Can the SEC Investigate Me Without a Subpoena??

Yes. SEC staff may start investigations using public records and other means. Public records, surveillance, examinations, and interviews with voluntary witnesses are some of the tools available to the SEC, and the SEC may also initiate an investigation based on a company’s self-report.

An investigation may also formally proceed without serving the investigated individual or company a subpoena. While the SEC has the power to compel testimony and document production, the SEC may also make requests voluntarily.

The SEC can also subpoena third parties, such as your bank, brokerage, or former employer. This occurs behind the scenes, and the SEC typically does not have to contact the investigated person before issuing subpoenas to third parties.

SEC investigations are generally nonpublic unless the agency decides to charge the investigated party or make disclosure, or unless you learn about the investigation some other way.

If the SEC requests your account records or other information from your brokerage firm, the brokerage firm may not notify you and may comply with the request behind the scenes.

The SEC may start an investigation based on a number of different factors, including:

• Complaints
• Tips
• Surveillance Alerts
• Examinations
• Media Reports
• Regulatory Referrals

Does an SEC Subpoena Mean I Am a Target?

What Does it Take to Issue a Subpoena?

Under C.F.R. § 200.30-4, the authority to issue an enforcement subpoena is delegated to the Director of the Division of Enforcement. The Director may formally delegate this authority to staff within the Division of Enforcement. As a result, the SEC does not necessarily need an individual case-specific formal order to issue a subpoena.

Does a Subpoena Mean I Am a Target?

Even though the SEC has authorized a subpoena, receipt of a subpoena does not prove you are a target. You may be requested to provide documents or testimony in connection with an investigation, but you may not be the focus. That said, an examination of the subpoena’s requested subjects and timeframe may be illuminating.

Can I Get to See the Formal Order?

If you have been subpoenaed in a formal investigation, the SEC is required to let you inspect the formal order upon request. C.F.R. § 203.7 requires the SEC to show you the order but it does not require the SEC to give you a copy of the order.

See, 15 U.S.C. 203(a) & C.F.R. § 200.2.

Can I Find Out Who Is Being Investigated?

The SEC generally does not respond to requests for this information, so your best bet will be to contact the enforcement staff attorney with questions about the investigation’s scope and your role in it.

Do SEC Investigations Always Take the Same Form?

Not necessarily. The SEC can initiate a formal enforcement proceeding at any time, and the SEC is not required to follow a fixed sequence of an informal inquiry, then a formal order, then a Wells notice, and then charges.

See, Manual of Investigations, 2, 3, 4.1.

Does a Formal Order Establish a Violation of Securities Law?

Opening a formal SEC investigation does not establish that anyone violated securities laws or protections. The SEC must still prove an alleged violation in an administrative or civil enforcement proceeding if it chooses to take enforcement action.

How Can I Narrow or Challenge an SEC Subpoena?

How Does the SEC Compel Evidence Production?

An SEC subpoena can be used to compel document production, a sworn deposition, or both. With respect to document production, you can negotiate with the SEC staff regarding the scope of the subpoena, whether the subpoena includes any privileges, what the format of production will be, and when you must respond. However, the SEC staff does not have to accept a request to extend the response date or to narrow the production.

See, Manual of Investigations, 4.2(A).

How Can I Challenge the SEC’s Subpoena Enforcement?

The enforcement of an SEC subpoena is subject to judicial review. If the SEC files a motion to enforce the subpoena with a district court, the court will look at the SEC’s:

• Authorization to issue the subpoena
• Proof that the subpoena is relevant
• Proof that the subpoena is sufficiently definite
• Proof that the SEC complied with the legal procedural requirements for issuing the subpoena

What Happens During an Enforcement Proceeding?

When you oppose the enforcement of an SEC subpoena, you generally face a substantial burden of proof. If a district court refuses to enforce an SEC subpoena, then the SEC may have to restart the process for obtaining a subpoena that a court will enforce. However, the district court has the option to deny or limit enforcement of an overbroad SEC subpoena if it finds that the subpoena may violate your Fifth Amendment privilege.

What Happens During SEC Formal Testimony?

SEC formal testimony is conducted under oath, it is recorded by a court reporter, and it is treated as evidence. If you have been subpoenaed to give testimony, you should make sure you have the information necessary to adequately respond.

See, C.F.R. § 200.2 and Manual of Investigations, 4.2(B).

What Are the Costs for Responding to an SEC Investigation?

No statute fixes the cost for responding to an SEC investigation. The costs of responding to an SEC investigation include:

• Attorney’s fees
• The cost of producing documents or other information
• The cost of time missed from work or business
• Other costs incidental to responding to the investigation

What Happens if I Ignore an SEC Subpoena?

