation – One of the first priorities after engaging defense counsel should be to intervene in the SEC’s investigation. This is a strategic step that requires intimate familiarity with the SEC’s procedures, and it is a step that should be undertaken directly by the target’s defense attorneys.
  • Assess the Viability of All Potential Charges – After intervening in the investigation, the next priority should be to assess the viability of any and all potential charges. This is a necessary precursor to developing a targeted defense strategy.
  • Challenge Invalid Investigative Practices – While SEC Enforcement Division personnel have substantial authority to conduct securities fraud investigations, their authority is not absolute. If Enforcement Division personnel exceed their authority during the investigative process, this should be used to bolster the target’s defense strategy.
  • Target a Favorable Pre-Charge Result – With a comprehensive understanding of the allegations, legal issues, and facts at hand, companies and individuals targeted in SEC investigations can work toward securing a favorable pre-trial result. While this may mean negotiating a settlement with the SEC’s Enforcement Division, it could also mean terminating the investigation without any administrative, civil, or criminal liability.

Contact the Federal Securities Fraud Defense Lawyers at Oberheiden P.C.

If the SEC’s Enforcement Division is looking into your company’s (or your personal) practices in the securities market, it is important that you engage experienced defense counsel immediately. Our federal securities fraud defense lawyers have centuries of combined experience, and many of our lawyers previously prosecuted criminal securities fraud cases at the DOJ. For a complimentary consultation, call 888-680-1745 or contact us confidentially online now.

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