The SEC Investigation Process

While the SEC is a national, federal agency, there are regional offices across the country which work hand-in-hand with nearby branches of the Department of Justice and U.S. Attorney’s Offices. The SEC most often files complaints with a U.S. District Court, asking for a sanction or remedy against an individual or company accused of violating federal laws, such as the Securities Act of 1933 and the Exchange Act of 1934.

Common factors that can trigger an SEC investigation include:

  • Large assets reported despite small revenues
  • Inconsistent items listed in a company’s financial statements
  • Unusual accounting practices
  • Increasing revenues despite static cash flows
  • A company is using unregistered/unlicensed sellers of securities/offerings
  • Unexplained bonuses/loans provided to company executives
  • Whistleblower complaints

The most common accusations involve allegations of manipulative and deceptive practices to defraud investors, clients, or institutions, under Section 10(b) of the Exchange Act §§ 240.10b-1 – 240.10b-21, and fraud or misrepresentations in the offering and sale of securities under Section 17(a) of the Securities Act. In general, the SEC must bring an action within 5 years since the conduct in question.

Subpoenas and Requests

The SEC has authority on its own to issue subpoenas requiring witnesses to appear, produce documents, and even give testimony under oath. A formal order by the Commission is required in order for such a request to be enforced, however, and you should always demand to see it if you’re contacted by an investigator. Refusing to comply might lead to a separate court action to compel you to cooperate. The agency sometimes requests voluntary meetings or interviews, but these can have just as much impact on your future dealings with them. Any individual compelled to appear before the Commission’s staff has the right to be accompanied and advised by an attorney.

Notice to Subjects of Investigations

Under the SEC’s practice, any person for whom the agency has made an initial determination of violating the securities laws will generally receive what’s referred to as a “Wells” notice, which will specify the allegations and allow a deadline for the recipient to provide a response to the agency. Any response will be considered by the Commission in determining whether to proceed with further investigation. An attorney will be able to craft a legal defense, argue mitigating circumstances, provide documentation that will rebut the allegations, and request a meeting with SEC staff to review any relevant evidence and argue on your behalf.

The Commission’s Action

Once the SEC staff assigned to your matter presents a recommendation to the Commission, it will vote on whether to approve or reject that recommendation. This is a closed proceeding that neither you nor your attorney will participate in or observe.

Potential Penalties

SEC proceedings carry a risk of a variety of sanctions including disgorgement of profits, pre-judgment interest, injunctions, civil penalties, loss of professional licenses, harm to one’s reputation, and even criminal penalties, if a referral is made to federal prosecutors.

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305 Broadway 7th Floor

New York, NY 10007

Phone: 646.290.7033

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