Any person or company that participates in the securities market could become the subject or target of a U.S. Securities & Exchange Commission (SEC) investigation. In United States v. Morton Salt, 338 U.S. 632, 652 (1950) , the Supreme Court of the United States determined that all it takes to justify an SEC investigation is an "official curiosity."
The SEC will not confirm or deny the existence of an ongoing investigation. SEC investigations are conducted in private. When an SEC investigation has been completed, the SEC may file an action in court or through an administrative proceeding, depending on the nature of the investigation. In the 2015 fiscal year, the SEC filed 807 enforcement actions.
According to the SEC, common violations that may lead to an investigation include:
- Misrepresenting or omitting important information about securities
- Manipulating market prices of securities
- Stealing customers' funds or securities
- Violating broker-dealers' responsibility to treat customers fairly
- Violating trust by trading on material, non-public information about a security (insider trading)
- Selling unregistered securities
The SEC also frequently investigates negligence and breach of fiduciary duty cases.
The Investigation Process
As discussed above, an investigation can be initiated due to nothing more than the SEC's "official curiosity." This curiosity could be triggered by formal complaints from investors or competitors, a whistleblower tip, improper or odd company filings, an alert from market surveillance technology, or any number of events. Since "official curiosity" is such a low bar, anything that gives the appearance of wrongdoing could trigger an investigation.
Once an investigation begins, the SEC starts a process of informal inquiries to determine if the investigation should move forward. This often involves SEC agents requesting information and attempting to gain statements directly from the subject of the investigation. Cooperating with reasonable requests during this stage is often a good idea, but subjects should consult with an attorney first.
After this informal stage, if the SEC feels that it has uncovered evidence of misconduct, it may move forward with a Formal Order of Investigation. At this point, the SEC issues subpoenas and conducts a forensic investigation. After gathering evidence, if the SEC feels that a violation can be proven, it provides the subject with notice and files an enforcement action.
SEC investigations are strictly civil in nature, but in many cases the SEC works with the U.S. Department of Justice to bring criminal charges as well.
Contact an Attorney Before Speaking to Investigators
If you think or suspect that you are the subject or target of an SEC investigation, you should contact an attorney immediately. Cooperating with the SEC during the informal questioning stage of an investigation can be advantageous, especially when you believe you have done nothing wrong, but it is still crucial that you only do so after speaking with an experienced SEC investigations attorney. You should not agree to be interviewed without consulting with an attorney first. Federal agents are trained to elicit incriminating statements. Even if you feel that you have done nothing wrong, talking to federal agents without an attorney puts you at risk.
The Law Offices of Scott D. Hughes Can Help
At the Law Offices of Scott D. Hughes, we represent clients who are being investigated by the SEC. Scott regularly practices in federal court in Orange and Los Angeles Counties, and is dedicated to protecting his clients' rights. Contact Attorney Hughes today if you would like to discuss your case or would like more information about this issue.