Last verified on Tuesday 15th November 2016
In the United States, both federal and state authorities regulate aspects of the securities markets. This publication focuses on US federal authorities. The primary authority for the enforcement of federal securities laws is the Securities and Exchange Commission (SEC), which is responsible for administratively and civilly enforcing the Securities Act of 1933, the Securities and Exchange Act of 1934 and other related statutes, such as the Investment Advisers Act of 1940. The Department of Justice (DOJ) and US attorneys’ offices across the United States also enforce federal securities laws through criminal prosecutions. Self-regulatory organisations (SROs), such as the Financial Industry Regulatory Authority (FINRA), also enforce securities and related regulations. The Commodity Futures Trading Commission (CFTC) is responsible for enforcing the Commodity Exchange Act (CEA) and regulating the commodity futures market and has joint jurisdiction with the SEC for securities futures. A relatively new agency of increasing relevance is the Consumer Financial Protection Bureau (CFPB), which is responsible for enforcing consumer financial protection laws and regulating any person who provides a consumer financial product or service. The CFPB is excluded from regulating persons regulated by the SEC or the CFTC.
A wide array of actions may be brought by the SEC and other related law enforcement authorities for violations of federal securities laws. These violations include, but are not limited to:
The SEC and, in limited circumstances, the CFTC, have the authority to bring administrative and civil enforcement actions for alleged violations of securities laws. The CFPB is specifically excluded from regulating conduct by persons already regulated by the SEC or CFTC. Criminal prosecution is reserved to the DOJ. The SEC and CFTC may refer an action to the DOJ for criminal prosecution if they feel such prosecution is warranted. Where the SEC and/or the CFTC and the DOJ investigate the same matter, the agencies typically cooperate and share information regarding the investigation. Examples of this include matters brought under the Foreign Corrupt Practices Act, where typically the SEC and DOJ will resolve their investigations against the same party together.
SROs may bring civil and administrative actions against their members for violations of their rules. Decisions by an SRO are subject to review by the SEC, although in practice the SEC rarely reverses a decision.
The SEC, the DOJ and relevant SROs all have authority to investigate suspected violations of federal securities laws or rules thereunder.
The SEC may bring civil and administrative actions. The SEC’s Enforcement Division (Enforcement Division), after conducting an investigation into a possible violation of federal securities laws, will present its findings and recommendations to the Commission. The SEC is composed of five individuals appointed by the President of the United States, no more than three of whom may belong to the same political party. The Enforcement Division can recommend that the Commission approve a proposed settlement, authorise the filing of a lawsuit in federal court or bring an administrative action before an administrative law judge independent of the SEC, which recommendation the Commission can accept or reject. Individuals investigated by the SEC have, with increasing frequency, alleged that the SEC’s administrative courts are unconstitutional. However, in a major victory for the SEC, the federal court of appeals for the District of Columbia ruled in August 2016 that such administrative courts are constitutional (Lucia v. SEC, No.15-1345 (D.C. Cir. 2016)). Nevertheless, the SEC continues to face similar challenges before other federal courts of appeals, and some district courts have ruled that the SEC’s administrative courts are unconstitutional, although these decisions have so far been vacated by courts of appeals for lack of jurisdiction.
The DOJ has the authority to bring criminal actions. The assistant US attorney (AUSA) responsible will investigate and discuss the matter with his or her supervising US attorney prior to bringing a criminal action.
SROs may bring enforcement actions before a hearing officer. For example, FINRA’s enforcement department will investigate and, if it chooses to proceed with disciplinary action, will file a complaint with the Office of Hearing Officers, an independent department within FINRA, which will decide whether disciplinary action is appropriate.
The substance of regulatory and criminal investigations is kept confidential by the relevant authority until the investigation is resolved. In the case of the SEC, a finding of facts from the investigation will be announced through an order by the Commission instituting an administrative proceeding, a complaint filed in federal court or a settlement order. The DOJ will issue a statement of facts supporting the criminal charges in a grand jury indictment or in a plea agreement if settlement is reached. An SRO’s enforcement division will generally issue a complaint setting forth facts supporting a violation of securities laws or the organisation’s rules.
Although the substance of an investigation is kept confidential until resolved, the fact of an investigation may be publicly disclosed by a company under investigation, either because the company determines disclosure is required under applicable law or for other reasons. A company may also choose to announce that it is under investigation to manage reactions from investors.