1. Administrative Subpoenas and Enforcement

An administrative subpoena issued by the SEC is not enforceable through the threat of contempt unless it is first filed in a federal district court. Under 15 U.S.C. § 78u(c), also known as Exchange Act § 21(c), the SEC can file a motion to enforce its administrative subpoena with a federal district court. If you have objections to the SEC’s subpoena, then these objections will typically be litigated when the SEC files its motion to enforce. Disobeying a resulting federal court order can then justify contempt sanctions.

2. Declining to Respond to Voluntary SEC Requests

Responding to a voluntary request for an interview is optional, and ignoring a voluntary request does not necessarily equate to violating a subpoena. If you have not been served with a subpoena and you have no independent duty to be interviewed by the SEC, you are entitled to decline to participate in an interview. However, if the SEC has already initiated an investigation, it may consider how you are interacting with its staff when deciding whether it should recommend that its Division of Enforcement file charges or a request for certain remedies or a settlement.

3. Document Preservation Requirements

Even before you have been served with a subpoena, you should begin preservation efforts for relevant records and documents if you have knowledge that litigation or enforcement proceedings are reasonably anticipated. This often involves making sure that your computer systems do not automatically delete or replace documents and emails that would be relevant to the SEC’s investigation. While not explicitly required by a subpoena, the duty to preserve information relevant to an investigation is recognized in the U.S. court system and could subject you to sanctions if you engage in document destruction after learning about an SEC investigation. See, Manual of Investigations, 4.1(B).

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

How Long Can an SEC Investigation Last?

Does an SEC Investigation Have to End by a Certain Deadline?

No. In general, no statute requires SEC staff to complete an investigation by a certain deadline. While a MUI is typically opened with a target of 60 days, the 60-day target governs SEC staff’s workflow rather than an SEC investigation’s legal duration. Complex investigations can and do continue for months, years, or longer.

Does the Statute of Limitations Affect an SEC Investigation?

The SEC faces statute of limitation periods for pursuing enforcement claims in civil and administrative proceedings. These limitation periods limit how long the SEC has to litigate its enforcement claims, but they do not limit how long the SEC staff may investigate to pursue those claims. The statute of limitations triggers the filing of a civil enforcement action in federal court or a civil or administrative enforcement action in the SEC’s administrative law courts.

See, Federal Rule of Civil Procedure 3.

Can an SEC Investigation Expand?

Yes. In some cases, a company or individual becomes subject to an SEC investigation as the result of the company’s or individual’s prior scrutiny of another party. An SEC investigation may also expand to cover other alleged violations and to include other individuals and companies. The SEC may also request other information that was not included in a subpoena or formal order that initiated an investigation.

Does an SEC Investigation Closing Mean I Am Not a Target?

A closure letter may establish that you are no longer a target, but it is important to remember that a closure letter does not constitute an adjudication that no violation of securities laws has occurred or is occurring. A closure letter just states the current SEC staff’s opinion, and the investigation could be reopened later if new or additional information about an alleged violation comes to light.

What Deadlines Limit SEC Penalties and Disgorgement Claims?

1. Civil Penalties

A five-year statute of limitations generally applies to civil penalties. 28 U.S.C. § 2462 limits the time for the SEC to seek “any civil fine, penalty, or forfeiture, pecuniary or otherwise” in a federal district court. SEC insider-trading penalties are subject to a similar limitation period, though the amount of the penalties is different. Under Exchange Act § 21A, SEC insider-trading penalties can be as much as three times a defendant’s gains or avoided losses.

2. Disgorgement and Equitable Remedies

Exchange Act § 21(d)(8) addresses the SEC’s enforcement authority with respect to disgorgement and other equitable remedies. According to 15 U.S.C. § 78u(d)(8) (which codifies Section 21(d)(8) of the Exchange Act), the statute of limitations for enforcement of the SEC’s authority for disgorgement and equitable remedies is:

• 10 years for disgorgement claims involving “scienter” (the intentional intent to defraud);
• 10 years for disgorgement claims under subsection (d)(7) of Section 21 of the Exchange Act;
• 10 years for certain other equitable remedies;
• 5 years for disgorgement claims that do not involve scienter; and,
• 5 years for other disgorgement claims under subsection (d)(7) of Section 21 of the Exchange Act.

U.S.C. § 78u(d)(8)(C) also clarifies that the time a defendant spends outside the United States cannot be counted towards a statute of limitations period.

