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SEC Investigations and Enforcement Process

The Securities and Exchange Commission's (SEC) Division of Enforcement (“Enforcement”) regulates and handles investigations and litigations for alleged violations of federal securities laws. If a case has potential criminal implications, or involves a registered broker dealer or its agent, the investigation can be handled by the Department of Justice (“DOJ”) or the securities industries’ self-regulatory organization, the Financial Industry Regulatory Authority (“FINRA”). When an investigation of an alleged securities fraud violation is opened, the SEC informs the concerned party of the Matter Under Inquiry/Investigation (“MUI”). An investigation can be triggered in a number of ways such as:

  • Trading data
  • Referral from State regulator or FINRA
  • Public filings required per Securities’ Act
  • Investor/Customer complaint
  • Issue revealed during periodic examination
  • Whistleblower

A broker dealer or investment advisor can also elect to self-report. As will be discussed in greater detail later, self-reporting will do much to mitigate the scale of potential penalties that the SEC could assess.

MUI and the Scope of the Investigation

When an SEC investigation commences it is known as an MUI. At this juncture the SEC does not have subpoena power and is generally relying on the cooperation of the parties the subject of the investigation for document production and information requests. The SEC has broad power to request documents and information in furtherance of an MUI. Once an MUI is opened, there are several steps that should be taken. Some of the most crucial steps will be outlined below. Experienced securities attorneys first step will be to contact SEC enforcement to determine how close they are to making a charging recommendation. Assessing the scope of the investigation and setting a time for production of documents is key. Production at this phase is voluntary, but failure to produce requested documents will have major implications in terms of the SEC determination of whether to open a full-scale investigation, which will be issued in the form of a “Wells Notice”.

The Wells Notice

If the SEC believes that the MUI shows potential violations of federal securities laws, then it will place a “Wells Call” presenting evidence and seeking approval to open a formal investigation from an SEC Director. Counsel will be notified of the SEC intention to launch an investigation prior to receiving the Wells Notice, which is generally brief and absent any detailed information concerning the scope and purpose of the SEC Enforcement action. Per the SEC Enforcement Manual, the written Wells Notice will contain the following key pieces of information:

  • Identify charges under the applicable securities statutes that have been violated
  • Provide for a written statement from the recipient of the Wells Notice – this is known as a Wells Submission.
  • Instruct that the documents called for in production are not subject to any evidentiary privilege and can be sued in any subsequent action or proceeding. There are evidentiary issues to consider at this juncture that will be discussed in greater detail below. Briefly the SEC may deny a Wells Submission if the submitting party seeks to limit admissibility of the documentation provided in a later trial or enforcement proceeding.
  • Provide a production deadline.

Once a Wells Notice is received certain reporting obligations pop up. Whether someone has to report that they are the subject of a Wells Notice is very fact sensitive and requires consultation with a securities attorney.

The Wells Submission

Presenting a Wells Submission to the SEC has pros and cons. The obvious pros are presenting key arguments that will convince the SEC to drop certain charges. There are multiple cons that must also be considered. Besides the apparent fact that a detailed Wells Submission will tip the SEC Enforcement Division’s hand to the strategy of defense counsel, the following is a list of some of the most essential cons that should be considered:

  • The statement can be used by SEC, DOJ or any other regulatory body such as FINRA.
  • Statement could also be discoverable by private third-party litigants in a separate claim for investment losses tied to the Wells Notice.
  • The 5th Amendment protects individuals from being compelled to provide testimony that would incriminate themselves in a trial. A Wells Submission might contain statements which would be deemed a waiver of the 5th Amendment protection against self-incrimination.

If a Wells Submission is ultimately agreed upon it must be carefully organized. The most important information that should be provided are mitigating factors to any violations of federal securities laws that recipient has acknowledged. Securities Attorneys will highlight whether there has been self-disclosure to the SEC and cooperation with the staff’s investigation. In addition to this, the attorney will highlight whether there were any efforts to recompense those harmed by the alleged violations and any efforts to establish preventative guidelines to ensure history does not repeat itself. If you are the subject of an SEC investigation please contact the securities lawyers of Lubiner Schmidt & Palumbo for a consultation.

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