US governmental authorities, including the SEC, CFTC and the DOJ, can pursue regulatory, civil and criminal actions against individuals and companies. The SEC and the DOJ have general guidelines on when an action against a corporation versus an individual is appropriate. The SEC and DOJ consider a variety of similar factors including, but not limited to, the seriousness of the misconduct, actions taken by a company to resolve the misconduct, and collateral consequences of an action. In general, SROs may also bring actions against individuals and companies at their discretion.
A governmental authority may begin an investigation based on information from various sources, such as whistleblowers, public complaints, media coverage, examinations or reviews of information by the governmental authority or referrals from other governmental authorities, and instances of self-reported conduct by companies.
The SEC typically begins an investigation informally by opening a matter under inquiry (MUI), which begins when a possible violation of federal securities law is brought to the SEC’s attention by one of the means discussed above. The SEC issues informal requests for information from companies or individuals. If the information indicates a likely violation of federal securities law, the enforcement division will request an order for formal investigation from the Commission, although the authority to issue such an order has been delegated to the enforcement division. A formal investigation permits the Enforcement Division to issue subpoenas to compel production of information and testimony.
Like the SEC, the CFTC may begin an investigation by making informal requests for information. If its enforcement division finds evidence indicating a likely violation of the CEA, it will request an order of investigation from the Commission. An order of investigation gives the enforcement division the authority to issue subpoenas.
FINRA typically begins an investigation based on suspected violations found in the course of a firm examination, a review of customer complaints, and other sources. Such information will be provided to FINRA’s enforcement staff for investigation. The enforcement staff will request that the FINRA member provide information relevant to its investigation.
The DOJ may begin an investigation informally with requests for voluntary production of information from companies or individuals. In practice, DOJ investigations tend to be more formal due to the possibility of criminal proceedings and the presence of armed agents from the Federal Bureau of Investigation (FBI). The DOJ may also issue grand jury subpoenas to compel the production of information or testimony.
The SEC will open an MUI if the SEC staff determines it has a sufficiently credible source or set of facts to believe the MUI will lead to an enforcement action. The SEC staff will consider, inter alia, the magnitude of the potential violation, whether other authorities should investigate, and the availability of resources. The SEC will authorise a formal investigation if it determines there is likely a violation of federal securities law, which is a higher threshold than opening a MUI. The SEC will consider whether an investigation can redress a violation of the law, whether the violation involves serious misconduct, and whether the investigation merits expenditure of resources.
The CFTC follows a procedure similar to the SEC, beginning with an informal investigation and subsequently requesting an order of investigation from the Commission if the informal investigation reveals evidence supporting a violation.
FINRA’s Enforcement Staff will decide to conduct an investigation based on a review of firm examinations, the credibility of customer complaints and anonymous tips, and referrals from government authorities. Whether the evidence is sufficient to begin an investigation and subsequently bring a complaint before a hearing officer is subject to the judgement of the enforcement staff.
When a DOJ investigation is in the informal phase and the AUSA is requesting only voluntary production of information and voluntary interviews, the amount of suspicion required to continue the investigation is left to the AUSA’s judgement. In practice, the AUSA’s authority will be limited by the need to justify a continuing investigation to a superior.
The dawn raids that occur in the European Union without warrants or probable cause do not happen in the United States due to limitations under the US Constitution’s Fourth Amendment, which generally requires law enforcement to obtain a warrant based on probable cause prior to a search or seizure. A search warrant is issued by a court and will authorise searches and seizures at reasonable times. The search warrant requirement does not preclude an investigator, such as an agent from the FBI on behalf of the DOJ, from appearing unannounced to ask questions, which may help the law enforcement authority formulate probable cause.
The circumstances in which the findings of an internal review must be reported to a law enforcement authority are rare. One example of when a finding must be reported is under Section 10A of the Securities Exchange Act. In general terms, Section 10A requires an audit firm that discovers an illegal act to report the conduct to the SEC if, upon reporting the conduct to senior management and the board of directors, the company fails to take remedial action. As a practical matter, this typically leads the company to self-report to the authorities.
In the majority of circumstances, self-reporting is optional and requires a consideration of a variety of factors. Such considerations may include the likelihood that a law enforcement authority will identify the misconduct, the magnitude of the misconduct, whether the misconduct implicates civil or criminal action or both, the credit received from a law enforcement authority for cooperation and self-reporting, the possibility that there may be a whistleblower who will report the conduct, and the reputation of the company if the misconduct is reported or if discovered by law enforcement.
