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How SEC Investigations Typically Start and Proceed

January 22, 2015

LORI PATTERSON, BOB CORNISH, STEVEN KRAMER, RONALD FIELDSTONE

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Steven Kamer
Securities Attorney, Sheppard Mullin

 

 

 

 

 

 

Recently the SEC became focused on Regional Centers and Issuer activities related to the offer and sale of securities to foreign investors seeking EB-5 visas which have resulted in SEC investigations as well as a recent Investment Alert, jointly issued by the SEC and USCIS. The SEC's investigation of Regional Centers, Issuers and other EB-5 players is no different than any of other SEC investigation.

Since 2013, the SEC has filed three lawsuits involving the offer and sale of securities to foreign investors related to the EB-5 visa program:

  • Filed in Feb 8, 2013, SEC v. A Chicago Convention Center, LLC, Anshoo Sethi, et al, the SEC filed against an individual and two companies related to the offer and sale of securities to foreign investors seeking a legal path to U.S. residency through the EB-5 visa program. The SEC sought, among other things, a freeze of assets and injunctive relief.
  • Filed in Sep 30, 2013, SEC v. Marco A. Ramirez, the SEC filed fraud charges against a husband and wife in Texas in a case involving the theft of funds from investors under the guise of an investment opportunity.
  • Filed in Sep, 2014, SEC v. Justin Moongyu Lee, the SEC filed a complaint involving an EB-5 investment scheme to defraud foreign investors.

How an investigation begins

SEC investigations typically begin with a letter, a subpoena or a phone call from the SEC asking for documents and information related to an offering of securities with the investigation beginning in one of two ways: 

  • An informal letter asking for the production of documents to, or a meeting with the SEC. 
  • A subpoena requiring production of documents to or testify before the SEC. 

Typically the SEC subpoenas documents first and then follows-up with a request for testimony. 

A 'Formal Order of Investigation'

The first thing to know when you get a subpoena is that the SEC has a 'Formal Order of Investigation' which means the SEC has looked into the situation (somehow it has come to their attention, through an informant or through looking at the offering materials for the sale of securities to foreign investors) and has concluded that there may be a potential violation of the federal securities law, such as the anti-fraud provisions of the Securities Act of 1933 (’33 Act) or the Securities Exchange Act of 1934 (’34 Act).

To open a formal investigation, the staff of the SEC writes a memorandum which it sends up to the Commission (composed of five (5) commissioners), who review the staff’s recommendation and then vote on whether to issue a Formal Order of Investigation. This is a document (usually two to three pages in length) that gives SEC staff the power to issue subpoenas for documents and testimony.  You may request a copy of the Formal Order of Investigation but it is a confidential document and if you receive a copy, may not share it with others. 

SEC and Department of Justice investigations can overlap

Sometimes, SEC investigations overlap with investigations of the Department of Justice involving potential criminal violations.  One such overlap occurred in a case involving the Chicago Convention Center.  First the SEC brought a civil lawsuit which was followed by a criminal case, US v. Anshoo Sethi, brought by the Department of Justice. 

An SEC investigation can go in two directions

If you are contacted by the SEC, the first thing you ought to do is talk to a lawyer and know that any potential case could go in two directions:

  • a civil action by the SEC and/or
  • a criminal action by the U.S. Department of Justice.

Anti-fraud violation allegations

In an SEC investigation you will interact with SEC staff and hopefully convince them not to bring a case against you. But if the SEC decides to recommend the Commission to bring a proceeding, it will either be a civil injunctive suit in federal district court seeking such things as an accounting, a freezing of assets, a return of funds to investors, a temporary, preliminary and/or permanent injunction against the individuals/entities regarding violations of the federal securities laws, or alternatively, an administrative proceeding seeking similar relief, such as a cease and desist order. 

Such lawsuits often allege violations of the anti-fraud provisions of Section 17 (a) of the “33 Act”, and/or the anti-fraud provisions of Section 10b, Rule 10b-5 of the “34 Act”. 

If the SEC staff decides to recommend the Commission to bring an administrative proceeding seeking a cease and desist order, or a civil lawsuit in federal district court seeking injunctive relief, they will normally inform you. You and your attorney will be able to talk with them about it and try to persuade staff not to bring an action. If you cannot convince them then you can make what's called a “Wells Submission” which is a submission stating your (client’s) position, which goes to the Commission stating your position. 

Persuading the SEC to Close Its Investigation

If you successfully persuade the SEC, they may send a recommendation back to the commission concluding that no further action is needed and recommend to the Commission that the Formal Order of Investigation be terminated and the investigation be closed. This should be followed by a visit to the local pub where a round of drinks are in order. 

Closing Panelist Thoughts

  • Hire an attorney
  • Cooperate with SEC

The SEC's powers are vast and their resources are inexhaustible. This should lead any firm or individual that receives a subpoena to immediately seek outside counsel and cooperate fully with SEC staff . Here are some panelist quotes on this point:

Steven Kramer

"Anybody in this field that gets any SEC investigation inquiry should immediately retain separate outside counsel. If you don’t you’re making a big mistake because you don’t know where you may end up in the food chain. So I want to emphasize to absolutely get counsel and not try to do it on your own.”

“Its better to be cooperative with the SEC, certainly you have to know your legal rights and if you’re in a situation and you have to get a criminal lawyer, sometimes (you’ll) take the fifth, but … the government is an 800-pound gorilla. If they want to go after you, win, lose or draw, you’re going to spend a fortune defending the case. So its better to not get on their bad side and to work with the SEC and try to work out an agreement. Make sure they don’t take a view of you that causes them to just start pounding on you because you’re not cooperating. It’s important to have good rapport, be honest and truthful.”

Lori Patterson

“Get counsel… the SEC expects you to get counsel, and frankly you should.”

“I would say the SEC’s idea of cooperation sometimes means waiving attorney-client privilege especially if … it would attach to the formation of the project, the offering documents and things like that.”

Robert Cornish

“They (SEC) definitely treat people differently, no matter what we say, they treat people differently who think that they can (represent themselves) on their own vs. having an attorney handle it. If you’re responding directly to anything with the regulator, you are essentially a proverbial ‘fish in a barrel’. “

We invite you to share your thoughts, questions and comments.

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