How the SEC Works With the DOJ.

Parallel Investigations

The SEC and DOJ can (and often do) investigate the same conduct at the same time. If the SEC brings charges, it will be a civil matter; if the DOJ brings charges, it will potentially include criminal charges and prosecution for securities fraud.

While these two agencies communicate with each other during their investigations, they do not defer to each other. An agreement to settle with the SEC will not bind the DOJ unless the DOJ expressly agrees to join the agreement, and an agreement reached with the DOJ will not bind the SEC unless the SEC also expressly agrees. In both instances, while it is possible to avoid parallel enforcement actions, it requires a concerted effort on the part of the defendant.

When Parallel Investigations are Likely

Parallel investigations are very common and typically involve both a company and one or more individual executives who have decided not to accept responsibility and defend against the allegations. This scenario creates a complex environment in which executives may need to make strategic decisions on behalf of the company that have personal consequences (and vice-versa).

Common Scenarios Triggering Parallel Investigations

Accounting, Books, and Records

Accounting, books, records, and disclosure allegations frequently attract interest from both the SEC and DOJ. This is especially true where there are indications of criminal or fraudulent conduct, in which case a potential criminal investigation by the DOJ will run alongside a parallel investigation by the SEC.

Insider Trading

Insider trading allegations are another area in which there is often a parallel investigation involving both the SEC and DOJ. If an individual or entity bought or sold securities on the basis of material non-public information, this could trigger a civil inquiry by the SEC and a parallel criminal inquiry by the DOJ.

Market Manipulation

Similar allegations of market manipulation can generate both civil and criminal proceedings as well. This includes artificial price inflation (or deflation), fraudulent market conduct, and pump and dump schemes. In these cases, the DOJ may seek to file charges while the SEC also seeks to pursue an enforcement action under different rules and standards.

Can the SEC Share My Evidence with Criminal Prosecutors?

Statutory and Regulatory Authority

The SEC has broad authority to share information it obtains during the course of its investigations and enforcement proceedings with the DOJ and other criminal prosecutors. Exchange Act Section 21(d)(1) specifically authorizes the SEC to transmit, “along with other information which the Commission may determine to be pertinent,” to the Attorney General “any evidence and documents acquired in connection with any investigation undertaken under this section.”

Exchange Act Section 24(c) provides that the Commission “may, in its discretion and upon a showing that such information is needed, provide all ‘records’ (as defined in subsection (a)) and other information in its possession to such persons, both domestic and foreign, as the Commission by rule deems appropriate if the person receiving such records or information provides such assurances of confidentiality as the Commission deems appropriate.” SEC Rule 24c-1 implements this authority, providing that “The Commission’s officials and personnel may share nonpublic information with other government agencies” that are engaged in investigations or prosecutions for official purposes, “to the extent such personnel may believe it necessary to share the information.”

As a result, these provisions give the SEC expansive authority to facilitate joint investigations and share documents and testimony with prosecutors who are conducting parallel investigations into the same conduct that the SEC has investigated.

One-Way Information Sharing

Conversely, the Attorney General and the DOJ generally do not have similar authority to share information with the SEC. Exchange Act Section 24(c) specifically limits the SEC’s ability to access grand jury materials protected by Federal Rule of Criminal Procedure 6(e). However, this protection does not apply to other materials that the DOJ may have collected or produced during its investigation. This asymmetry makes the DOJ’s authority to share information more limited than that of the SEC, but as a result, it also makes it more difficult for companies and executives to protect their interests in parallel investigations.

While the DOJ and SEC can share documents, they cannot share information regarding pending grand jury proceedings or other materials protected by federal law or court rules. The SEC cannot intervene in grand jury proceedings, and it does not have access to grand jury documents unless the DOJ expressly consents.

Voluntary and Compelled Information

This information-sharing authority includes the SEC’s authority to disclose information that you may provide during an SEC inquiry (whether responding to the SEC’s request for voluntary compliance, providing evidence in a subpoena, or testifying in an SEC-initiated deposition). SEC Form 1662, which the SEC instructs companies, executives, and brokers to sign when providing information, includes a clear and unequivocal warning that “The U.S. Securities and Exchange Commission (“Commission”) may disclose any information you provide to the United States Department of Justice (“Department”) or to other law enforcement authorities, as the Commission deems appropriate.”