Yes. Whistleblowers are a powerful and common source of information for securities investigations due to their first-hand knowledge of the individuals and circumstances leading to violations of securities laws. The SEC’s Office of the Whistleblower provides financial incentives to eligible whistleblowers who alert the SEC to possible securities violations with reliable, original information leading to an enforcement action involving a sanction of at least $1 million. Monetary awards are between 10 per cent and 30 per cent of the money collected by the SEC.
Between August 2011, when the SEC’s whistleblower rules went into effect, and September 2016, the SEC has paid more than $107 million to 33 whistleblowers. The largest award by the SEC to date is a $30 million award in September 2014. The whistleblower programme also proscribes employer retaliation against employees who provide information to the SEC, and the SEC has brought enforcement actions and imposed fines on companies that sought to impede whistleblowing by current and former employees. Similar whistleblower protection and incentives are offered to those who provide information to the CFTC. State whistleblower programmes may also gain importance in the future. For example, New York’s Attorney General proposed a bill in February 2015 that would implement a whistleblower programme similar to the SEC’s programme.
An investigation has several typical phases, including the fact-finding phase, the charging decision phase, the advocacy phase, and the resolution phase.
The fact-finding phase involves requests, formal or informal, for information by a law enforcement authority. Counsel conduct fact-finding in parallel to the law enforcement authority and review information before it is provided to the law enforcement authority.
As the fact-finding concludes, the law enforcement authority begins the charging decision phase (although in practice this phase often occurs before fact-finding is fully complete). This phase occurs when the law enforcement authority believes it has sufficient information to determine the appropriate charges given the facts. This phase overlaps with the advocacy phase, as counsel may have opportunities to present information in a manner to help decide who gets charged, such as a parent company versus a subsidiary or individuals, and the type of charge. In some circumstances, the authority may even ask the target to provide factual information in the form of a presentation or submission, which provides counsel with an opportunity for advocacy.
The advocacy phase begins in earnest once the law enforcement authority identifies charges to the target. The authority will generally inform the target of the potential charges and the facts supporting these charges to give the target an opportunity to respond. For example, in the context of the SEC, this is known as the Wells Notice. The process allows the ultimate decision-making body within the governmental authority to consider the strength of its potential action.
Generally, after hearing from the target, the resolution phase begins with the authority or the target offering terms for settlement or the authority informing the target of its decision as to whether to pursue charges. If a settlement is discussed and the parties are unable to negotiate a settlement, an administrative, civil or criminal action then may be brought by the authority.
The SEC uses both bilateral and multilateral agreements, known as memoranda of understanding (MoUs), to share information with foreign authorities. In 2002, the International Organization of Securities Commissions (IOSCO) established a MMoU, which enabled securities regulators from many countries to share important information. Signatories agree to allow the shared information to be used in civil or administrative proceedings, to pass the information on to SROs and criminal authorities, and to keep all the shared information confidential.
The Department of Justice and other authorities may also utilise mutual legal assistance treaties and the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters to request evidence from foreign countries to facilitate cooperation in cross-border investigations. If a treaty or executive agreement does not exist, US courts can issue letters rogatory to request assistance with a criminal prosecution from a foreign judiciary.
Findings of a foreign law enforcement authority supported by judgment of a foreign court may have collateral estoppel effect in a US federal court. As a result, a US law enforcement authority may take a foreign court judgment into account in the course of its investigation because elements of a potential charge may already be proven or need not be proven again by the authority if an action is brought in court.
A finding by a foreign law enforcement authority not supported by a court judgment may not have binding collateral estoppel effect. In practice, the US law enforcement authority will likely use a foreign authority’s findings to guide its own investigation and requests for information. A foreign authority’s finding that results in a settlement or fine may also set expectations for the US authority to resolve the investigation, including the size of any potential fine.
The SEC may request the voluntary production of information through documents, interviews and other means. While there is no requirement to comply with these requests, companies and individuals usually do so to demonstrate cooperation and to avoid subpoenas, which the SEC can generally use to compel testimony and the production of evidence that is not subject to privilege, such as attorney–client privilege.
The DOJ may also make informal requests for information and interviews in connection with criminal investigations. The DOJ may also issue grand jury subpoenas to compel production of information and testimony. Although styled as grand jury subpoenas, they are drafted and issued by the US attorney overseeing the investigation.
