Signs You're Under SEC Investigation.

It’s rare for the SEC to make its investigative efforts public. In fact, unless information makes its way into a news outlet, court records, or a company’s investor relations communications, there will likely be no formal SEC announcement that the Commission is investigating you.

If you have direct contact from the SEC, you know that the Commission has an inquiry. However, you won’t know whether you are the focus of that inquiry. In fact, investigators will typically avoid disclosing this information.

2. Receipt of a Subpoena from the SEC

The government does not want to rush into issuing a subpoena because subpoenas require approval from a central SEC enforcement division in Washington, D.C. Issuing a subpoena triggers a separate SEC review that determines whether the Commission has issued the subpoena for an appropriate purpose and not to unnecessarily burden you. If you receive a subpoena, know that the SEC has authority to demand records and statements relevant or material to the inquiry. However, this does not necessarily mean that the Commission has targeted you.

3. Questions from Your Broker, Advisor, or Auditor

In some cases, your broker or other professionals may raise questions about the SEC. This might occur because a brokerage firm, auditor, or other professional has received a letter of inquiry. However, many third parties ask these questions even if they aren’t working with the SEC. Contact with any third party is not a confirmation that the SEC is investigating you.

4. Media Coverage

Another common sign is coverage by the news media. However, media coverage isn’t confirmation of SEC involvement, as media outlets may not have an insider source.

5. Account Freeze or Suspension

While an account freeze or suspension could be related to the SEC, there are several reasons why account restrictions may be imposed. None of these reasons prove that the SEC is conducting an investigation.

What is SEC Enforcement?

The SEC’s Enforcement Division is responsible for investigating alleged violations of federal securities laws and initiating civil enforcement actions against individuals and firms. There are other divisions within the SEC as well, but if the SEC is investigating you or your business, it will be the Enforcement Division conducting the investigation.

Which investigative demands are confirmed SEC warning signs?

1. Third-Party Subpoenas

Often, a third party will receive a subpoena before you receive a subpoena. In these cases, the third party may notify you of the subpoena. The SEC is not required to notify you when it subpoenas a third party, so you will often learn of the subpoena only because the recipient chooses to tell you. However, receipt of a third-party subpoena is not the only way you can find out that the SEC is investigating.

2. Document-Preservation Requests

Another way to learn that the SEC is investigating is to receive a document-preservation request. This request is a strong investigative signal, and once you receive one, you may have a duty to preserve potentially relevant records. In fact, one of the primary grounds for criminal charges and civil liability for contempt of court are the destruction or production of false, misleading, or incomplete records.

3. SEC Interviews of Colleagues or Employees

As a result of your association with a colleague or employee, the SEC may interview that individual. This may occur in one of two ways: as a result of the SEC issuing a subpoena, or due to the interviewee’s decision to volunteer information to the SEC. These interviews will typically provide you with an early warning that the SEC is gathering information about you or your business.

4. Informal Inquiries from SEC Enforcement

While the SEC needs an investigative order to issue a subpoena, it does not need an investigative order to ask you for voluntary production of records. So, receipt of an informal inquiry can also serve as a red flag. Although the SEC investigators do not need subpoena power to make an inquiry, they often make these inquiries after securing subpoena power.

5. A Formal Order of Investigation

A formal order of investigation may be one of the strongest warning signs of an SEC investigation. A formal order is what designates the enforcement staff who are authorized to issue subpoenas for documents and testimony, so the order marks a critical stage in the enforcement process. The SEC does not need to notify anyone who may be affected by an investigation before issuing a formal order, and formal investigative proceedings are non-public unless the Commission orders otherwise.

A subpoena from the SEC can take two different forms. One type is for the production of documents (or records), and the second type is for sworn testimony. The SEC also has the authority to subpoena each individual’s email and social media account records from brokerage and advisory firms.

What can trigger SEC scrutiny in the first place?

