Coordination Between SEC and U.S. Attorney's Office.

The SEC has enforcement authority limited to civil proceedings, and the DOJ and its U.S. Attorneys have authority to pursue criminal charges. Often, the SEC and U.S. Attorneys will work together in parallel civil and criminal investigations, sharing information and conducting joint investigations into the same alleged misconduct.

Even when conducting parallel investigations, the SEC and federal prosecutors retain separate charging authority. The SEC has the power either to pursue civil enforcement action or to recommend criminal charges to the DOJ. The DOJ, in turn, can pursue federal criminal charges regardless of the SEC’s decision or seek assistance with its investigation.

Many common federal allegations can generate parallel civil and criminal investigations:

• FCPA Allegations, Allegations that violate the Foreign Corrupt Practices Act (FCPA) can trigger simultaneous civil investigations by the SEC and criminal investigations by the DOJ and its U.S. Attorney’s Offices.
• Insider Trading, Suspicions of illegal insider trading can prompt parallel civil and criminal investigations as well. Both the SEC and the U.S. Attorney’s Office will scrutinize whether the target traded on material nonpublic information.
• Cryptocurrency Offerings, Alleged fraudulent or unregistered cryptocurrency offerings can prompt concurrent SEC and DOJ investigations. These investigations will focus on whether the target fraudulently induced investors to participate in the offering or violated the laws governing securities offerings.
• Accounting Restatements, A public company accounting restatement can trigger both an SEC and a DOJ investigation. The SEC will examine whether the public company improperly overstated its earnings, and the DOJ will examine whether the public company’s executives knowingly provided misleading information to the SEC and the public.
• Mortgage-Backed Securities, Allegations concerning issuers’ conduct with mortgage-backed securities have likewise drawn parallel SEC and DOJ scrutiny. These investigations focused on allegations of mortgage fraud as well as allegations of violating the laws governing securities offerings.

What Information Can the SEC Share with Federal Prosecutors?

SEC Enforcement staff can refer suspected criminal violations to the DOJ. A criminal referral doesn’t strip the SEC of its authority to pursue civil enforcement action against the same target, and the SEC does not need to make a criminal referral in order to exercise its own civil enforcement authority. 15 U.S.C. § 78x(c) allows the SEC to share records with federal agencies that “the Commission determines is necessary for enforcing a federal statute,” provided there are “adequate safeguards” to protect confidentiality. SEC Enforcement staff warn of this possibility on SEC Form 1662, stating: “The information that you provide may be shared with federal criminal authorities, including the Department of Justice.” This means that a target should never assume that if the SEC, the SEC’s enforcement division, or the SEC’s office of the securities ombudsman does not pursue a criminal referral, information obtained in a civil investigation will not reach federal criminal authorities.

This one-way sharing flow is not unusual in civil-criminal investigations conducted by the SEC and the DOJ. During a securities investigation, U.S. Attorneys have access to the information that the SEC gathers and can also use the SEC’s assistance to pursue civil charges through grand-jury subpoenas and other means. However, information in a grand-jury investigation is governed by Rule 6(e) of the Federal Rules of Criminal Procedure, which generally forbids prosecutors, judges, and other court personnel to disclose “the nature and substance of matters occurring before the grand jury.” Even though federal prosecutors generally cannot disclose grand-jury information to the SEC, information in a grand-jury investigation is otherwise confidential.

In other words, SEC civil lawyers generally cannot obtain access to grand-jury material merely because they are government personnel. Rule 6(e) applies even when criminal authorities share information with the SEC’s civil enforcement staff, and this is generally true regardless of whether the SEC is pursuing civil enforcement action against the target. When seeking civil access to grand-jury material, SEC lawyers generally need to show “particularized need” and obtain approval from a judge in district court.

Are Simultaneous Civil and Criminal Investigations Proof that the SEC and the DOJ Are Coordinated?

