First, the enforcement division will obtain evidence of potential violations of securities and trade laws. They will do this monitoring the markets – including buys and sells of stocks. They will also take tips from investors and employees, or even media reports. During an investigation to obtain evidence, witness interviews, an examination of firm records, or the market activities can help strengthen a case of the SEC against violators. These are informal inquiries. Once a formal order of investigation is acquired, the SEC can compel testimony or production of records via subpoena.
The SEC will, after examining the evidence, determine whether to bring the case to court (with the assistance of the office of the U.S. Attorney’s office), or to bring an administrative action. However, many times, the SEC and subject will attempt to settle before going further.
The SEC can bring either a civil action or an administrative action, depending on the facts and circumstances of the case. In a civil Action, the SEC will file a complaint with the U.S. District court, usually calling for an injunction or court order to prohibit any activity that further violates securities law. The SEC is also entitled to ask for civil penalties, restitution or even the return of whatever profits were illegally earned. In an Administrative action, the SEC can seek multiple sanctions from an administrative law judge, acting independently of the SEC. The ALJ will issue a decision after a hearing and examination of evidence. The decision will include findings of fact and conclusions of law, as well as recommended punishments. The SEC can approve of the decision, reverse it, or remand it for additional action. Some of the punishments that can be given by the ALJ include monetary penalties, suspension of registrations, bars from associating with the securities industry, or repayment of illegally earned profits.
Sometimes these cases can evolve into a criminal matter. If this occurs, there will usually be a grand jury involved. In the event the investigation turns criminal, ensure your attorney is also well versed in criminal procedure, including dealing with federal prosecutors and presenting a case to a judge or jury. While the securities laws include specific criminal penalties, the government can also use the fraud statutes, including mail fraud and wire fraud, to prosecute the subjects. Thus, it is necessary to find an attorney familiar with both securities laws and fraud.
If the SEC begins conducting an investigation, even informally, it is a good idea to seek the advice of an experienced attorney, familiar with SEC and securities procedures and laws. The attorney will be able to guide you through the investigation, warning you of your rights and duties under the law.