Can I Settle With the SEC If There's a Criminal Investigation??

A pending criminal investigation does not per se preclude an SEC settlement, although federal prosecutors will normally (and should) want to review an SEC settlement before the settlement becomes final. Even if the SEC has no objections to an settlement, however, the DOJ will still have the ability to pursue civil and criminal charges regardless of the SEC settlement. An SEC-only settlement will not bind the DOJ, and it will not eliminate (and it may not even preclude) a potential for criminal exposure or other collateral risks.

What Is Required to Eliminate Criminal Exposure?

Eliminating criminal exposure (and, generally, other collateral risks) during a federal investigation will require agreement from the federal prosecutors responsible for the investigation. Once agreement is reached, the resolution needs to be fully coordinated to eliminate the risk of civil or criminal exposure in advance of taking formal action.

What Is the SEC’s Jurisdiction to Bring Matters?

For the SEC to have jurisdiction to bring matters, there must be a nexus to federal securities laws. Being a registered investment adviser, broker-dealer, mutual fund, or other entity is not enough on its own. Generally, as a matter of practice, registered entities need not be the parties involved in order for the SEC to bring matters. SEC matters can involve registered entities, individuals, public companies, private companies, and financial firms.

How Does the SEC Bring Matters?

The SEC can bring matters in federal district court, where it files civil complaints and other civil cases. However, the SEC can also bring matters via administrative proceedings. According to the Supreme Court’s recent decision in SEC v. Jarkesy, when the SEC seeks civil penalties for securities fraud it must bring the action in federal court, where the defendant is entitled to trial by jury, rather than in an in-house administrative proceeding.

Why Doesn’t an SEC Settlement Stop a Criminal Case?

The SEC is a civil enforcement agency. It cannot prosecute crimes or send anyone to prison; instead, DOJ and United States Attorneys prosecute criminal cases in federal district court. The SEC Division of Enforcement is responsible for investigating possible violations of federal securities laws, and it may refer cases to DOJ for civil or criminal prosecution. It may also refer cases to other authorities such as state criminal and regulatory authorities or other federal agencies. The U.S. Attorney’s Office for the Southern District of New York works with the SEC and DOJ to bring civil and criminal enforcement actions.

What Are the Potential Penalties for Criminal Securities Violations?

The potential penalties for criminal securities violations vary. These offenses may produce imprisonment, restitution, forfeiture, criminal fines, probation, and other penalties. Defendants in criminal cases have several defenses, and they can try to negotiate a plea agreement or settlement. At Spodek Law Group, we work with clients to help them avoid criminal charges when possible, and we aim to protect our clients by ensuring their guilt is not presumed. If facing a criminal case, we are able to provide insight in order to develop legal defenses and work toward a favorable resolution.

What Is a Parallel Criminal Investigation?

A parallel investigation is a situation where the SEC pursues civil enforcement and the DOJ pursues a criminal case. If you are under investigation for a possible securities violation, you can seek information regarding whether there is a parallel criminal investigation. You may not be aware that there is a parallel criminal investigation at first, and there are several reasons why. The SEC may share investigative evidence with criminal and regulatory authorities. FBI Special Agents work with federal prosecutors to investigate suspected securities crimes. FinRA investigates member firms and associated persons and refers criminal cases to federal authorities for prosecution. Even if a criminal investigation is conducted in parallel, the investigation may not necessarily lead to criminal charges or a civil enforcement action.

What Does “The SEC is Working with Federal Prosecutors” Mean?

The statement that “the SEC is working with federal prosecutors” generally means that the SEC has referred a case to the DOJ and/or the DOJ has requested access to evidence in the SEC’s possession. It can also mean that the SEC is cooperating in a parallel investigation. The SEC is the primary federal agency for securities law violations, and it may share findings in parallel criminal investigations.

How Should SEC and DOJ Negotiations Be Sequenced?

The order of negotiations during a parallel SEC and DOJ investigation can vary. Generally, an order of negotiations that allows the DOJ to resolve the criminal investigation and SEC to resolve the civil matter can have important benefits. However, there are many considerations to weigh when making decisions regarding the order of negotiations. The following are some key considerations for defendants in parallel investigations:

1. Wells Notice and Wells Submission

A Wells notice is a notice given to the recipient that the SEC contemplates filing charges. It does not constitute a charge, nor is it a demand for a plea agreement or a cooperation agreement. The recipient’s response is called a Wells submission, and a Wells submission may disclose information that leads to criminal charges by exposing the defendant’s defense to federal prosecutors.

