Securities and Exchange Commission (and FINRA) Investigations

When the SEC believes that a company or an individual is violating the securities laws, they may launch an investigation into the potential violations. Some of the most commonly investigated violations include those related to the sale of unregistered securities, insider trading, stealing funds or securities from customers, manipulating prices of securities in the market, or failing to provide material information regarding securities to investors.

An SEC investigation involves a number of steps, including the interviewing of witnesses, and obtaining and examining documents and records. The process can take a year or more, and can be commenced years after the activity in question occurred.

If the SEC determines there were violations, it typically will inform the target of the investigation by sending them a letter called a Wells Notice. That document outlines why the SEC believes the person violated the securities laws, and gives them an opportunity to try to convince the SEC that its views are incorrect. This process will either lead to a settlement (common),  a decision to drop the investigation (rare) or perhaps narrow it, or could result in the SEC deciding to sue (likely). At that point, the SEC staff may initiate a civil action in court or an administrative action before an administrative law judge.

The rights of the defendants in a civil vs. administrative proceeding are very different, as are the remedies that may be obtained against the person who has been charged. Sanctions can include an injunction that requires the party to refrain from future violations (so that a failure to do so would result in contempt of court and additional penalties), a suspension, a cease and desist order, a fine (including financial penalties and disgorgement of ill-gotten gains), or a ban from the securities industry or from being able to participate in certain types of business activities.

If you work in the financial services industry, or are a broker-dealer or work for one, you could be subject to an investigation conducted by FINRA or other securities industry regulators. The process in such investigations is similar in several respects to that in SEC investigations. For example, they can require that you appear to provide sworn testimony and produce documents and other records, and if they conclude that there has been a violation of the applicable laws or rules, they will send a Wells Notice.

If you have been contacted by the SEC, FINRA or other securities industry regulator about an investigation, you should contact a lawyer who is experienced in regulatory defense without delay.

Hutner Klarish LLP is an experienced business law firm focusing on matters related to hedge funds, company formation, private equity, venture capital, employment matters, and many other legal issues that impact your business. For strong legal representation when your business needs it most, contact Hutner Klarish LLP  today to see how we can help.