The Impact of a Parallel SEC and DOJ Investigation After an SEC Target Letter

Receiving an SEC target letter can be scary. It means the SEC thinks you may have broken securities laws. They might take legal action against you, including fines or even criminal charges.

But what happens when there’s also a parallel DOJ investigation? Now you’re looking at potential criminal prosecution on top of civil penalties. This one-two punch can have serious consequences for your freedom and finances. Let’s break it down.

What is an SEC Target Letter?

An SEC target letter informs you that you’re under investigation for possible violations of securities laws. It means the SEC has identified you as a target in their inquiry into potential wrongdoing.

These letters usually go out when the investigation has advanced significantly. The SEC has already gathered evidence through documents and witness interviews. Now they want to talk to you, the target.

The letter will identify the specific laws or regulations you may have violated. It also provides details on how to respond. Often, the SEC will request documents or testimony from you.

DOJ Parallel Investigations

In some cases, the Department of Justice may open their own parallel investigation. They are looking into potential criminal charges based on the same activities.

The DOJ has power to file criminal charges for securities fraud and other federal crimes. An SEC case is civil, but a DOJ case means possible prison time.

With a parallel criminal investigation, the SEC and DOJ coordinate their efforts. They share evidence and collaborate on strategy. But they maintain separation between the civil and criminal cases.

Risks of Parallel Investigations

Parallel SEC and DOJ investigations can create several risks for targets:

• Increased likelihood of criminal prosecution – With two agencies on the case, charges are more likely.
• Broader investigation – The DOJ’s involvement widens the probe beyond just securities issues.
• More severe penalties – Criminal sanctions can include prison time and steeper fines.
• Coordinated strategy – SEC and DOJ can align strategies, increasing pressure.

With two powerful agencies targeting you, the stakes become much higher. The SEC may offer you a civil settlement. But rejecting it could mean facing criminal indictment from the DOJ.

Responding to an SEC Target Letter

If you receive an SEC target letter, especially with a parallel DOJ investigation, take it very seriously. Here are some tips on responding:

• Hire experienced securities counsel – You need lawyers knowledgeable in both SEC and DOJ processes.
• Ask for more details – Find out specifics on violations alleged and evidence gathered.
• Negotiate the scope – Try to narrow the probe by arguing against overreach.
• Be cautious in testimony – Statements can be used by both agencies, so testimony should be carefully prepared.
• Explore settlement – Weigh pros and cons of early settlement with SEC to avoid criminal charges.
• Don’t destroy evidence – Document preservation is critical with parallel investigations.

The most important move is hiring skilled legal counsel. SEC and DOJ investigations require niche expertise in securities law and criminal defense.

Key Laws in Parallel Investigations

Some of the most common statutes involved in parallel SEC and DOJ securities investigations include:

Securities Exchange Act of 1934

This landmark securities law broadly prohibits fraud related to the purchase or sale of securities. Under Section 10(b), it is illegal to use manipulation or deception in connection with securities trading.

Parallel SEC and DOJ cases often include claims under Section 10(b) and related Rule 10b-5. The SEC can bring civil charges, while DOJ can pursue criminal charges and prison time.

Securities Act of 1933

Known as the “truth in securities” law, this act targets misrepresentations and omissions in connection with securities offerings. Section 17(a) prohibits fraud in the offer or sale of securities.

Again, the SEC has power to charge this civilly, while the DOJ can bring criminal cases. Section 24 specifically defines violations of the Securities Act as potential felonies.

Sarbanes-Oxley Act of 2002

Passed after the Enron scandal, Sarbanes-Oxley strengthened corporate governance and protections against fraud. It increased penalties under the Exchange Act while adding new charges.

Sarbanes-Oxley violations often appear in parallel cases, including falsifying records and lying to auditors under Section 802 and Section 1102.

Strategies in Parallel Investigations

Navigating parallel SEC and DOJ investigations requires strategic thinking and coordination. Some key strategies include:

• Pursuing global settlement – Resolving both cases together may lead to concessions.
• Seeking deferred prosecution – An agreement can suspend criminal charges.
• Cooperating against others – Providing substantial assistance to the agencies can reduce penalties.
• Asserting privilege claims – Protections like attorney-client privilege can limit evidence sharing.
• Avoiding joint meetings – Insist on separate sessions with SEC and DOJ to control narratives.

An experienced legal team will know how to strategically interact with the SEC and DOJ across both matters. The goal is mitigating the chance of criminal prosecution and reducing potential penalties.

The Bottom Line

An SEC target letter is bad enough. But a parallel DOJ investigation can turn a civil inquiry into a criminal one. The combined power of both agencies makes charges, and steeper punishments, much more likely.

If you receive a target letter, especially with DOJ involvement, retaining specialized counsel right away is critical. With an experienced legal team advising you, it’s possible to avoid criminal prosecution and seek the most favorable outcome.