SEC Subpoenas 101 – Securities Attorneys

Receiving a Securities and Exchange Commission (“SEC”) subpoena is a new and uncomfortable experience for most market participants. A SEC subpoena is an indication that the Division of Enforcement is investigating potential violations of the federal securities laws. SEC subpoenas can be issued to a variety of persons, many of which may not be suspected as securities law violators.

Most market participants understand that the Securities and Exchange Commission ( “SEC”) is a law enforcement agency.  SEC Actions can involve a case in federal court or an administrative action. They can be informal or pursuant to an SEC formal order of investigation.  SEC actions are common in the penny stock markets and the SEC frequently pursues shell packers, unregistered brokers stock promoters, investor relations firms, attorneys and auditors in connection with penny stock schemes.

Any SEC subpoena should be taken seriously and not ignored. When a formal order of investigation is obtained, the SEC’s Division of Enforcement can issue subpoenas and compel witnesses to testify and produce books and records.

The SEC’s Enforcement Division functions as the enforcement arm of the SEC.  It is the Division of Enforcement that commences investigations of potential securities law violations, by recommending that the SEC bring SEC actions in federal court or before an administrative law judge, and by prosecuting the cases on the SEC’s behalf.

The SEC’s Division of Enforcement investigates potential violations of the federal securities laws and collects evidence of securities law violations.  Often times, the SEC makes referals to the Justice Department for criminal prosecution. The SEC obtains  evidence from a variety of sources including market surveillance activities, investors, whistleblowers, other Divisions and Offices of the SEC, self-regulatory organizations such as the Financial Industry Regulatory Authority (“FINRA”), other securities industry sources, and news and/or media reports.

The SEC Division of Enforcement’s information gathering process involves the use of informal inquiries, witness interviews, examination of brokerage, transfer agent and other records, reviewing trading data, and other sources.

After an investigation, the Division of Enforcement’s staff presents their investigative findings to the SEC for its review.

Common SEC Violations that Lead to Investigations include:

• Securities fraud – Misrepresentation or omission of important information about a company or its securities
• Manipulative Trading – Manipulating the market prices of securities
• Conversion of 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)
• Selling unregistered securities

Whether the SEC brings a case in federal court or before an administrative judge, depends on various factors.  When warranted, the SEC may bring both a civil and administrative proceeding.

Potential defendants in SEC actions will receive a wells notice.   A Wells Notice is sent to subjects of a SEC investigation when Enforcement staff has substantially completed its investigation and intends to recommend that an enforcement be pursued.  Under SEC Rules, in response to such a notice, the recipient is entitled to make a Wells submission presenting facts and arguments intended to dissuade the staff from taking further action.  If the staff goes forward with its recommendation, the SEC will review the recommendation and the Wells submission, and then decide whether to authorize an enforcement proceeding.

SEC Civil Actions

If it determines that violations of the securities laws has occurred, the SEC’s Division of Enforcement files a complaint with a U.S. District Court and asks the court for a sanction or remedy.  Often the SEC asks for an injunction that prohibits any further acts or practices that violate the securities laws.   In addition, the SEC often seeks civil monetary penalties, or 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 Actions

The SEC 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, who is independent of the SEC.  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 administrative judge 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 SEC.  The SEC may affirm the decision of the administrative law judge, reverse the decision, or remand it for additional hearings.  SEC 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.

Issuers and market participants should seek the advice of a qualified securities attorney prior to responding to an SEC subpoena to ensure compliance with applicable laws.

For more information about SEC investigations, please contact Hamilton & Associates Law Group, at 561-416-8956 or [email protected].  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyer
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com