Securities Fraud Attorney in Nashville, TN

Written by Kimberly S. Hodde, National Chair of Criminal Defense at Meister Seelig & Schuster

Federal criminal securities fraud investigations are comprehensive, multi-agency inquiries into deceptive market practices like insider trading, accounting fraud, and market manipulation. Led by the Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI), often alongside civil probes by the Securities and Exchange Commission (SEC), these secret, long-term cases focus on proving intentional wrongdoing. They can lead to significant prison time and asset seizure. These parallel civil and criminal proceedings require counsel with substantial experience in federal white-collar criminal defense.

SEC and Federal Securities Fraud Investigations

Each year, the SEC brings hundreds of civil and administrative enforcement actions against individuals and companies for violations of the nation’s federal securities laws. Within the SEC, the Division of Enforcement conducts investigations. The SEC’s Division of Enforcement works closely with the FBI and other federal agencies to pursue federal criminal prosecutions. Likewise, the SEC’s Office of International Affairs works with international law enforcement agencies, including Interpol, the Financial Conduct Authority (FCA) in the United Kingdom, the Australian Securities and Investments Commission (ASIC), and the European Securities and Markets Authority (ESMA), to pursue criminal charges in the United States and overseas when appropriate.

All SEC investigations are conducted privately. Investigators develop facts largely through informal inquiries, witness interviews, examinations of financial and brokerage records, reviews of trading data, data mining, and other methods. By issuing a formal Order of SEC Investigations, the SEC’s Division of Enforcement can compel witnesses to testify and produce books, records, and other relevant documents by subpoena. Following SEC Investigations, Division staff present their findings to the SEC Commissioner for review, and the Commissioner may authorize staff to file a case in federal court, bring an administrative action, or refer the case to the DOJ for criminal prosecution.

Triggers for SEC investigations

SEC investigations stem from various sources, including anonymous tips, market professional alerts, disgruntled employees, whistleblowers, competitors, media reports, divorce proceedings, business disputes, Suspicious Activity Reports (“SARs”) submitted by financial institutions, lawsuits, unusual trading patterns, and “red flags” in market data. Law enforcement and regulatory agencies also frequently refer cases to the Division of Enforcement.

After an initial review of the inquiry, SEC staff decide whether to open a “Matters Under Inquiry” (“MUI”). MUIs are preliminary investigations that often involve incomplete information. The threshold for opening an MUI is low, as its purpose is to collect additional facts to assess whether launching a formal investigation is appropriate. The SEC considers factors such as the information’s reliability, the severity of the alleged violation, the potential for harm, and whether the activity is ongoing. If the SEC initiates an MUI, it generally decides within 60 days whether to close the MUI or escalate to an Investigation.

If SEC staff decide a comprehensive investigation is necessary, they will issue an Order of Investigation. This order grants SEC staff extensive powers to investigate alleged misconduct, such as administering oaths, subpoenaing witnesses, compelling attendance, collecting evidence, and demanding document production. Unless the Commission specifies otherwise, formal investigation procedures remain confidential.

Violations of federal securities laws often involve selling unregistered securities, misusing customers’ funds, engaging in insider trading, and manipulating market prices, among other offenses.

Types of Information Sought and Collected During an SEC Investigation

The SEC employs various sources and methods to investigate potential securities law violations. Usually, it issues administrative subpoenas or informal requests for all involved persons and entities to submit relevant documents and information. The SEC maintains strict standards for electronic submission of these documents. A team of professionals—such as forensic accountants, economists, and securities law experts—helps SEC staff analyze the collected data. The SEC commonly requests bank and trading account records, internal emails from corporate and personal accounts, and chat room communications, including Bloomberg messages.

The SEC possesses broad authority to gather information through both formal and informal channels. It can conduct voluntary interviews, including over the phone, and issue voluntary Background Questionnaires to involved parties. These questionnaires seek personal details like date and place of birth, securities and brokerage account information, educational history, and employment details.

