SEC Investigation vs. FBI Investigation.

While the SEC and FBI both investigate securities law violations, their scopes and ultimate purposes are very different.

The U.S. Securities and Exchange Commission (SEC) is a regulatory body with civil enforcement authority to prosecute suspected securities law violations. However, the SEC cannot seek criminal penalties or indict defendants. Instead, the SEC can initiate administrative enforcement proceedings, either through an administrative law judge (ALJ) or the U.S. District Court, resulting in penalties including fines, disgorgement, permanent bars from the securities industry, and other administrative or monetary sanctions.

The FBI, conversely, serves as the federal law enforcement arm of the U.S. Department of Justice (DOJ). FBI investigations typically target cases involving suspected securities fraud, public corruption, criminal tax evasion, and other crimes that trigger criminal penalties, including incarceration and substantial criminal fines. However, FBI Special Agents do not have the power to independently determine whether to pursue criminal charges; this power is vested solely with the DOJ federal prosecutors. If sufficient evidence of criminal misconduct is obtained during an FBI investigation, DOJ prosecutors may seek grand jury indictments, or alternatively, they may work with the U.S. Attorney’s Office to pursue civil securities enforcement actions.

While the two entities serve very different roles, their investigations are not mutually exclusive. The SEC and DOJ often work in tandem, and it is not uncommon for parallel investigations to pursue the same alleged securities-related conduct. While the DOJ only pursues criminal securities offenses, it may also seek civil penalties in the same cases. If federal agents investigate you for suspected securities-related misconduct, it is critical to retain experienced legal counsel immediately. At Spodek Law Group, we advise individuals and companies who are the target of both SEC and DOJ/FBI inquiries.

How Does an SEC Investigation Start and Progress?

While the SEC can initiate an enforcement action on its own initiative, it frequently receives information about potential securities law violations from external sources. For example, a tip or complaint from a whistleblower can trigger an investigation. If the whistleblower’s claim is deemed worthy of investigation, the SEC will then assign staff to open an inquiry. The SEC also conducts routine compliance examinations (such as SEC Form ADV examinations). However, compliance examinations are separate from enforcement investigations. When, during a routine compliance examination, the SEC staff uncovers evidence of a possible securities law violation, the SEC will open an investigation.

What Is the Process for an SEC Investigation?

The SEC’s process varies from case to case. However, generally, a case involving the SEC proceeds through several stages:

1. Opening the Investigation

If the SEC staff believes further evidence of a potential securities law violation is warranted, they will open an inquiry. At this stage, the SEC may conduct an informal or formal investigation.

2. Conducting the Investigation

If the SEC chooses to conduct a formal investigation, it will issue a formal investigation order. At this point, the SEC may issue subpoenas to gather additional evidence. However, the SEC may begin an inquiry on an informal basis. If a formal investigation order is not issued, the SEC may request that an individual or company provide information on a voluntary basis. When facing a request for information, the individual or company will need to determine whether there is a legal obligation to comply and whether to pursue a voluntary (or involuntary) production.

Subjects of SEC investigations have no general legal right to receive notice of the investigation when it opens. Instead, they will receive notice in the SEC staff’s proposed charges.

3. The SEC Staff Recommends Enforcement Action

Once the SEC staff concludes its investigation and determines that enforcement action is warranted, the staff must then seek authorization from the Commission to proceed. In many cases, the SEC staff will send a “Wells notice” to the individual or company it intends to target. A Wells notice does not serve as a filed charge or the Commission’s final determination; rather, it signals the staff’s preliminary intent to recommend enforcement action. The individual or company has the opportunity to respond to the Wells notice by filing a “Wells submission,” and the SEC staff must then submit the Wells submission to the Commission for consideration.

4. Seeking Final Commission Approval

As noted above, before the SEC can file charges, the staff must seek authorization from the Commission. If approved, the SEC will seek civil or administrative penalties in federal court or an administrative proceedings.

If the SEC staff does not recommend enforcement action, the SEC staff does not have to issue a closing letter or similar notification when concluding its investigation.

How long do SEC investigations usually take?

The time it takes the SEC to investigate potential securities law violations depends on a variety of factors. It is not uncommon for an SEC investigation to continue for several years, and the investigation does not necessarily lead to formal enforcement charges. Many SEC investigations will end with the SEC staff choosing not to recommend charges to the Commission, while others will be limited to a single area of alleged misconduct, and others may go much broader in scope. The fact that the SEC staff chooses to investigate allegations of securities law violations for several years does not, per se, necessarily mean that the allegations are true, that the case will lead to enforcement action, or that the case will lead to an enforcement action involving the SEC seeking significant penalties.

