October 3, 2022

Volume XII, Number 276


October 03, 2022

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4 FAQs and 3 Defense Strategies for SEC Investigations

Securities professionals regulated by the U.S. Securities and Exchange Commission (SEC) can face investigations of securities law violations from the agency in a wide variety of circumstances. In many cases, it will be unclear what the Securities and Exchange Commission (SEC) is actually playing at. This can leave securities professionals, brokers, and firms with big questions about what to do and how to defend themselves against potential enforcement action.

FAQs About SEC Investigations

1. Am I Even Under Investigation?

A surprising question that securities professionals quickly find themselves asking, and one that they should be asking more often, is “Wait… Am I even the one under investigation?”

The Securities and Exchange Commission (SEC) casts a wide net for information relating to a potential federal securities laws violation. The SEC staff will frequently ask for the same set of information from multiple parties, including some who are not the targets of the investigation. This is to ensure that it gets all of the information that it wants, but also to see if someone is destroying or hiding evidence.

The result, though, can be confusing for securities professionals. It can be difficult to tell whether you are the target of an investigation or just a collateral party who might have information relevant to an investigation into someone else. This can make it difficult to tell how to respond in a way that protects your interests.

One of the best ways to read between the lines and see what is going on is to hire an SEC investigation attorney. SEC defense attorneys' experience defending people during these investigations helps them see through the smoke and determine what the SEC is up to.

2. What Could the SEC Be Investigating?

The SEC is tasked with regulating the securities market. As a result, the federal securities laws that fall under the agency’s jurisdiction are extremely widespread and cover a huge variety of conduct. Just some of the allegations that the SEC may be looking into are:

  • Taking illegal kickbacks

  • Market manipulation, like pump and dump schemes

  • Mutual fund fraud

  • Stock fraud

  • Insider trading

  • Accounting fraud

  • Omissions and misrepresentations in financial documents or SEC filings

  • Bribery

  • Embezzlement

Many of these issues can lead to a criminal indictment. Getting an SEC investigation attorney on board as quickly as possible is one of the best ways to prevent an investigation from escalating.

3. Can the SEC Charge Me With a Crime?

No, the SEC does not have the authority to charge you with a criminal offense. However, it can, and frequently does, work in tandem with the Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI) to pursue criminal prosecution and charges. If the SEC’s investigation turns up evidence of criminal activity, you can count on the agency forwarding it to law enforcement officers at these other federal agencies. This can lead to another investigation by DOJ or FBI personnel, or straight to a criminal charge.

4. How Severe are the Penalties?

The potential penalties, civil and criminal penalties, will depend on how much the investigation escalates.

In the worst cases, the investigation uncovers evidence of a crime. This can lead to criminal charges that carry decades in prison and huge criminal fines.

Civil enforcement actions are less severe, but still very serious matters. Defendants often have to disgorge wrongly earned profits and pay treble damages – three times the amount at issue.

But even if law enforcement does not get involved, the SEC can still take administrative actions against your financial securities license. They can suspend or even permanently revoke it, banning you from buying or selling securities for the rest of your life.

Defense Strategies for SEC Investigations

It is important to first mention that every SEC investigation is unique and requires a defense strategy that is tailored to your particular circumstances.

1. A Proactive Defense May Fit Your Needs

In some limited cases, it can be clear that the SEC is running an investigation that they think is going to go somewhere when it is really not. Maybe they have discovered signs of what they think is securities fraud but is really a string of perfectly legitimate transactions, and they have not pieced that together yet.

Voluntarily disclosing information that the SEC is not asking for can be a good way to quash the SEC investigations. By showing investigators that the evidence that they have already found will lead to nothing, you can skip several stages in the process and eliminate a lot of unnecessary stress.

However, this defense strategy should only be done carefully. It runs the risk of voluntarily revealing evidence that actually fits into the SEC’s case against you, which can hurt you in the long run.

2. Undermine the Source of the Information That Led to Your Investigation

When the SEC’s case is based on information revealed by a whistleblower, attacking the informant’s credibility and motives for disclosing the evidence can be an extremely strong defense in some instances.

Whistleblowers are frequently ex-employees or customers with an ax to grind. Worse, they may have a financial motivation to bring potentially incriminating evidence to law enforcement, as they may stand to recover a portion of whatever financial penalties are levied against you or your firm. Stressing that ulterior motive properly can make the SEC doubt their informant enough that they close their investigation against you.

3. Use a Lack of Intent Defense Only as a Last Resort

Lots of securities professionals know that white-collar crimes generally require an intent to defraud. They often think that a solid defense is to just claim that they did not have that intent.

The problems with this plan are that it is only a defense to criminal conduct and it essentially confesses to the underlying conduct. It puts law enforcement in a great position where they can pursue civil liability, instead, and then use this confession as a part of their case.

There is almost always a better and stronger defense that can be used during an SEC investigation.

Oberheiden P.C. © 2022 National Law Review, Volume XII, Number 202

About this Author

Nick Oberheiden Criminal Defense Attorney Oberheiden PC
Federal Criminal Defense Attorney

Dr. Nick Oberheiden focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation. He has defended clients in PPP Loan Fraud cases and COVID-19 investigations. Nick also directs internal corporate investigations and he leads defense teams in whistleblower actions, corporate defense cases, as well as cases involving national security and elected officials.

Clients from more than 45 U.S. states have hired Nick to seek effective protection against government...