Introduction
SEC Enforcement proceedings can be intimidating. As former SEC Staff Attorneys, and Securities Defense Attorneys, the attorneys at Sallah Astarita & Cox, LLC can represent you in connection with an SEC investigation. If the investigation turns into an enforcement proceeding, will use our decades of experience to assist you in the defense of the SEC’s allegations, reach a settlement, or defend you at trial.
It is important to note that an SEC investigation does not necessarily imply wrongdoing on the part of the individuals or entities being investigated. The SEC conducts investigations to gather information and evidence, and while its findings may result in enforcement actions, litigation, or settlements if violations are discovered, that is not always the case.
Understanding the Role of the SEC
We have covered the role of the SEC in other articles at SECLaw.com including introductions to The SEC, and SEC Investigations, Responding to a Wells Notice, and Can the SEC Bring Criminal Charges? A complete list of posts and articles is available by searching “investigations.”
Simply put, the SEC is a federal agency established with the primary mission of enforcing securities laws and regulating the securities industry in the United States.
Initiating the Investigation
The SEC’s enforcement division is responsible for investigating potential violations of securities laws and regulations. There are several triggers that can lead to an SEC investigation:
Tips and Complaints: The SEC often receives tips and complaints from whistleblowers, investors, industry insiders, or the public. If these tips suggest potential securities law violations, the SEC may launch an investigation.
Market Surveillance: The SEC monitors the financial markets for unusual trading activity or patterns that could indicate market manipulation or insider trading. Unusual trading volume, rapid price fluctuations, or other anomalies may trigger an investigation.
Corporate Disclosures: Inaccurate or misleading information in a company’s financial statements, annual reports, or other filings with the SEC can prompt an investigation. This can include fraudulent accounting practices, revenue recognition issues, or other forms of financial fraud.
Insider Trading: Suspicious trading by corporate insiders, such as officers, directors, or employees, ahead of significant company news or events can lead to an SEC investigation. Insider trading is illegal if based on non-public information.
Market Manipulation: Activities designed to manipulate the price of securities or create artificial trading activity, such as “pump and dump” schemes, can trigger SEC investigations.
Regulatory Violations: Violations of securities regulations or failure to comply with SEC rules can result in investigations. This can include violations related to registration requirements, disclosure obligations, or the handling of customer funds by brokerage firms.
Initial Public Offerings (IPOs): The SEC reviews the registration statements and offering documents for companies going public to ensure compliance with securities laws. If there are concerns about the accuracy or completeness of these documents, an investigation may be initiated.
Whistleblower Reports: The SEC has a whistleblower program that encourages individuals with knowledge of securities violations to come forward. Whistleblowers who provide credible information can be eligible for rewards, and their reports can lead to investigations.
Enforcement Priorities: The SEC may also initiate investigations based on its enforcement priorities, which can shift over time based on market conditions, emerging risks, and policy objectives.
Market Events: Major market events, such as financial crises or significant corporate scandals, can lead to broader investigations into systemic issues or specific companies and individuals involved.
Examination and Data Collection
Once an investigation is authorized, the SEC’s staff, comprised of attorneys, accountants, and investigators, begin the examination process. They collect data, financial records, emails, and other relevant evidence to build a solid case against the alleged wrongdoers. This stage is critical, as the strength of the evidence can significantly impact the outcome of the investigation.
Confidentiality and Non-Publicity
SEC investigations are inherently sensitive, and maintaining confidentiality is important. The agency attempts to ensure that information related to ongoing investigations remains non-public, safeguarding the reputations of both the subject of the investigation and the involved companies. However, upon concluding the investigation, and filing an enforcement proceeding, the SEC will issue press releases announcing the filing, naming the respondents, and detailing the allegations.
Cooperation and Settlements
Throughout the investigation process, the SEC encourages cooperation from all parties involved. Individuals or entities under investigation have the option to cooperate fully and provide valuable information that aids in resolving the case efficiently. In some instances, cooperation may lead to settlements, where the accused party agrees to certain sanctions or penalties without admitting guilt. Typically at this stage, the SEC’s settlement offer is rejected by the proposed respondent, as they are typically outrageous. In one recent case where I represented the respondents, the SEC’s settlement demand was $8 million dollars. After years of investigations, depositions, and a federal court complaint, we settled for $350,000.
Representation of Financial Professionals and Investors Across the Country
Enforcement Actions and Litigation
In cases where settlements are not feasible or appropriate, the SEC may opt for enforcement actions and litigation. Enforcement actions can take various forms, including civil suits, administrative proceedings, or cease-and-desist orders. The SEC has the authority to seek injunctions, monetary penalties, disgorgement of ill-gotten gains, and even bans from engaging in the securities industry.
The Role of the Court System
Once the SEC files a complaint, the case is brought before federal courts or administrative law judges. The court system plays a vital role in adjudicating the alleged violations. During the trial, both parties present their evidence and arguments, ensuring due process is followed to protect the rights of the accused.
The Impact of SEC Enforcement
The impact of SEC enforcement actions is far-reaching. Successful enforcement actions serve as a deterrent to potential wrongdoers, sending a strong message that securities law violations will not be tolerated. Additionally, these actions contribute to maintaining market integrity, bolstering investor confidence, and fostering a fair and transparent financial landscape.
Conclusion
Understanding how investigations work in SEC enforcement is crucial for anyone navigating the financial markets. One additional and crucial point. Responding to an SEC subpoena, appearing for an investigative deposition, and defending an enforcement proceeding is not for the inexperienced. The guidance of an experienced securities attorney provides the best chance for an acceptable outcome.
The attorneys at Sallah Astarita & Cox, LLC are former SEC Staff Attorneys and brokerage firm counsel, with over 100 years of collective experience. If you have received a subpoena from the SEC, a document request from FINRA, or have a dispute with a brokerage firm, call 212-509-6544 for a free consultation. The firm represents investors and financial professionals nationwide.
