What to Do If You’re Under Investigation for Securities Fraud

What to Do If You’re Under Investigation for Securities Fraud

Getting that letter in the mail saying you‘re under investigation for securities fraud is enough to make anyone freak out. It‘s like whoa, securities fraud? Me? For real? But try not to panic. Let’s walk through what it means to be under investigation, what got you here, and most importantly, what you can do now.

So What Does “Under Investigation” Actually Mean?

Basically, it means the SEC (Securities and Exchange Commission) is looking into whether you violated any securities laws. This doesn‘t necessarily mean you’re guilty or will be charged. It just means they have some reason to believe you may have broken the rules, so they wanna dig deeper.The investigation itself can take awhile—we’re talking months or even years. During this time, the SEC will be collecting evidence by subpoenaing documents, interviewing witnesses, reviewing financial records, etc. They’re trying to build a case and figure out if any laws were actually broken.

What Kinda Things Can Trigger an Investigation in the First Place?

There’s a bunch of stuff that can catch the SEC’s attention. Maybe they got a tip from an insider or whistleblower about shady dealings at your company. Or their fancy algorithms detected weird trading patterns involving your stock. Some common red flags include:

  • Financial reporting fraud – Cooking the books to make revenue/profits look better. This gets them every time.
  • Insider trading – Buying or selling stock based on non-public info you got through work. Big no-no.
  • Ponzi schemes – Using money from new investors to pay off old investors. Very illegal.
  • Misleading or false statements – Lying about your company’s performance or products. The SEC hates that.
  • Accounting fraud – Screwing with the numbers to misrepresent financials. Enron, anyone?

Basically if they think you manipulated the market or took advantage of insider info for your own gain, you can expect a call from the SEC.

What Happens Once the Investigation Is Underway?

Well, try not to stress too much. An investigation doesn’t equal an indictment. Plenty of these things end without any formal charges being filed. But here’s what you can expect:

  • Document requests – The SEC will hit you with a ton of requests for emails, financial statements, phone records, etc. You’ll have to comply within a pretty tight timeframe.
  • Interviews – Both you and other executives/employees may be called in for questioning. The SEC will try to poke holes in your story and get people to turn on each other.
  • Subpoenas – If you don’t cooperate fully, the SEC can force you to produce documents or testify via subpoena. You gotta comply or risk being charged with obstruction of justice.
  • Wells notice – This is a letter saying the SEC intends to recommend charges. You can then respond with your side of things before they make it official.

Throughout all this, the SEC is basically trying to uncover the facts. They‘ll pressure people involved to see who cracks or takes a deal. Not fun, but if you stay cool and get a good lawyer, you can get through it.

What Can You Do to Protect Yourself?

If you find yourself under the SEC‘s microscope, here are some tips:

Get a lawyer ASAP – Seriously, call a securities attorney right now. Do not try to handle this yourself. A good lawyer can interface with investigators for you, argue to limit document production, and give you advice at every turn. Pay whatever they ask. It‘s worth it.

Say nothing – To the SEC at least. Plead the Fifth if interviewed. The investigators are not your friends. They‘re building a case against you. Don’t help them. Keep your mouth shut.

Gather documents – Locate anything the SEC may request – emails, financial records, calendars, etc. You’ll need to comply with subpoenas down the road. An organized response looks better too.

Review your insurance – Check if you have D&O (directors and officers) coverage or an errors and omissions policy. If so, they may cover legal fees or settlements/judgments up to a limit.

Get your story straight – Discuss the facts with your attorney and leadership team. Make sure everyone has their roles and timelines down. Conflicting accounts will sink you.

Don’t retaliate – It can be tempting to lash out at whistleblowers or employees cooperating with the investigation. Resist that urge as it can get you charged with obstruction of justice.

Stay off social media – Don’t post anything related to the investigation online. It can and will be used against you. SEC monitors social media closely for slip ups.

What Are the Potential Outcomes Here?

Best case? The SEC concludes their investigation with no action taken. But here are other ways this could shake out:

  • Settlement – The SEC may offer to settle if you pay a fine and follow certain rules going forward. Getting this over with may be preferable to a long legal battle.
  • Cease-and-desist – The SEC can order you to stop any ongoing wrongdoing immediately or face stiffer penalties.
  • Civil charges – If settlement talks fail, the SEC can file civil charges against you in federal court seeking fines or disgorgement of ill-gotten gains.
  • Criminal charges – If they find serious misconduct, the SEC may refer the case to the DOJ for criminal prosecution. Then you’re looking at possible prison time.
  • Bars from the industry – The SEC can ban you from working in the securities industry again. Kiss that finance career goodbye.

So in summary, getting investigated for securities fraud is scary stuff. Lawyer up, shut up, and take it seriously. With smart moves, you can contain the damage and maybe even avoid charges. But ignore it, and your problems are just getting started. Good luck!