As a result of a Wells notice, a defendant may receive a target letter as well, which is a letter notifying a target that the DOJ is conducting a criminal investigation. It may also describe the potential criminal offenses in the investigation, but it does not formally charge the target.

2. Cooperation and Proffer

While it is a good idea to resolve a potential civil enforcement action in parallel with a potential criminal case, a proffer to criminal authorities should be carefully evaluated. A proffer can serve as the basis for a defendant to seek immunity or a cooperation agreement, but it can also expose defense arguments and vulnerabilities to the federal government. Under Rule 410 of the Federal Rules of Evidence, statements made during plea discussions with a prosecutor are generally inadmissible against the defendant, although proffer agreements routinely waive that protection in specified circumstances.

While a proffer provides evidence that can be used to avoid criminal prosecution, it can also be used to prosecute defendants when evidence is no longer admissible at trial. A proffer agreement with the DOJ may contain a provision that allows prosecutors to use the statements made in the proffer to impeach a defendant who later takes an inconsistent position at trial.

3. SEC Enforcement Agreement and Plea Agreement

In cases involving a possible SEC enforcement action and criminal prosecution, the SEC and DOJ may work to coordinate a resolution that settles both matters through separate civil and criminal agreements.

While defendants in SEC matters do not make guilty pleas, an SEC enforcement settlement usually requires Commission approval to become final. A plea agreement requires the judicial acceptance of a guilty plea to become final. Therefore, the order of negotiations and the timing of an SEC enforcement settlement or plea agreement can have important legal implications.

With respect to the order of negotiations during a parallel SEC and DOJ investigation, there is no rule that prescribes a universal sequence for Wells submissions, proffers, and plea negotiations. Instead, each defendant must work closely with their counsel to develop strategies based on the specific facts and circumstances of their case.

Todd Spodek is the managing partner of Spodek Law Group, a second generation criminal defense firm that has been practicing since 1976.

What SEC Settlement Terms Can Hurt Me Later?

SEC enforcement settlements are civil agreements, but the terms of these settlements can still present challenges for future enforcement proceedings, civil litigation, and regulatory matters.

For example, express admissions in SEC settlements can:

• Be used as evidence in related criminal proceedings, and, in many cases, express admissions will lead to criminal charges.
• Supply evidence of liability and damages in related private securities fraud class action lawsuits.
• Establish liability in related state or federal enforcement cases.

The SEC can impose various penalties, disgorgement, and other sanctions. It can also seek cease-and-desist relief (i.e., a court order or administrative order to stop continuing, recurring, or future violations). In some cases, the SEC may seek “bars” in SEC enforcement settlements, which means that an individual respondent is banned from the securities industry for a specified period or permanently. The SEC can seek a ban against any individual who has worked in or intends to work in the securities industry.

1. Admissions or Neither-Admit-nor-Deny Provisions

In an SEC enforcement settlement, the respondent either admits to certain facts or the SEC permits a “neither-admit-nor-deny” resolution. While SEC enforcement settlements often include neither-admit-nor-deny provisions, these provisions are becoming less common as the SEC’s Division of Enforcement has increasingly focused on seeking admissions in settlements. When a respondent takes the SEC’s approach of neither admitting nor denying the allegations, the resolution generally lacks evidentiary effect. As a result, a defendant’s conduct in a parallel civil enforcement action should not be used against them in civil litigation. However, as noted above, a defendant’s conduct in an SEC enforcement settlement that contains express admissions may still be harmful.

2. Bars

The SEC can seek various “bars” in SEC enforcement settlements. These include (but are not limited to) broker-dealer, investment adviser, mutual fund, and commodity-trader bars. In the latter cases, the individual is barred from registering with, or associating with, a broker-dealer or investment adviser. FINRA-registered persons must report certain SEC disciplinary actions on Form U4. When facing a potential bar, defendants need to work with their counsel to understand how to avoid bars when possible. When bars are imposed, defendants should consider their options as well.

If an SEC enforcement matter involves a public company, the SEC may seek an officer-and-director bar, which means that an individual is banned from serving as an officer or director of any public company. In some cases, the SEC may only seek a bar for certain roles, and in other cases, the SEC may seek a bar against all types of roles.

3. Other Settlement Terms

Other settlement terms the SEC may seek to include in SEC enforcement settlements are (i) civil monetary penalties, (ii) disgorgement (i.e., any profits earned as a result of securities violations), (iii) prejudgment interest, and (iv) cease-and-desist relief. The SEC may also seek monetary penalties and disgorgement that exceeds the individual’s liability, and it may seek disgorgement and other monetary penalties from third parties. The potential for insurance coverage is a consideration that cannot be overlooked, although many insurance policies (including directors and officers (D&O) policies) only cover certain types of securities violations and other specific types of penalties and disgorgement. The availability of insurance coverage may depend on (i) the wording of the insurance policy, (ii) the state law under which the insurance policy was issued, and (iii) the specific types of admissions the SEC is seeking.