The existence of simultaneous civil and criminal investigations is generally not proof that the SEC and the DOJ are coordinated. However, that is not a reason to assume that the agencies are not coordinated. As both the SEC and the DOJ, the coordination between the agencies’ enforcement staff is a concern for targets regardless of whether it is legally proven in a given case. Furthermore, even if the SEC and DOJ are not coordinated, the facts that they are both pursuing a target suggest that it is in the target’s best interests to respond to both cases at once.

Who Controls Subpoenas, Interviews, Delays, and Charging Decisions?

The SEC’s investigations into alleged insider trading, cryptocurrency offerings, financial fraud, and other securities issues involve various procedures and steps. An investigation can include:

• The Gathering of Records, U.S. attorneys and investigators with the SEC’s Enforcement Division are likely to request or subpoena records and communications from a target.
• Interviews, Interviews can involve formal testimony or informal discussions. Targets should be cautious about volunteering information during informal interviews, and they should not volunteer information that they think could hurt their case.
• Proffers, A proffer is a voluntary discussion that allows targets to share information with federal prosecutors in order to assess potential cooperation in exchange for favorable treatment.
• Wells Submissions, A Wells submission is a formal presentation to the SEC. In general, it is a form of a target’s chance to persuade the SEC not to seek civil charges.
• Charging Decisions, The SEC’s commissioners generally authorize the civil charges recommended by the Commission’s Enforcement Division. At the DOJ, U.S. Attorneys generally make district criminal charging decisions independently, subject to the DOJ’s policies and supervision.

Can a Wells Submission Be Used to Persuade the SEC Not to Refer Matters to the DOJ for Criminal Enforcement?

The SEC’s administrative process permits prospective defendants to present arguments to the SEC before the Enforcement Division recommends a civil charge. 17 C.F.R. § 202.5(c) states: “ Before the Commission takes action on a recommendation from the Enforcement Division to initiate an enforcement action against an individual or firm, it shall allow the person or firm an opportunity to make a submission for the Commission’s consideration.” This applies even to cases where the SEC has referred the matter to the DOJ, but it only applies to matters that are within the SEC’s civil enforcement authority. A Wells notice is not a criminal charge, and it does not bind any prosecutor who might seek criminal charges for the same alleged misconduct.

The SEC can also bypass the Wells process if delay “would be contrary to the public interest.” 17 C.F.R. § 202.5(c)(3). This is true if delaying prosecution “would harm current or prospective investors or would be substantially contrary to the Commission’s investigative or remedial efforts.”

When Does the SEC Require a Formal Order of Investigation?

The SEC conducts various types of investigations. Most investigations begin as informal inquiries. The SEC’s Enforcement Division may informally send requests for records and communications to targets, and it may informally invite targets to interview its investigators. To issue subpoenas, however, the SEC needs a formal order of investigation from the SEC’s Commissioners. A formal order of investigation is required whenever the SEC seeks to compel testimony or the production of documents by subpoena.

Can SEC Testimony or Proffers Be Used Against Me?

If the SEC, DOJ, or any other federal authority is using a criminal or civil investigation against you or your company, your right to assert your Fifth Amendment privilege may be of paramount importance. However, the Fifth Amendment privilege should be asserted with care and in an appropriate situation.

With regard to investigations and proceedings initiated by the SEC and other federal agencies, the Fifth Amendment privilege has significant limitations:

