SEC investigations can begin uh in several ways from several sources. It can be a whistleblower.
It can be a press re report in the news or media that alerts the SEC to an
issue. It is often a referral from a another regulatory agency. In fact, an insider trading investigations.
Those investigations quite often arise from referrals from
FINRA or the NASDAQ where it identifies potentially suspicious trading. The SEC
also has its own technology that identifies suspicious trading patterns
which in turn can generate leads for investigations.
Once the SEC begins investigating, it’s usually uh an informal inquiry, meaning
they do not have subpoena power, but can ask for voluntary cooperation from individuals.
For those who are licensed like uh investment advisors or uh securities broker dealers, they do not need a
subpoena because those entities are licensed and registered and must cooperate.
If the in inquiry advances or they cannot otherwise get information
without compulsion, meaning through a subpoena, the SEC will seek subpoena power and the investigation then becomes a formal investigation.
The SEC will then issue subpoenas requiring individuals and companies to
produce documents to appear for testimony under oath and will otherwise utilize its vast resources to investigate the matter.
Once the investigation has concluded, there are essentially two options for
the SEC. The first is for the SEC to analyze the evidence that it’s developed
and make a decision whether it believes it has sufficient evidence to charge or not. If it does not believe it has
sufficient evidence, it drops the case, the investigation. It’s over. If however it believes it has sufficient evidence
to prove its case, it will issue a wells notification which is a notification to
the targeted individual and their legal council that the SEC staff intends to
recommend to their client, the SEC commission, an enforcement action. And at that point,
council for the targeted defendant can respond and attempt to explain why
the SEC should not charge the client. In the alternative, if that is not successful, the matter can be negotiated
to a resolution. And if no settlement can be reached, it goes to litigation.