Can an SEC Investigation Lead to Jail??

Can an SEC Investigation Lead to Jail?

No, an SEC investigation itself will not send you to jail.

The SEC is a civil regulatory agency, and it does not have the authority to initiate criminal charges or impose prison sentences. While its federal agents can investigate allegations of federal securities fraud and gather evidence in support of criminal prosecution, this is different from the power to sentence. Within the SEC, investigators and auditors do not have authority to determine guilt, and they cannot impose a criminal sentence.

Deciding whether federal securities crimes warrant filing criminal charges is a decision that rests entirely within the discretion of federal prosecutors at the Department of Justice (DOJ). Once the DOJ determines that charges are warranted, it is up to a federal judge to determine guilt and impose imprisonment.

Can the SEC and DOJ Investigate Simultaneously?

Yes. While the SEC does not have the authority to initiate criminal charges, its investigators can work alongside prosecutors at the DOJ. This means that an SEC and DOJ investigation may proceed simultaneously, with the SEC and DOJ leveraging the evidence in both cases.

While SEC investigations may not directly lead to jail, they are extremely important because the SEC will often share evidence with the DOJ. The SEC will also refer cases to the DOJ whenever it uncovers evidence that federal securities violations warrant criminal prosecution.

Why Do SEC Investigations Take So Long?

SEC investigations can span many months, years, or decades. Often, this length is due to the broad scope of the investigation. While criminal investigations target specific events and have an inherently smaller scope, an SEC investigation may be based on more general suspicions of securities fraud. In order to gather evidence of guilt, the SEC will often need to review a massive volume of records. This broad investigative scope can sometimes uncover evidence that DOJ prosecutors will deem a federal crime, meaning that SEC investigations themselves can be triggers for criminal charges and potential imprisonment.

What Happens During an SEC Investigation, and How Long Can it Last?

SEC investigations are conducted by the SEC’s Division of Enforcement. These investigations can be triggered by a variety of events, including:

• Investor complaints
• Whistleblower tips
• Referrals from regulators
• News reports
• Company filings
• Self-reporting or voluntary disclosures
• Media reports

While SEC investigations are conducted on behalf of the commission, they are technically conducted by SEC federal agents. During an SEC investigation, these investigators and auditors seek to uncover evidence of securities fraud, or other violations of the federal securities laws that prohibit fraud, scams, and other forms of securities fraud.

SEC Informal Inquiries vs. Formal SEC Investigations

There are two types of SEC investigations: informal inquiries and formal investigations. The difference between these two types of inquiries is that, unlike formal investigations, informal inquiries do not have the power to compel cooperation.

Informal inquiries rely on voluntary cooperation, interviews, and voluntary document requests. While many targets of an informal inquiry provide cooperation to help the SEC close the case quickly, voluntary cooperation is not required. When an SEC investigation is informal, the SEC’s investigators and auditors generally focus only on the allegations that triggered the inquiry.

Formal investigations begin when the SEC’s Commissioners issue a formal order. A formal order allows the SEC’s investigators and auditors to issue compulsory subpoenas to force cooperation. The SEC’s investigators and auditors can also compel sworn testimony during a formal investigation. Along with the power to compel cooperation, formal investigations have a much broader scope than informal inquiries.

How Long Does an SEC Investigation Take?

There is no universal deadline for finishing an SEC investigation. While many cases resolve relatively quickly, complex SEC investigations involving hundreds of parties and massive volumes of records can take several years to resolve. An inquiry may expand into a full-scale investigation as more evidence comes to light. This is true of both criminal and civil cases.

Why Is the SEC Targeting Me (or My Company)?

SEC investigations begin as an inquiry when there is suspicion of securities fraud. While the exact reason you have been targeted may be unclear at the onset, the evidence that the SEC has uncovered suggests you (or your company) is responsible for conduct that violates the federal securities laws.

At Spodek Law Group, we offer SEC investigation defense representation to individuals and entities facing scrutiny by the SEC Division of Enforcement. We represent investors, executives, companies, and other defendants in federal securities fraud cases, including those that were filed as civil enforcement proceedings and criminal prosecutions.

