Litigating Against the SEC: When to Fight Back.

Litigating Against the SEC: When to Fight Back Spodek Law Group

lawyers can and often do develop defense strategies for securities investigations at the examination and informal inquiry stage. We also have extensive experience representing clients in parallel SEC civil and DOJ criminal investigations. In such investigations, which often target related parties, we use the information we obtain from our defense efforts to resolve the matter pre-litigation. Our attorneys’ experience developing successful defense strategies includes effectively utilizing the “Wells submission,” the pre-litigation stage during which companies, individuals, and others can challenge the facts, legal theories, evidentiary sufficiency, and the SEC’s own enforcement policies. At trial, the SEC generally has to prove its allegations to a “preponderance of the evidence” in order to establish civil liability for securities fraud or other civil violations. That is a lower standard of proof than prosecutors must use in criminal cases to establish guilt “beyond a reasonable doubt.” However, meeting that standard is not guaranteed. When required to litigate to protect our clients’ reputations and financial interests, we have successfully: - Obtained a complete defense verdict in an SEC civil case against CapWealth Advisors;

• Got a federal district court to dismiss the SEC’s entire lawsuit against Richard Heart;
• Persuaded the SEC not to file civil enforcement action after our attorneys presented it with overwhelming evidence exonerating our client; and,
• Successfully protected our client in an SEC criminal fraud prosecution. If you want to calculate the SEC litigation success rate of a federal securities defense attorney, you must divide their favorable outcomes by the total number of comparable matters that they have handled. You can verify that this number includes all of the pertinent outcomes by requesting from the attorney:
• The names of the parties involved;
• The docket numbers;
• The dates; and,
• The final dispositions of the matters involved.

  What Is an SEC Subpoena?

  An SEC subpoena is a legal document that compels a party to turn over specified documents, records, or testimony to the SEC. For companies and individuals who receive subpoenas, compliance requires preservation, collection, review, and production. However, these compliance efforts must be completed before the merits litigation that follows the SEC’s investigation even begins.

  What Is an SEC Wells Notice?

  An SEC Wells notice is a document that reflects the SEC’s enforcement staff’s preliminary decision to recommend that the Commission authorize enforcement charges. While issuing a Wells notice is often a pre-litigation formality, it provides targeted parties the opportunity to fight back before litigation begins. The enforcement staff can modify its recommendations, or abandon them altogether, after reviewing a well-crafted Wells submission.

  How Does a Wells Notice Differ from a Subpoena?

  The primary difference between a Wells notice and an SEC subpoena is that the Wells notice is issued at a later stage of an SEC investigation. By the time the SEC issues a Wells notice, its staff has already determined that it wants to seek enforcement action. This means that the Wells notice represents a much higher level of risk.

  What Happens after an SEC Staffer’s Wells Recommendation?

  If the SEC’s enforcement staff decides to recommend an enforcement action against a party, it must present that recommendation to the Commission. Commission authorization is required before the enforcement staff can file an action.

  How Does the SEC File an Enforcement Action?

  The SEC can file its enforcement actions in either federal district court or administrative proceedings. A federal complaint initiates an SEC civil enforcement action in district court, while a Commission-issued order instituting proceedings initiates an SEC administrative enforcement proceeding.

  What Is the Role of the SEC in Federal Securities Fraud Cases?

  The SEC’s role is to investigate and prosecute federal securities fraud cases. It can conduct interviews, collect proffers, and compel witness testimony in order to obtain the information it needs in order to pursue enforcement action. The SEC’s role also includes developing regulations for the financial services industry and other areas, as well as maintaining the federal securities markets, protecting retail investors, and implementing SEC rules and regulations.

  Does the SEC Have a Secret Police Force?

  The SEC has no police force of any kind. It is a civil law enforcement agency, and its investigators gather evidence through document requests, subpoenas, and sworn testimony rather than surveillance. Criminal investigative tools are available only to the Department of Justice and the FBI, to which the SEC refers matters that may warrant criminal charges. While this does not mean that it is the most powerful agency in the government, it does have the ability to conduct investigations into anyone who may be violating federal securities laws.

