Wall Street Fraud Investigation.

While each investigation takes a unique shape, there are many commonalities. In addition to having individuals and companies involved in investigations, investigators seek to gain access to relevant records including trading records, financial statements, and other materials. The government will review emails, electronic messages, and other communications to establish a basis for fraud charges. Investigators also look for false accounting entries, auditor statements, press releases, public reports, and investor communications.

When facing allegations of Wall Street fraud, one needs to know the difference between being a witness, a subject, or a target. These terms are crucial in determining the appropriate steps to take next. When firms and companies are under investigation, common responses include preserving records, engaging outside counsel, and conducting internal reviews to identify potential exposures.

The terms involved are extremely important because the difference between being a witness, a subject, and a target in a federal criminal case is significant. Understanding these terms, as well as the procedures that are likely to unfold, can help you work with your defense attorney to seek favorable outcomes. The differences between an allegation, a civil finding, a criminal conviction, and a defense result are also crucial. Each has its own implications, and they require different defense strategies.

How does an SEC inquiry become a formal enforcement case?

How does an SEC inquiry start?

SEC inquiries can stem from a multitude of sources including a formal complaint, public filings, media reports, or a whistleblower complaint. An inquiry triggers a broad review of a potential SEC violation, as the SEC intends to gather information to determine whether an enforcement action is warranted. This process has the potential to be very broad in scope, though the SEC generally intends to target those individuals or entities likely to have information pertinent to the case.

What is an informal SEC investigation?

Informal SEC investigations are characterized by the agency’s lack of subpoena power. While this means that documents or testimony are not compellingly sought, this does not necessarily make these cases less serious. During an informal investigation, the SEC will ask for documents, statements, and onsite access to company records. While companies and individuals are not required to produce documents or testimony during an informal investigation, this does not preclude them from doing so. Furthermore, the SEC may decide to refer cases that fall within the jurisdiction of other agencies to these agencies.

What is a formal SEC investigation?

Formal SEC investigations allow the agency to seek compulsory document production and sworn testimony. While this may sound daunting, companies and individuals facing formal SEC subpoenas can seek to limit the scope of these requests.

What are SEC enforcement proceedings?

If the SEC decides to pursue enforcement action, it can do so in federal district court or, for claims and remedies that may constitutionally be adjudicated administratively, through an administrative proceeding. Both venues carry significant risks, though they differ in their procedures, scopes of discovery, and methods of appeal.

What are potential SEC remedies?

Federal SEC remedies can range from injunctions to disgorgement and monetary penalties to bars from serving as an officer or director of a public company.

Which fraud theories can turn trading or investment conduct into allegations?

Insider Trading

Insider trading is perhaps the most widely known form of securities fraud. When corporate insiders trade on material nonpublic information, they violate their fiduciary duties. However, the law also identifies others as “insiders” in certain contexts, and insiders can face liability under different legal theories as well. Specifically, insider trading theories can reach corporate insiders, attorneys, accountants, and financial advisers who have a duty of confidentiality. As a result, a person who trades on material nonpublic information in breach of a duty of trust or confidence can face liability, even if not employed by the issuer.

Misappropriation of Confidential Information

In misappropriation cases, liability is typically based on the theft of confidential information. For example, family members, personal friends, or business associates who learn about potential securities trades from corporate insiders can face charges if they use this information to make trades. The target of the investigation is not necessarily the person who disclosed the information, but the person who misappropriated it.

Tipping and Trade

When insider trading is illegal, the legal ramifications can reach both the tipster who disclosed confidential information and the tippee who traded on it. This can lead to civil and criminal exposure for both parties.

Front-Running

Front-running is conduct that may violate FINRA rules or federal securities laws when a person trades ahead of material, nonpublic information concerning an imminent customer order. Individuals or firms who front-run trades to the benefit of themselves or their clients can face legal consequences, and they can be accused of securities fraud.

Churning

Churning is illegal conduct involving excessive trading of securities by a broker in order to generate commissions on a client’s account. Churning constitutes fraud under several federal statutes and is subject to enforcement by both the SEC and the DOJ.

