Will I Know If the SEC Is Investigating Me??

The SEC Enforcement Manual specifies that its investigations should remain nonpublic unless the Commission authorizes disclosure. This reflects the SEC’s statutory mandate to maintain “the confidentiality of its investigative files.” With these restrictions in mind, the SEC is not required to notify everyone whose conduct it examines. Instead, it may only notify those whose cooperation or testimony is essential, or those it is prepared to charge with a violation of federal securities laws. That said, all individuals, not just companies and other regulated firms, could find themselves subject to SEC scrutiny.

As outlined in the Enforcement Manual, SEC lawyers and investigators have the power to:

• Reach out to individuals and entities directly to seek voluntary assistance;
• Issue subpoenas to compel production of documents; or
• Send letters requesting that recipients preserve potentially relevant records.

Along with these tools, senior Enforcement officials have the authority to approve formal orders in “many instances” under authority delegated to them by the Commission. Such orders would allow for the use of subpoenas and other means of coercive fact-gathering, and would also establish that the SEC is conducting an investigation.

While the SEC may ask for voluntary assistance, it does not need to do so. Instead, it can obtain relevant records from brokers, banks, accountants, employers, and other third-party sources. In many cases, the only tangible evidence of SEC scrutiny is a subpoena demanding information or a call from one of the SEC’s investigators.

As for knowing the outcome of an SEC investigation, the SEC’s Enforcement Manual states that staff may “provide termination notices to individuals and entities as appropriate.” Often, these notices will state that the staff has completed its investigation and, at that time, has not recommended an enforcement action against the recipient. However, if a termination notice is not sent, a public SEC complaint or press release may provide the first (and only) official confirmation of an individual’s or entity’s involvement in an SEC investigation.

How can I tell whether the SEC is investigating me?

While you may get information about an SEC investigation from third parties, it will not be reliable.

With one notable exception, however, third parties may obtain information directly from the SEC by submitting Freedom of Information Act (FOIA) requests. However, you can also request information from the SEC under FOIA, although the SEC may withhold information that falls under one of its nine FOIA exemptions. This include Exemption 7(A), which specifically allows the government to withhold “records, or information contained in records, compiled for law enforcement purposes, the disclosure of which could reasonably be expected to interfere with enforcement proceedings.”

Why You Can’t Rely on Your Right to Know About the SEC’s Activities

Why You Can’t Rely on Your Right to Know About the SEC’s Activities

Under FOIA, the government must disclose information it possesses. However, the statute includes “nine exemptions that allow the government to withhold information in certain circumstances.” As a result, the government will not typically disclose information that is the subject of an active law enforcement investigation, and SEC investigative records may fall within that exemption when disclosure could reasonably be expected to interfere with an enforcement proceeding. However, it is only one among many possible grounds on which the SEC might refuse to disclose information. For example, the SEC also frequently invokes Exemption 7(C) to “withhold information that, if disclosed, could reasonably be expected to constitute an unwarranted invasion of personal privacy.” As a result, even if you can access the SEC’s investigative records under FOIA, the government will likely refuse to do so, and, in many cases, the government will redact anything it determines to fall within any applicable exemption.

Why an SEC Subpoena Is Not Proof of Suspected Wrongdoing

As outlined below, receiving an SEC subpoena is among the few ways you can discern the existence of an SEC investigation. However, this will not be sufficient evidence to show the SEC suspects you of wrongdoing. As the SEC explains, the SEC may issue subpoenas both to “recipients that the SEC believes may be able to provide information” as well as “recipients that the SEC believes may have received the information requested by the subpoena.”

As a result, a subpoena does not necessarily indicate that the recipient is a potential defendant in the SEC’s investigation. Instead, the SEC may be issuing the subpoena to a witness who is unlikely to be the target of the investigation but who possesses relevant records or who can give pertinent testimony. When dealing with an SEC subpoena, one of the first things to determine is what, if anything, the SEC alleges you have done wrong. With this important information in hand, your lawyer can evaluate the possibility of fighting the subpoena on the grounds that the SEC lacks authority to issue it.

Why Information from Third Parties Is Not Proof of an SEC Investigation

There are several other types of information that could indicate an SEC investigation. However, as explained above, this information will not be reliable on its own, and it may even be outright false. As a result, you should not assume that you are under investigation based solely on:

• Information from a third-party subpoena recipient;
• Information from a FOIA request;
• An account restriction by a brokerage firm or bank; or, or
• Information regarding an account restriction, which may come from a third-party call or even a call from the SEC itself.

As a result, when you face allegations of securities fraud, you can take some additional steps to learn what you can about the SEC’s investigation, and then use the information you obtain to make informed and strategic decisions about how to proceed.

If any of this describes your situation, it is worth talking it through with counsel. Spodek Law Group can be reached at 212-300-5196.

What Rights Do I Have when the SEC Contacts Me?

If the SEC contacts you as part of an investigation, one of your first questions should be whether the agency has a “formal order.” An informal inquiry allows the SEC to request documents and information on a voluntary basis. A formal order, however, permits the SEC to issue subpoenas in order to compel testimony and the production of records. If the SEC contacts you, you should ask whether it has a formal order on file. If the agency does, you may also request to inspect the order to determine what information the SEC is seeking and the scope of its investigation.

If the SEC contacts you as a result of an investigation into your employer or business, you may also need to determine whether the organization’s counsel represents you as well. Generally speaking, organizational counsel only represents the organization. While you may be able to retain the organization’s counsel to represent you personally as well, the organization’s counsel will only be able to serve in this capacity absent a separate (and paid) agreement between you and the firm. Unless you have such an agreement, you should not assume that the company’s lawyers are representing you, and you should not disclose anything to them that you would not disclose to a third party.