If you have received an SEC subpoena, Wells notice, or are otherwise concerned about the SEC’s activities, reach out to Spodek Law Group now to speak with an SEC defense attorney. We offer free and confidential initial consultations for prospective clients, and we can help you make informed decisions about your next steps.

How should you compare an SEC settlement against litigation?

Why Does it Matter How the SEC’s Settlement “Denial” Provisions Affect My Decision to Settle?

The SEC rescinded its prior prohibition on “denial” language in settlement agreements on May 28, 2026. That means that if you agree to settle, the language that goes into the settlement agreement is now negotiable. So, if you and the SEC’s enforcement staff agree to terms, the only way you won’t have “no admission or denial” language in your settlement agreement is if you don’t negotiate for it.

How Do I Compare the Economics of an SEC Settlement Against Those of SEC Litigation?

When weighing the economics of an SEC settlement against the economics of SEC litigation, you must look beyond the SEC’s demanded monetary relief. In addition to the cost of the settlement itself, the financial consequences of settling can also include:

• Your defense costs;
• The cost of business disruption; and,
• Any other collateral consequences.

For example, if the SEC requires you to make changes to your company’s internal policies, this could lead to significant costs. As a result, when calculating the economics of an SEC settlement, you must account for all costs that could potentially arise from settling.

What Are the Non-Monetary Terms of an SEC Settlement?

In addition to monetary relief, the SEC’s settlement terms can also include:

• Injunctions, an injunction is a court order that requires you to refrain from committing similar violations in the future;
• Bars, a bar is a similar court order or administrative order that bars you from serving as an officer or director of a public company;
• Undertakings, an undertaking is a settlement term that requires you to adopt a set of measures, such as hiring a compliance consultant to examine your internal policies and procedures, to ensure that you comply with securities laws in the future;
• Admissions, although relatively rare, the SEC also requires admissions of fault or culpability as a condition of settlement; and,
• Automatic Regulatory Disqualifications, settlement terms that include “ bad actor” disqualifications can also prevent you from relying on the private offering exemptions of Rule 506(b) or 506(c).

  What are the Limitations on the Amount of Disgorgement the SEC Can Demand in an SEC Settlement?

  As a result of the Supreme Court’s decision in Liu v. SEC, the SEC is now limited in the amount of disgorgement it can demand. Generally, the SEC can only seek disgorgement up to the net profits obtained as a result of the alleged securities fraud. This means that if you commit securities fraud that nets you $10 million in profits, the SEC can seek to disgorge up to $10 million plus prejudgment interest. However, it cannot seek to recover the $50 million you allegedly stole from your victims.

  What Are the “Bad Actor” Disqualifications in the Federal Securities Law?

  Rule 506(d) of Regulation D prohibits companies and individuals from relying on the “ safe harbor” private offering exemptions in Rule 506(b) and 506(c) if they have previously been subject to certain “bad actor” disqualifications. These “bad actor” disqualifications include being subject to a certain SEC order or a certain court judgment within a “ relevant period.” Some examples include:

• A final order or judgment from the SEC or a federal court prohibiting you from aiding or abetting securities fraud;
• A cease-and-desist order from the SEC with respect to certain violations of Section 10(b) of the Securities Exchange Act of 1934 or Section 17(a) of the Securities Act of 1933; and,
• A “scienter-based” injunction from a federal court.

  What Are “Undertakings” in an SEC Settlement?

  In an SEC settlement, undertakings are terms and conditions that an individual or company must agree to in order to resolve an enforcement case without facing litigation. These undertakings can include:

• Adopting a compliance consultant;
• Updating internal policies;
• Certifying compliance with securities laws;
• Providing the SEC with periodic reporting;
• Seeking legal advice;
• Appointing a compliance officer;
• Implementing new anti-fraud compliance systems; and,
• Maintaining and enhancing customer and investor protection programs.

