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Parallel Civil and Criminal Investigations After Receiving SEC Target Letters


Parallel Civil and Criminal Investigations After Receiving SEC Target Letters

If you or your company receives a target letter from the Securities and Exchange Commission (SEC), it likely means you are under investigation for potential violations of federal securities laws. While concerning, receiving a target letter does not necessarily mean you will face criminal charges. However, it does signal that the SEC’s investigation has reached an advanced stage and you could become a defendant in a civil or criminal case.

In today’s enforcement environment, many SEC investigations prompt parallel criminal inquiries by the Department of Justice (DOJ). So if you get an SEC target letter, there’s a good chance criminal prosecutors are also looking into the matter. This article provides an overview of parallel proceedings, how criminal and civil SEC investigations work, and key issues to consider if you find yourself in this situation.

Overview of Parallel Proceedings

Parallel proceedings refer to simultaneous or consecutive investigations of the same alleged misconduct by multiple government agencies[4]. This often involves a criminal inquiry by the DOJ and a civil investigation by the SEC. Other agencies like the Commodity Futures Trading Commission (CFTC) or federal banking regulators may also be involved.

Government agencies say parallel probes promote comprehensive enforcement and allow both criminal punishment and civil remedies[5]. But critics argue they give prosecutors unfair leverage and evade constitutional protections for criminal defendants[4]. There are also concerns about coordination between agencies eroding the separation of civil and criminal law.

Whatever your view, parallel proceedings are now common in cases involving public companies, securities fraud, accounting issues, insider trading, and other white collar offenses. So understanding how parallel SEC and criminal investigations work is critical for anyone in this situation.

How Criminal and Civil SEC Investigations Unfold

Before diving into issues raised by parallel probes, let’s review how typical SEC and criminal investigations progress:

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SEC Investigations

The SEC has broad authority to investigate potential violations of federal securities laws under the Securities Exchange Act of 1934 and the Securities Act of 1933[2]. This includes matters like:

  • Accounting fraud
  • Insider trading
  • Misleading disclosures
  • Offering fraud
  • Investment adviser issues

SEC probes often begin with an informal inquiry. At this stage, SEC staff can issue subpoenas for documents and take investigative testimony. If the inquiry uncovers evidence of wrongdoing, the SEC may open a formal investigation and issue target letters to suspected participants[2].

The target letter identifies you as a target of the investigation. This means the SEC staff has determined it has sufficient evidence for potential civil enforcement action against you. Targets are distinguished from subjects, who have a lower level of exposure.

If the SEC decides to file a civil enforcement action, common remedies include[2]:

  • Injunctions
  • Disgorgement of ill-gotten gains
  • Civil monetary penalties
  • Bars from serving as a public company officer or director

The SEC may also refer matters to the DOJ for criminal prosecution. But the SEC does not have authority to bring criminal charges on its own.

Criminal Investigations

In parallel with an SEC inquiry, federal prosecutors can investigate if they suspect criminal violations of securities laws or other federal statutes like mail/wire fraud or false statements. Common criminal charges in these cases include[1]:

  • Securities fraud
  • Accounting fraud
  • Insider trading
  • Obstruction of justice
  • False statements

Prosecutors have broad powers to gather evidence through search warrants, subpoenas, witness interviews, and grand jury proceedings. Targets of criminal probes may receive a target letter from the DOJ outlining their status and potential charges.

If indicted and convicted, defendants face harsh criminal penalties like multi-year prison sentences and heavy fines. The government can also seek forfeiture of assets linked to the offenses.

Key Issues in Parallel Investigations

Parallel SEC and criminal probes raise several important issues to consider when responding:

Coordination Between Agencies

Extensive coordination occurs between the SEC and DOJ in parallel matters[5]. They routinely share information, coordinate investigatory steps, and collaborate on litigation strategy. So anything conveyed to the SEC may also reach prosecutors.

This coordination erodes traditional barriers between civil and criminal law. Defense lawyers argue it’s unfair for criminal prosecutors to access SEC testimony and evidence not subject to constitutional protections like the right against self-incrimination[4]. But courts have generally permitted such collaboration provided civil and criminal staff remain separate.

Responding to SEC and DOJ Requests

Given the coordination between agencies, responding requires a coordinated defense strategy. SEC testimony could waive Fifth Amendment rights and lead to compelled self-incrimination. So targets should carefully weigh whether and how to respond to SEC and DOJ inquiries.

Refusing to cooperate risks antagonizing prosecutors and the SEC. But blind cooperation may expose you to criminal liability. Invoking the Fifth Amendment during SEC testimony may be necessary but also suggests criminal exposure.

An experienced securities enforcement and white collar defense attorney can advise on responding to agency requests while mitigating risks in both matters.

Securing Cooperation Credit

Cooperating with the government can sometimes lead to reduced charges or penalties. But how does this work across parallel proceedings? Generally, the DOJ controls cooperation credit decisions while the SEC decides on civil remedies[1].

Yet the agencies still coordinate on these issues. So cooperation with the SEC may influence charging and sentencing decisions by prosecutors. The key is navigating cooperation across both matters to maximize benefits while limiting adverse impacts.

Litigation and Settlement Considerations

Parallel probes also raise questions of whether to litigate or settle with the SEC and DOJ. Fighting criminal charges risks harsh trial penalties compared to settling. The SEC may also demand admissions of wrongdoing as part of any settlement.

Yet settling either matter could undercut defenses in the other. There is also the dilemma of whether to try resolving one matter before the other. Here again, experienced counsel can help craft an optimal strategy.

Takeaway Tips

Here are some key takeaways if you receive an SEC target letter and may face parallel criminal investigation:

  • Get experienced counsel on board immediately. Navigating parallel proceedings presents many legal and strategic complexities.
  • Do not underestimate your criminal exposure. SEC coordination with the DOJ is extensive.
  • Craft coordinated responses to SEC and DOJ inquiries. Seek to mitigate risks in both matters.
  • Explore cooperation credit, but understand the trade-offs across agencies.
  • Assess litigation vs. settlement options strategically in light of parallel exposure.

While an SEC target letter is undoubtedly concerning, prompt action guided by experienced securities enforcement counsel can help mitigate risks and aim for the most favorable outcomes across parallel civil and criminal probes.


[1] Department of Justice Manual on Parallel Proceedings

[2] Latham & Watkins Guide to SEC Investigations

[3] WilmerHale Article on Parallel Criminal and SEC Prosecution

[4] UM Carey Law Article on Parallel Enforcement

[5] Burnham & Gorokhov Article on Federal Investigations


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