Can an SEC Investigation Lead to Criminal Charges??

The U.S. Securities and Exchange Commission (SEC) is the nation’s primary securities regulator, so it does not have the authority to file criminal indictments, seek criminal convictions, or prosecute federal crimes. The responsibility to conduct criminal investigations and pursue criminal charges is vested exclusively with the U.S. Department of Justice (DOJ), while the SEC’s enforcement authority is civil in nature.

However, while the SEC and DOJ are separate agencies with very different priorities, the SEC frequently shares information and evidence it obtains during civil investigations with federal criminal authorities. This practice of sharing information can trigger DOJ involvement even when an initial investigation appears to be strictly civil in nature.

As a result, SEC and DOJ investigations may proceed simultaneously, leading to parallel civil and criminal proceedings involving the same target, business, or allegations. It is important to recognize that the initiation of an SEC investigation does not establish that securities laws were violated. Nonetheless, the stakes are remarkably high in these proceedings, as the criminal provisions of the Securities Exchange Act impose a maximum penalty of 25 years of imprisonment for convictions under 18 U.S.C. § 1348 (which covers a broad range of securities fraud offenses).

Furthermore, SEC investigations can often uncover evidence of additional federal crimes. At Spodek Law Group, we have successfully defended business people, financial advisors, and other individuals in complex SEC investigations involving allegations of securities fraud that also posed the risk of wire fraud charges (18 U.S.C. § 1343) and related charges of conspiracy (18 U.S.C. § 371). While criminal charges may not be pursued in all cases, federal securities investigations are complex, and sometimes very dangerous, proceedings that require experienced legal counsel from the outset.

How Does an SEC Matter Become a Criminal Case?

If a securities investigation leads to civil and criminal charges, the DOJ does not have to wait for the SEC to pursue a criminal referral, and federal prosecutors do not have to wait for the SEC to finish its civil investigation to pursue criminal prosecution. In most cases, the two agencies will collaborate throughout the investigative process, sharing information to build their separate cases. This process can take the form of parallel investigations, but it can also involve a team of prosecutors and SEC enforcement attorneys working together.

Although this is common, it is not clear how often SEC investigations result in criminal charges. While the SEC publishes some data regarding its enforcement activity, it does not establish how frequently its investigations trigger DOJ involvement. This is a critical point, as the most effective way to avoid the possibility of criminal charges is to intervene in the SEC’s investigative process before it reaches this point.

The following information is just one example of the types of information we use to defend clients in SEC investigations and DOJ prosecutions.

What is a Target of a Federal Grand Jury Investigation?

A key term that describes the status of a person or organization during a federal criminal investigation is a “target.” According to Justice Manual § 9-11.151, a target is described as “a person or corporation that is the putative defendant,” and federal prosecutors may choose to designate an individual or entity as a target of their grand jury investigation when there is “substantial evidence” to support criminal prosecution.

What is a Subject of a Federal Grand Jury Investigation?

Similarly, the Justice Manual defines a “subject” as “a person or corporation whose conduct falls within the scope of the grand jury’s investigation.” While being identified as a subject does not necessarily mean the federal prosecutors or grand jury have evidence to support criminal prosecution, it does raise substantial concerns about the investigation’s ultimate outcome.

What is a Witness in a Federal Grand Jury Investigation?

And finally, in the context of a grand jury investigation, a witness “is a person who has information that is relevant to the grand jury’s investigation, and that the witness is not already a subject or a target.” Being designated as a witness could still raise concerns, as it implies the possibility of becoming a subject or a target later in the investigation.

What Triggers an SEC Investigation?

While we typically discuss the initiation of SEC investigations through means such as whistleblower tips, investor complaints, surveillance, and referrals, it is important to keep in mind that the SEC is also highly attuned to the activities that it sees in public filings, restatements, and media reports.

Can SEC Testimony Be Used Against Me Criminally?

When the SEC initiates a formal investigation, this gives its staff the authority to issue subpoenas. While this also includes the authority to compel testimony (or depositions from securities industry professionals, which are often referred to as “investigative testimony”), the issuance of a subpoena for documents can be equally intrusive.

An SEC document subpoena can, and often does, reach banks, brokerages, employers, other clients, and other third parties. While the SEC generally needs to seek a court order to enforce noncompliance with its subpoenas, it has the authority to apply to a federal district court for enforcement, and that court may punish a failure to comply as contempt.

Can I Invoke the Fifth Amendment in an SEC Investigation?

