Blog
SEC Referrals to DOJ for Criminal Charges: Navigating the Crossroads
Contents
The Securities and Exchange Commission (SEC) is tasked with civil enforcement of federal securities laws. However, in some cases where serious misconduct is uncovered, the SEC may choose to refer matters to the Department of Justice (DOJ) for criminal prosecution. This article examines the referral process, implications for companies and individuals, and key considerations around criminal charges stemming from SEC matters.
The SEC does not have authority to bring criminal charges on its own. However, the SEC’s Enforcement Manual outlines procedures for referring matters to criminal authorities when warranted. This may occur through informal referrals during investigations or formal referrals upon completion of an investigation.
According to the manual, SEC staff may consult with criminal authorities during investigations if they uncover evidence of criminal violations. The goal is to determine whether to bring criminal charges concurrent with the SEC’s civil action. Formal criminal referrals are written memos sent to DOJ outlining the SEC’s findings and recommendations for criminal prosecution.
Factors the SEC considers when making referrals include:
- Nature and seriousness of the misconduct
- Deterrent value of criminal sanctions
- Extent of harm to investors and others
- Disciplinary and criminal history of responsible individuals
Recent high-profile examples of SEC referrals leading to criminal charges include cases against Martin Shkreli for securities fraud in 2017 and Nikola Corporation founder Trevor Milton in 2020.
DOJ’s Discretion on Criminal Charges
The DOJ has sole discretion whether to bring criminal charges based on an SEC referral. The DOJ will independently investigate the matter and apply its own charging policies. According to the Justice Manual, prosecutors weigh factors such as:
- Nature and seriousness of the offense
- Deterrent effect of prosecution
- Person’s culpability and criminal history
- Willingness to cooperate in investigation
The DOJ may decline to prosecute a referral for various reasons, including insufficient evidence or limited resources. However, SEC referrals are taken very seriously. In recent years, the DOJ has ramped up prosecutions of securities laws violations referred by the SEC.
Implications of Criminal Charges
The implications of criminal charges stemming from an SEC investigation are far more severe than civil penalties. Individuals face the prospect of prison time, fines, and restitution orders. For companies, the fallout can include reputational harm, loss of contracts, and exclusion from government programs.
Prosecutors typically pursue criminal charges in cases involving egregious, intentional misconduct. Charges may include securities fraud, false statements, obstruction of justice, and conspiracy. Defendants could potentially raise constitutional and procedural defenses around grand jury proceedings, charging decisions, and conduct of the prosecution.
Companies facing criminal exposure will need to assess their cooperation posture. Full cooperation and remediation efforts could persuade prosecutors to grant leniency. However, companies also need to weigh legal risks in disclosing privileged information.
Key Considerations for Companies and Individuals
The prospect of criminal prosecution significantly raises the stakes in an SEC investigation. Here are some key considerations for companies and individuals navigating this crossroads:
- Assemble experienced white collar defense counsel
- Conduct thorough internal investigation of alleged misconduct
- Evaluate remedial steps and cooperation credit
- Develop strategy to mitigate criminal exposure
- Prepare for heightened scrutiny from regulators, shareholders, and the public
While SEC referrals do not guarantee criminal charges, they greatly increase the risks. Companies and individuals should engage counsel at the first sign of criminal exposure to protect their rights and interests.
Conclusion
SEC referrals to the DOJ for criminal prosecution represent a major escalation and watershed moment in enforcement matters. Though not guaranteed, criminal charges bring severe consequences for companies and responsible individuals. With skilled counsel and a thoughtful strategy, targets of SEC investigations can best position themselves in the face of potential criminal prosecution.
References
SEC Charges Pharma CEO Martin Shkreli with Fraud