Parallel SEC and DOJ Investigations: Strategies for Navigating Overlap

Parallel SEC and DOJ Investigations: Strategies for Navigating Overlap

Companies operating in highly regulated industries like finance and healthcare often face the prospect of parallel civil and criminal investigations by different government agencies. For example, alleged violations of federal securities laws could trigger separate but related inquiries by both the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ).

Navigating these overlapping investigations poses unique challenges. Information produced in one inquiry could potentially be used against you in the other. And the different burdens of proof in civil and criminal matters shape litigation strategies in important ways. So coordination is key.

This article provides an overview of parallel SEC and DOJ investigations—how they work, where they overlap, and strategies for managing them effectively.

The SEC’s Civil Authority

The SEC enforces federal securities laws under its civil authority. Common allegations include:

• Insider trading
• Accounting fraud
• Misleading disclosures
• Offering fraud
• Investment advisor violations

Civil charges generally require a lower burden of proof than criminal charges. The SEC must show only that a securities law violation occurred by a “preponderance of the evidence”—meaning it was more likely than not.

If the SEC believes securities laws have been broken, it can bring civil charges through an administrative proceeding or by filing suit in federal court. Typical remedies include fines, disgorgement of ill-gotten gains, and injunctive relief.

DOJ’s Criminal Authority

In parallel with an SEC inquiry, the DOJ may open a criminal investigation of the same or related conduct.

The DOJ polices federal securities laws under its criminal authority. Common allegations mirror those brought civilly by the SEC, including:

• Insider trading
• Accounting fraud
• False regulatory filings

But the DOJ must meet a higher evidentiary standard to bring charges. It must establish “beyond a reasonable doubt” that a crime occurred.

If a criminal violation is found, the DOJ can prosecute through an indictment or criminal complaint. Penalties may include hefty fines and imprisonment for individuals.

Key Differences and Strategic Considerations

Because the SEC and DOJ wield different enforcement tools, several key differences shape litigation strategy:

1. Burden of Proof

The SEC’s lower civil burden enables it to bring cases on conduct that may not warrant criminal charges. So the SEC can extract settlements in close calls where evidence is limited.

But the DOJ’s higher criminal burden also allows more room to fight allegations—or negotiate a favorable resolution.

2. Leverage

The threat of criminal sanctions gives the DOJ significant leverage. Many targets choose to settle with the DOJ rather than risk prison time.

But the SEC lacks this leverage over organizations. Companies often litigate civil charges that would result in criminal pleas were prison time on the table.

3. Discovery

Civil discovery in the SEC matter can provide a wealth of information—and create exposure in the parallel criminal case.

But restrictions on criminal discovery limit access to the DOJ’s evidence and theories. This asymmetry can make civil litigation more perilous.

4. Pace

Civil cases generally move faster than criminal ones. The SEC can bring charges more quickly and push toward trial.

But criminal matters take time. The DOJ proceeds methodically and delays can stretch years. This may allow tempers to cool and facts to develop.

5. Coordination

The agencies often collaborate and exchange information, but also act independently. Close coordination is key to navigate differences.

With these key contrasts in mind, several strategies can help navigate parallel proceedings:

• Seek stays or limits on civil discovery to avoid early exposure of the DOJ’s criminal case. Courts will weigh prejudice to the SEC case against integrity of the criminal matter.
• Consider a global resolution with both agencies on coordinated terms. This can cap exposure and avoid protracted litigation. But the devil is in the details.
• Leverage differences creatively. For example, use higher criminal burden to resist SEC settlement demands. Or use faster civil case to frame key facts.
• Communicate regularly with both agencies to anticipate next steps and identify potential pitfalls. Keep lines open.
• Develop a unified strategy and messaging to avoid inconsistencies. Mixed signals can undermine credibility in both matters.
• Insist on separation between DOJ and SEC teams to limit information sharing. Cite privilege and confidentiality concerns.
• Pick your battles carefully. Prioritize the most serious charges with the most exposure.

Parallel proceedings present unique hurdles. But a focused strategy tailored to the different dynamics can help achieve the best possible resolution across both matters.

Overview of Key Laws and Regulations

Several federal statutes authorize the SEC and DOJ to investigate securities violations. Here is an overview of the key laws at play in many parallel proceedings:

Securities Exchange Act of 1934

This landmark law established the SEC and empowered it to regulate securities markets. It prohibits market manipulation and false statements about securities. The SEC often brings civil charges for violations, while the DOJ prosecutes criminal cases[1].