If you are targeted in an SEC investigation, you will likely have to answer the SEC’s questions at some point. Whether you will be subpoenaed to provide testimony or you are contacted for a voluntary interview, you must be prepared to respond with care and experience. While witnesses to compelled SEC testimony can (and are entitled to) invoke their Fifth Amendment privilege, the consequences of invoking the privilege can be significant, as SEC factfinders are entitled to draw adverse inferences from invocations of the privilege in civil investigations.

Can I Get in Trouble for Lying to the SEC?

You can be convicted of a crime for giving untruthful testimony in an SEC investigation, because SEC staff are empowered to administer oaths under 15 U.S.C. § 78u(b) and willfully false material testimony can be prosecuted as perjury under 18 U.S.C. § 1621. Materially false statements made to SEC investigators can constitute a federal offense. If you are targeted in an SEC investigation, this can present another potential risk of criminal charges, with prosecutors sometimes using 18 U.S.C. § 1001, the general federal false statements statute, to pursue charges of making materially false statements during investigations.

What Happens After an SEC Settlement?

A common question for those targeted in SEC investigations is: “If I reach a settlement with the SEC, can that settlement (and the underlying allegations) be used against me in a DOJ criminal investigation?”

While the terms of a settlement agreement can significantly mitigate the risk of future criminal charges, these agreements also do not insulate the parties to an SEC settlement from the risk of DOJ prosecution. Furthermore, statements made by the SEC that appear to clear targets or businesses in settlements agreements do not necessarily constitute “disclaimers” that would bind the DOJ in a separate proceeding.

Are There SEC Protections Against Criminal Prosecution?

There are, but not all of them are created equal. The SEC’s cooperation agreement process includes various degrees of protection against criminal prosecution, and it is imperative to negotiate these protections to the fullest extent possible when facing potential criminal charges in connection with an SEC enforcement proceeding.

Can the SEC Refer an Investigation to the DOJ?

Again, not exactly. While the SEC’s enforcement division can refer a matter to the DOJ, the DOJ does not consider this referral binding. Rather, it is just one factor the DOJ considers when deciding whether to pursue criminal charges. Criminal prosecutions are not the result of a referral but are the result of independent investigations by DOJ prosecutors.

Can SEC Testimony be Used Against Me Criminally?

If the statements you made are not subject to a protection under the law, then yes, they can be admitted in any subsequent criminal prosecution.

If you are facing this situation, Spodek Law Group handles federal criminal defense matters nationwide, from offices in New York and Los Angeles.

Does an SEC Settlement Prevent Later Criminal Prosecution?

If you settle your SEC investigation, you’ve resolved your civil liability with the SEC, but you may not have resolved (or avoided) criminal charges from the Justice Department. Because the SEC cannot impose imprisonment, it generally has nothing to say about criminal prosecution, and while its settlement agreements might refer to other federal agencies in general terms, these are not usually sufficient to bind the DOJ.

Consequently, not only can federal prosecutors bring charges in a parallel criminal proceeding, but they can also bring charges even after an SEC settlement. Again, the Justice Department is able (and entitled) to seek prosecution based on evidence that is available to the SEC, regardless of any arrangements that the SEC and DOJ’s target or defendant have entered into, and without need to rely upon the SEC’s referral.

And, while this raises substantial concerns for targets and defendants, it also means that a parallel criminal case does not automatically result in a stay of SEC civil litigation. Meanwhile, the SEC can still seek its own forms of remediation, including civil penalties, injunctions, disgorgement, and other civil remedies such as the revocation of professional licenses (professional bars), among others.

How Long Can an SEC Investigation and Prosecution Take?

Similar to the timeframe of a criminal investigation, and the subsequent criminal prosecution, the duration of a complex SEC investigation can range from several months to several years. At Spodek Law Group, our lawyers routinely handle complex investigations of this nature and manage the unique challenges that they present. We represent clients nationwide, and we know what to expect regardless of the complexity of the investigation or the time it takes to resolve.

How Long Does the SEC Have to File Suit?

Again, in the context of SEC investigations, there is no universal “deadline” to complete an investigation, and federal law establishes no fixed time period. While various limitation periods restrict the types of claims the SEC can bring, they do not restrict the investigation’s duration in any meaningful sense, as the government can (and will) wait to make any claim until the limitations clock has run out (and, if that means it waits for ten years, then it waits ten years).

What Are the SEC’s Civil Limitations Periods?

