Strategic Protection In SEC Enforcement Charges
The self-described mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, the SEC believes its investor protection mission is more compelling than ever.
The SEC believes that as the United States’ securities exchanges mature into global for-profit competitors, there is even greater need for sound market regulation.
Such regulation could impact ordinary citizens.
The SEC believes that the laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. It is only through the steady flow of timely, comprehensive, and accurate information that the SEC believes people can make sound investment decisions.
The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation so important to the U.S. economy. To insure that this objective is always being met, the SEC attempts to work with all major market participants, including especially the investors in our securities markets, to listen to their concerns and to learn from their experience.
The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC claims to be concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.
The SEC believes that its enforcement authority is crucial to its effectiveness in each of these areas. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.
The SEC is the primary overseer and regulator of the U.S. securities markets. However, the SEC works closely with many other institutions, including Congress, other federal departments and agencies, including law-enforcement, self-regulatory organizations (e.g. the stock exchanges), state securities regulators, and various private sector organizations.
The SEC views itself “first and foremost [as a] law enforcement agency”.
Consequently, an SEC investigation may lead to criminal charges. Therefore, it is imperative to consult with a criminal defense attorney before speaking with the SEC or other enforcement investigators, including internal investigators of various stock markets.
The SEC’s Division of Enforcement assists the Commission in executing its law enforcement function by recommending the commencement of investigations of securities law violations, by recommending that the Commission bring civil actions in federal court or before an administrative law judge, and by prosecuting these cases on behalf of the Commission. As an adjunct to the SEC’s civil enforcement authority, the Division works closely with law enforcement agencies, including the FBI, in the U.S. and around the world to bring criminal cases when they believe it is appropriate.
The Division obtains evidence of possible violations of the securities laws from many sources, including market surveillance activities, investor tips and complaints, other Divisions and Offices of the SEC, the self-regulatory organizations and other securities industry sources, media reports, and from the persons they investigate.
All SEC investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. Once the Commission issues a formal order of investigation, the Division’s staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can authorize the staff to file a case in federal court or bring an administrative action.
According to the SEC, common violations that may lead to SEC investigations include: misrepresentation or omission of important information about securities; manipulating the market prices of securities; stealing customers’ funds or securities; violating broker-dealers’ responsibility to treat customers fairly; insider trading (violating a trust relationship by trading on material, non-public information about a security); and selling unregistered securities.
Whether the Commission decides to bring a case in federal court or within the SEC before an administrative law judge may depend upon the type of sanction or relief that is being sought. For example, the Commission may bar someone from the brokerage industry in an administrative proceeding, but an order barring someone from acting as a corporate officer or director must be obtained in federal court. Often, when the misconduct warrants it, the Commission will bring both proceedings.
Civil action: The Commission files a complaint with a U.S. District Court and asks the court for a sanction or remedy. Often the Commission asks for a court order, called an injunction, that prohibits any further acts or practices that violate the law or Commission rules. An injunction can also require audits, accounting for frauds, or special supervisory arrangements. In addition, the SEC can seek civil monetary penalties, or the return of illegal profits (called disgorgement). The court may also bar or suspend an individual from serving as a corporate officer or director. A person who violates the court’s order may be found in contempt and be subject to additional fines or imprisonment.
Administrative action: The Commission can seek a variety of sanctions through the administrative proceeding process. Administrative proceedings differ from civil court actions in that they are heard by an administrative law judge (ALJ), who is independent of the Commission. The administrative law judge presides over a hearing and considers the evidence presented by the Division staff, as well as any evidence submitted by the subject of the proceeding. Following the hearing the ALJ issues an initial decision that includes findings of fact and legal conclusions. The initial decision also contains a recommended sanction. Both the Division staff and the defendant may appeal all or any portion of the initial decision to the Commission. The Commission may affirm the decision of the ALJ, reverse the decision, or remand it for additional hearings. Administrative sanctions include cease and desist orders, suspension or revocation of broker-dealer and investment advisor registrations, censures, bars from association with the securities industry, civil monetary penalties, and disgorgement.
The consequences of an SEC investigation are significant. If you believe you are the subject of an SEC investigation, do not delay in consulting with an experienced defense attorney.
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