If the SEC compels your testimony, you may invoke your Fifth Amendment right to refuse to answer any question if the answer would provide evidence of your guilt in a future criminal case. However, this right is inapplicable if you volunteer information during a voluntary interview or in response to a voluntary document request. Furthermore, while individuals can invoke the Fifth Amendment in response to the SEC’s inquiries, corporations do not have the right to rely on the Fifth Amendment in order to shield corporate records from being produced by the company. The company must produce all corporate records that fall within the SEC’s subpoena, and it cannot rely on the Fifth Amendment to shield those records if doing so would expose the company to liability.

Under 15 U.S.C. § 78u(c), SEC witnesses who are compelled to provide testimony or records also have a statutory right to legal representation. According to the SEC Enforcement Manual, when counsel is present, SEC staff “must allow counsel to”:

• Be present during questioning;
• Be present during recording of testimony;
• Confer with the witness; and, and
• In addition, staff must allow counsel to request redactions and sealing of SEC records containing the witness’s personal information.

Although this statutory right to counsel exists, the SEC does not have a duty to ensure that you have legal representation. As a result, witnesses who are compelled to testify under subpoena must take the initiative to ensure they have legal representation and that they are prepared to defend their interests and assert their rights.

If the SEC charges you with a violation of the federal securities laws (or threatens to do so), you may also need to decide whether you will invoke your Fifth Amendment right in order to avoid providing incriminating testimony during the SEC’s enforcement proceedings. While your Fifth Amendment right allows you to refuse to provide testimony that would be self-incriminating in a potential criminal case, exercising your Fifth Amendment right can also lead to adverse inferences in a civil enforcement proceeding. In order to discourage SEC targets from relying on the Fifth Amendment in order to avoid the consequences of suspected violations, courts have held that they can draw adverse inferences in SEC civil cases.

If your organization has retained outside counsel, you should also determine whether your organization, rather than you, holds the privilege over the information that you provide to the organization’s counsel. The organization will likely control the privilege over any interviews it conducts, and it may be able to disclose the information you share to the SEC.

As a result, if you are contacted by the SEC as part of an investigation, one of your first priorities should be to secure your own legal representation. Your lawyer will be able to help you make informed and strategic decisions based on all the information available, and he or she can work toward a favorable resolution without unnecessarily compromising your position.

How long until the SEC tells me its decision?

While this sounds like a straightforward question, there is not a straightforward answer. With the exception of single-file appeals, the SEC publishes no authoritative data on how long it takes to resolve investigations on average. Additionally, there is no general statute or regulation setting a deadline for the duration of an SEC investigation. As a result, the duration of SEC investigations can vary greatly depending on the matter at hand, the level of complexity involved, the investigative evidence available, and other factors.

While SEC investigations are often completed within months, complex matters involving potential criminal implications can take several years to resolve. In such cases, a combination of factors could make resolving an SEC investigation difficult, including the need for thorough analysis and investigation, the involvement of other government agencies, the availability of evidence, and any ongoing enforcement or litigation in other proceedings.

What is a Wells Notice?

A Wells notice is a document that the SEC staff sends to a potential defendant in a securities fraud investigation. In the notice, the staff explains the grounds on which the SEC believes that an enforcement action is warranted, and it informs the recipient that it is “planning to recommend the Commission file enforcement proceedings” against them. However, the Wells notice is neither a filed charge nor a final decision by the Commission. As a result, if you have received a Wells notice from the SEC, it is still possible to avoid formal enforcement action.

According to the SEC’s Enforcement Manual, while a Wells notice is “standard” and is generally sent before the SEC staff makes an enforcement recommendation, the SEC “is not required to issue a Wells notice in every case.” This means that the SEC can initiate an enforcement action (such as filing a complaint in federal district court) without first issuing a Wells notice. If you have not received a Wells notice but are still concerned about the possibility of an SEC enforcement action, you should discuss this concern with your lawyer as soon as possible.

How Long Does the SEC Take to Respond to a Wells Submission?

Under 17 C.F.R. § 202.5(c), the SEC staff may advise a prospective defendant of the amount of time available to submit a written statement, and under the Division of Enforcement's Enforcement Manual the SEC generally grants Wells notice recipients four weeks to respond to the staff's preliminary enforcement recommendation, subject to extensions at the staff's discretion. After the submission period expires, the SEC takes time to review and consider the recipient’s submission. The length of time the SEC takes to respond to a Wells submission varies based on the specific circumstances of the case, the volume and substance of the recipient’s submission, the staff’s concerns and objections, and other factors. However, once the SEC reaches its decision, the person or entity who made the Wells submission is typically notified as soon as possible. If you have submitted a Wells submission to the SEC, you can consult with your lawyer about the expected time frame for receiving the SEC’s response.

Will the SEC Notify Me if It Decides Not to Pursue Enforcement?

Although the SEC often sends termination notices when it declines to pursue an enforcement action, this practice is not required. Under the SEC’s Enforcement Manual, the staff only “provide termination notices to individuals and entities as appropriate,” and, as a result, you cannot rely on receiving a notice to know that the SEC has decided not to pursue an enforcement action. This fact can present issues in circumstances where a recipient has not received an SEC enforcement action (or a termination notice) and does not have any other way to determine the SEC’s decision. In such cases, if there are grounds to believe that the SEC did make a decision, you should consult with your lawyer about the viability of making a FOIA request for information about the investigation and other options that could help you move forward.

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.