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What Should You Expect During the SEC Investigation Process

Sign INVESTIGATION and Gavel on Wooden TableWhen you think of investigations by the Securities and Exchange Commission (SEC), you might think of Wall Street kingpins like Bernie Madoff and Michael Milken, but the SEC’s investigatory process takes them far beyond Manhattan. In 1983, Oklahoma’s own legendary football coach Barry Switzer became the target of an SEC investigation for violating federal insider trading laws. The SEC even took Switzer to court, although Switzer prevailed based on his argument that he had made stock trades based on information he had innocently overheard while in the bleachers at his son’s track meet.

To be sure, the SEC can’t be all places at all times, and many potential violations of federal securities laws go unnoticed or unpursued by the federal government. But when the SEC opens into an investigation into you or your company, you will want to respond properly to avoid further scrutiny and to minimize the negative consequences, including a civil trial and even a pathway to criminal charges.

Why Investigations Are Opened

The financial industry is enormous, with securities professionals and traders all across the country, so how does a single agency with limited resources even know where to begin? A few of the most common types of reasons that investigations are opened are below:

  • Complaints: The SEC receives complaints from investors, customers, employees, competitors and others on a regular basis of potential securities violations. Some of these are founded, and some are not.
  • Whistleblowers: Many investigations are opened when a whistleblower – often an employee of a company – informs the SEC that wrongdoing is occurring.
  • News Articles: If the Wall Street Journal or some other paper of note reports on wrongdoing in the industry, the SEC may open an investigation to look into it.
  • Proximity to Other Wrongdoers: This is a very common reason investigations are opened. For example, after the Madoff scandal broke, many people connected to him – including all kinds of financial services he used for his business – were investigated for their potential role in the scandal.
  • Data Tracking: The SEC follows irregular trading patterns (e.g. increased trading prior to a merger announcement) and may inquire as necessary.

Document Requests and Interviews

The SEC might open an investigation by simply writing to the target of the investigation and asking for information, such as documents or emails relating to a certain time or topic. The SEC might also approach people connected with the target to find out information either with or without the target’s knowledge.

The question at this point becomes how to respond to the SEC’s request. Proper cooperation with the SEC can be very helpful in resolving the investigation quickly, but it is also important to understand how to properly give the SEC what it is requesting, and to understand the implications of the information you might be providing, e.g. whether it will open you to civil or criminal charges.

The SEC may also want to interview you or others connected to you at this time. You are allowed to have your attorney present you who can work with you to prepare for the interview and to protect your rights and interests.

At this point, the investigation will not be made public by the SEC.

Negotiations and Settlements

As the investigation moves along, your attorney can negotiate with the SEC to reach a favorable outcome to the investigation, ideally a closing of the investigation without penalty and without the investigation being made public. You may also attempt to reach a settlement with the SEC to prevent the SEC from suing you in a civil trial, which runs the risk of making much of your private information public. Often, the SEC will be amenable to reduced penalties including an agreement to defer prosecution indefinitely in exchange for efforts to avoid wrongdoing in the future.

Going to Trial

If you are unable to reach a settlement with the SEC, the SEC may sue you or your company in a civil trial for damages. Such a trial may open you up to private lawsuits from investors and others who can gain access to information through the trial. Criminal charges may also be brought by the U.S. Attorney’s office or state regulators.

Work with an Experienced White Collar Defense Attorney

If you believe you are the subject of an SEC investigation, it is important to not undertake responding to the investigation alone, as this can often make matters worse through inadvertent and unnecessary disclosure and antagonism which only increases the scrutiny. Contact an experienced white collar defense attorney who can guide you through the SEC investigation process and protect your interests. Contact Oklahoma defense attorney J. Patrick Quillian today at 405.294.4448.

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