The duty to preserve evidence arises whenever litigation is reasonably foreseeable or anticipated. Although exactly when litigation becomes 'reasonably foreseeable' may be subject to judgement in some circumstances, companies and individuals should, as a practical matter, preserve all documents and other evidence potentially relevant to an investigation after receiving a subpoena or informal information request from a law enforcement authority. The subpoenaed individual or company has a duty to preserve paper documents and electronically stored information by making reasonable efforts, which include suspending automatic email deletion and other document-retention strategies.
SEC staff may ask a party to waive privilege and produce privileged information only with the approval of the director or deputy director. Before asking for a waiver of privilege, SEC staff must consider, among other issues, the desire to encourage consultation with attorneys, whether the party has disclosed all underlying facts within its knowledge and whether the party is making all reasonable efforts to cooperate. If, however, a party asserts an advice-of-counsel defence, the SEC may request that the party produce evidence sufficient to enable the SEC staff to evaluate the validity of the defence that will involve waiving privilege.
The DOJ’s official policy is that prosecutors may not ask for a waiver of privilege, but a company can voluntarily choose to disclose privileged information. Voluntary disclosure of all relevant information will be used in an agency’s decision to award credit for cooperation.
A party may assert privilege for materials an authority obtains from third parties if the party provided the information to the third party on express terms that the privilege was not waived. Privilege may be waived, however, if the material was accidentally disclosed to the third party.
A company may request that a law enforcement authority treat information that it provides as confidential. In general, this request may be made under the federal Freedom of Information Act (FOIA) and by citing exceptions within the FOIA that permit the law enforcement authority to withhold information requested by a member of the general public. New York state has a similar Freedom of Information Law (FOIL) under which a company may request that information provided be treated as confidential.
When the SEC obtains documents pursuant to an investigation, the documents are considered confidential unless disclosure has been authorised to a specific authority or individual, such as a domestic or international government agency or an SRO. The DOJ has regulations implementing the FOIA under which it will treat certain information provided, such as business information, confidential.
The recipient of a request for the voluntary production of information may refuse to provide the information. A request for information under subpoena cannot be refused, but the recipient can challenge the subpoena in court for being overbroad and burdensome, and can move to quash or modify the subpoena. An overbroad or burdensome subpoena is one that requests substantial volumes of information in a short period of time.
Yes, data privacy and bank secrecy laws may restrict the production of materials. For example, the Right to Financial Privacy Act provides bank customers with a privacy interest in their banking records held by a financial institution. As a result, a company cannot provide these records to law enforcement authority voluntarily, but rather must receive a subpoena and provide notice of the subpoena to the customer. Another consideration is the Electronic Communications Privacy Act, which protects customer records in the possession of third-party electronic communications service providers. Under this law, electronic communications may be obtained only by criminal law enforcement authorities within 180 days with a warrant or be demanded by subpoena by any government agency after 180 days.
In general, there are no restrictions on where documents and communications may be stored during an investigation. One possible consideration is the Bank Secrecy Act, which protects suspicious activity reports (SARs) used by financial institutions to report potential violations of law or suspicious activity. The SEC may use the information in SARs to identify individuals in violation of federal securities laws, but the materials must be stored separately and marked to indicate that they contain sensitive information.
The SEC, DOJ, or other law enforcement authority may ask a party to voluntarily produce information located outside the United States. For example, the authority may ask a parent US company to provide information from a foreign subsidiary. The SEC and DOJ may also issue a subpoena to the party to compel the production of documents and other evidence under a party’s custody and control located outside the United States.
Whether providing the information voluntarily or under a subpoena, the party should consider potentially applicable data privacy and bank secrecy laws of the country from which the information will be obtained. Practitioners working on matters related to Europe should be particularly aware of the EU’s data protection laws, which are stricter than in the United States are undergoing changes, including significantly increased penalties for non-compliance. For example, practitioners should consider the impact of the revised EU-US data privacy shield made operational in July 2016 and the impending implementation of the General Data Protection Regulation in 2018. Britain’s decision to leave the EU may also have an impact on data protection laws, although in the short term while Britain continues to negotiate its exit, Britain will continue to be subject to the EU’s data protection laws.
If there is no party in the United States with custody and control over evidence located outside the United States, the SEC and DOJ may attempt to obtain the information through cooperation with their counterparts via MoUs and international treaties, as discussed more thoroughly in question 13.
The SEC conducts witness interviews as part of their fact-finding investigation phase. SEC staff may conduct voluntary interviews of witnesses, but witnesses are not required to answer the questions. When conducting voluntary interviews, SEC staff can choose to take notes or electronically record the interview.