There are multiple limitations periods for civil claims. For example, while 28 U.S.C. § 2462 limits civil enforcement by the SEC generally to five years, 15 U.S.C. § 78u(d)(8) allows the SEC to seek disgorgement in securities fraud cases based on scienter (intentional or reckless misconduct) for ten years, and to seek equitable remedies such as injunctions and industry bars for ten years, while civil penalties remain subject to the five-year period.

What Are the SEC’s Criminal Limitations Periods?

Similar to civil cases, criminal limitations periods are generally determined by the nature of the securities-fraud offenses charged. 18 U.S.C. § 3301 sets a six-year limitations period for securities fraud offenses, including violations of 18 U.S.C. § 1348 and the criminal provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, and the Trust Indenture Act of 1939. Criminal violations of the securities laws’ fraud and manipulation provisions can also be punished under the wire fraud and mail fraud statutes, which generally have a five-year limitations period.

How Long Can an SEC Investigation Go On?

The limitations clock generally starts when the claim first accrues, that is, when the violation occurs, and filing a formal enforcement action stops the clock rather than starting it. It can be significantly extended if the target or defendant enters into a tolling agreement, and it can also be extended in cases of concealment or continuing offenses. As a result, the SEC’s staff can continue investigations for ten or twenty years if necessary, provided that it has evidence to support criminal or civil action.

Will the Media Find Out About an SEC Investigation?

While many SEC investigations end before enforcement action is initiated, the SEC’s investigations are generally nonpublic. The general public will not learn about an enforcement action until the SEC publishes its news release (or press release) announcing the filing of an enforcement action, which typically occurs in a District Court for the United States.

What Separates SEC Civil Enforcement from DOJ Criminal Charges?

Unlike criminal cases, the SEC can use two main methods of civil enforcement. It can file a civil complaint in federal district court, or it can institute administrative enforcement proceedings conducted before an administrative law judge (ALJ).

The Justice Department’s criminal prosecution of a securities-fraud case is a very different animal altogether. To prevail at trial, criminal prosecutors must prove criminal guilt beyond a reasonable doubt, whereas the standard of liability in the SEC’s civil enforcement cases is generally a preponderance of evidence. While securities fraud is a civil offense, it is also a criminal offense when committed willfully or with intent to deceive. The criminal provisions of the Exchange Act authorize, but do not require, criminal prosecution for willful violations of "any provision of this title," and 15 U.S.C. § 78u(d)(1) leaves the decision whether to institute criminal proceedings to the Attorney General's discretion. The federal district courts are empowered to do anything they can (and should) to punish those who engage in such violations.

When Are Juries Required to Decide SEC Civil Cases?

Generally, juries are not required in SEC enforcement proceedings, and there is a legal presumption that civil cases involving fraud-related issues do not entitle parties to a jury trial. However, as a result of the 2024 Supreme Court decision in SEC v. Jarkesy, jury trials are now required in some cases. Specifically, Jarkesy holds that any enforcement action that seeks civil penalties for the violation of the Exchange Act’s anti-fraud provisions requires a jury trial.

What Does Jarkesy Mean for SEC Administrative Proceedings?

The Supreme Court’s holding in Jarkesy prohibits the SEC from using its administrative enforcement process for any fraud-related cases seeking civil penalties. Specifically, as a result of Jarkesy, the SEC’s administrative enforcement process is no longer an available remedy for any “covered” civil cases, and the government must instead rely on litigation in federal district court. This substantially expands the role of federal juries in securities enforcement litigation, and it raises several other questions about the future of SEC enforcement, most notably, how the SEC will be able to efficiently prosecute fraud cases in light of the need for juries to decide these cases in federal district court.

What Separates Criminal Violations of the Exchange Act from Civil Ones?

At 15 U.S.C. § 78ff(a) authorizes criminal prosecution of individuals and corporations that “willfully” violate the Exchange Act or otherwise “willfully and knowingly” deceive or fail to disclose required information in connection with the filing of documents with the SEC. The standard of willfulness marks a significant difference between civil and criminal violations of the Exchange Act, and while the standard can be subject to interpretation, it is well recognized that it is fundamentally different from the standard of scienter in civil securities fraud cases.

What Other Remedies Can Be Sought in Securities Fraud Cases?

In addition to civil penalties, SEC’s administrative law judges and federal judges are also able to order other forms of remediation in civil enforcement actions, and in certain circumstances, the SEC can bar individuals from serving as directors or officers of public companies.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.