Can an SEC Investigation Lead to Criminal Charges?

Can an SEC Investigation Lead to Criminal Charges?

The SEC cannot put anyone in prison. That limitation, which is statutory and absolute, provides less comfort than one might expect. The Commission’s Division of Enforcement conducts investigations, compels testimony, collects documents, and assembles case files with a thoroughness that would satisfy any federal prosecutor. It then shares those files. The Department of Justice, which possesses the authority the SEC lacks, receives the assembled evidence through a mechanism called an Access Request and determines whether the matter warrants criminal prosecution. In most of the cases that cross from civil to criminal, the subject of the investigation does not learn that a parallel criminal inquiry has been running until the evidence has already been collected, much of it provided voluntarily.

This is the architecture of federal securities enforcement, and it contains a feature that warrants close examination: the person cooperating with a civil investigation is, in many instances, constructing the criminal case against themselves.

How Civil Evidence Becomes Criminal Evidence

The SEC’s enabling statutes restrict it to civil and administrative remedies: injunctions, disgorgement, civil penalties, and the authority to bar individuals from an industry they may have spent decades entering. It cannot convene a grand jury. It cannot seek an indictment. The gap between what the SEC can investigate and what it can prosecute is filled by the DOJ, and the two agencies coordinate with a fluency that the word “referral” understates.

A referral, in the formal sense, occurs when the Division of Enforcement presents its findings to the Commission and the Commission authorizes staff to forward the matter to criminal authorities. The SEC’s revised Enforcement Manual, updated in early 2026, now requires that non-urgent referrals receive affirmative approval from the Director of Enforcement before proceeding. But the formal referral often ratifies what has already begun. Criminal investigations run parallel to SEC inquiries from inception in many cases, with DOJ prosecutors and FBI agents working alongside Enforcement staff before any referral is memorialized.

The DOJ’s Access Request is the instrument that renders this coordination efficient. One request from the U.S. Attorney’s Office, and the entire SEC investigative file (testimony transcripts, document productions, internal analyses) flows to federal prosecutors. The Commission’s rules permit this sharing. The 2015 Yates Memorandum, which directed federal agencies to prioritize individual accountability, encouraged what it described as early and regular communication between civil attorneys and criminal prosecutors.

What this means in practical terms resembles the way a tenant discovers, after months of paying rent on a building the city has scheduled for condemnation, that the landlord’s willingness to accept checks was never intended to preserve the arrangement: the person testifying before the SEC, producing documents, attempting to demonstrate good faith, may be furnishing the prosecution with the evidence it could not have obtained through criminal process alone, because a subject who knew a criminal investigation was underway would invoke the Fifth Amendment, would retain criminal defense counsel, would approach every question as a question posed by a future adversary rather than a present regulator, and the entire posture of the proceeding would shift from cooperation to defense. The subject who believes the matter is civil cooperates. The cooperation becomes the case.

In April 2025, the SEC and DOJ charged the founder of an AI startup with raising over forty two million dollars through false statements about the company’s use of artificial intelligence. The civil and criminal actions were announced the same day.

The Fifth Amendment Calculation

The constitutional bind created by parallel proceedings is, if one is being precise about it, a structural feature of the system, one that maximizes the government’s informational advantage at the expense of the individual caught between two proceedings with incompatible rules.

In a criminal proceeding, the Fifth Amendment protects a defendant from compelled self-incrimination, and no adverse inference may be drawn from the exercise of that right. The jury cannot be told that silence implies guilt. In a civil proceeding, including an SEC enforcement action, the protection is distinct. A court or factfinder is permitted to draw an adverse inference from the invocation of the Fifth Amendment. Silence, in the civil context, becomes evidence that the person withholding testimony possesses something damaging to disclose.

The choice, as it presents itself in a conference room with SEC enforcement staff across the table, is not between cooperation and silence. It is between two forms of damage, calibrated to destroy different parts of one’s professional life.