  What Was the SEC’s May 28, 2026, Rescission of its Settlement “Denial” Policy?

  On May 18, 2026, the SEC issued a final rule and order rescinding Rule 202.5(e), the “no-deny” portion of its settlement policy. In doing so, the SEC made “denial” language negotiable, rather than categorically prohibited.

This means that if you are considering settling with the SEC, you can negotiate the language of your settlement agreement. This will allow you to protect yourself against future civil and criminal enforcement proceedings. The extent of your rights under the 2026 rescission will depend on how well your counsel is able to negotiate with the SEC, and it will also depend on the SEC’s willingness to agree to “no admission or denial” language.

Do I Have Advancement or Indemnification Rights Under Federal Securities Law?

Generally, advancement and indemnification rights are not created under federal securities law. Instead, these rights typically are created under applicable state law or under a company’s governing documents. If you have any questions about your right to advancement or indemnification, our attorneys will be able to assist.

When should a company self-report, cooperate, or preserve defenses?

When Should Companies Consider Remediation, Self-Reporting, or Cooperating with the SEC?

Generally, before the SEC reaches out, company counsel should evaluate whether remediation, self-reporting, or cooperating is warranted. In cases where an internal investigation is warranted, boards and audit committees will commission an independent investigation. If it is necessary, the company will then work with the SEC under the SEC’s Seaboard framework, which takes into consideration a company’s efforts to engage in self-policing, self-reporting, remediation, and cooperation.

Will Self-Reporting or Cooperating Lead to Reduced Charges or Sanctions?

While self-reporting and cooperating can improve a company’s prospects for favorable results, neither guarantees reduced charges, reduced sanctions, or avoiding enforcement action entirely. This means that companies need to consider the benefits of self-reporting or cooperating against the risks.

When Does Joint Representation Become Conflict-of-Interests?

Companies and executives can, and often should, jointly retain counsel during SEC investigations. However, joint representation becomes a conflict-of-interest issue if the company’s interests and the individual’s interests materially diverge in either of these key areas:

• The development of their defenses; or,
• The pursuit of settlements with the SEC.

  What Is an Upjohn Warning?

  When company counsel conducts interviews in an internal investigation, it generally provides all interviewees with an Upjohn warning. With an Upjohn warning, company counsel clarifies that it represents only the company, and that it does not represent the interviewee. This means that the interview is still privileged, but the privilege belongs to the company rather than to the interviewee, so the company alone decides whether to waive it and disclose what the interviewee said.

  Is Waiving Attorney-Client Privilege or the Work-Product Protection Necessary to Cooperate with the SEC?

  Not necessarily. For example, companies and executives can voluntarily disclose to the SEC a red-lined version of a document while preserving the privilege for the red-lined information. They can also voluntarily disclose the fact that they conducted an internal investigation without waiving the attorney-client privilege that attaches to the investigation. They can also waive the attorney-client privilege by offering to disclose their interviewed employees for testimony under certain circumstances. However, before companies or executives voluntarily disclose information, they need to ensure that the information will not be subject to disclosure to prosecutors or other agencies.

  Does Filing SEC Form 1662 Waive the Attorney-Client Privilege?

  Receiving SEC Form 1662 does not waive the attorney-client privilege, because Form 1662 is not a disclosure form at all. It is the SEC’s “Supplemental Information for Persons Requested to Supply Information Voluntarily or Directed to Supply Information Pursuant to a Commission Subpoena,” which the enforcement staff provides to witnesses to explain their rights, the routine uses the Commission may make of the information they supply, and the penalties for false statements. However, SEC Form 1662 explicitly states that information disclosed to the SEC under the form is subject to disclosure to the Department of Justice, other federal agencies, and other parties. In other words, while you will not waive the privilege, you are providing the SEC with information that it can then share with other agencies.

  How Did the Jarkesy Decision Change the SEC’s Forum and Jury Trial Strategy?