This includes sworn testimony and documents you provide in response to SEC inquiries. As the SEC makes clear on its website: “The Commission may share information it has gathered with the Department of Justice, the FBI, and other law enforcement agencies for the purpose of pursuing civil or criminal enforcement action. This includes, but is not limited to:

• Sworn testimony and records collected in connection with investigations
• Documents provided voluntarily by companies, executives, brokers, and others
• Documents produced in response to subpoena
• Documents and information provided by witnesses
• Wells submissions

These materials may also be disclosable as non-public records that are shared between the SEC and DOJ in accordance with SEC Rule 24c-1.”

Informal or Formal Investigations

Whether an inquiry is informal, formal, or something in between, the SEC’s ability to share information with criminal prosecutors remains largely the same. Even if the SEC chooses not to pursue enforcement action based on its inquiry, it may still share the information it has acquired with prosecutors based on the federal government’s information sharing rules.

Who Decides Whether the SEC or DOJ Brings Charges?

The DOJ’s Charging Decision

For criminal charges, 28 U.S.C. §547 directs the U.S. Attorney for each federal judicial district to “prosecute all offenses against the United States committed within [his] district.”

Although this is the relevant U.S. Attorney’s authority, the agencies, including the FBI, Postal Inspection Service, SEC, and the Drug Enforcement Administration, will gather the relevant evidence, and the DOJ prosecutors themselves will make the ultimate decision on whether to pursue criminal charges based on the evidence and the relevant standards set forth in the Justice Manual.

Pursuant to Justice Manual Section 9-27.220, a prosecutor should commence or recommend federal prosecution only if the prosecutor believes that the person’s conduct constitutes a federal offense and that “the admissible evidence will probably be sufficient to obtain and sustain a conviction,” unless the prosecution would serve no substantial federal interest, the person is subject to effective prosecution in another jurisdiction, or there exists an adequate non-criminal alternative to prosecution. The manual adds, “It is also important to consider whether the criminal matter would be more appropriately handled in a civil proceeding.”

The SEC’s Charging Decision

For the SEC, the SEC’s enforcement staff will ordinarily identify the relevant facts and law and then recommend the Commission take enforcement action when the enforcement staff’s recommendation meets the requisite standard. The five-member Commission will then ordinarily vote on the enforcement staff’s recommendation.

If the Commission votes to authorize enforcement action, that action is civil, the SEC cannot bring criminal charges, which only the DOJ can file, and the SEC will then pursue the action as authorized. If the Commission votes not to authorize enforcement action, the SEC’s enforcement staff may agree with the Commission or they may seek to present additional evidence or make additional arguments to convince the Commission. If the Commission does not authorize enforcement action, then unless the SEC has other bases to pursue the charges, the SEC’s investigation of that particular charge ends.

Potential defendants (and those who cooperate with the investigation) may attempt to persuade the SEC not to bring an enforcement action by responding to the SEC’s Wells Notice. While the SEC staff can decline to recommend Commission enforcement action, the DOJ will not be bound by the SEC’s decision not to pursue charges.

How Do Civil and Criminal Securities Cases Differ?

Evidence Standards

One of the most significant differences between the SEC and the DOJ is the evidence standard for pursuing liability. For civil enforcement actions, the SEC generally needs to prove its case by a preponderance of the evidence. This means that a fact that is more likely to be true than not will be considered to be true in light of a preponderance of the evidence. Conversely, the DOJ must prove every element of a criminal offense beyond a reasonable doubt. It should be noted that the evidence standard for disgorgement in an SEC case is the same as for civil penalties: a preponderance of the evidence.

Statute of Limitations

The statute of limitations for civil securities cases is typically limited to five years. However, after the Supreme Court’s decision in Liu v. SEC, where the Supreme Court decided that the SEC’s authority to seek disgorgement is limited to “unjust enrichment,” Congress passed a law to increase the time period in which the SEC could seek disgorgement for scienter-based securities violations. 15 U.S.C. §78u(d)(8) provides that the statute of limitations for disgorgement claims based on scienter-based violations is limited to ten years in “all civil actions brought by the Commission to compel disgorgement as a result of a violation of section 16(b) or any action that commenced before June 30, 2005 . .. as a result of a violation of subsection(b) of section 10(b) of the Securities Exchange Act of 1934, section 17(a) of the Securities Act of 1933, or subsection (i) or (j) of section 20 of the Securities Act or any action commenced after May 20, 2024, to compel disgorgement as a result of a violation of section 10(b) of the Exchange Act, or section 17(a) of the Act, in which the claim to disgorgement does not depend on the plaintiff proving the defendant acted with scienter.”

