The SEC Investigation Process

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Brian Kuester
Attorney Brian Kuester
SEC Investigation Team Lead
Former US Attorney
Former District Attorney
Ellen Comley
Attorney Ellen Comley
SEC Investigation Team Lead
Senior Counsel
Roger Bach
Roger Bach
SEC Investigation Team Consultant
Former Special Agent (OIG)

Understanding how the U.S. Securities and Exchange Commission (SEC) investigates potential violations of federal securities law is essential for individuals and businesses that operate in the industry, even if they do not intend on committing securities fraud. Knowing how investigations work and how quickly they can escalate can help people and brokerage firms respond appropriately if they ever find themselves in the crosshairs of one.

If you realize that you are under investigation by the SEC, hiring a skilled securities fraud defense lawyer is essential. A good attorney may be able to persuade the SEC that the investigation is groundless and get the agency to drop its inspection to free you and your business from the stress, inconvenience, and bad publicity that it would have caused. Even if that is not possible, a good SEC defense lawyer can get ahead of the case and protect your rights and future.

These are just a couple of outcomes that the SEC defense attorneys at The Criminal Defense Firm strive to achieve for their clients.

The Two Types of SEC Investigations

Broadly speaking, there are two different types, or stages, of SEC investigations:

  1. Formal investigations
  2. Informal investigations

Generally, cases begin as informal investigations that can turn into formal ones if they uncover evidence of misconduct or criminality. However, occasionally SEC personnel find evidence incriminating enough for the investigation to begin as a formal one.

How Informal SEC Investigations Progress

Just because an SEC investigation is informal does not mean that it is trivial. It can quickly escalate and become a formal investigation if it uncovers sufficient evidence to warrant the decision. Additionally, informal investigations do not have the momentum or the publicity that formal investigations have, so it is often better to take aggressive action at this early stage and keep them from growing while they are still less of a threat. By treating informal investigations as being just as serious as formal investigations, companies and stakeholders can put themselves in the best possible mindset to protect their future.

Informal investigations tend to go through the following stages:

  1. Detecting a potential violation of securities law
  2. Interviewing witnesses and reviewing documentary evidence
  3. Evaluating potential defenses
  4. Determining whether to proceed with a formal investigation

1. Detecting Potential Wrongdoing

The first step of any SEC investigation occurs when the agency first learns of a potential violation of securities law. The SEC Enforcement Division detects signs of wrongdoing through the following methods:

  • Monitoring market transactions
  • Receiving tips from investors and whistleblowers
  • Reading investors’ complaints
  • Receiving information from other divisions within the SEC and other regulatory bodies in the securities industry, like the Financial Industry Regulatory Authority (FINRA)
  • Reading and watching news reports and industry news outlets

If indications of suspicious activity reaches the SEC through one of these methods, or through any other source, the agency’s personnel will look further into the matter. The goal of this preliminary investigation is to determine whether it is worth spending additional agency resources in pursuing it.

2. Gathering Evidence

If it seems worthy of attention, SEC agents will begin to make concerted efforts to gather more evidence about the potential violation. That evidence can come in the form of:

  • Testimony from witnesses or relevant parties
  • Documentary evidence, such as emails or market transactions

The testimony in an SEC investigation can come from a wide variety of people, including:

  • Investors
  • Employees of the target company
  • Coworkers of a targeted individual
  • Employees in other brokerage firms

These witnesses are not legally obligated to speak out, though many of them do so voluntarily. Some of them are not aware that they do not have to respond to questions from the SEC, while others think that it is in their best interests to answer.

SEC agents will also gather evidence of the suspected securities violation by gathering documentary evidence such as:

  • Brokerage records
  • Trading data
  • EDGAR filings
  • Press releases
  • Social media posts
  • Emails and other correspondence voluntarily provided by witnesses

At this point in an informal investigation, SEC agents will limit themselves to what they can gather without issuing an SEC subpoena.