1. Whistleblower Tips

The SEC relies on tips from whistleblowers more than any other source of information. In fact, the SEC has greatly expanded its Whistleblower Program in recent years. The SEC encourages all individuals, including current, former, and potential investors, and employees, to come forward with information about possible securities violations. Additionally, whistleblowers can contact the SEC through its online portal. Once the SEC receives a tip, the Office of the Whistleblower reviews the submission, but the Commission retains discretion over whether to open an investigation. If the allegation appears valid, the SEC may then open an investigation.

2. Referrals from Other Regulators

Another major source of information for the SEC is referrals from other government regulators. The SEC works closely with regulators at both the state and federal levels. This includes, but is not limited to, state securities commissioners, state attorneys general, the Commodity Futures Trading Commission (CFTC), the Department of Justice (DOJ), the Department of Labor (DOL), the Internal Revenue Service (IRS), and state securities regulators, in certain cases. The SEC also works with FINRA and other self-regulatory organizations. If any of these organizations suspect a securities violation, they will refer the matter to the SEC.

3. Trading Data and Market Surveillance

The SEC and other regulators monitor trading data and market activity on a continuous basis. If trading patterns suggest suspicious activity, such as potential insider trading, the SEC may initiate an investigation. The SEC can examine trading data at the market level and at the individual brokerage level as well, often without issuing a subpoena for this information. The SEC’s use of data analytics and surveillance tools has become increasingly sophisticated in recent years, allowing the Commission to identify suspicious patterns with greater accuracy.

4. SEC Filings and Periodic Compliance Examinations

The SEC also relies on information gathered from public filings. If a company or individual makes a misleading or inaccurate statement in a public filing, this can prompt an SEC investigation. Additionally, SEC enforcement may follow periodic compliance examinations. While these examinations are meant to ensure that firms are complying with federal securities laws, they may uncover evidence of violations.

5. Areas of SEC Enforcement

The SEC targets a wide range of issues. Some common areas of focus include:

• Insider trading: The SEC conducts investigations focusing on suspected insider trading both for individuals and companies. This includes both buying and selling securities based on material nonpublic information.
• Material misstatements and omissions: Material misstatements or omissions in securities disclosures can violate the SEC’s antifraud provisions. This can lead to SEC enforcement actions for both individuals and companies.
• Registration violations: The SEC’s enforcement division conducts investigations relating to selling unregistered securities. Selling unregistered securities is a violation of federal law unless an applicable registration exemption applies.
• Accounting and financial-reporting violations: Various accounting and financial-reporting violations can prompt SEC enforcement actions. These include all forms of improper recordkeeping, financial statements, and related disclosures.

Could an SEC inquiry also mean a criminal investigation?

1. The SEC and the DOJ

The SEC is a civil enforcement agency. The SEC cannot file criminal charges or seek imprisonment for any offense. Instead, the Department of Justice (DOJ) conducts criminal prosecutions for securities violations. The SEC works closely with the DOJ and shares information with the DOJ when appropriate. If the SEC uncovers evidence of criminal liability during a civil investigation, the SEC will often notify the DOJ, allowing the DOJ to evaluate the information and initiate a parallel criminal investigation.

2. Parallel SEC and DOJ Investigations

Parallel investigations may arise in many cases involving allegations of federal securities violations. If a parallel criminal investigation is underway, you need to know about the DOJ’s level of interest in the case to make informed decisions. While parallel SEC and DOJ investigations aren’t mutually exclusive, there are important differences between the SEC’s civil enforcement process and the DOJ’s criminal prosecution process. Federal authorities may communicate with one another, and investigative information may be shared with other government agencies and criminal authorities as well.

The terms “witness,” “subject,” and “target” are prosecutorial labels used in federal criminal investigations. While federal authorities may identify witnesses, subjects, and targets during their investigations, they often avoid using these labels. In many cases, even the government’s use of the label does not reliably indicate one’s status in a federal case. If you suspect that the DOJ has opened a criminal investigation into your case, you should avoid making contact with federal authorities until you have a clear understanding of the case and your role within it.