There is no deadline for the SEC staff to conclude an SEC enforcement investigation under the SEC’s rules and regulations. As discussed above, however, the SEC generally has five years to file charges in order to recover civil penalties under 28 U.S.C. § 2462. In Kokesh v. SEC, 581 U.S. 455 (2017), the Supreme Court confirmed that disgorgement is a monetary penalty for the purposes of this provision and that the SEC must therefore also seek disgorgement within this same five-year timeframe.

While the statutory statute of limitations period is five years, the SEC can also seek to stop the clock by asking defendants to sign a tolling agreement, and defendants may agree to sign a tolling agreement even when there is no immediate need to do so. While generally not strongly recommended by most defense attorneys, signing a tolling agreement can allow for more comprehensive and effective defense preparation when facing charges, potentially providing valuable insights for both sides, and ultimately promoting a more informed and efficient resolution.

More importantly, 15 U.S.C. § 78u(d)(8) authorizes disgorgement claims involving scienter-based violations to be filed up to ten years after the date of the violation.

Can Evidence Obtained during an SEC Investigation be Used in a Federal Criminal Case?

While the SEC lacks the authority to pursue criminal charges, it may refer suspected criminal violations to the DOJ if there is evidence of potential criminal culpability. In these cases, the SEC may provide the DOJ with all information that it has obtained to date. At this point, the SEC staff can and will continue to work with the DOJ to resolve criminal matters when appropriate. This information may include:

Can Evidence Obtained during an FBI Investigation be Used in an SEC Civil Enforcement Action?

The answer to this question is yes as well. The SEC may share its evidence with both federal and state authorities, and statements made to SEC staff may also later be used by other enforcement agencies. As a result, it is very important to take the situation seriously and promptly retain experienced legal counsel to advise you about the best approach to take. If the SEC asks you for statements, testimony, or documents, your attorney can then contact the SEC staff to find out more about the investigation and to work out the next steps. This can include negotiating a defense strategy that minimizes the risk of the evidence becoming harmful to you or your company.

How Often Does the DOJ Share Grand-Jury Material with the SEC?

In general, federal prosecutors are prohibited from sharing grand-jury material with anyone else. Federal Rule of Criminal Procedure 6(e)(3) sets out the limited exceptions to grand-jury secrecy, and none of them gives the SEC automatic access, so the SEC generally must obtain a court order based on a showing of particularized need. In many cases, the SEC staff may have access to grand-jury material if the DOJ and SEC are working together. In other cases, the DOJ may be unable to share grand-jury material.

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

Can I Refuse to Testify or Produce Records to the SEC?

Generally, no. However, there are significant exceptions and defenses, and they will ultimately depend on the specific circumstances involved. In general, individuals and entities may (and should) refuse to comply with SEC-issued subpoenas when they have certain privileges. The following are the most common exceptions to a general obligation to comply with SEC subpoenas:

1. The Fifth Amendment Privilege Against Self-Incrimination

Individuals may invoke the Fifth Amendment privilege against self-incrimination if they have a reasonable fear that testifying or producing documents could jeopardize their federal criminal liability. However, while a criminal jury is prohibited from drawing adverse inferences from an individual invoking the Fifth Amendment, civil factfinders in SEC matters are not. As a result, individuals must carefully consider how invoking the Fifth Amendment may affect their civil liability.

2. The “Entity” Fifth Amendment Privilege

While individuals can invoke the Fifth Amendment privilege, collective entities, such as companies, investment firms, banks, and others, do not have the same protection. They cannot invoke the Fifth Amendment privilege when refusing to disclose records.

3. Attorney-Client Privilege and Work-Product Protection

Generally, SEC subpoenas do not override the attorney-client privilege or work-product protection. If you have privileged documents in your possession, you are entitled to refuse to produce them (and can assert these protections when responding to the SEC’s subpoena request).

Can the SEC Compel Testimony or the Production of Records Despite These Exemptions?

Yes. As noted above, there are several circumstances under which the SEC can potentially compel testimony and the production of records despite an individual’s Fifth Amendment privilege, attorney-client privilege, or work-product protection.

For example, if an individual invokes their Fifth Amendment privilege, the SEC may work with the DOJ to obtain a court order compelling the individual to comply. While the SEC can also seek a court order under 15 U.S.C. § 78u(c), it does not have the power to grant a “use-immunity order” on its own. Use-immunity orders, which shield an individual’s testimony (and other evidence resulting from his or her forced compliance) from being used against the individual in criminal proceedings, are subject to the authorization of the Attorney General. Once an authorization is obtained under 18 U.S.C. § 6004, the use of the immunized testimony or other evidence resulting from coerced compliance in criminal proceedings is prohibited under 18 U.S.C. § 6002(c).