The SEC may also conduct on-the-record interviews to obtain testimony relevant to ongoing investigations, if there is a formal order of investigation. Without a formal order of investigation, SEC staff cannot administer an oath, but a witness may voluntarily testify under oath after giving consent. Witnesses are entitled to the assistance of counsel while giving on-the-record testimony. On occasion, the SEC may conduct an interview while another authority, such as the DOJ, is in the interview room. When another authority is present in the interview, the SEC will conduct an off-the-record interview.
Generally, the SEC and other law enforcement authorities will not publicly report that they have interviewed particular individuals, but such fact may be discovered by the media, such as when SEC officials are observed entering a bank. Although the fact that an interview has occurred may be learned by the public, the contents of the interview will not be disclosed unless the SEC chooses to bring an enforcement action, in which case it may use the contents of the interview to support its action.
The SEC has the authority to compel an individual to provide testimony only if there is a formal order of investigation allowing the SEC staff to issue a subpoena. Even if engaging in an interview under a subpoena, an individual may exercise his or her constitutional Fifth Amendment right not to incriminate him or herself.
The SEC may informally request that witnesses submit to voluntary interviews and may request that the interviews be on the record. While an individual may decline to participate in a voluntary interview, he or she may suffer adverse consequences from his or her employer, such as termination, if the company is under investigation and cooperating with the authorities. In some situations, a company may also encourage a former employee to cooperate and conduct voluntary interviews with the SEC through an undertaking or cooperation clause included in the terms of the employee’s termination or severance.
Whether a witness receives counsel separate from other witnesses or the company depends on the nature of the investigation and whether the interests of the parties are aligned. Where interests are aligned, it is not uncommon for a single attorney to represent more than one party, particularly as there is greater efficiency in using a single attorney who is familiar with the factual and legal issues arising from the same investigation. The SEC or other law enforcement authority may express concerns about the ability of an attorney to represent certain clients that may have conflicts. In these circumstances, it is advisable for the clients to seek separate attorneys or for the company to offer other attorneys to their employees.
A company’s provision of an attorney for an employee may be required by the company’s by-laws or included in the terms of employment, and may be provided by the company’s insurance.
A challenge may be made only in very rare circumstances. In the criminal context, a grand jury (a body convened to determine whether probable cause exists to believe a crime was committed and whether criminal charges should be filed) is granted extremely wide latitude to conduct a thorough investigation. A subpoena issued by a grand jury may be challenged only in limited situations, such as when to comply would violate a right against self-incrimination or the attorney–client privilege. Theoretically a subpoena may also be challenged when there is no reasonable possibility that documents sought could be relevant to the grand jury’s investigation, although this ground is virtually impossible to meet in practice. In the civil context, there is generally no opportunity for challenging an investigation in court while the investigation is ongoing. For example, even if the SEC obtains inadvertently disclosed evidence, an argument that SEC personnel are tainted must wait until charges are brought.
Responses can be made both formally and informally. Formal responses can be submitted to the SEC through what is known as the Wells process. When the SEC enforcement division decides to recommend to the commissioners that charges be filed against an investigated party, it first issues a Wells notice, which informs the investigated party of the nature of the recommended charges. The investigated party then has the opportunity to submit a response to the Wells notice to argue why those charges should not be pursued, as well as the opportunity to request a meeting to discuss the Enforcement Division’s recommendation. The Wells submission and any related discussions may lead to a decision not to file charges, to settlement discussions or to charges being pursued. Other securities agencies have processes similar to the SEC’s Wells process.
In addition to formal responses, the investigated party will typically be afforded the opportunity to meet or correspond informally, such as through white papers with the DOJ, the SEC or other investigating agency to discuss the investigation and argue against the pursuit of charges. If the personnel conducting the investigation are not receptive to such arguments, the investigated party will often be permitted to speak further with supervisors at ascending levels of authority within the agency.
Advocacy can occur through means as informal as phone calls or as formal as a Wells submission (see question 27). Critically, advocacy should occur from the very first contact with the DOJ or regulatory agency and should continue at every opportunity throughout the course of the investigation – it should not be viewed as something that occurs only at the end of the investigation. For example, if the investigated party receives a request for documents during the early stages of the investigation, it may advocate for narrowing the scope of the request and reducing the expense of the resulting production. Throughout the process, the investigated party should continually strive to sensitise the government to its point of view.