3. Calculation of Disgorgement Amount

While the statute of limitations may not bar the SEC’s disgorgement claim, the amount of the disgorgement that the SEC can recover may still be subject to challenge. While the SEC may seek disgorgement of gross profits, Liu v. SEC, 591 U.S. 71 (2020), generally limits “equitable” disgorgement to net profits. Under Exchange Act § 21(d)(7), the SEC may seek disgorgement of any unjust enrichment obtained from a securities law violation. This often involves the SEC placing funds in a “disgorgement fund” for the benefit of victims of alleged securities law violations.

What Privileges Protect Me During an SEC Investigation?

1. Attorney-Client Privilege

The attorney-client privilege protects communications made in the course of a confidential relationship between a client and attorney for the purpose of obtaining legal advice. The attorney-client privilege does not apply to preexisting underlying facts or records that do not become privileged just because they are shared with a lawyer.

2. The Fifth Amendment Privilege Against Incriminating Testimonial Compulsion

The Fifth Amendment protects individuals against being compelled to give testimonial evidence that may help establish their guilt in a criminal proceeding. While this provides a significant protection, it also carries risks in civil enforcement proceedings. In a civil district court proceeding, the court may draw an adverse inference if you invoke your Fifth Amendment privilege. In a civil SEC administrative proceeding, an adverse inference may likewise be drawn. In both types of proceedings, the SEC can still issue subpoenas and otherwise compel production of evidence.

See, U.S. Const. amend. V.

3. Business Entities’ Application of the Fifth Amendment Privilege

A corporation or other business entity cannot invoke the Fifth Amendment privilege. Under the “collective-entity” doctrine, corporate documents are not “incriminating,” and the company cannot resist production on this ground. As a result, the SEC can issue enforcement subpoenas to corporations without providing the benefit of the Fifth Amendment protections.

4. The Work-Product Doctrine

The work-product doctrine protects an attorney’s materials created in anticipation of litigation. The work-product doctrine generally protects a broader range of materials than the attorney-client privilege, which only applies to “communications.” However, both the work-product doctrine and the attorney-client privilege may protect against the SEC’s request for the attorney’s “opinion notes” and “work product.”

5. Issues Which May Not Invoke Protections During an SEC Investigation

While the Fifth Amendment protection is important, there are many circumstances under which it does not apply. For example, the Fifth Amendment generally does not protect against the content of documents and electronic records that were created voluntarily. However, producing records can be testimonial if the production of the records implicitly identifies the records or vouches for their authenticity.

If you are an individual under investigation by the SEC, you are legally required not to make any knowingly false statements to the SEC investigators. A knowingly false statement to the SEC investigator could trigger federal criminal exposure that is unrelated to the underlying reason for the SEC investigation. This means that if you are unsure about how to respond to the SEC’s request for information, the best way to be safe is to not respond.

Who Investigates Securities Violations and Possible Criminal Conduct?

1. The SEC’s Division of Enforcement

The SEC’s Division of Enforcement is responsible for investigating all potential violations of federal securities laws. If the investigation substantiates the violation allegations, the SEC may then seek a remedy including disgorgement of profits, civil penalties, cease-and-desist orders, and, in some cases, monetary bars. While the SEC can impose disgorgement, civil penalties, and other remedies against violators, it cannot impose imprisonment sentences.

2. The Justice Department

The Justice Department is responsible for investigating and prosecuting suspected federal securities crimes. When it is appropriate to do so, the Justice Department may initiate an investigation of a securities law violation based on an investigation initiated by the SEC. This means that an individual or entity accused of committing a securities crime could face separate SEC and Justice Department investigations and trials.

3. Other Federal Securities Law Enforcement Agencies

The SEC is not the only agency with authority to investigate potential securities-law violations. FINRA and state regulators may also separately investigate potential violations occurring within their jurisdictions. Both FINRA and state regulators may share information with the SEC and Justice Department when they uncover evidence of a potential securities-law violation.

4. Are Justice Department and SEC Investigations the Same?

The Justice Department and the SEC can both investigate securities-law violations, but the SEC’s enforcement proceedings and the Justice Department’s enforcement proceedings are separate. In most cases, the two agencies will investigate based on the same evidence and then pursue their respective administrative or criminal claims. The SEC or Justice Department may also decide not to pursue its claim based on the evidence that the other agency gathers.

5. What Are the Procedural and Discovery Differences Between SEC and Department of Justice Proceedings?

When the SEC conducts its enforcement proceedings in the SEC’s administrative courts, it follows the Commission’s Rules of Practice. When the SEC initiates an enforcement proceeding in a federal district court, then this proceeding is subject to the Federal Rules of Civil Procedure. For Justice Department proceedings, the Justice Department’s attorneys must follow the Federal Rules of Criminal Procedure. In all of these cases, the federal court may establish the necessary discovery procedures before deciding how to rule on a motion for summary judgment or any of the evidence presented by the prosecution or the defense.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.