What is The Formal Order

In some cases, where the SEC investigates potential securities violations, it can start an informal investigation, which can drag on for a long time, sometimes for months and even years. If the matter resolves, the SEC may never seek to convert the informal inquiry into a formal investigation. If not, it will seek a Formal Order giving the SEC investigators the authority to subpoena the production of documents and compel the appearance and testimony of witnesses. Investigators can seek a Formal Order even in “fishing expedition” cases where they have no evidence of any securities violations.

Section 21(a) Orders

In addition to authorizing the SEC to issue subpoenas for documents and testimony, Section 21 of the Exchange Act authorizes the SEC to “require or permit any person to file with it a statement in writing under oath or otherwise as the Commission shall determine, as to all the facts and circumstances concerning the matter to be investigated.”

Under this provision, the SEC issues orders requiring target companies to respond to detailed interrogatories. These interrogatories must be signed under oath by a senior corporate officer. Responding to these interrogatories may be a daunting task. The company may have to conduct a massive and very expensive internal investigation so that it can collect and verify the information required by the SEC. Also, there is a serious issue with potentially waiving attorney-client privilege and the work-product privilege if the company answers the interrogatory based on the investigative work conducted by defense attorney.

The Wells and Authorization Process

At the end of the initial investigative, the SEC Enforcement Staff will make a preliminary determination about the next steps. It will decide whether to recommend the institution of an enforcement action. If it is determined that the company violated federal securities laws, the Staff will make such a recommendation and they will notify the company’s attorney of this decision. This notice is known as a “Wells Call”. The defendant/respondent-to-be will have an opportunity to submit to the Staff a document explaining why the enforcement action should not be taken. This is known as a “Wells Submission.”

If the Enforcement Staff decides to go ahead with the enforcement action recommendation, they will submit and distribute to the Commissioners and other SEC offices the recommendation memorandum, along with the Wells Submissions. The Commission will then vote on the proposed action recommendation. This is done in a closed meeting without the defense attorney presence.

Enforcement Proceedings

The SEC has authority to bring actions for remedies in federal court and in administrative proceedings. If the SEC determines that a company or a person has violated, or is about to violate, the federal securities laws, the Commission will likely authorize its Staff to institute one or more enforcement proceedings. The consequences of an SEC enforcement action can be even more severe than those one can expect to face during an investigation. There will be serious negative publicity fallout just based on filing of the enforcement action. Of course, there are additional consequences to SEC enforcement actions which include the following:

  • Court may order injunction or an administrative order against the company, its personnel and its auditors, prohibiting them from future violations of the federal securities laws;
  • An individual may be prohibited from serving as an officer or director of a public company;
  • Lawyers and accountants may be barred from practicing before the SEC;
  • Court may order disgorgement of any unjust enrichment such as incentive compensation received as a result of overstated financial statements;
  • A company may be ordered to re-file its financial statements
  • A company or individual respondents may be ordered to pay fines.

If the SEC choses to file a civil complaint in federal court or if the Staff brings an administrative action, the charging document becomes public, which will create serious negative publicity for the company. The SEC will also issue press releases with the filings of civil actions and makes all filing documents public.

If you or your company are under investigation by the SEC or if you face a SEC administrative or enforcement action, call our experienced SEC defense attorneys. Joseph Potashnik and Associates PC is a boutique NYC law firm located in the Financial District. Our NYC SEC defense attorneys assist clients with all SEC issues including investigations, administrative action, and complex white-collar criminal litigation.