How does an SEC case become a DOJ prosecution?

Do DOJ Prosecutors Need a Formal SEC Referral in Order to Open an Investigation?

No, DOJ prosecutors do not need a formal SEC referral to open an investigation. DOJ prosecutors have the authority to open investigations on their own, and they can use any evidence they have gathered to pursue charges if warranted. This includes opening an investigation in response to a referral from another agency such as the Internal Revenue Service (IRS), FBI, Federal Trade Commission (FTC), or Financial Industry Regulatory Authority (FINRA).

Are SEC Investigators the Ones Who Investigate Criminal Securities Fraud?

No. FBI agents often investigate federal securities crimes in collaboration with DOJ prosecutors. In parallel to an SEC investigation, a criminal investigation can also be conducted. While SEC agents may be involved in the process, the decision of whether to pursue criminal charges is made by DOJ prosecutors.

Does the SEC Still Have the Authority to Cooperate with the DOJ Following a Criminal Referral?

Yes. Even after a criminal referral, SEC staff may continue to work alongside criminal prosecutors. At a minimum, the SEC must work with criminal prosecutors to provide access to the evidence it has uncovered to date. This is typically done through an access request. DOJ prosecutors can use this process to obtain testimony transcripts, document productions, and other forms of investigative evidence.

Does an SEC Settlement Preclude Possible DOJ Charges?

No. A settlement agreement is a contract to resolve a pending civil enforcement proceeding. While settlements are an effective way to resolve SEC investigations, they are not binding in criminal matters. The DOJ can still pursue charges regardless of the outcome of a civil investigation.

Does Giving Statements to the SEC Pose a Risk of Criminal Consequences?

Yes, giving statements to the SEC poses a risk. Statements made to the SEC can be shared with criminal investigators, and they can be used to build a case for criminal prosecution. This is why it is critical to seek the guidance of defense counsel before providing testimony to the SEC.

Is a Criminal Referral the Same as a Criminal Complaint?

No. A criminal referral is a communication from one agency to another; it is not a formal charging instrument. After receiving a criminal referral, the DOJ must decide if there is enough evidence to file a criminal complaint with the court.

Does an Interagency Evidence Request Signal a Formal Criminal Referral?

Not necessarily. While an interagency evidence request can signal a potential criminal referral, this is not always the case. The DOJ can and does file requests for evidence from the SEC without making a formal referral.

Does an SEC subpoena mean I am a criminal target?

Does Receiving an SEC Subpoena Establish Wrongdoing?

No, receiving an SEC subpoena does not establish any wrongdoing on your part. Instead, it means that the SEC has established that your cooperation is warranted. A subpoena recipient may be anything from a witness to the records custodian of a company under investigation.

Can the SEC Use the Courts to Enforce Disobeyed Subpoenas?

Yes. While the SEC does not have the inherent power to enforce disobedience, it can turn to the federal courts. A federal court can order compliance, and it can order coercive confinement in the event of civil contempt.

Is Being a Subject or a Witness a Criminal Matter?

The terminology of being a “subject” or “witness” does not automatically mean your case is criminal in nature. DOJ prosecutors use the Justice Manual to distinguish between “subjects,” “targets,” and “witnesses” in federal grand-jury investigations, and DOJ prosecutors use these distinctions to decide which witnesses must receive an advice-of-rights and target warning before testifying, and to identify who is a putative defendant. However, while DOJ prosecutors use the Justice Manual, the SEC has its own internal rules and procedures that may make use of similar distinctions.

Does Attorney-Client Privilege Prevent the Production of Information in Response to an SEC Subpoena?

Attorney-client privilege prevents a subpoena recipient from disclosing information when certain conditions are met. For example, communications with defense counsel must be protected under the attorney-client privilege. This means that you cannot be compelled to testify about conversations with your lawyer, and you do not have to disclose documents and communications that are subject to this privilege. However, it is important to remember that the attorney-client privilege covers only qualifying communications; it does not cover the underlying facts or the preexisting documents of a case.