If an individual or company refuses to comply with an SEC subpoena, the SEC can file an enforcement action in federal court to compel production under 15 U.S.C. § 78u(c). While the U.S. District Court generally has the authority to enforce SEC subpoenas, it will generally refuse to do so in the case of a valid assertion of a privilege.

Can I Request an Extension of Time to Comply with an SEC Subpoena?

While this is common, recipients of SEC subpoenas have no procedural entitlement to a deadline extension. If you want a deadline extension, you should promptly contact the SEC staff member who issued the subpoena and request the extension by mail or email. With this, the SEC may be willing to grant you a deadline extension, and this process allows you to avoid unnecessary enforcement action while you gather records or prepare testimony.

What Consequences Can Follow a Civil or Criminal Securities Investigation?

As explained in this article, civil and criminal securities investigations can lead to different consequences. Generally, a civil securities enforcement action cannot result in imprisonment. However, a federal criminal conviction can lead to imprisonment.

What Are the Potential Consequences of an SEC Civil Securities Enforcement Action?

The SEC can pursue several different types of penalties and remedies. Depending on the specific alleged securities law violations involved, these can include:

• Civil monetary penalties, the SEC may ask a court to impose fines, and the court will determine the appropriate fine amount based on the specific violations involved (15 U.S.C. §§ 77v, 78u, 78v, 80b(4), 80b-3(e)(1), 80c(1)).
• Temporary restraining orders and asset freezes, if the SEC staff has strong evidence of misconduct, it can work with the U.S. District Court to obtain temporary restraining orders and asset freezes in many cases, and it can request appointment of a receiver in other cases.
• Equitable disgorgement, the SEC can also seek “equitable disgorgement” in cases where the individual or company has illegally profited. Although a long-standing Supreme Court case allowed for a broad range of equitable disgorgement awards, the Supreme Court recently significantly limited the scope of these awards. In Liu v. SEC, 140 S. Ct. 1936, 1944-46 (2020), the Supreme Court held that disgorgement must be limited to the “amount of the net profits” that were illegally obtained and that the amount recovered must be “directed toward victims, not the Treasury.”
• Mandatory trial by jury in some cases, until recently, the SEC has been able to seek civil penalties by having its enforcement cases heard by administrative law judges (ALJs) in administrative proceedings. However, in SEC v. Jarkesy, 603 U.S. 109, 144 S. Ct. 2117 (2024), the Supreme Court held that, with this specific class of claims, the SEC must seek civil penalties through a jury trial in federal district court. This ruling will likely expose many other claims as well.
• Disgorgement, along with the SEC seeking equitable disgorgement in many cases, the SEC can also seek disgorgement of gains as a remedy under statutory authority. For example, 15 U.S.C. §§ 78u-1, 78u-3, 80b-2(c) (15th) require the SEC staff to establish that a securities law violation occurred and that “the individual or entity received benefits as a result of such a violation.”

What Are the Potential Consequences of an FBI / DOJ Criminal Securities Investigation?

With the exception of disgorgement (which requires the same process as the civil process), the potential consequences of an FBI / DOJ criminal investigation are much similar to those in an SEC civil enforcement action. However, while the SEC is not able to impose prison time, a federal criminal conviction carries the risk of incarceration for individuals.

Who Investigates Misconduct by the SEC or Its Employees?

Are FINRA or PCAOB Proceedings “SEC Investigations”?

Generally, the answer to this is no. While the Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization (SRO) and the Public Company Accounting Oversight Board (PCAOB) is an oversight board registered under the SEC’s federal registration requirements, these organizations’ investigations and proceedings are separate from SEC investigations and proceedings. However, FINRA and PCAOB may refer suspected violations to the SEC in certain cases.

Who Investigates Misconduct Involving SEC Personnel or the SEC’s Federal Agency Operations?

In cases of misconduct, including criminal misconduct, the SEC’s Office of Inspector General (OIG) investigates misconduct involving SEC personnel or operations. While the SEC’s OIG does not generally have authority to pursue civil or criminal enforcement, it may refer suspected violations of federal criminal law to the Attorney General or other DOJ federal prosecutors. The SEC’s OIG’s authority is derived from 5 U.S.C. § 404(d), and the authority to investigate alleged personnel misconduct is derived from the Inspector General Act of 1978.

Who Investigates Suspected Prohibited Personnel Practices Affecting SEC Personnel?

In cases involving prohibited personnel practices (i.e., “whistleblower” cases), the Office of Special Counsel (OSC) has authority to conduct investigations. The OSC’s authority to investigate allegations of prohibited personnel practices that affect SEC personnel is derived from 5 U.S.C. § 1214, and the OSC can make recommendations as appropriate.

Similar to the SEC’s OIG, the OSC does not conduct enforcement investigations, and while its investigations can lead to enforcement action, the OSC does not have the authority to pursue civil or criminal charges in federal court.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.