SEC Investigations Explained

violation of state and federal regulations

The Securities and Exchange Commission (SEC) plays an important role in enforcing securities laws against brokerages, investment advisors, and other parties. While an SEC investigation can illuminate potential problems with your broker, the SEC has its own objective, which is not to make financial recoveries for investors.

The investment, securities, and stock fraud attorneys at Erez Law, PLLC understand SEC investigations. Even if you learn your advisor or broker is subject to an SEC investigation, you still need to retain private counsel to represent you and bring claims against liable brokerage firms. With over 35 years of experience, our team has the skills and knowledge to help you move through this process with confidence. Contact us today for a free consultation to learn more about how we can help you.

Overview of SEC Investigations

The United States Securities and Exchange Commission was founded in 1934 as a response to the stock market crash of 1929. What does the SEC do? Its role is to regulate financial institutions and enforce securities laws against market manipulation. The SEC’s Division of Enforcement conducts hundreds of private investigations to ensure market transparency and fairness, protect investors, and ensure compliance with securities laws. The SEC investigation process may involve the following:

  • Holding informal inquiries
  • Interviewing witnesses
  • Examining records
  • Analyzing trading data

After the investigation is concluded, the Division presents its findings to a commissioner of the SEC. The result may be a federal court filing, administrative action, or a prosecution referral to the Department of Justice. The SEC could also decide to settle the matter out of court or not pursue any action.

Through these actions, the SEC seeks to punish those who violate securities laws. While they may sometimes recover lost investment money for investors, its primary objective is to provide enforcement against wrongdoers, not to make investors whole again after being victimized by deceptive investors. However, SEC investigations can yield valuable information that can be used to help you recover compensation from liable brokerage firms through FINRA arbitration.

Triggers for SEC Investigations

Several factors can prompt an SEC investigation, including:

  • Suspicious trading patterns
  • Whistleblower tips
  • Unusual financial reporting
  • Newspaper stories
  • Alerts from competitors

The SEC assesses the information it receives and decides whether to open a “Matters Under Inquiry” (MUI). Because many of the triggers for an SEC investigation come from publicly available information or whistleblower leads, the MUI is often based on incomplete information. However, opening an MUI allows the SEC to initiate a fact-finding mission to determine the appropriateness of a full investigation. This determination depends on factors such as:

  • The credibility of the source
  • The gravity of the allegations
  • The capacity for harm
  • Whether the offense is ongoing

The SEC usually makes a determination within 60 days. If they choose to proceed, the SEC issues an Order of Investigation, allowing staff to administer oaths, subpoena witnesses, and take evidence. This evidence can prove valuable in your civil claim against a liable broker or brokerage firm.

Investigation Process and Tools

In addition to subpoena power, an Order of Investigation gives SEC staff the power to analyze the suspect’s data, review their documents, and interview all relevant parties. The legal team at Erez Law, PLLC can obtain relevant information discovered during this process to assist you with your private right of action.

It is important to note that if the SEC decides to open an investigation into your advisor’s financial activities, they will not inform the suspect. However, you may receive a subpoena from the Division, requiring you to provide documents or testimony. You should respond to the SEC as soon as possible, as failure to do so may prompt enforcement action against you. Retaining experienced legal counsel before you provide your response can help protect your rights throughout the process.

Types of SEC Violations

The SEC investigates many types of misconduct related to securities laws and financial markets. Some of the most common violations include:

  • Insider trading – When someone trades securities based on material, non-public information in violation of a duty of trust
  • Accounting fraud – Intentionally falsifying or misrepresenting financial information about a public company
  • Fraudulent securities offerings – When companies or individuals give false or misleading information to investors when offering or selling securities
  • Market manipulation – Artificially affecting the supply or demand for a security to manipulate its price
  • Unregistered securities offerings – Selling securities without properly registering them per SEC regulations

Violations of securities laws have serious consequences. The SEC may impose fines, require disgorgement of ill-gotten gains, issue cease and desist orders, bar individuals from working in the industry, and refer cases for criminal prosecution.

Having your own legal representation is still vital even if your brokerage firm is the subject of an SEC investigation. A lawyer will be focused on obtaining monetary recovery of your specific losses, seeking to maximize your recovery.

Legal Defense and Enforcement Actions

Once the SEC begins an informal inquiry or formal investigation, the suspected broker or advisor may lodge a defense, which may involve:

  • Challenging the factual basis of allegations
  • Arguing the conduct did not violate securities laws
  • Asserting an affirmative defense like lack of scienter (prior knowledge of wrongdoing)
  • Disputing the extent of harm caused

The suspect’s lawyer may try to negotiate a settlement. Typical settlements involve agreeing to cease the relevant conduct and pay a fine without admitting guilt. This agreement resolves the matter without the need for an SEC lawsuit.

If settlement talks fail, the SEC may pursue civil enforcement actions through administrative proceedings or in federal court.

Potential consequences to the suspect include:

  • Injunctions to prevent future violations
  • Disgorgement of ill-gotten gains
  • Civil monetary penalties
  • Officer/director bars
  • Revocation of broker-dealer registration

For severe securities fraud, the SEC may refer the matter to the Department of Justice for criminal prosecution, which could result in steep fines and even imprisonment.

It is important to remember that the SEC is not your advocate. It represents society’s interests and tries to deter similar misconduct from other wrongdoers. Your exclusive remedy to recover your financial losses is through FINRA arbitration, so having a lawyer skilled in this specialized arena is pivotal to securing a positive outcome for your case.

Contact Our Nationwide Fraud Lawyers

If you have learned of an SEC investigation of one of your brokers or advisors, do not try to handle the situation alone. Your interests should be vigorously represented during this process. When everything is at stake, the experienced SEC investigation attorneys at Erez Law, PLLC are ready to fight for your rights.

An SEC investigation can yield valuable evidence our skilled legal team can use to fight for your fair recovery. Erez Law, PLLC has a reputation for winning, and we will do everything in our power to achieve a favorable result for you. Call us today or contact us online for a free consultation to learn more about your legal options.