• Fifth Amendment Privilege in SEC Investigations, The Fifth Amendment privilege generally must be asserted on a question-by-question basis. This can make it easier for federal investigators to identify evidence of criminal liability.
• Fifth Amendment Privilege in the SEC’s Civil Enforcement Action, While a properly invoked Fifth Amendment privilege will not contribute to a finding of guilt in a criminal trial, civil factfinders can generally draw adverse inferences from the privilege. This means that if you choose to remain silent during the SEC’s civil enforcement action, the civil factfinders can generally use that silence as a sign of guilt or other wrongdoing.
• The Corporation’s Inability to Invoke the Fifth Amendment Privilege, Corporations are unable to invoke the Fifth Amendment privilege. This means that if the SEC and the DOJ open simultaneous investigations into a company, the company must comply with the SEC’s investigative process, even though it is facing potential criminal prosecution alongside the SEC’s civil enforcement investigation.
• Records Held by Third Parties, An individual’s Fifth Amendment invocation will not shield records and other information held by third parties. The SEC can subpoena bank records, tax records, and other information from banks, financial institutions, accountants, and other third parties that do not have Fifth Amendment rights.
• Wells Submissions, While the SEC cannot use a Wells submission to support a civil enforcement action against a target, this is subject to various exceptions, and Wells submissions may not be shielded from use in a criminal prosecution.
• Proffer Agreements, While the U.S. Attorney’s Office and other federal prosecutors generally abide by the terms of proffer agreements, the protections provided under these agreements are not blanket immunity. The use of a target’s proffer in a subsequent case may depend on the terms of the specific proffer agreement. Many federal proffer agreements permit the use of the proffer for derivative purposes or permit the government to use the target’s statements for impeachment during trial.
• Cooperation with the SEC, If a target chooses to cooperate with the SEC’s investigation, the target’s testimony will still be subject to Fifth Amendment privilege assertions. This remains true regardless of the target’s relationship with the SEC, although immunity may apply in some cases.

Spodek Law Group, led by managing partner Todd Spodek, defends clients in federal criminal and white collar matters.

Can Sharing Information Waive Privilege or Create Defense Conflicts?

The SEC and other authorities rarely initiate inquiries in isolation. Often, internal corporate investigations are launched in anticipation of or alongside government securities inquiries. In these investigations, targets must exercise extreme caution when sharing information with investigators. Voluntary disclosure to investigators that may later end up with prosecutors can waive attorney-client privilege against later adversaries, making the waiver retroactive in nature.

In some cases, a target will rely on the common-interest protection to shield information shared by a client and its outside counsel. The common-interest protection applies when two or more parties share the same legal interest, and this should not be confused with a business interest.

In many federal circuits, once the privilege has been waived to a federal agency, it may not be reinstated upon appeal. However, the federal courts of appeals have almost uniformly rejected the concept of selective waiver, and numerous federal courts have found the privilege waived after voluntary disclosure to federal prosecutors and investigators.

Conflicts can also arise when a target’s company and the target’s individual defense strategies diverge. If a target agrees to joint representation with their company, a conflict can arise if the government seeks to blame the company, its executive, or both. If the government makes clear that it is only interested in prosecuting one party, the common interest can remain intact. However, Federal Rule of Criminal Procedure 44(c) is clear: “Unless there is good cause to believe that no conflict of interest is likely to arise, the court must take appropriate measures to protect each defendant’s right to counsel.”

Parallel SEC and criminal investigations often target both companies and individual officers. For example, parallel investigations of companies such as Wells Fargo and Lehman Brothers have focused on both the companies’ corporate misconduct and individual culpability. While a company’s audit committee may oversee an internal investigation into an SEC investigation or subpoena, individuals must be wary of relying on common interest when facing the SEC.

Can Improper Coordination Stop an SEC Case or Prosecution?

While, in general, the SEC and the DOJ can coordinate in parallel civil and criminal investigations, this coordination must stay within the law. A trial judge once found that government attorneys improperly used the parallel nature of Richard Scrushy’s proceedings to secure a witness and induce testimony from the defendant. In such circumstances, courts may find improper government conduct.