Whether an investigated party’s statements may be admitted as evidence in future proceedings will vary depending on the subject matter and context of the statements. Generally, statements made by an investigated party will be admissible against that party in a future court proceeding under Federal Rule of Evidence 801(d)(2). A Wells notice from the SEC (see question 27) will generally state explicitly that a submission by the investigated party will be admissible in future court proceedings or discoverable by third parties. Statements made in the context of settlement discussions or plea negotiations are, however, inadmissible in court in certain situations (such as when offered to prove liability, in the case of settlement discussions) under Federal Rules of Evidence 408 and 410. Even if an investigated party’s statement is inadmissible in court, it may be subject to disclosure in a subsequent lawsuit if it is relevant to any party’s claim or defence and proportional to the needs of the case. Statements made by an investigated party during an investigation will typically not be publicised because the investigation itself will be confidential. These statements could, however, become public if introduced as evidence in a subsequent court proceeding or if sought by a third party under the FOIA, which gives third parties the right to request records from any US government agency. Investigated parties submitting documents to the DOJ or a regulatory agency will generally include a request that the documents be treated as confidential and exempt from disclosure under one of several exemptions provided for in the FOIA.
The limitation period for criminal securities fraud prosecutions is generally six years (18 USC section 3301). The limitation period for civil securities fraud enforcement actions is generally five years (28 USC section 2462). There is, however, no limitation period for enforcement actions seeking equitable remedies, such as injunctive relief or disgorgement. The due process clause of the US Constitution protects against intentional delays in instituting proceedings if done to obtain a tactical advantage and the defendant is prejudiced by the delay. The statute of limitations can be tolled for a variety of reasons, including by agreement, as discussed further in question 32.
Generally speaking, the limitation period begins to run when the crime is complete (in criminal prosecutions) or when the actionable activity occurs (in civil enforcement cases). However, this standard can sometimes be easier to articulate than to apply in the context of securities fraud. Notably, the limitation period for conspiracy to commit a securities law violation will not begin to run until the last overt act in furtherance of the conspiracy is committed.
The running of the limitation period for securities law violations can be suspended, or 'tolled', in certain situations. Although the Supreme Court recently held that the statute of limitations for a securities enforcement action begins to run when the fraud occurs, not when the fraud is discovered (Gabelli v SEC, 133 S.Ct. 1216, 1224 (2013)), several tolling doctrines may still apply. For example, the doctrine of fraudulent concealment may toll the running of the limitation period if the defendant takes steps beyond the fraud itself to conceal the fraudulent activity (SEC v Wyly, 950 F.Supp 2d 547 (SDNY 2013)). The continuing violations doctrine may allow the government to reach activity outside the limitation period if it was related to conduct that continued into the limitation period (US SEC v Geswein, 2, F.Supp 3d 1074 (ND Ohio 2014). The running of the limitation period will be tolled during any period a defendant is a fugitive from justice (18 USC section 3290). The running of the five-year limitation period for civil enforcement actions can be tolled during any period a defendant is physically located outside the United States. Finally, in criminal cases, the DOJ can request a court order suspending the running of the limitation period for up to three years while the DOJ pursues evidence located in a country other than the United States (18 USC section 3292).
The DOJ and regulatory agencies can – and frequently do – request that investigated parties enter into tolling agreements that suspend the running of the limitation period.
A securities investigation can last anywhere from several weeks to several years. The duration of an investigation will depend on variables such as the complexity and scope of the matter under investigation, the ease or difficulty of gathering relevant evidence, the DOJ or regulatory agency’s staffing situation, and the cooperation of the parties under investigation or possessing information relevant to the investigation.
The process will vary depending on the investigating body. For example, if the SEC enforcement division decides not to recommend an enforcement action to the Commission, it will generally send a written termination notice informing the investigated party of this decision. The DOJ will generally provide only oral notice of a decision not to pursue criminal charges. If violations of other laws or regulations are uncovered during the investigation, these will generally be referred to the appropriate agency.
In the context of SEC investigations, settlement discussions typically begin as part of the Wells process (see question 27). Settlement discussions with the DOJ are typically initiated organically as part of ongoing communication with the prosecutors during the course of the investigation.
At the SEC, the SEC enforcement division submits an action memorandum to the Commission that explains the enforcement division’s recommendation to initiate an enforcement action, and the commissioners then vote based on that recommendation. A majority vote by a quorum of three or more commissioners is generally required to initiate an enforcement action.