In criminal cases, the statute of limitations is generally longer. The statute of limitations for federal securities-fraud offenses is generally six years: no person may be “prosecuted, tried, or punished for a securities fraud offense, unless the indictment is found or the information is instituted within 6 years after the commission of the offense.” 18 U.S.C. §3301.

For most federal criminal cases, the statute of limitations is five years. However, in most cases, those charged under the Bank Secrecy Act, Anti-Money Laundering, and Fraud enforcement statutes will find it more difficult to avoid civil prosecution due to the SEC’s broadened disgorgement statute of limitations.

Remedies and Penalties

The remedies and penalties that the SEC can pursue are quite different from those that are available to the DOJ. With civil enforcement actions, the SEC can pursue:

• Injunctions (e.g., barring certain conduct)
• Disgorgement of ill-gotten proceeds
• Civil penalties
• Officer-and-director bars

With criminal enforcement actions, the DOJ can seek judgments and penalties that include:

• Imprisonment
• Fines
• Forfeiture
• Probation
• Restitution

For a number of offenses, the DOJ can pursue both civil and criminal proceedings. For example, while DOJ prosecutors will often pursue charges under securities law and a matching fraud charge, such as wire fraud, the DOJ can pursue both. A civil prosecution by the SEC could result in a monetary disgorgement and/or civil penalties, while the DOJ’s criminal prosecution could result in federal imprisonment and/or criminal fines, penalties, and/or restitution.

Spodek Law Group, led by managing partner Todd Spodek, defends clients in federal criminal and white collar matters.

Can a Related Criminal Investigation Affect the SEC’s Next Steps?

Access to Evidence and Property

The most significant aspect of the DOJ’s involvement is how the DOJ may help the SEC gather evidence. While Exchange Act Section 21(b) allows the SEC’s staff to use subpoenas to obtain testimony and documentary evidence, SEC staff do not have the authority to conduct searches or seize property without the owner’s consent. SEC civil subpoenas can only be used to request documents and testimony; they cannot be used to authorize searches or seizures.

The DOJ and the FBI, however, are empowered to conduct searches and seize documents and property. They can use warrants in accordance with Federal Rule of Criminal Procedure 41 in criminal investigations. As a result, a parallel criminal investigation by the DOJ can allow the SEC to obtain information that is otherwise unavailable.

Investigative Steps and Strategy

While a criminal investigation will typically not affect the SEC’s next investigative steps, the SEC’s enforcement staff can take steps to ensure that the DOJ can pursue its parallel criminal investigation. This includes delaying certain investigative steps that may compromise the DOJ’s ability to pursue criminal charges. For example, the SEC’s enforcement staff may not send subpoenas for testimony or records until they are sure that the DOJ is ready to seek criminal indictments.

Impact of a Related Criminal Investigation on an SEC Civil Proceeding

While a related criminal investigation can (and often will) have some consequences, it generally does not warrant delaying the SEC’s proceeding. In United States v. Kordel, 822 F. Supp. 138, 144 (S.D. Fla. 1993), the court ruled that, “The presence of a concurrent proceeding is not an absolute bar to parallel civil enforcement. Prosecution cannot be enjoined unless it is shown that the proceedings have given the United States an unfair advantage.” As a result, a related criminal investigation will not per se warrant a stay of an SEC proceeding, and civil and criminal proceedings can continue to proceed simultaneously.

Still, in certain cases, a related criminal proceeding can warrant a stay of an SEC civil case. Courts generally consider civil discovery at this stage of a criminal case and criminal case before allowing a stay, although stays of SEC civil cases in light of related criminal proceedings are not uncommon. However, this is typically determined on a case-by-case basis, and the stay will generally be limited to delaying the SEC’s requests for discovery.

How Do Parallel Proceedings Affect My Rights and Defense?

Fifth Amendment Rights

Although the Fifth Amendment offers broad protection against self-incrimination, it is a personal privilege. Therefore, corporations have no right to invoke the Fifth Amendment. As a result, while individuals can refuse to answer potentially incriminating questions during their testimony to the SEC, corporations can only refuse to answer questions if it would be necessary to produce documents the company or the individual answering the question has privileged authority to withhold.