  The SEC’s enforcement power proceeds through either federal lawsuits or through agency administrative proceedings. In a federal lawsuit, the case will go through traditional civil litigation in federal district court. In an agency administrative proceeding, however, the case will proceed before the SEC’s own in-house administrative law judge.

The Supreme Court’s decision in Jarkesy recognized a Seventh Amendment jury right for certain types of SEC securities-fraud civil-penalty claims. This means that if the SEC seeks a civil penalty, it must file a federal lawsuit rather than an administrative proceeding. If the SEC attempts to file the penalties through an administrative proceeding, defendants can seek a referral to federal district court under the Axon v. SEC.

What Are the SEC’s Administrative Proceedings?

The SEC’s administrative proceedings are quasi-judicial proceedings that use different adjudicators and procedural rules than federal civil actions. If you have been named as a defendant in an administrative proceeding, you must challenge the allegations before an administrative law judge. However, in a federal civil action, defendants can challenge the SEC’s pleadings under Rule 12 or the factual allegations under Rule 56 prior to the trial.

Can I Challenge the SEC’s Administrative Proceeding?

Yes, in certain cases, defendants can challenge an SEC administrative proceeding. In Axon v. SEC, the Supreme Court held that while companies or individuals who are subject to the SEC’s administrative proceedings generally cannot challenge their structural constitutional rights before a federal court in an interlocutory appeal, this does not apply to cases involving structural constitutional challenges. Thus, if an SEC enforcement action is initiated in an administrative proceeding, you may challenge the proceeding as unconstitutional in the relevant federal district court.

However, a federal district court judge’s conclusion that you are entitled to a jury trial only allows you to move the case to district court for trial, not to dismiss the case. Once the case moves to the district court, the burden of proof remains on the SEC.

Are FINRA Proceedings Also Subject to the Jarkesy Decision?

The FINRA proceedings are distinct from the SEC’s enforcement actions. While the SEC provides a regulatory role for FINRA, FINRA’s proceedings do not generally involve SEC authority. Thus, the Jarkesy decision does not generally apply to FINRA proceedings.

Does the PCAOB also Have an Enforcement Division?

Yes, the PCAOB has an Enforcement Division that targets audit firms and other accounting professionals. While the PCAOB has similar authority to the SEC in certain cases, its authority is strictly limited to auditing matters.

How Long Can an SEC Investigation Remain Open?

Generally, the SEC has no fixed deadline for completing its investigations. However, the SEC must file civil penalty claims within a five-year limitations period under 28 U.S.C. § 2462 (though certain scienter-based disgorgement claims and equitable-remedy claims have longer limitations periods).

Companies and executives who are under investigation can obtain a tolling agreement with the SEC to give the SEC’s enforcement staff more time to pursue enforcement action. While signing a tolling agreement is common, these agreements typically suspend your limitations defenses during the period covered by the agreement.

What Are the Limitations Periods for SEC Enforcement Actions?

Under 28 U.S.C. § 2462, the general limitations period for civil penalty claims is five years. However, under 15 U.S.C. § 78u(d)(8)(A)(ii), the period for pursuing scienter-based disgorgement claims is ten years. In addition, claims that only seek equitable remedies under 15 U.S.C. § 78u(d)(8)(B) also have a ten-year limitations period.

What Does it Mean When an SEC Investigation Closes?

When an SEC investigation closes, the enforcement staff has completed its inquiry without recommending action to the Commission. While a closing letter means that you do not currently face liability for securities fraud, a closing letter is not an adjudicated merits victory. So, if the SEC’s enforcement staff pursues action against another party to your investigation, this may result in new information coming to light that allows the SEC’s enforcement staff to re-open your investigation.

How Quickly Did the SEC’s Enforcement Staff Close Your Last SEC Crowdfunding Investigation?

The SEC’s enforcement staff closed our last SEC crowdfunding investigation within four months of our client’s retention of new counsel.

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.