Understanding SEC Investigations: How It Works? 2024

By W. James Payne Law Firm

The U.S. Securities and Exchange Commission (SEC) is a federal agency that enforces securities laws and works to ensure transparency in financial markets like the stock exchange. When potential violations come to their attention, the SEC may launch an investigation to determine if laws have been breached. The W. James Payne Law Firm knows that when you are facing allegations, understanding SEC investigations and the process is key to preparing well.

What Happens During an SEC Investigation

An SEC investigation is the process of a formal exploration into the potential violations of securities laws. It is the structured process where the SEC can gather evidence, review facts, and determine if enforcement action is needed because of a violation. Generally, it begins when the SEC becomes aware of a potential violation through a public complaint, routine examination, whistleblower tip, or other avenues and launches their informal inquiry to get information. Common federal crimes that may trigger such investigations include securities fraud, insider trading, market manipulation, and accounting fraud.

The SEC seeks to gather information in this informal investigation. They often ask for voluntary information from the individuals and entities being investigated, such as documents, emails, and financial data. If the evidence is incriminating, they initiate the formal investigation, giving them subpoena power to get testimonies, gather key documents, and find other necessary evidence.

If there is proven wrongdoing, the SEC may negotiate a settlement that gives an individual or company the opportunity to resolve the matter without litigation. In the event that a settlement is not possible, the SEC can pursue enforcement through civil claims or an administrative proceeding, often involving an administrative separation attorney.

Common Reasons SEC Investigations Are Initiated

SEC investigations are often initiated to protect investors, preserve market integrity, and, ultimately, enforce securities laws. There are several key reasons these investigations are initiated, including the following:

• Insider Trading: Insider trading is illegal and happens when an individual or party decides to trade based on material, non-public information (MNPI) that is not available to the general public. An insider trading investigation can be triggered by monitoring if there is unusual trading activity before big news or through tips and reports from whistleblowers.
• Accounting Fraud or Misrepresentation: This can happen through the falsifying of financial statements or failure to disclose important financial information that misleads investors. An investigation can be initiated based on discrepancies in financial filings, whistleblower accounts, and suspicious auditor reports.
• Market Manipulation: Market manipulation is in the name. It is practices that interfere with the fair operation of the securities markets, like artificially inflating or deflating stock prices. This may be discovered if there is coordinated trading that inflates stock prices or false information is spread that manipulates stock prices.
• False or Misleading Disclosures: Public companies are legally required to disclose and share truthful and accurate information in their filings with the SEC through annual reports, prospectuses, and press releases. If they fail to do so, they may be evaluated by the SEC for illegal practices and may face certain penalties.
• Ponzi Schemes: A Ponzi scheme is illegal and a form of investment fraud when there is a promise of a high return with little to no risk, often paying returns to earlier investors with the capital of the newer investors. A Ponzi scheme may be discovered if investors complain about not receiving their promised funds or from reports from financial professionals.

FAQs

How Does an SEC Investigation work?

An SEC investigation often starts with a preliminary informal inquiry where the SEC asks for voluntary cooperation from the entity or individual who is under investigation with the goal of determining if there is evidence to support a formal investigation. If the SEC suspects violations, they initiate a formal investigation and make a decision on how to proceed, either by dropping the case or pursuing a legal claim.

How Long Do Most SEC Investigations Take?

How long an SEC investigation can take will vary widely depending on the specific situation, as factors like the case’s complexity, the amount of evidence present, and the nature of the alleged violations can all impact the timeline. Simple and straightforward cases that have clear evidence may resolve quickly, whereas cases involving elements like intricate financial instruments or cross-border issues can make the process take longer.

Are All SEC Investigations Public?

No, not every SEC investigation is public, as some are done privately, especially in the initial stages of the investigation. The goal of keeping investigations private is to protect the integrity of the search and prevent unnecessary harm to reputations, as some cases are dismissed because there is not enough evidence to support the allegations.

What Triggers an SEC Investigation?

An SEC investigation can be triggered by various circumstances or events that suggest a potential violation of federal securities laws. Common triggers can include whistleblower complaints, market surveillance, routine examinations, media reports, discrepancies in public filings, and tips from the public. Illegal actions like insider trading, Ponzi schemes, and financial fraud are investigated by the SEC.

Do I Have to Cooperate With an SEC Investigation?

Cooperating with an SEC investigation may be required depending on the context and type of request the SEC issues. Voluntary requests for information in the early stages of an investigation may not legally require compliance, but cooperation may work in your favor. If an investigation is initiated with a subpoena, compliance with the investigation may be legally required.

Contact a Trusted Criminal Defense Lawyer Today

SEC investigations are serious matters that can impact many areas of life, such as careers, reputations, and finances. Understanding why these investigations happen and how they unfold can be essential to preparing for a case if you are facing allegations of a financial crime.

Whether you are facing allegations of accounting fraud, insider trading, or other securities law violations, having a trusted criminal defense lawyer on your side can make a great difference in your case outcome. Reach out to the W. James Payne Law Firm to set up an initial consultation today and learn how our legal team can support you with your legal matter.