It is important to note that, while parties are entitled to invoke the Fifth Amendment, this has consequences. In criminal cases, the factfinder cannot draw adverse inferences from a defendant’s silence. However, in civil cases, the factfinder may be allowed to draw adverse inferences from a defendant’s silence (though this differs by jurisdiction).

Waiver of Privilege

Voluntary disclosure of information to the SEC is one way that individuals and companies may waive their privilege against subsequent parties. While the government generally cannot use disclosures made during a voluntary interaction with the SEC as evidence in civil litigation against a party, an agreement to disclose privileged information to the SEC is voluntary and may result in a waiver of the applicable attorney-client or other privileges.

Fee Advancement

The DOJ’s decision to pursue a parallel criminal investigation generally has no effect on a company’s obligation to advance an executive’s legal fees. Instead, whether a company must advance legal fees for an executive, broker, or other party depends on the company’s governing documents, applicable corporate law, and any other relevant contractual provisions.

Federal Discovery Rules

The federal rules of civil and criminal procedure differ in significant respects, including those pertaining to discovery. In a criminal case, the government’s obligation to disclose evidence under Rule 16 is generally not as broad as the government’s obligation to produce evidence in civil cases.

Conversely, a civil deposition is a powerful discovery tool. This is a powerful tool for the SEC that is not readily available in a criminal case. If the SEC takes a deposition, it will create a record that can then be shared with the DOJ and prosecutors.

As a result, parallel proceedings can be particularly risky, creating numerous collateral consequences for companies, executives, brokers, and others. These consequences include not only reputational, commercial, licensing, and debarment risk, but also additional civil and criminal litigation risk.

Does Resolving One Case End the Other Investigation?

SEC Civil Resolution

An agreement with the SEC to resolve its civil allegations will not confer immunity from criminal prosecution. The DOJ is not bound by the SEC’s civil resolution, unless the DOJ expressly agrees to join the agreement.

While an agreement with the SEC’s staff to avoid civil or criminal enforcement may end the SEC’s current inquiry, the individual or entity should continue to assume the possibility of criminal prosecution unless the DOJ also affirmatively declines to pursue the case.

SEC Staff’s Closing Letter

When the SEC’s staff has no evidence to support enforcement action, it will typically issue a closing letter. An SEC staff closing letter is not an adjudication by the SEC Commission. While the SEC’s staff may choose not to pursue civil or criminal enforcement action, it can reopen its case upon receiving new information or having new reason to believe the evidence or circumstances warrant reconsideration.

DOJ’s Decision Not to Pursue Prosecution

A DOJ declination to pursue criminal prosecution is not a judicial finding of guilt or innocence, but a decision by the DOJ’s prosecutors regarding the allocation of resources among pending cases. If new evidence becomes available, criminal prosecution may still be warranted.

In some cases, the DOJ will offer to enter into a deferred prosecution agreement (DPA) or non-prosecution agreement (NPA).

• A deferred prosecution agreement (DPA) postpones criminal prosecution. When entering into a DPA, the individual or entity typically agrees to meet the conditions negotiated by the DOJ, and in exchange, the DOJ will typically agree to delay pursuing a criminal case for a set amount of time. If the individual or entity is able to satisfy all requirements in the DPA, the DOJ may then choose to refrain from pursuing the case. However, if criminal prosecution still warrants pursued based on newly available evidence, the DOJ may end the DPA prematurely.
• In contrast to a DPA, a non-prosecution agreement (NPA) is a conditional promise that the DOJ will not file criminal charges. Like a DPA, an NPA is entered into by the individual or entity to avoid prosecution and requires satisfaction of the DOJ’s demands for the NPA to take effect.

Neither a deferred prosecution agreement nor a non-prosecution agreement constitutes an acquittal. If the SEC does not agree to forego pursuing enforcement action as well, then an SEC civil proceeding could continue following a DPA or NPA.

Criminal Acquittal

Finally, a criminal acquittal (or any other outcome of a criminal case) typically does not end the SEC’s civil proceeding. With criminal cases, the DOJ must prove liability beyond a reasonable doubt; however, with civil cases, the SEC must show liability by a preponderance of the evidence. As a result, a criminal acquittal will typically not prevent civil liability. However, in some cases, this may be true.

Given the complexities and the unique issues presented in parallel SEC and DOJ investigations, it is important to retain experienced SEC defense counsel. Our SEC defense firm has prior experience in both civil and criminal investigations, and we can represent you in parallel proceedings. If you would like to discuss your situation further, reach out to a senior SEC defense attorney today.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.