Can the SEC Initiate a Civil Contempt Proceeding in Order to Seek Compelled Compliance?

No, the SEC cannot pursue a civil contempt proceeding on its own. Instead, the SEC must seek the federal court’s enforcement of the subpoena in order to establish civil contempt. Once the court enters an enforcement order, the SEC can request that the court impose civil contempt in the event of continued disobedience.

Can a Court Confinement Order Be Considered a Criminal Sentence?

No. While criminal contempt is a punitive sanction, civil-contempt confinement is coercive rather than punitive and is not a criminal sentence. Instead, the DOJ and other agencies use civil-contempt confinement as a means of attempting to coerce compliance from subpoena recipients who disobey SEC subpoenas.

Should I Invoke the Fifth Amendment in an SEC Investigation?

Whether or not you should invoke the Fifth Amendment, you need to discuss this issue in confidence with your attorney. If you decide to invoke the Fifth Amendment, a licensed attorney should do so on your behalf.

Can the SEC Infer Guilt from my Silence?

When defendants invoke the Fifth Amendment, they generally cannot be penalized for their silence. However, the rules in criminal and civil cases are different. While criminal juries may not infer guilt from a defendant’s silence, the rules of fact-finding in civil matters are different. Under the Supreme Court’s ruling in Baxter v. Palmigiano, civil factfinders may draw an adverse inference from the defendant’s invocation of the Fifth Amendment. This means that if you invoke the Fifth Amendment in an SEC investigation, the SEC can draw an adverse inference from your silence, provided that this is in addition to other evidence that indicates you committed a civil securities violation.

Is it a Bad Idea to Provide Cooperation to the SEC?

If providing cooperation presents a risk of criminal liability, then providing cooperation is not necessarily a good idea. Moreover, while testifying in order to provide cooperation is a recommended approach in many cases, providing false or misleading information is never a good idea. Providing false statements to federal investigators can be a crime in and of itself, which can create criminal liability even if the underpinnings of the investigation do not support criminal charges.

Does the Fifth Amendment Apply to FINRA Investigations?

The Fifth Amendment applies to all government action. In order for the Fifth Amendment to apply to a FINRA investigation, the investigation would have to qualify as government action. Generally, the Fifth Amendment does not constrain FINRA’s investigation because FINRA is a private organization and not a government entity. However, in cases where FINRA and the SEC are conducting parallel investigations, the Fifth Amendment may be invoked to prevent self-incrimination in DOJ proceedings.

Can FINRA Bar Me for Invoking the Fifth Amendment?

If a FINRA investigation is a result of cooperation between FINRA and the SEC, then you can invoke the Fifth Amendment to avoid compelled testimony. However, if you invoke the Fifth Amendment in an inquiry based solely on a referral to FINRA, then FINRA may impose disciplinary sanctions. According to FINRA Rule 8210, refusal to comply with a request for testimony is disciplinary grounds. However, Rule 8210 itself does not prescribe a sanction; a refusal to comply is addressed through FINRA& #x27;s disciplinary and expedited proceedings under the Rule 9000 Series. If you are at risk of being barred, FINRA may suspend you. If you cannot remove a suspension within three months, FINRA Rule 9552 then declares that your suspension has become a bar.

What Criminal Charges and Prison Terms Can Follow SEC Evidence?

As the federal government’s largest and best-known securities regulator, the SEC is often involved in major cases. However, the SEC investigates a broad range of civil securities fraud and other securities law violations. When the SEC refers a case to the DOJ, DOJ prosecutors will evaluate whether they have sufficient evidence to proceed with filing a criminal case.

While criminal referrals can happen when there is evidence of any type of conduct that may violate federal law, DOJ prosecutors typically rely on referrals in cases that involve intentional deception of investors or the falsification of records.

As DOJ prosecutors, this is just the first step, as they then assess whether they have sufficient evidence to prove each element of a federal crime beyond a reasonable doubt. While civil cases in federal court are subject to a preponderance of the evidence standard, this higher standard of proof is necessary in criminal matters.

What are the Possible Criminal Charges in a Securities Fraud Case?