Although technically decided by a grand jury, as a practical matter, senior DOJ prosecutors decide whether to pursue charges based on the recommendation of junior prosecutors. The seniority level of required approval depends on the case’s prominence, novelty, etc.
The DOJ, SEC and other agencies have wide discretion in determining whether to initiate prosecution or an enforcement action. They will consider a wide variety of factors when making this determination. Illustrative (but in no way exclusive) factors can include the nature and seriousness of the offence, any history of misconduct, whether the misconduct was timely and voluntarily disclosed, any remedial action taken, the strength of the evidence and likelihood of success at trial, the adequacy of non-criminal remedies such as civil enforcement actions, and the collateral consequences that would result from the charges. Once a decision to initiate prosecution has been made, the DOJ will generally charge the most serious readily provable offence. As with the decision to initiate prosecution, the determination of what offence to charge is discretionary and essentially unreviewable by a court.
The DOJ, SEC and other agencies can pursue a variety of remedies, including imprisonment (for individuals), punitive fines, disgorgement of any gain, the appointment of a monitor, prohibition from engaging in certain conduct, debarment from federal or state contracts, and the revocation of certain statuses or privileges, such as well-known seasoned issuer status or broker-dealer registration.
Criminal penalties are calculated under the applicable statute (which may contain mandatory minimum or maximum penalties (or both)) and the Federal Sentencing Guidelines. In SEC administrative proceedings, penalties are calculated according to a three-tier structure in which the fine for a company can range from $50,000 to $500,000 for each violation (15 USC section 78u-2(b)). Fines imposed in enforcement actions brought in court by the SEC are calculated according to a similar three-tier structure (15 USC section 78u(d)(3)).
Disgorgement can be sought both in SEC administrative proceedings (15 USC section 78u-2(e)), and in SEC enforcement actions (15 USC section 78u(d)(5)). A disgorgement remedy is measured by 'a reasonable approximation of profits causally connected to the violation' (SEC v First City Fin Corp Ltd, 890 F.2d 1215, 1231 (DC Cir 1989)).
A convicted criminal defendant can be ordered to pay restitution (18 USC section 3663). Additionally, such defendant can be required to pay a fine of up to twice the pecuniary gain from the offence (18 USC section 3571(d)).
Companies can be criminally prosecuted for the actions of their employees as long as the employee was motivated to commit the crime at least in part to benefit the company.
Although companies can be prosecuted, in September 2015 the DOJ announced a renewed commitment to also prosecuting individual employees involved in wrongdoing.
Cooperation can result either in a decision not to initiate prosecution or enforcement proceedings, or in reduced penalties in the event such proceedings are initiated. The Federal Sentencing Guidelines used for calculating criminal penalties provide for a reduction in the penalty to account for cooperation. The SEC has stated that it will reward cooperation with reduced penalties in civil and administrative enforcement proceedings, but it is very difficult to quantify the benefit that will result from cooperation – the level of benefit will vary on a case-by-case basis, and cooperation must be meaningful to result in a benefit. The DOJ has emphasised that it will not reward half-hearted cooperation.
In September 2015, the DOJ published a document commonly referred to as the Yates Memorandum that makes clear a company will not receive any cooperation credit unless it provides the DOJ with all relevant information about the individuals involved in the misconduct. The DOJ stated that to be eligible for any cooperation credit, a company must inform itself as to the individuals involved in the misconduct and all facts relating to that misconduct and provide this information to the DOJ.
In April 2016, the DOJ announced a one-year ‘Pilot Program’ for evaluating cooperation credit in the context of investigations into violations of the US Foreign Corrupt Practices Act (FCPA). The programme sets out in relatively concrete terms what a company must do to receive full cooperation credit, and it clarifies that full cooperation credit will lead to a reduction of up to 50 per cent off the bottom end of the Federal Sentencing Guidelines. Although the Pilot Program guidance applies specifically to FCPA investigations, it may also apply by analogy to securities and related investigations.
Yes, both are permitted. A deferred prosecution agreement (DPA) involves filing criminal charges, but the government agrees to defer prosecution and to dismiss the charges after a specified term if the defendant complies with the terms of the agreement. A non-prosecution agreement (NPA) does not involve filing criminal charges. The government agrees not to prosecute for a designated period, and the counterparty agrees to take certain remedial measures during that time. Since no criminal charges are filed in connection with an NPA, it is the more desirable of the two options.