Interviews with the SEC are conducted under civil enforcement rules. However, civil enforcement interviews can often be used in criminal prosecutions. Statements made to SEC investigators can be shared with criminal authorities and federal prosecutors. If you have any concerns about your role in an investigation, you need to have an understanding of what a “subject” is and how this differs from a “target.”

3. The Significance of a Federal Grand-Jury Subpoena

A federal grand-jury subpoena is an investigative demand from the DOJ. If you receive a federal grand-jury subpoena, this means that the grand jury that issued it has subpoenaed evidence from at least one witness. A grand-jury subpoena does not establish target status, but it indicates the DOJ is gathering evidence.

A request to sit down with federal agents, such as FBI special agents, is a common first step in federal investigations. As you will see, requesting an interview alone does not establish your status as a witness, subject, or target.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

What should you do when warning signs appear?

1. Be Proactive in Your Approach

If you suspect that the SEC is investigating, you need to be proactive. While it may be tempting to wait and see what the SEC does, this is not a good strategy. Even if it seems that the SEC has opened its investigation to investigate a particular or isolated set of actions, the investigation could expand. When you learn of a possible SEC investigation, you need to obtain information about the scope of the investigation and what the SEC thinks you are involved in.

While generally company counsel only represents company interests, it will be possible for him or her to represent company interests in an SEC investigation that may involve a possible securities violation by a company employee. However, if the employee is not the focus of the SEC investigation, you may need to obtain separate legal representation. The most efficient approach in most cases is to designate separate legal representation for yourself or your business.

2. Assess Your Privilege Options

Federal law recognizes limited protections for independent accountants and auditors in cases involving public companies. While most communications with auditors are subject to limited protections, federal law generally does not recognize accountant-client privilege.

A company or individual who appears as a witness in an SEC investigation has the right to have counsel present during testimony. However, this is not the same as representation.

3. Preserve Relevant Documents and Statements

Federal Rule 37(e) provides guidance regarding lost electronic information. While this is a civil rule, the SEC relies on it for civil enforcement. When an investigation is anticipated or should have been anticipated, companies and individuals are required to preserve all records related to the investigation. 18 18 U.S.C. § 1519 is a federal criminal statute that criminalizes the knowing destruction or alteration of records with intent to impede a federal investigation.

When the SEC receives information, the SEC will try to keep that information confidential. However, privilege protections only apply to the company’s communications with its counsel, and the company generally controls the waiver of the privilege. If the company’s counsel also represents employees, employees will have to rely on the company to keep the records they receive from the company’s counsel confidential.

4. Retain SEC Enforcement Counsel

Ultimately, when you learn of a potential SEC investigation, your next step should be to retain SEC enforcement counsel. If your company counsel does not represent you, find out how this differs from representation. A lot of lawyers represent a company and its employees in securities cases. While some lawyers are willing to represent both clients simultaneously, this is often a concurrent conflict of interest. If the lawyer waives this conflict of interest and provides a written informed consent, then the lawyer can represent you as well.

Does a Wells Notice Mean You’re About to be Charged?

A Wells notice strongly indicates that the staff is considering making an enforcement recommendation to the Commission. This doesn’t necessarily mean charges will follow, but it also doesn’t mean you’re off the hook. The staff must issue a Wells notice to allow the target of the investigation time to respond and provide a comprehensive defense before the staff makes its recommendation. But, this is still a preliminary staff decision, and the staff cannot make the decision to file a charge against you or your company. To file a charge, the staff must make a recommendation that is then approved by the SEC Commissioners.

A Wells notice is not something you will receive in every SEC investigation. The SEC has discretion over the process and only needs to issue a Wells notice to provide notice before the staff makes its recommendation to charge. While the process is discretionary, there are certain limitations on when a Wells notice must be issued. This is especially true in cases where charges must be filed on a quick or emergent basis.