When DOJ prosecutors pursue criminal cases based on referrals, these cases can involve any number of different charges. Common criminal charges in federal securities fraud cases include:

• Willful violations of the Exchange Act, 15 U.S.C. § 78ff(a)
• Securities fraud, 18 U.S.C. § 1348
• Mail and wire fraud, 18 U.S.C. §§ 1341 and 1343
• Conspiracy, 18 U.S.C. § 371
• Securities offering violations, 15 U.S.C. §§ 77k(2) and 77u(2)

These are just some examples, and it is important to remember that DOJ prosecutors can pursue any number of charges based on the evidence at hand.

What is the Prison Sentence for Federal Securities Fraud?

If you are found guilty in a federal securities fraud case, a federal judge may sentence you to imprisonment. While the federal criminal statutes list prison sentences that can include up to 20 years or up to 25 years, these are the maximum penalties. Sentencing Guidelines are advisory rather than mandatory, and federal judges evaluate a wide range of factors when deciding what is an appropriate sentence.

With this in mind, the U.S. Sentencing Guidelines (U.S.S.G.) for securities fraud are calculated using financial loss as one of their factors. U.S.S.G. § 2B1.1 includes financial loss as a factor for fraud crimes, and it provides an additional offense level to the base offense level for any financial loss over $6,500, up to a maximum of 30 additional offense levels for losses over $550 million.

In addition to the advisory Sentencing Guidelines, federal judges are also required to impose a sentence based on factors described in 18 U.S.C. § 3553(a). As a result, sentencing in federal securities fraud cases is extremely complex.

As a result, it is important to engage a knowledgeable federal criminal defense lawyer, who can help negotiate a favorable outcome for you if necessary.

What Other Penalties Can a Federal Judge Impose in a Federal Securities Fraud Case?

In addition to incarceration, federal judges can impose other penalties in federal securities fraud cases as well. U.S.C. § 3301 establishes that specified securities-fraud offenses carry up to six years of imprisonment in addition to a six-figure or seven-figure fine depending on the offense.

What Can the SEC Do If No Criminal Case Is Filed?

If DOJ prosecutors decide to forego opening a criminal case, the SEC can still open a civil enforcement proceeding. Typically, these proceedings result from an SEC investigation, and the SEC’s enforcement staff generally seeks the SEC Commission’s authorization before filing charges. Once authorized, the SEC may proceed with an enforcement action administratively or in federal civil district court.

If the SEC plans to pursue charges, the target of an SEC investigation will generally receive a Wells notice first. A Wells notice communicates the SEC enforcement staff’s preliminary recommendation and its proposed charges. While some targets of an SEC investigation may not receive Wells notices, these are customary in many cases.

Receiving a Wells notice does not necessarily mean that you will face liability in a civil securities fraud case. Receiving a Wells notice is not the same as receiving a filed charge, and it is not a liability finding.

What Remedies Can the SEC Pursue in Civil Securities Fraud Cases?

In civil securities fraud cases, the SEC can pursue various remedies. These remedies include monetary penalties, disgorgement, injunctive relief, asset restrictions, and appointment of receivers. With regard to the SEC’s ability to seek asset restrictions and the appointment of receivers, the SEC does not have the power to enforce asset restrictions or receiverships on its own. However, federal courts generally grant the SEC’s requests for asset freezes and receiverships, and they generally require the defendant to post a bond to avoid these court-imposed measures.

Can the SEC Impose Penalties Administratively?

The SEC generally has the authority to impose penalties administratively, but there is an exception to this rule. In SEC v. Jarkesy, the Supreme Court held that if the SEC seeks to impose civil penalties in an enforcement action that bears a substantial similarity to a common-law fraud claim, then these penalties cannot be imposed administratively.

While SEC enforcement attorneys frequently make administrative claims, SEC enforcement attorneys have to assess whether their claims are subject to the limitations of the Supreme Court’s ruling in Jarkesy. If they are, then they must file a lawsuit in federal civil district court. While this is the case for some claims, others do not involve common-law fraud and can still be litigated administratively.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.