You never want to be in the situation where the SEC is investigating you, but when they do, you must act quickly and decisively to minimize any harm.
In this article, we’ll take a look at some of the most common reasons why the SEC might initiate an investigation into a company or individual, the SEC investigation process, how long SEC investigations take, and some steps you can take to protect yourself if it happens to you.
The SEC may also investigate a company or individual if they receive a complaint from someone who has been harmed by the alleged violations.
Note: If you are under investigation by the SEC, it’s generally safe to assume that you’re under investigation for or a witness to securities fraud. You are strongly enouraged to seek an expereinced SEC defense lawyer.
There are Two Types of SEC Investigations:
The SEC can conduct two types of investigations: formal and informal.
Informal Investigations: For a vast majority of cases, investigations are informal. An informal investigation is less formal and typically occurs when the SEC has general concerns about a company or individual’s compliance with securities laws. The focus of an informal investigation is broader, and the SEC typically relies on information provided by the company or individual under investigation as well as other sources such as whistleblowers.
This means that the SEC staff will review the facts and evidence available to them and make a determination as to whether or not an enforcement action is warranted.
Following an informal investigation, the SEC may choose to take no action, issue a warning letter, or file a formal enforcement action.
Formal Investigation: A formal investigation is more serious and typically occurs when the SEC has specific evidence that a violation of securities laws has occurred. In a formal investigation, the SEC will often use its subpoena power to obtain documents and other information from the company or individual being investigated.
The SEC generally reserves formal investigations for more-important matters involving large sums of money or a large number of investors. However, this isn’t always the case, and Enforcement Division staff may elect to pursue a formal inquiry in any situation where it appears that administrative, civil, or criminal fines might be appropriate.
All SEC investigations are conducted privately. Facts and evidence obtained by the SEC during an investigation are not made public unless and until the SEC files a formal enforcement action.
What Happens When You are Under Investigation?
First, you will NOT be told you are under investigation by the SEC. But you will likely receive a letter from the SEC’s Division of Enforcement with a Subpoena requesting documents and/or requiring you to give testimony. At that point, you can request the opportunity to view the Formal Order of Investigation with a summary of the investigation underway. It is a very general description and rarely identifies who or what conduct is under investigation.
In most cases, it is important to respond to the SEC as quickly as possible and to provide them with all of the relevant information. Failure to respond or provide false information can lead to civil and criminal penalties.
It is strongly advised that you seek legal representation if you are under investigation by the SEC before you respond to the SEC’s letter. An experienced securities defense lawyer will be able to help you navigate the process and protect your rights.
What are the Risks of Not Responding to an SEC Investigation?
If you do not respond to an SEC investigation, the SEC may take enforcement action against you. This could include filing a lawsuit against you or seeking a court order requiring you to take specific actions such as making restitution to investors or ceasing and desisting from certain activities.
The SEC may also seek to bar you from working in the securities industry or from participating in penny stock offerings if you are a registered person.
Of course there are factors outside of the SEC’s control that can also affect the length of an investigation, such as the availability of witnesses or the need to gather evidence from foreign jurisdictions.
You can learn more about the SEC’s enforcement process by visiting the SEC’s website.
What Happens After an SEC Investigation?
After an SEC investigation, the Enforcement Division will decide whether to take enforcement action. Of course, the ideal case (when the SEC has started an investigation) is to conclude the inquiry with no evidence of wrongdoing.
However, if the SEC’s Enforcement Division decides to take action, the division will file a lawsuit in federal court.
The SEC’s litigation is generally public, and the agency will typically issue a press release announcing its action.
The press release will include a summary of the allegations and the relief being sought by the SEC.
Defendants in SEC lawsuits have the right to be represented by an attorney and to file a response to the SEC’s allegations.
The litigation will proceed through the court system, and a final judgment will be issued by the court.
What’s a Wells Notice?
If the SEC decides that they want to pursue a formal enforcement action against you, they will send you what is known as a Wells Notice.
A Wells Notice is a formal notification from the SEC that they are considering bringing an enforcement action against you for violating securities law. It gives you an opportunity to respond to the allegations and to provide information in defense of yourself.
This notice first comes via telephone, and then by letter.
The Wells Notice will provide specific details about the alleged violations and will give the company or individual an opportunity to respond. If you receive a Wells Notice, you should immediately consult with an experienced securities lawyer to discuss your options.
Should I Respond to a Wells Notice?
If you have received a Wells Notice, you generally will have one month to respond. The response to the Wells Notice is known as the Wells Submission.
The Wells Submission is a short defense of why an enforcement action isn’t necessary. The SEC staff may choose to modify or reverse its recommendation to the SEC after reviewing the Wells Submission.
The process of submitting an application for a Wells Submission is not required.
The decision to respond depends on a number of factors, including the severity of the allegations in the Wells Notice, your likelihood of success, and the potential consequences of an enforcement action.
It is strongly recommended that you speak with an experienced securities lawyer before submitting a Wells Submission because it will be viewed as an admission by you of whatever is written in that document.
What Types of Enforcement Actions does the SEC Take?
The SEC may seek civil or administrative action against a firm if it discovers evidence of securities fraud. These inquiries might be the basis for federal or state legal action—or, in some circumstances, criminal enforcement by the DOJ.
These investigations and enforcement actions by the SEC should not be taken lightly.
The costs of an unfavorable outcome can be significant. That is why, if you are under investigation by the SEC, it is important to have an experienced securities defense lawyer on your side to provide an effective defense.
How Can You Protect Yourself During an SEC Investigation?
The SEC’s Division of Enforcement is dedicated to investigating and bringing enforcement actions against companies and individuals who violate securities laws regardless of whether or not they are aware of the violation (or if the violation even occurred).
Therefore, it is important to take steps to protect yourself during an SEC investigation. This includes:
- Cooperating with the SEC – It is important to cooperate with the SEC and provide them with all of the relevant information. Failure to cooperate or providing false information can lead to civil and criminal penalties.
- Retaining an experienced securities defense lawyer – An experienced securities defense lawyer can help you navigate the process and protect your rights.
- Taking steps to protect your assets – The SEC may seek to freeze your assets or order you to forfeit them if they believe that you have obtained them through illegal means. It is important to take steps to protect your assets and keep them separate from any assets that may be subject to seizure by the SEC.
- Avoiding contact with the individuals or companies being investigated – It is important to avoid contact with the individuals or companies being investigated. This could lead to allegations that you are trying to interfere with the SEC’s investigation.
- Preserving documents and other evidence – You should preserve any documents or other evidence that may be relevant to the SEC’s investigation. This includes emails, text messages, financial records, and any other communications.
You Should Schedule a Consultation with an Experienced SEC Defense Lawyer
If you are under investigation by the SEC, you should schedule a consultation with an experienced SEC defense lawyer. Failure to do so in a timely manner could lead to serious consequences.
The Law Offices of Robert Wayne Pearce, P.A. has over 40 years of experience dealing with the SEC investigations, subpoenas and enforcement actions. Our attorneys can help you determine what information needs to be turned over, provide advice on how to handle the SEC investigation, and work hard to protect your interests. We will carefully review all of your options and develop a strategy that best protects you from any consequences.
If you would like to speak with one of our partners directly, please call us today at 800-732-2889 or Contact Us online for a free consultation.