3. Evaluating Potential Defenses

As evidence mounts and suggests that a violation has occurred, the SEC will begin to consider whether there is a valid defense to it. If the target of the investigation has obtained legal counsel, their attorney can try to intervene in the SEC investigation and present exculpatory evidence or attempt to explain why the seemingly damning evidence is all a misunderstanding. If this attempt is successful, the SEC can be persuaded to close the case and disband the investigation without going any further.

4. Deciding Whether to Open a Formal Investigation

At some point, the SEC will have to decide whether to escalate the informal investigation into a formal one. This is a pivotal moment in the case. If the SEC decides to start a formal investigation, it will no longer care much about gathering evidence in a quiet way. Instead, the evidence-gathering process will begin to make noise and could make some news headlines.

The Formal Investigation Process

When the SEC launches a formal investigation, it means that the agency has detected strong signs of misconduct. Formal investigations typically involve:

  1. Issuing subpoenas
  2. Preliminary determination of charges
  3. Issuing a Wells Notice
  4. Starting settlement negotiations
  5. Deciding which type of enforcement action to pursue

1. SEC Subpoenas

The SEC is one of the few federal agencies that has the legal authority to issue administrative subpoenas – legal demands for information that carry penalties for noncompliance, but that do not require judicial approval. When the agency opens a formal investigation, it will issue subpoenas for the information and evidence that it could not access or gather during the informal stage of the investigation.

2. Preliminary Charges

Based on the information that the SEC has obtained up to that point, the agency will make a preliminary determination of the type of criminal charges or civil lawsuit it will file. Options include:

3. The Wells Notice

Occasionally, the SEC’s charging decision is followed by the issuance of a Wells Notice. This formal letter summarizes the findings of the investigation and informs the target that the SEC intends to pursue charges. Recipients can respond to the Wells Notice and make their case for why the charges are not warranted, but are under no obligation to do so.

4. Settlement Negotiations

The SEC will then open a dialogue with the targeted individual or company about settling the case before it goes any further. Many cases resolve at this stage in the proceeding. Those that do not can face civil securities litigation or a criminal securities fraud case.

5. Deciding on an Enforcement Action

If the case does not settle, the SEC will have to decide which type of enforcement action they will proceed with:

  1. Criminal charges
  2. Civil allegations
  3. Administrative proceedings

This decision is based on the severity of the allegations and the strength of the evidence that supports them. If the SEC elects to pursue criminal charges, it will refer the case to the U.S. Department of Justice (DOJ) or the Federal Bureau of Investigation (FBI).

Frequently Asked Questions About The Criminal Defense Firm

Where are Your Offices Located?

The Criminal Defense Firm is a national law firm. While our main offices are in Dallas and Houston, we have satellite offices in many major U.S. cities, from New York to Detroit to Miami.

Why Should I Consider Hiring The Criminal Defense Firm?

The experience of our securities defense lawyers and are familiarity with the federal court system are two major draws for many of our clients.

First, everyone at The Criminal Defense Firm is a senior-level attorney with years of experience handling cases that are similar to your own. This does not just mean that your lawyer will have experience; it also means that he or she will perform all of the legal work in your case. We do not have junior associates or paralegals to delegate tasks to. We have found that, this way, you get premium work product and the best legal defense available.

Second, The Criminal Defense Firm is different than many other defense firms in that we advocate for clients in federal court a lot. Most other firms focus predominantly or even exclusively in state court. This often means they are overwhelmed when they go up against federal law enforcement agencies like the SEC.

Why Don't You Call Yourselves the Best Defense Firm?

We think that our clients’ testimonials are more important than anything we could say about our firm’s qualities.

The Criminal Defense Firm: Securities Defense Lawyers

If you learn that the SEC is investigating you or your company, you should strongly consider hiring defense lawyers right away. With their help, you can try to quash the investigation immediately and end the legal threat before it gets stronger and before it takes up more of your time.

Call The Criminal Defense Firm at (866) 603-4540 or contact them online for vigorous and experienced legal guidance.

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