However, when raising issues based on the government’s improper coordination in SEC and DOJ investigations and criminal proceedings, a target must remember the limitations that the courts routinely recognize:

• Improper Coordination does not Automatically Affect Parallel Investigations, An SEC investigation generally is not stayed because of a related criminal investigation. While an SEC investigation may be stayed under circumstances where it makes the criminal investigation impractical, this is the exception rather than the rule.
• Parallel Proceedings are Generally Lawful, United States v. Kordel, 397 U.S. 1 (1970) that: “Our prior decisions in this Circuit have long and clearly recognized the fact that the government can pursue parallel civil and criminal proceedings . .. so long as the civil proceeding is not used to unlawfully advance the criminal proceeding. . . .. and, most especially, so long as the civil proceeding does not improperly interfere with the defendant’s constitutional rights at the criminal trial.”
• Protective Orders Protect Against Improper Use of Information, Federal Rule of Civil Procedure 26(c) recognizes the potential for misuse of information obtained during a civil proceeding and authorizes a court to issue protective orders under appropriate circumstances. “ a court may, for good cause, make any just and appropriate order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense, including but not limited to . .. the discovery of a party or person in a pending criminal matter to the extent that the court determines that such discovery would present a substantial risk of infringing upon the constitutional rights of a defendant to a fair and impartial trial.”
• Due-Process Challenges Require Evidence of Wrongdoing, Raising a due-process challenge in a parallel proceeding requires presenting evidence of more than simple interagency communication or evidence sharing. The challenge must involve a constitutional or statutory violation that rises to a level of wrongdoing.

Can a Related Criminal Prosecution Stop SEC Civil Litigation?

A related criminal prosecution does not automatically stay SEC civil litigation. To obtain a stay, the government generally has to move for one, and the government’s request will be reviewed by a judge. Factors that courts consider in deciding a stay include the overlap of the issues involved, whether an indictment has been filed, whether the criminal litigation would prejudice the civil matter, and other factors relating to the public interest.

Many companies and individuals have faced these parallel proceedings. For example, Richard Scrushy faced simultaneous investigations and proceedings by the SEC, the DOJ, and the U.S. Senate. The parallel nature of the government’s effort was extensively documented, and Scrushy’s lawyers challenged this coordination at all stages.

Does Resolving One Case End the Parallel Proceeding?

Settling an SEC enforcement action does not necessarily end a criminal investigation or proceeding initiated by the DOJ and its U.S. Attorney’s Office. For a settlement that provides for criminal liability to avoid prosecution or conviction, the settlement must include federal prosecutors in its terms.

Resolving criminal liability does not necessarily result in the SEC’s civil remedies going away. While criminal guilty pleas and the subsequent judgments obtained will provide admissions and other factual information that may be relevant in later SEC proceedings, they do not end the SEC’s ability to pursue civil remedies.

The possibility for the SEC and criminal prosecutors to secure similar monetary judgments often leads to a variety of concerns. While courts generally discourage duplicate recovery, the issue is not always resolved automatically when offsetting restitution, disgorgement, and forfeiture is warranted.

• Disgorgement: Under Section 21(d)(7) of the Securities Exchange Act, the SEC may ask a federal court to order defendants to disgorge their ill-gotten profits, and those funds may be distributed to harmed investors.
• Criminal Forfeiture: In some criminal cases, defendants’ assets acquired through commissions of an offense may be forfeited to the federal government.
• Restitution: In some criminal cases, mandatory restitution may be ordered under 18 U.S.C. § 3663A.

When a criminal prosecution is finally resolved, it is common for a defendant to get credit for any assets that he or she previously gave up in disgorgement to the SEC or that the SEC took in forfeiture or as a result of restitution. However, in cases involving the SEC, the target can either negotiate to settle its parallel proceedings or fight to avoid criminal charges and civil liability in parallel litigation.

When Does a Parallel SEC and Criminal Investigation End?

If a target is not charged, a parallel SEC and criminal investigation may end in several different ways:

• SEC Examination, The SEC conducts an examination and closes its investigation without referring it to the Enforcement Division.
• SEC Staff Investigation, The SEC staff conducts an investigation and closes it without referring the matter to the SEC’s Enforcement Division.
• SEC Enforcement Investigation, The SEC staff conducts an investigation and closes it without recommending enforcement action to the SEC Commissioners.
• DOJ Closes Criminal Investigation, The DOJ closes its criminal investigation without referring it to the SEC’s Enforcement Division.
• Both Close Without Charging, Both the DOJ and the SEC close their investigations without recommending or filing charges.

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