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

Getting 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.

Going through simultaneous SEC and DOJ investigations can feel like legal whiplash. You respond to SEC requests, then get hit with DOJ subpoenas. It’s a lot to handle.

In this article, we’ll break down what happens when the SEC and DOJ investigate you at the same time, and how to handle it.

What is an SEC Target Letter?

A target letter from the SEC means they think you violated securities laws. This could include things like:

• Insider trading
• Accounting fraud
• Misleading investors

The SEC sends target letters to individuals or companies at the start of a formal investigation. The letter identifies you as a target and explains why.

For example, if the SEC is looking into accounting irregularities at your company, you may get a target letter about your role as CFO.

Why Do the SEC and DOJ Investigate Together?

The SEC and DOJ often team up on securities cases. They have a formal agreement to share information and resources.

The SEC is a civil enforcement agency. They investigate securities law violations and can bring civil charges. The DOJ prosecutes criminal cases. So they each play a role.

Cooperation between the agencies helps build stronger cases. The SEC gathers documents and testimony for the DOJ to use. In return, DOJ criminal charges can pressure targets into settling SEC charges.

Some common situations where they work together include:

• Accounting and disclosure fraud
• Insider trading rings
• Ponzi schemes
• Foreign bribery

In these cases, the SEC and DOJ pursue parallel investigations. The agencies share information but conduct separate interviews, subpoenas, etc.

The SEC Investigation Process

After you get an SEC target letter, the investigation phase begins. This involves formal requests for documents and testimony.

The SEC may issue subpoenas for emails, financial records, or other documents. They’ll also take sworn testimony from witnesses and targets.

Some tips for handling the SEC side:

• Hire experienced SEC defense counsel
• Negotiate the scope of requests
• Review documents before producing them
• Prepare thoroughly for testimony
• Assert privileges where appropriate

The SEC uses the investigation to build its case. They may uncover new areas to probe. You’ll need to respond to follow-up requests as the investigation develops.

DOJ’s Role in the Investigation

While the SEC conducts its civil probe, DOJ does a parallel criminal investigation. This can lead to criminal securities charges.

The DOJ typically gets involved in more egregious or complex cases. For example, large accounting frauds that hurt many investors.

DOJ tactics include:

• Interviewing witnesses
• Working with the FBI to gather evidence
• Issuing grand jury subpoenas
• Obtaining search warrants
• Undercover operations

DOJ prosecutors have broad authority to compel cooperation. If you refuse to comply, they can get a court order.

Handling Parallel Investigations

Dealing with simultaneous SEC and DOJ probes is challenging. The government wields tremendous power in these cases.

Here are some tips for navigating parallel investigations:

• Get experienced counsel for both SEC and criminal defense
• Understand your rights and obligations
• Craft a unified defense strategy
• Carefully prepare for SEC testimony
• Weigh the pros and cons of cooperating
• Explore early resolution options

Having one legal team coordinate the response can be efficient. But you need lawyers knowledgeable about both SEC and DOJ processes.

Cooperation with one agency can affect the other’s investigation. This requires careful strategic thinking.

Potential SEC Settlements

Most SEC probes end in a settlement. This resolves the matter without a trial.

Common SEC settlements include:

• Cease and desist order – Agrees to stop violating securities laws
• Civil fines – Monetary penalties
• Disgorgement – Repaying ill-gotten gains
• Bars – Being banned from the securities industry

Settling saves time and money over litigation. But it still means admitting wrongdoing. Some cases don’t settle if liability or sanctions are unreasonable.

Potential Criminal Charges

For serious or willful violations, the DOJ may pursue criminal charges.

Common securities crimes include:

• Securities fraud
• Accounting fraud
• Insider trading
• Ponzi schemes

Defendants face steep penalties if convicted, including:

• Prison time
• Fines
• Asset forfeiture

But the DOJ can’t file charges without a grand jury indictment. Your lawyers can present evidence and defenses to avoid indictment.

If you do get indicted, possible strategies include plea negotiations or trial.

Avoiding SEC and DOJ Prosecution

Here are some tips to avoid getting prosecuted by the SEC and DOJ:

• Implement strong compliance programs
• Promptly fix control weaknesses
• Conduct thorough internal investigations
• Self-report violations
• Cooperate fully during investigations
• Improve corporate culture

No compliance program is perfect. But showing regulators you take compliance seriously can help.

If issues do arise, investigating and disclosing them promptly shows good faith. SEC and DOJ give credit for self-reporting and cooperation.

Takeaways

Here are the key takeaways about parallel SEC and DOJ investigations:

• Getting an SEC target letter means you’re under formal investigation
• The SEC and DOJ often investigate securities violations together
• The SEC conducts a civil probe, while DOJ does a criminal one
• Managing parallel cases takes experienced counsel on both sides
• The SEC aims for settlements, but DOJ can bring criminal charges
• Strong compliance and cooperation may persuade regulators not to prosecute

Facing SEC and DOJ action is scary. But good legal advice and strategic decisions can help you navigate this challenging process.