Todd Spodek defended Anna Sorokin, the case Netflix later dramatised as Inventing Anna.

When can securities allegations become criminal charges rather than civil claims?

What is the SEC’s authority in securities cases?

The SEC can pursue civil enforcement in federal court and administrative proceedings, subject to the governing statutes and constitutional limits on administrative adjudication. The SEC cannot, however, directly pursue criminal charges against individuals or companies. Instead, if the SEC finds evidence of suspected criminal conduct, it will refer this to the U.S. Department of Justice (DOJ) or a state prosecution office.

When can DOJ attorneys pursue criminal charges against Wall Street suspects?

DOJ attorneys must prove criminal securities-fraud charges beyond a reasonable doubt, a much higher standard of proof than is generally required in civil or administrative proceedings. These criminal charges may be initiated at the federal level or delegated to the local U.S. Attorney’s Office for prosecution. When prosecuted by federal attorneys, DOJ cases will be heard in federal district court. When prosecuted by a state or local office under state law, cases can be heard in state court; federal cases are prosecuted in federal court by the Department of Justice or a U.S. Attorney’s Office.

How does proof differ between SEC and DOJ securities proceedings?

The main differences between the SEC and DOJ’s enforcement authority in securities cases are the remedies available for pursuing a case and the standard of proof required for obtaining a conviction. The SEC can seek fines, cease-and-desist orders, or even officer-director bars. However, the SEC cannot pursue criminal charges on its own, but it can seek disgorgement in federal court and in administrative proceedings. Administrative law judges and commissioners, as well, can impose fines for civil law or regulatory violations, although administrative law judges have less jurisdiction than SEC Commissioners. In many cases, the DOJ will pursue criminal penalties against Wall Street suspects, while the SEC or the SEC Commissioners and Administrative Law Judges will seek civil and administrative remedies.

Can the SEC and DOJ pursue a case at the same time?

Securities cases involving the SEC and the DOJ can proceed simultaneously. They may use the same evidence, the same witnesses, and they may pursue the same type of fraud. However, the SEC and DOJ have different standards of proof and remedies, and individuals and companies charged with Wall Street fraud in either venue must defend their positions strategically.

Who may investigate the same Wall Street conduct in New York?

The FBI and DOJ

The FBI and DOJ can investigate securities fraud alongside the SEC. This may occur in cases where evidence obtained by the SEC indicates criminal charges could be on the table. In these cases, evidence will often flow from the SEC to the DOJ and FBI, and the SEC and DOJ will work together to execute their investigations.

IRS Criminal Investigation

IRS Criminal Investigation may participate in securities fraud investigations when these inquiries involve allegations of tax violations. IRS agents often have decades of experience in fraud cases, and their involvement typically increases the likelihood of criminal prosecution.

State Securities Regulators

Wall Street fraud can affect investors across the country, and state securities regulators will often investigate conduct that impacts investors or securities markets within their respective states.

New York’s Attorney General

For securities or investor-fraud cases that affect state residents, the Attorney General of New York (or the AG of the same state) may get involved as well. New York’s Attorney General’s investigations are particularly noteworthy. Unlike many other securities fraud investigations, the New York Attorney General can pursue investor-fraud cases under the state’s Martin Act. Under the Martin Act, the Attorney General does not have to prove scienter or intentional fraud, removing one of the key hurdles to bringing a successful civil enforcement action.

Manhattan District Attorney

In cases occurring within Manhattan, the Manhattan District Attorney’s Office may pursue charges. As New York City is the financial center of the United States, the Manhattan DA is one of the most exposed prosecutors for Wall Street fraud in the country. The Manhattan DA’s Office aggressively prosecutes high-profile defendants in cases ranging from insider trading to tax evasion and securities fraud.

Where to Go From Here

If any of this describes your situation, the next step is a conversation rather than more reading. Spodek Law Group runs a fully online client portal and represents clients coast to coast, with offices in New York, Brooklyn, Queens and Los Angeles. The number is 888 348 8028.