Federal Securities Fraud: SEC and Criminal Investigations.

While the SEC is a federal law enforcement agency with significant investigative authority, it is important to understand that the SEC does not prosecute criminal cases. Criminal prosecution is the sole purview of the Department of Justice (DOJ). If the SEC concludes that criminal conduct is involved in a matter, the SEC may refer the investigation to the DOJ for criminal prosecution. It is also possible for the SEC and the DOJ to conduct parallel proceedings. In this scenario, the SEC continues its civil investigation while the DOJ proceeds with its criminal investigation concurrently. Because information and evidence may be shared between the two agencies, any evidence gathered during the SEC’s civil investigation could potentially be used to support a criminal case brought by the DOJ. If you or your company are contacted by the SEC in connection with a civil investigation, it is important to be aware that answers provided during a voluntary interview or a compelled deposition could potentially be used against you in a subsequent criminal proceeding conducted by the DOJ. This is true regardless of whether answers were provided voluntarily or in response to a subpoena. Consequently, it is imperative to be extremely careful when interacting with the SEC, as there are real risks of self-incrimination when facing potential criminal charges. Because of the risks involved in an SEC investigation and the possibility of parallel proceedings, it is important to make informed and strategic decisions throughout the investigation process. From choosing whether or not to cooperate to deciding what information and testimony to provide and how to respond to subpoenas and other requests for information, every step in the process is significant. At Spodek Law Group, our team of attorneys can advise you of the potential consequences of your case, and we can work to resolve the matter as quickly and favorably as possible. We can represent you in interactions with the SEC and DOJ, evaluate the evidence in your case, and proactively work toward protecting your interests.

How Does an SEC Inquiry Move from a Hidden Lead to a Wells Notice?

The SEC’s enforcement program is one of the largest of any federal agency. Much of this is due to the program’s use of voluntary information from third parties, and when necessary, compelling information from third parties, as well as third-party referrals from sources such as the Financial Industry Regulatory Authority (FINRA), the Department of Justice (DOJ), and the U.S. Postal Inspection Service.

In most cases, SEC enforcement action begins with a complaint from an investor, allegations from a disgruntled employee, tips from competitors, and whistleblowers. SEC’s monitoring systems and review of company filings, media reports, and other sources can also trigger investigations, and as a result, investigations can often be initiated long before individuals and companies are even aware of their status. The SEC is a federal law enforcement agency whose role is primarily to enforce the federal securities laws through civil and administrative proceedings. The SEC is authorized to conduct investigations, request information (or compel a response when necessary), initiate enforcement proceedings, and seek civil fines and other monetary sanctions.

The scope of the SEC’s investigative authority is far-reaching. The agency has the power to investigate conduct that exceeds simply trading on the exchange or over-the-counter stock markets. While criminal prosecution is not a tool of the SEC, if the SEC discovers evidence of criminal conduct, it may forward its findings to the DOJ for criminal prosecution.

The SEC may also pursue civil or administrative enforcement alongside any DOJ criminal proceedings. In other words, individuals and companies targeted by the DOJ can expect to face civil and administrative consequences as well. When facing scrutiny from the SEC or DOJ, it is important to make informed decisions. While the possibility of facing criminal charges can often lead to an initial hesitation to cooperate with the SEC, that hesitation can increase the likelihood of facing civil charges and other administrative consequences.

When you receive a Wells notice, the SEC staff is signaling that it has made a preliminary determination to recommend that the Commission file an action or institute a proceeding and has preliminarily identified the violations to include in that recommendation. In this situation, it is important to contact defense counsel as soon as possible.

At Spodek Law Group, our defense team deals with the SEC and DOJ. Our legal team is well-acquainted with their investigative processes. We represent clients in SEC investigations, civil enforcement actions, DOJ criminal matters, parallel proceedings, and grand jury proceedings.

Which Alleged Conduct Can Support Section 1348 or Related Federal Charges?