Securities Act of 1933

Also called the “Truth in Securities Law,” this statute governs disclosures in initial securities offerings. Violations involving false or misleading registration statements may trigger SEC and DOJ inquiries[2].

Investment Advisers Act of 1940

This law regulates investment advisors. It establishes fiduciary duties and other requirements. The SEC and DOJ can charge violations involving fraud, failure to register, false records, and misappropriation[3].

Investment Company Act of 1940

This statute regulates mutual funds and other investment companies. It prohibits various forms of misconduct, including self-dealing, misleading marketing, and conflicts of interest. Civil and criminal charges may result from violations[4].

Sarbanes-Oxley Act of 2002

Passed after the Enron scandal, this law increased accountability for corporate fraud. It expanded criminal liability for securities violations and boosted penalties. The DOJ relies heavily on Sarbanes-Oxley to prosecute accounting misconduct[5].

Dodd-Frank Act of 2010

This sweeping reform law boosted SEC enforcement powers after the 2008 financial crisis. It expanded authority over securities-based swaps and rating agencies. The SEC can now bring more civil charges without going to court first[6].

Common SEC and DOJ Charges

While the SEC and DOJ target many types of securities misconduct, several specific allegations arise frequently in parallel proceedings:

Insider Trading

This involves trading securities based on confidential information in breach of a duty. It may trigger civil charges from the SEC and criminal prosecution by the DOJ.

Accounting Fraud

Misstating revenues, expenses, or other metrics in financial statements may draw SEC charges and DOJ prosecution for securities fraud, false statements, or false filings.

Offering Fraud

Misrepresentations and omissions in securities offerings commonly lead to coordinated SEC and DOJ actions. Criminal charges may follow civil injunctions.

FCPA Violations

Paying bribes overseas violates the Foreign Corrupt Practices Act (FCPA). The SEC pursues civil FCPA charges as the DOJ handles criminal prosecution.

Microcap Fraud

Manipulation of small, thinly traded securities spawns recurring SEC and FBI cases. Criminal pump-and-dump charges often follow SEC trading suspensions.

Strategies for Responding to Specific Allegations

Certain recurring charges merit tailored response strategies:

Insider Trading

• Challenge causation. Argue the trades in question were based on public information or analyst reports, not inside tips.
• Contest knowledge. Maintain the defendants were unaware of any breach of duty by the tipper and had no reason to know the information was confidential.
• Raise personal benefit doubts. Argue the evidence does not show the tipper received any tangible benefit for disclosing inside information.

Accounting Fraud

• Emphasize reliance on professionals. Assert the defendants relied on accountants, auditors, and lawyers who blessed the problematic transactions or accounting.
• Blame flawed processes. Contend flawed internal processes, controls, and systems contributed to any improper revenue recognition or expense classification.
• Cite gray areas. Many accounting rules involve judgment calls. Argue any misapplications were reasonable interpretations made in good faith.

Offering Fraud

• Attribute to market conditions. Blame falling stock prices on overall market conditions rather than any misrepresentations.
• Cite intervening events. Argue unexpected developments after the offering led to business shortfalls, not preexisting problems concealed during fundraising.
• Challenge materiality. Contest whether any alleged misstatements or omissions were important enough to influence investor decisions.

FCPA Violations

• Dispute knowledge. Deny awareness payments were going to foreign officials rather than legitimate expenses.
• Raise jurisdictional doubts. Challenge whether the recipients qualify as “foreign officials” or the payments have a sufficient U.S. nexus.
• Cite local law. Argue the payments were lawful under the foreign country’s written laws and regulations.

Microcap Fraud

• Blame advisors. Attribute any false promotions or manipulative trading to third-party consultants who acted alone.
• Contest intent. Argue the goal was facilitating liquidity, not inflating prices artificially.
• Challenge causation. Dispute whether promotional activity actually moved the stock price or caused specific trades.

Key Takeaways

Here are some key tips for navigating parallel SEC and DOJ investigations:

• • Anticipate differences between civil and criminal matters early. Develop a coordinated strategy tailored to both.
  • Limit civil discovery if possible to avoid exposing the DOJ’s criminal case. Seek stays or protective orders.
  • Weigh the benefits of a global settlement resolving all charges together against fighting on two fronts.
  • Leverage each agency’s burdens of proof and leverage points to maximum advantage.
  • Insist on strict separation between the DOJ and SEC teams to restrict information sharing.