An SEC investigation can threaten your career, finances, and personal freedom. The Securities and Exchange Commission has broad enforcement powers and devotes substantial resources to investigating potential securities law violations. Understanding how SEC investigations work and how to respond effectively can significantly impact the outcome of your case.
How SEC Investigations Begin
SEC investigations originate from various sources including tips from whistleblowers, market surveillance detecting unusual trading patterns, referrals from other agencies, routine examinations of regulated entities, and media reports of potential misconduct. The SEC's whistleblower program provides financial incentives for reporting securities violations, increasing the number of tips the agency receives.
Investigations typically proceed through two phases. Informal inquiries involve voluntary requests for information and interviews, while formal investigations provide the SEC with subpoena power to compel document production and testimony. Receiving a formal order of investigation signals that the SEC has reason to believe violations may have occurred and is conducting a serious examination.
Common Areas of SEC Investigation
The SEC investigates a broad range of potential securities violations. Insider trading investigations examine whether individuals traded on material nonpublic information. Accounting fraud investigations scrutinize whether companies manipulated financial statements to deceive investors. Market manipulation investigations look at schemes to artificially affect securities prices.
Investment advisor misconduct, broker-dealer violations, and unregistered securities offerings represent other common investigation areas. The SEC also actively investigates foreign corrupt practices, cybersecurity disclosure failures, and emerging areas like cryptocurrency fraud.
Responding to SEC Inquiries
How you respond to initial SEC inquiries sets the tone for the entire investigation. Engaging experienced securities defense counsel before responding protects your interests and helps avoid missteps that could worsen your situation. Never provide information to the SEC without first understanding your rights and the implications of your responses.
Cooperation can benefit investigation targets in some circumstances, potentially resulting in more favorable outcomes. However, cooperation decisions require careful analysis of your exposure, the strength of the SEC's case, and whether other parties might provide information that implicates you. Strategic cooperation must be distinguished from simply helping build a case against yourself.
Document Preservation and Production
Upon learning of an SEC investigation, immediate document preservation becomes mandatory. Destroying, altering, or concealing relevant documents constitutes obstruction of justice, potentially converting a civil matter into a criminal one. Implement litigation holds to ensure no relevant documents are deleted through routine retention procedures.
Document production requires careful review to identify privileged materials, ensure you're providing what's required, and understand what the documents reveal about your potential exposure. Organized, professional document production demonstrates cooperation while protecting your rights.
Potential Outcomes
SEC investigations can result in several outcomes ranging from closure without action to civil enforcement and criminal referral. When the SEC decides to pursue enforcement, it may seek injunctions, disgorgement of ill-gotten gains, civil monetary penalties, and industry bars. Settlements allow resolution without admitting or denying allegations, though the SEC has increased pressure on defendants to admit wrongdoing in recent years.
Criminal referrals to the Department of Justice represent the most serious potential outcome, exposing subjects to imprisonment. Parallel civil and criminal investigations require careful navigation to avoid statements in the civil context that create criminal liability.