Understanding SEC Investigations
What happens during an SEC investigation? Our federal securities fraud defense lawyers explain.
Each year, the U.S. Securities and Exchange Commission (SEC) brings hundreds of civil and administrative enforcement actions against individuals and companies for violations of the nation’s securities laws. Within the SEC, the Division of Enforcement (the “Division”) is responsible for conducting investigations. The Division also works closely with the U.S. Department of Justice (DOJ) and other law enforcement agencies in the U.S. and around the world to pursue criminal charges when appropriate.
All SEC investigations are conducted privately. The facts are developed to the fullest extent possible through informal inquiries, witness interviews, examining financial and brokerage records, reviewing trading data, and other methods. With the issuance of a formal Order of Investigation, the Division can compel witnesses to testify and produce books, records, and other relevant documents by subpoena. Following the investigation, Division staff present their findings to the SEC Commissioner for review, and the Commissioner may authorize staff to file a case in federal court, bring an administrative action, or refer the case to the DOJ for criminal prosecution. In practice, many securities fraud investigations are resolved via settlement without going to trial.
What Triggers an SEC Investigation?
SEC investigations can originate from a variety of sources, including anonymous calls and tips, alerts from market professionals, disgruntled employees, whistleblowers, competitors, newspaper stories, Suspicious Activity Reports (“SARs”) filed by financial institutions, lawsuits, anomalies in trading patterns, and “red flags” in market trading data. Other law enforcement and regulatory agencies also regularly refer matters to the Division.
After an initial assessment of the inquiry, SEC staff members make a determination of whether to open a “Matters Under Inquiry” (“MUI”). MUIs are preliminary in nature and typically involve incomplete information. The threshold determination for opening a new MUI is low because the purpose of an MUI is to gather additional facts to help evaluate whether an investigation would be an appropriate use of SEC resources. Nevertheless, the SEC considers several factors in making its decision, including the reliability of the information, the seriousness of the alleged offense, the potential for harm, and whether the alleged activity is ongoing. If an MUI is opened, the SEC will typically decide whether to close the MUI or open an Investigation within 60 days.
If SEC staff determine that a full investigation is warranted, the SEC will issue an Order of Investigation, which affords the assigned SEC staff members broad authority to investigate the alleged misconduct. This includes the authority to administer oaths and affirmations, subpoena witnesses and compel their attendance. take evidence, and require the production of documents and other materials. Formal investigative proceedings are nonpublic unless otherwise ordered by the Commission.
What Information Will the SEC Seek to Collect During Its Investigation?
The SEC uses many sources and methods to investigate alleged securities law violations. Typically, the SEC will issue administrative subpoenas or informal requests requiring all involved persons and entities to provide relevant documents and information. The SEC has strict standards for how such documents and information are to be electronically provided, and it employs many professionals that assist the assigned SEC staff members in analyzing the information obtained. This includes forensic accountants, economists, and securities law experts. The SEC will often also seek to obtain bank and trading account records, internal emails from corporate and personal accounts, and copies of chat room communications (e.g., Bloomberg messages).
The SEC has broad authority to obtain information through formal and informal means. The SEC is authorized to conduct voluntary interviews, even over the telephone. The SEC can also issue voluntary Background Questionnaires to involved parties, seeking personal information including the witness’s date and place of birth, the names and account numbers for all securities and brokerage accounts, a list of all educational institutions attended and degrees received, and an employment history.
Do Targets of SEC Investigations have the Right to Counsel?
Any person compelled to appear before the SEC, or who appears by request or with the permission of the SEC, at a formal investigative proceeding may be accompanied, represented, and advised by legal counsel. This means that a testifying witness may have an attorney present with him or her during any formal investigative proceeding, and the attorney may (i) advise the witness before, during and after the testimony; (ii) question the witness briefly at the conclusion of the testimony to clarify any of the answers the witness gave during testimony; and, (iii) make summary notes during the witness’s testimony solely for the witness’s use
What is a Wells Notice?