18 U.S.C. § 1348(1) and (2) prohibit knowingly executing or attempting to execute schemes to defraud a person in connection with specified commodities or securities, or to obtain money or property by false or fraudulent pretenses in connection with the purchase or sale of those commodities or securities.

Section 1348(a)

18 U.S.C. § 1348(1) and (2) cover knowingly executing or attempting to execute a scheme or artifice to defraud any person in connection with any commodity for future delivery, any option on a commodity for future delivery, or any qualifying security of an issuer, or to obtain money or property by false or fraudulent pretenses in connection with the purchase or sale of those commodities or securities.

Although 18 U.S.C. § 1348(1) and (2) cover commodities transactions, the statute itself also expressly covers qualifying securities of an issuer.

As a result, 18 U.S.C. § 1348 has been used to support fraud-related criminal allegations in exchange, over-the-counter, and other markets.

Section 1348(b)

Section 1348(b) expressly extends the scope of Section 1348(a) by prohibiting “Whoever knowingly executes, or attempts to execute, a scheme or artifice-(1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); or (2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d));”

18 U.S.C. § 1348(1) and (2) require executing, or attempting to execute, a covered scheme “knowingly.”

The Criminal Elements of Securities Fraud

The criminal elements of securities fraud cases vary depending upon the specific conduct alleged and the specific statutes charged. For example, pump-and-dump schemes typically involve misleading media coverage or investor promotion preceding the sale of artificially inflated securities by issuers, major holders, or company insiders. Insider-trading allegations commonly involve trading on material non-public information acquired in breach of a duty of trust and confidence owed to the securities issuer.

These allegations require establishing various specific facts and circumstances. If you are facing allegations of securities fraud, one of your priorities should be to work with federal securities fraud defense counsel to identify any issues and errors the DOJ or SEC have made when collecting evidence and assessing the facts.

How do Civil Findings, Criminal Proof, and Professional Penalties Differ?

Under 18 U.S.C. § 1348, a criminal conviction carries a potential imprisonment term of up to twenty-five years. As a result, 18 U.S.C. § 1348 is frequently used in criminal cases where a defendant potentially faces a significant imprisonment term. When sentencing defendants convicted of federal securities fraud under Section 1348(a), federal sentencing judges will consider both the relevant provisions of the Sentencing Guidelines and the specific circumstances involved in order to determine the sentence. Other penalties that may be at issue in criminal securities fraud cases include restitution, probation, fines, and forfeiture.

Civil enforcement actions taken under the federal securities laws are civil matters. As a result, civil enforcement actions do not themselves carry the potential for imprisonment or other criminal penalties Instead, civil enforcement actions targeted at securities violations generally seek monetary fines, injunctions, and other civil sanctions. Notably, while the SEC can seek disgorgement in civil enforcement actions in certain circumstances, treble damages are not automatically imposed in civil securities enforcement cases.

Along with civil and criminal penalties, securities-fraud allegations can also lead to professional penalties. With respect to registered investment advisors and other licensed investment professionals, a conviction for securities fraud will typically lead to the loss of their professional license, or will be a primary factor in license revocation proceedings. The loss of a professional license can also be a factor if civil enforcement proceedings are initiated under the federal securities laws.

In light of the potential consequences of facing scrutiny from federal authorities, investing early and wisely in federal securities fraud defense counsel is critical. At Spodek Law Group, we can evaluate the evidence in your case and work out a plan that prioritizes protecting you or your company. We can assist with your decision to cooperate, assist with managing the discovery process, and assist with preparing your case for trial if necessary. In addition to acting as your defense counsel in any investigations or enforcement proceedings, we can also work with the government to reach a favorable resolution whenever possible.

Where to Go From Here

If any of this describes your situation, the next step is a conversation rather than more reading. Spodek Law Group runs a fully online client portal and represents clients coast to coast, with offices in New York, Brooklyn, Queens and Los Angeles. The number is 888 348 8028.