When Can I Invoke the Fifth Amendment with the SEC?

Statements made to SEC investigators in civil enforcement matters can later be used as evidence by federal prosecutors in related criminal enforcement actions. In civil matters, the Fifth Amendment protects individuals from being compelled to provide incriminating testimony. However, invoking the Fifth Amendment can also allow the opposing party to seek an adverse inference against you.

Does the Fifth Amendment Protect Existing Business Documents from Production to the SEC?

The Fifth Amendment does not categorically protect existing business documents from production. In a civil matter, producing the business document itself is not testimonial and does not fall under the protections of the Fifth Amendment. However, the act of producing business records can become testimonial if the act of production concedes:

• The records exist,
• They are within the respondent’s possession, custody, or control, or
• They are authentic.

Can Corporate Custodians Invoke their Fifth Amendment Right with Respect to Corporate Records?

Even when the act of producing documents presents testimonial aspects, those who are corporate custodians and must produce records from their company cannot invoke their personal Fifth Amendment rights to withhold corporate records. This rule is known as the “act production rule.” With this rule in mind, the act of producing documents can expose subjects to criminal liability even when the documents themselves are privileged.

Do Formal Orders and Informal Requests Change When You Can Invoke the Fifth Amendment?

A formal order allows SEC staff to compel production of records, testimony, and other evidence. The order authorizes SEC staff to issue subpoenas for this information. Conversely, informal SEC requests generally depend on voluntary cooperation. These requests should be evaluated based on whether the SEC is seeking records and testimony and whether a formal order is involved.

When Does the Fifth Amendment Not Apply to SEC Testimony?

The Fifth Amendment does not apply if the testimony requested does not require a person to be compelled to testify. For example, a witness in a criminal investigation can choose to provide information to federal authorities without the assistance of a court or formal order.

If facing testimony, you can work with a criminal defense lawyer to determine whether you should waive your Fifth Amendment privilege in exchange for immunity or favorable treatment in future proceedings. You can work with the attorney to decide whether you should rely on other constitutional or statutory defenses.

How Long Can an SEC Investigation Stay Open?

Similar to the DOJ, the SEC does not have a predetermined timeline for its investigations. While many investigations resolve in a few months, some can remain open for years. These investigations may extend due to complexity, the volume of evidence involved, the number of witnesses, the existence of parallel proceedings, and other issues.

When are the SEC’s Claims Subject to Limitations Periods?

The SEC’s claims are subject to limitations periods. For example, under Section 21(d)(8) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78u(d)(8), the SEC can seek disgorgement in cases involving fraud, deceit, or intentional misconduct up to ten years after the alleged violation. For seeking civil penalties, however, Section 2462 of Title 28 of the United States Code generally imposes a five-year period.

Importantly, limitations periods constrain the SEC’s ability to file civil charges rather than when an SEC investigation must close. In fact, the SEC can open an investigation at any time, and the statute of limitations only runs against filing charges in federal district court. Therefore, while an SEC investigation may take time, the SEC can still file charges against a defendant within the five or ten-year window.

Can a Defendant and the SEC Enter into a Tolling Agreement?

A defendant and the SEC can enter into a written tolling agreement. While tolling agreements are not required, they can be beneficial for defendants that want to resolve SEC matters outside of district court litigation. Tolling agreements give defendants the ability to prevent the statute of limitations from running against the SEC during negotiations and discussions. If a defendant declines to sign a tolling agreement, then the SEC will need to consider filing a civil complaint within the five or ten-year window.

Are SEC Investigations Confidential?

Generally, SEC investigations are confidential. However, the SEC must maintain this confidentiality, so it must be prepared to face consequences if a violation occurs. As a result, the SEC generally does not disclose investigations to the public unless enforcement proceedings have already commenced. This is an important distinction when dealing with the DOJ, and it emphasizes the importance of deciding whether you want to conduct a parallel investigation with the DOJ and SEC.

What Triggers an SEC Investigation?

Investigations can be triggered by:

• A whistleblower complaint;
• Complaints from victims, consumers, or other regulators;
• Referrals;
• SEC examinations and sweep investigations;
• Media reports of securities violations;
• Unusual trading data.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 212-300-5196.