Common Types of SEC Investigations That May Result in You Receiving a Subpoena

We frequently represent individuals who have received an SEC Subpoena, and often the first question asked is, “Why did I get this subpoena? I did nothing wrong.”  The SEC investigates many kinds of misconduct, and the people they seek information and documents from (through the use of Subpoenas) very often are not “targets” of the investigation, but the SEC may believe they could be a “witness,” or may have useful information that could aid the investigation.  Understanding the common investigations the SEC may commence is a good first step to understanding what prompted the Subpoena.

According to the SEC, the most common types of investigations of potential securities violations include:

  • Misrepresentation or omission of important information about securities – when promoting the sale of securities, brokers, broker-dealers and other securities professionals should ensure that promotional materials accurately reflect the characteristics and risks of the securities.
  • Manipulating the market prices of securities – the securities laws seek to ensure that the securities marketplace provides an “equal playing field” for all market participants. Those that attempt to make money or avoid losses by manipulating the market, such as by placing “wash sales” or “pumping then dumping” securities are prime targets for investigations.
  • Stealing customers’ funds or securities – the SEC will aggressively enforce anti-fraud securities laws and rules.
  • Violating broker-dealers’ responsibility to treat customers fairly – examples of failing to treat customers fairly include “cherry-picking” trades (selecting transactions where the customer loses and the firm wins) and prioritizing information or trades to certain customers over others.
  • Insider trading (violating a trust relationship by trading on material, non-public information about a security) – Insider trading can be criminally prosecuted by the U.S. Attorney General’s Office, as well as civilly prosecuted by the SEC.
  • Selling unregistered securities – What can be construed as a “security” has been broadly defined by courts around the country to include various products, including promissory notes. With very limited exception, all securities must be registered prior to sale to investors, or be offered through an exemption (such as Regulation D) to the registration process.

While receiving an SEC Subpoena does not automatically mean you are a target of an SEC investigation, it is imperative that you hire experienced securities lawyers to represent you, before you speak to the SEC staff.