Government Investigations

SEC Investigations

The Securities and Exchange Commission and the Financial Industry Regulatory Authority are the two primary regulatory bodies governing the securities industry. The SEC is a federal agency with civil enforcement authority and a direct pipeline for criminal referral to the DOJ. SEC matters frequently result in parallel criminal prosecution—from the moment you receive any SEC correspondence, every decision must account for the parallel criminal risk.

How SEC Investigations Begin

SEC investigations typically begin through four channels: (1) a tip submitted through the SEC's Whistleblower Program under Dodd-Frank Section 21F—which provides whistleblowers with 10-30% of sanctions over $1 million, creating powerful financial incentives for insiders to report; (2) algorithmic market surveillance by the SEC's Division of Economic and Risk Analysis (DERA), which identifies unusual trading patterns consistent with insider trading; (3) a referral from FINRA, the exchanges, or other self-regulatory organizations; or (4) a media report or public filing raising questions about financial disclosure accuracy.

Informal Inquiry vs. Formal Order of Investigation

An informal inquiry does not carry subpoena authority—the SEC can only request documents and voluntary testimony. Once the SEC issues a Formal Order of Investigation, it is authorized to issue subpoenas for testimony and documents under 15 U.S.C. § 78u. Most significant SEC investigations operate under a Formal Order.

The Wells Notice — The Critical Advocacy Window

Before bringing a civil enforcement action, SEC staff typically issue a Wells Notice to the subject of the investigation. The Wells Notice informs the recipient that staff has made a preliminary determination to recommend enforcement action and provides an opportunity to submit a Wells Submission—a written response arguing that enforcement action is unwarranted, premature, or should be narrowed.

A well-crafted Wells Submission can result in: staff declining to recommend any action; staff narrowing the proposed charges significantly; or staff recommending a lesser form of relief. A poorly prepared or missing submission can harden staff's position and accelerate the timeline to formal charges. The Wells Submission is the most consequential document in most securities enforcement matters—it must be treated accordingly.

SEC Investigation Stages

Stage	What Happens	MB Law’s Role
Informal Inquiry	SEC requests voluntary documents and interviews	Assess voluntary compliance; frame narrative
Formal Order	SEC can subpoena documents and testimony	Litigation hold; privilege review; negotiate scope
Testimony	SEC staff conducts recorded testimony; counsel present	Extensive preparation; Fifth Amendment strategy
Wells Notice	SEC staff preliminarily recommends enforcement	Begin Wells Submission immediately
Wells Submission	Client argues against enforcement in writing	Factual rebuttal; legal arguments; mitigation
Enforcement Action	Civil complaint or administrative proceeding	Litigate; coordinate parallel criminal defense
Settlement	Cease-and-desist, disgorgement, penalties, bar	Negotiate every term; minimize bar; challenge calculations

Key SEC Violations and Penalties

Violation	Statutory Basis	Civil Penalty	Criminal Exposure
Securities Fraud	15 U.S.C. § 78j(b) Rule 10b-5	$207,183/violation (individual)	18 U.S.C. § 1348: up to 25 years
Insider Trading	15 U.S.C. § 78j Rule 10b-5	Disgorgement + 3× profit/loss avoided	18 U.S.C. § 1348: up to 20 years
Investment Adviser Fraud	15 U.S.C. § 80b-6	Disgorgement + civil penalties	18 U.S.C. § 1348: up to 25 years
Registration Violations	15 U.S.C. § 77e	Rescission + per-violation penalties	18 U.S.C. §§ 1341/1343: up to 20 years
Market Manipulation	15 U.S.C. § 78i	Disgorgement + penalties + bar	18 U.S.C. § 1348: up to 25 years

Defending SEC Testimony — Key Principles

Counsel is present at all times

Unlike grand jury testimony, your attorney is present throughout SEC testimony and may object to improper questions—though objections generally do not prevent the question from being answered and are preserved for the record.

Fifth Amendment in civil proceedings

While you retain Fifth Amendment rights, invoking the Fifth in an SEC proceeding allows the court or ALJ to draw an adverse inference—that the answer would have been unfavorable. This adverse inference does not apply in parallel criminal proceedings, creating strategic complexity.

Prior inconsistent statements

SEC staff will compare testimony to prior documents—emails, texts, prior sworn statements—looking for inconsistencies. Preparation must include thorough review of all documents that may be used for impeachment.

Parallel criminal exposure

Every statement made in SEC testimony can be used in a parallel DOJ criminal prosecution. Defense strategy must account for this at every stage.

Strategic Federal Defense Starts Early

Early legal intervention can significantly impact the outcome of a federal investigation or prosecution.