With respect to both DPAs and NPAs, the counterparty typically agrees to a statement of facts summarising the underlying conduct. It also typically agrees to cooperate in providing any additional information requested by the government, undertakes to implement a compliance programme and promises not to engage in further illegal conduct during the term of the agreement. Failure to abide by these provisions can result in breach of the agreement and commencement of prosecution.
This will depend on the agreement, as non-prosecution agreements are not filed with a court and therefore require no court approval.
Deferred prosecution agreements involve filing criminal charges with a court. Under the Speedy Trial Act (18 USC section 3161), trial must commence within 70 days of the date the charges are filed. To avoid this restriction, the DOJ will seek the court’s approval of an agreement with the defendant that stops the 70 days from running. The court’s role is limited to ensuring that the purpose of the DPA is to allow the defendant to demonstrate compliance with the law. In particular, a court generally may not second guess the government’s charging decision or the liability imposed on the defendant. United States v Fokker Servs. B.V., 818 F.3d 733 (D.C. Cir. 2016). A settlement agreement reached during an SEC administrative proceeding must be approved by the Commission. The SEC will frequently initiate an enforcement proceeding in court and then ask the court to resolve the proceeding through a consent decree agreed to by the defendant. This approach allows the SEC to invoke the federal court’s injunctive power. Court approval of the consent decree is required, but the court’s role is limited to determining that the consent decree is fair and reasonable and the public interest would not be disserved by its entry.
It depends. Non-prosecution agreements and deferred prosecution agreements often require the defendant to agree to an accompanying statement of facts that reflects wrongdoing. In the past, however, settlement agreements with the SEC would typically allow the settling party to 'neither admit nor deny' wrongdoing. But the SEC is also beginning to require admissions of wrongdoing. On the whole, the trend is toward requiring admissions of wrongdoing.
A decision by an SEC administrative law judge can be appealed to the SEC Commission.
Criminal convictions can be appealed to an appellate court – the Court of Appeals in the federal court system. A decision by the Court of Appeals can be appealed to the United States Supreme Court, which has discretion over whether to hear the appeal.
Collateral consequences can include debarment from government contracts, filing a public disclosure, reporting requirements, prohibition from trading certain securities and more. The collateral consequences are likely to be less severe in the context of a settlement agreement, deferred prosecution agreement or non-prosecution agreement than in the context of a criminal conviction or guilty plea. Often, however, the party entering into these agreements will be required to admit to facts reflecting wrongful conduct, and such an admission will often trigger serious collateral consequences.
To ascertain the relevant potential collateral consequences, counsel must consider a wide range of issues including the business of the settling party and the nature of the resolution. Counsel must identify the organisations to which the party is a member (such as FINRA), the various registrations the party may possess (such as CFTC registration or broker-dealer registration) and any particular status the party possesses (such as well-known seasoned issuer status). Counsel must consider whether the party is performing under any government contracts. Counsel must be aware that the resolution may carry implications in countries other than the United States if the party is a non-US institution or operates overseas. Counsel must keep in mind that the resolution could affect entities affiliated with the party entering into it, as well as the party itself. Finally, counsel must also consider the effect the resolution may have on civil litigation, such as shareholder and class action lawsuits.
In certain situations, the settling party may succeed in seeking a waiver from disqualification or disciplinary action that would otherwise result from the settlement. Recently, however, some regulators – notably the SEC – appear to be less inclined to grant waivers than they were in the past.
An adverse decision on appeal will result in the decision from the lower court being affirmed. The consequences of a positive decision on appeal can include remanding for further proceedings or dismissal, depending on the circumstances of the particular case. An appellate court may review aspects of the decision below using a de novo standard of review, but it will not retry the case. In a criminal case, a ruling on appeal that the evidence was insufficient to support the conviction will result in dismissal of the indictment (ie, the case will not be retried).
The collateral consequences can include all those referenced in question 47 and more. The collateral consequences to a conviction or adverse judgment are likely to be more severe than the collateral consequences to a negotiated resolution, such as a settlement or DPA.
Any admission could be used against the admitting party in private proceedings. And adverse findings will likely embolden plaintiffs to pursue private litigation.
Generally, yes. Private plaintiffs can make discovery demands upon the investigated party to obtain the same files or documents collected during the investigation. Private plaintiffs may also seek these documents from the DOJ or regulatory agency under the FOIA.
Yes. But the government generally will not want its witnesses subject to discovery in a private lawsuit, so the government will frequently seek a stay of the private lawsuit. After the resolution with the DOJ or regulatory agency, private litigants will often rely on any agreed statement of facts prepared in connection with that resolution.
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