While not required, in the interest of fairness, persons and entities subject to an SEC investigation may be allowed to provide the SEC with a written statement of their position and interest in the subject matter of the investigation. This is intended to ensure that, before making the decision to initiate enforcement action, the SEC hears directly from the persons or entities that are being investigated and not just from internal staff members. This process is usually initiated through the issuance of a Wells Notice. However, the SEC will not always afford targeted individuals and entities this opportunity, particularly when the issuance of a Wells Notice could compromise the investigation (e.g., if there is a risk that a targeted individual or entity may attempt to hide assets or destroy evidence).
If the SEC issues a Wells Notice, the recipient should consult with legal counsel prior to responding, as submitting a response can have serious negative ramifications if the response is not carefully constructed.
When Should a Witness Consider Entering into a Proffer Agreement with the SEC?
Proffers of information and evidence by witnesses, including potential cooperating witnesses, are an important method used by SEC staff to assess the viability of statutory charges. A proffer is generally required in order to determine whether a cooperation agreement will be considered by the SEC. Offering to proffer is often a method for individuals and entities to initiate a discussion with the SEC concerning the potential benefits of cooperation in connection with an investigation or proceeding. Proffers are generally made directly by a witness, but at times are preceded by a proffer from the witness’s attorney.
How are SEC Investigations Resolved?
Upon completion of an investigation, the SEC will determine the appropriate resolution of the matter at hand. The SEC has broad authority to bring civil lawsuits in federal court, and may alternatively decide to settle matters administratively. As noted above, the SEC may also refer matters, either informally or formally, to other regulatory or law enforcement agencies. Prior or subsequent to initiating civil litigation or administrative proceedings, the SEC may agree to enter into a Deferred Prosecution Agreement, Non-Prosecution Agreement, or Settlement Agreement.
If the SEC files a civil lawsuit in federal court, it will typically seek an injunction, which is an order that prohibits future violations. An individual or company that violates an injunction can be subject to fines or imprisonment for contempt. Civil lawsuits also usually seek civil money penalties and the disgorgement of illegal profits. In certain circumstances, the SEC may also seek, among other things, a court order barring or suspending individuals from acting as corporate officers or directors.
Administrative proceedings are presided over by hearing officers at the SEC. One type of proceeding, for a cease and desist order, may be instituted against any person who violates the federal securities laws. With respect to regulated entities (e.g., brokers, dealers and investment advisers) and their employees, the SEC may institute administrative proceedings to, among other things, revoke or suspend registration, or to impose bars or suspensions from employment. In both cease-and-desist proceedings and administrative proceedings against regulated persons, the SEC is authorized, among other things, to order the payment of civil penalties and disgorgement of ill-gotten gains. Certain industry, associational, and conduct-related bars may also be possible as a result of SEC enforcement action.
Can Individuals and Companies Face Both Civil and Criminal Securities Law Enforcement Action?
It is not unusual for a separate law enforcement agency (e.g., the IRS or FBI) to conduct a separate criminal investigation in parallel with a civil investigation conducted by the SEC. The SEC is not privy to federal grand jury information, but nevertheless will cooperate with criminal authorities to the extent possible. Ultimately, despite the existence of a criminal investigation, the SEC’s investigation can continue. The SEC will not conduct investigations or take investigative actions solely to benefit the separate criminal investigation. Instead, it will conduct its own investigation but may grant an “Access Request” from the criminal investigative agency to obtain, under certain limitations, copies of documents and information the SEC has obtained during its investigation.
Generally, federal prosecutors assigned to criminal securities fraud cases will work with independent criminal agencies. At the same time, however, prosecutors may receive documents and information directly from the SEC, and they will routinely consult with the SEC about the appropriateness of criminal charges in the underlying investigation. These are complicated and high-risk scenarios, and individuals and companies facing SEC and other agency investigations need to engage experienced securities fraud defense counsel promptly.
Federal Defense Counsel for Administrative, Civil, and Criminal Securities Fraud Investigations
Our firm represents individuals and companies nationwide in securities fraud investigations involving the SEC and other agencies. If you are in need of legal advice or legal representation, we encourage you to call 214-692-2171 or contact us online for a complimentary consultation.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.