Right to Counsel in an SEC Investigation

Anyone who appears before the SEC, either because they were compelled pursuant to subpoena or voluntarily, at a formal investigation, may be accompanied, represented, and advised by legal counsel. This allows a testifying witness to have an attorney present during the proceeding, who may (i) advise the witness before, during, and after testimony; (ii) briefly question the witness at the end of the witness’s testimony to clarify answers given during testimony; and (iii) take summary notes during the witness’s testimony for the witness’s own use.

“Wells” Notice

Although not mandatory, to promote fairness, persons and entities under SEC investigation may submit a written statement of their position and interests related to the investigation. This allows the SEC to hear directly from those being investigated before deciding on an enforcement action, rather than relying solely on internal staff. Typically, this process begins with a “Wells” Notice. However, the SEC does not always provide this opportunity, especially if revealing information could hinder the investigation, such as risking asset concealment or evidence destruction. If you receive a Wells Notice, it’s crucial to consult legal counsel before responding, as an ill-advised reply can lead to serious consequences, including criminal charges.

The Results of SEC Investigations

After SEC investigations conclude, the SEC decides how to resolve the matter. It has broad authority to file civil lawsuits in federal court or settle cases administratively. SEC investigators may also decide to refer the matter for criminal prosecution.

Before or after pursuing civil litigation or administrative actions, the SEC has the discretion to resolve matters, including by entering into agreements such as a Deferred Prosecution Agreement, a Non-Prosecution Agreement, or a Settlement Agreement.

When the SEC files a civil lawsuit in federal court, it usually seeks an injunction to prevent future violations. Someone who violates an injunction may face fines or imprisonment for contempt. Civil lawsuits often also aim for civil money penalties and disgorgement of ill-gotten gains. In some cases, the SEC may seek court orders to ban or suspend individuals from serving as corporate officers or directors.

SEC hearing officers conduct administrative hearings. One type of proceeding, a cease-and-desist order, can be issued against anyone who breaches federal securities laws. For regulated entities like brokers, dealers, and investment advisers, the SEC can initiate proceedings to revoke or suspend registration or impose employment bans or suspensions. In both cease-and-desist and other administrative cases, the SEC can order civil penalties and disgorgement of illicit gains. Enforcement actions may also lead to industry-specific, association, or conduct-related bans.

It is not uncommon for a separate law enforcement agency, such as the IRS or FBI, to conduct a criminal investigation alongside an SEC civil investigation. Although the SEC is not allowed to access federal grand jury information, it will cooperate with criminal authorities as much as possible. Even if a criminal investigation is ongoing, SEC investigations can still proceed. The SEC does not conduct investigations or take actions solely to support the criminal investigation. Instead, it conducts its own investigation but may provide an “Access Request” to criminal agencies to access certain documents and information obtained during its inquiry, within specified limits.

Typically, federal prosecutors handling criminal securities fraud cases work with independent criminal agencies. However, prosecutors may also receive documents and information directly from the SEC and consult with it regularly regarding the appropriateness of criminal charges. These situations are complex and high-risk, so individuals and companies under SEC or other agency investigations should promptly seek advice from experienced securities fraud defense counsel.

Potential Criminal Charges and Penalties

Criminal exposure for securities and commodities fraud allegations can carry steep penalties. Prosecutors often pair securities fraud charges with wire fraud, mail fraud, conspiracy, and money laundering charges. Convictions under federal securities fraud statutes carry substantial prison sentences (up to 25 years per count under 18 U.S.C. § 1348), hefty financial fines, and mandatory asset forfeiture.

Experienced Securities Fraud Defense Counsel

As National Chair of Criminal Defense, Kim Hodde and her team at Meister Seelig & Schuster (MSS) represent individuals, businesses, and organizations in high-stakes criminal matters throughout Tennessee and across the country.

With offices in New York, New Jersey, Connecticut, California, and Tennessee, the firm is uniquely positioned to provide sophisticated, coordinated representation wherever federal or state criminal charges arise. If you have received an SEC subpoena, Wells Notice, or notice of a criminal securities fraud investigation, contact Kim Hodde and MSS-Nashville for experienced guidance.