SEC Inquiries and Investigations
The SEC’s Enforcement Division conducts investigations pursuant to formal Orders of Investigation that authorize the staff of the Enforcement Division to seek the production of relevant information, either in the form of documents or witness testimony. Although the SEC does not have prosecutoral powers, it often refers cases to the U.S. Attorney’s Office for criminal investigation. At times, the SEC and U.S. Attorney’s Office may also coordinate their investigations.
Receiving an SEC subpoena does not necessarily mean that the investigation is limited to civil matters.
SEC Investigation Triggers
Most SEC investigations are prompted by one or more of the following:
♦ unregistered securities offerings;
♦ accounting deficiencies;
♦ insider trading;
♦ broker-dealer sales practices;
♦ failure to supervise; and
♦ misleading or fraudulent disclosures or investor relations activity
Types of SEC Division of Enforcement Investigations
There are two types of SEC investigations. The first is the informal investigation, also called a Matter Under Inquiry. There is also the formal investigation. Sometimes “informal” is a preliminary stage proceeding a “formal” inquiry. In both instances, information exchanged between the SEC and the person or entity being investigated is confidential, and the investigation itself is not made public.
SEC Informal Investigations
During an informal investigation stage the SEC staff has no formal subpoena power and relies on the cooperation of the relevant individuals and entities to gather and provide information. Upon conclusion of an informal investigation, the SEC staff may simply close the investigation, recommend that the SEC bring an enforcement action or seek a formal order of investigation from the SEC to investigate further. In most cases, the informal investigation, if not closed, becomes “formal”, but in some circumstances the agency may proceed directly to enforcement.
SEC Formal Investigations
Formal orders may be issued only by senior members of the Enforcement Division. The SEC approves requests for formal orders when it determines that a violation of the securities laws has occurred. The formal order grants SEC staff the ability to issue subpoenas and to administer oaths. The SEC’s subpoena powers are broad. When the SEC staff receives a formal order it commences a formal investigation. The orders themselves generally describe the nature of the investigation, and explain what securities laws may have been violated.
The company or individual subpoena has the right to see the formal order. Access to Staff comments and recommendations is not granted.
Like informal investigations, SEC formal investigations may be terminated without further action, but the SEC staff is less likely to do so, as more time and effort has been invested in the case being investigated.
SEC Division of Enforcement Subpoenas
The SEC often issues document subpoenas before seeking to interview or subpoena witnesses. SEC document subpoenas can be directed at entities or individuals that the SEC believes may have information that is relevant to the investigation. After reviewing the documents the SEC may subpoena additional materials or witnesses for testimony.
The SEC’s Wells Notice
When the SEC staff concludes an investigation, it may recommend to the SEC that enforcement proceedings be commenced, or it may determine to take no further action. If the staff has recommended that the Commission commence an enforcement proceeding, it typically provides prospective defendants with a Wells Notice – named after John A. Wells, chairman of the committee that originally implemented the process – informing them of its intention to bring an enforcement action.
The targets of the SEC investigation will first be notified by telephone, and then by letter.
The recipient of a Wells Notice has generally one month to provide the staff with its response to the Wells Notice known as a Wells Submission. The Wells Submission is basically a brief arguing why an enforcement proceeding is not warranted. Upon reviewing the Wells Submission the SEC staff may elect to modify or reverse its recommendation to the SEC, but rarely does so.
A wells submission is not mandatory. Some attorneys recommend that their clients make no Wells Submission because the statements made in the submissions may become admissions.
Confidentiality of SEC Division of Enforcement Investigations
The SEC is not required to disclose the status of an SEC investigation to subpoena recipients. Absent an agreement with the SEC or a court order, compliance with an SEC subpoena is mandatory. The recipient of an SEC subpoena must take reasonable steps to preserve potentially relevant documents, as well as emails and other electronically stored information. This could include modifying or suspending document retention policies and the automated deletion of emails. Failure to do so could, in the worst case, results in obstruction of justice charges.
Recipients of SEC subpoenas have no means of objecting to the scope of the SEC subpoena. The only way to challenge an investigative subpoena is to refuse to comply with it. In that case, the SEC may, and probably will, apply in Federal court to compel compliance. That happened two years ago, when San Diego law firm Carrillo Huettel and its founders objected to a subpoena demanding they turn over their attorney-client trust accounts. The judge ruled against Carrillo Huettel, and the law firm became the subject of an SEC enforcement action.
Response to the SEC’s Division of Enforcement Subpoenas
Generally, communications with the SEC should be handled by a securities attorney. Once the SEC becomes aware that a party is represented by counsel it cannot contact that party directly, but must go through counsel. Apart from cooperating with a securities attorney, an issuer’s employees should be discouraged from engaging in informal or unnecessary discussion of the SEC subpoena or investigation among themselves. Discussions about SEC subpoena’s may be subject to SEC scrutiny during an investigation.
SEC Enforcement Actions
Upon the SEC staff’s recommendation to bring an SEC enforcement action, it may pursue a civil action in federal court, an administrative proceeding before an administrative law judge, or decide not to bring an enforcement action. Whether the SEC authorizes a civil action in federal court or an administrative proceeding depends on the severity of the allegations, the nature of the conduct alleged, tactical considerations, and the type of sanctions sought.
If the SEC proceeds with an enforcement action, the matter will be posted on the Litigation or Administrative Proceedings pages of the SEC website.
Consequences of SEC Enforcement Actions
The consequences of SEC investigations, among other things, can range from a slap on the wrist to asset freezes, large fines and criminal referrals of matters to the United States Attorney’s Office.
Generally, civil suits brought by the SEC seek injunctive relief from further violations of the federal securities laws, an asset freeze, an order for disgorgement of ill-gotten gains, and large civil fines and penalties. The SEC can also seek to bar a person permanently from acting as an officer or director of a public company or registered entity, such as a broker-dealer, investment company and investment adviser.
Any microcap issuer or other person who receives a phone call from the SEC enforcement attorney would be wise to plead an urgent business meeting and get on the phone with a qualified securities lawyer. Do not babble everything you think the SEC enforcement attorney might want to know. Above all, do not lie. Let your securities lawyer handle decisions, give advice, and deal with the SEC. Failure to do so can be devastating for companies and individuals alike.
For more information about the SEC investigations, see:
For further information about this article, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 201 S, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.gopublic101.com. This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings,SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.