The Wells process is reciprocal. If the SEC provides a Wells notice, you have the right to respond to the notice. This is the point where you and your lawyers will prepare your defense and present your best argument to the SEC staff. In most cases, the response will take the form of a letter. This document will be analyzed along with all of the evidence the SEC has gathered, and your defense will either support the SEC’s recommendation not to pursue charges or the staff will decide to pursue charges.

Once you receive a Wells notice, it does not necessarily mean the investigation is complete. After issuing a Wells notice, the staff may still need to do further investigative work or conduct further review in light of information gained from the witness or targets. The SEC has the power to continue investigative work after issuing a Wells notice and continue reviewing the case to make sure its recommendation to the Commissioners is backed up with evidence.

What to Do With a Wells Notice

The next key issue after receiving a Wells notice is whether you must disclose the notice to the SEC and the public. The answer to this question will depend on several factors, including your company bylaws, the materiality of the SEC investigation, and the applicable disclosure obligations. If a Wells notice triggers any disclosure obligations, then the company and the individual will need to make a determination on how and when to make the disclosure.

The SEC mandates the disclosure of a wide range of information. While some trigger events result in an automatic requirement to file a Form 8-K, a Wells notice is not one of these events. However, a company and its shareholders may still need to disclose the notice to comply with federal regulations and U.S. securities laws.

Regulation S-K Item 103 is another example of a regulation that requires disclosure of certain SEC proceedings. With respect to an SEC investigation, this regulation mandates the disclosure of a material proceeding “which is known to be contemplated by governmental authorities.” Whether a Wells notice counts as a contemplated proceeding is a fact-specific question that requires a close review of the company’s unique situation.

How long can an SEC investigation remain open?

1. Duration of SEC Investigations

SEC investigations can be extremely long. While the statute does not set a specific length of time for SEC investigations, complex investigations into public companies and financial firms can stretch for several years. The SEC will often continue investigating until it has enough evidence to determine if it should pursue enforcement.

As a result, investigators can return for more information. After you produce documents and witnesses to the SEC, investigators can return for more. You must respond to every inquiry with an effective strategy to resolve the SEC’s concerns, or you will likely be in jeopardy of facing enforcement.

2. Closure of SEC Investigations

The SEC may close investigations without any signs of enforcement. The SEC often closes investigations that don’t show clear signs of statutory violations. In many cases, the SEC will send out a closure letter letting all affected parties know the investigation is over. The investigation can also end because it is no longer cost-effective or the statute has run.

The SEC only opens an investigation if it has evidence indicating that a violation may have occurred. Thus, receiving an SEC closure letter is not exoneration. It does not prove a party’s innocence, and the SEC can still use the evidence it gathered in subsequent investigations. Closing an investigation also does not preclude enforcement based on the same records and evidence in the future.

3. SEC Investigative Statistics

The SEC publishes the number of investigations it opens each year. These statistics are used to estimate the number of investigations completed annually. However, this method of calculating the average time the SEC spends investigating does not establish how long the average investigation takes. In most cases, it is much harder to find out how the SEC investigation is going.

The SEC conducts an SEC enforcement statistics analysis annually. The SEC’s SEC Enforcement statistics analysis has helped analysts develop an “average investigation time” of approximately 24 months. However, the government’s failure to publish these statistics is a major reason why you have to deal with a law firm in the field of SEC enforcement that can accurately evaluate your case and advise you properly.

4. Statute of Limitations for SEC Enforcement Action

28 U.S.C. §2462 sets a statute of limitations that generally gives the SEC five years for seeking civil penalties. Generally, the government will seek to file a complaint for SEC penalties before the five-year period runs out. However, for federal agencies, the statute of limitations is often complex, and there are various defenses that can be raised to protect you from prosecution. If the SEC has been investigating for several years, you should be aware of your case’s statute of limitations.

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.