The calculation worsens for anyone holding a securities license. FINRA, which exercises quasi-governmental enforcement powers while maintaining its status as a private self-regulatory organization, can bar an individual from the industry upon invocation of the Fifth Amendment. The bar is automatic. There is no hearing on the merits. The constitutional right that protects against criminal liability eliminates the ability to work. These two facts coexist, and the system that produced them has not reconciled them.

Whether the courts that authorized this arrangement considered its full consequences is a question worth examining. This article will not resolve it.

One is left with a practical question. A client who faces both SEC and DOJ exposure must evaluate, with counsel, which form of damage is survivable. Testifying before the SEC provides the prosecution with evidence that could not have been compelled in a criminal investigation. Invoking the Fifth Amendment destroys the civil defense through adverse inference, terminates any securities career through FINRA’s automatic bar, and may itself be treated by SEC enforcement staff as a factor supporting referral to criminal authorities. The Ninth Circuit, in United States v. Stringer, addressed the boundaries of permissible coordination between the agencies. The district court in SEC v. Scrushy went further and suppressed testimony obtained through what it characterized as collusive conduct between SEC and DOJ investigators. But these decisions represent the outer limits of judicial intervention. In the ordinary case, the parallel investigation proceeds, and the subject learns about the criminal component when an indictment arrives.

Martha Stewart’s case remains instructive for a reason that has little to do with insider trading. She was acquitted of the securities fraud charges. She went to prison for making false statements to investigators about conduct of which she was found not guilty. The testimony itself, not the underlying violation, generated the criminal liability. I am less certain than most commentators about what lessons to draw from this, beyond the obvious one: every interaction with a federal investigator, civil or criminal, creates independent exposure for the statements made during that interaction, regardless of whether the underlying conduct was lawful.

Referral Triggers and the 2025 Enforcement Manual

Three cases in the Southern District last year involved parallel criminal components that the defendants did not anticipate. The factors that elevate a civil matter to criminal attention are not published in a checklist, but the pattern is discernible from enforcement history.

Willfulness is the primary criterion. The SEC distinguishes between negligence or inadvertence and deliberate misconduct. Falsified documents, intentional misrepresentations to investors, schemes structured to evade detection: these attract DOJ interest. Scale matters as well. A violation affecting a small number of investors and involving modest sums may resolve through civil process. Fraud affecting thousands, or involving losses in the tens of millions, is far more likely to generate a parallel inquiry.

The updated Enforcement Manual codified factors that staff should consider when evaluating a potential referral. Among the changes is a requirement that the Associate Director or Unit Chief notify the Director of Enforcement and receive approval before referring a non-urgent matter to criminal authorities. The manual also expanded guidance on cooperation credit, including the possibility of reduced penalties for subjects who self-report and remediate before the investigation reaches its conclusion.

The current Commission, under Chairman Paul Atkins, has described its enforcement posture as a return to the agency’s core mission. The staff has contracted. But the cases the SEC does bring appear to carry a criminal parallel with increasing frequency, particularly in areas involving fraud. The first criminal prosecution based on misuse of a Rule 10b5-1 trading plan, brought in June 2025 against the former CEO of Ontrak, Inc., is representative. The theory was not new to securities practitioners. The willingness to prosecute it was.

What a Settlement Does Not Resolve

A settlement with the SEC resolves civil liability. The Commission’s own rules state this without ambiguity: any person who consents to a judgment or order does so for the purpose of resolving the civil or administrative matter, not for the purpose of resolving any criminal charges that have been, or might be, brought.

This is not always understood by the people signing consent orders. I have spoken with individuals, some as recently as last winter, who settled SEC enforcement actions under the impression that the matter was concluded. The fine was paid. The injunction accepted. Then a criminal indictment arrived. The DOJ makes its determination on its own timeline, using evidence the SEC collected and shared, and the statute of limitations for both securities fraud and wire fraud extends five years from the conduct at issue.

The settlement that felt like a resolution was a point along a longer sequence, and the concessions made during negotiation exist in a file that prosecutors can obtain.

The Earliest Conversation

The question that titles this article has a simple answer. An SEC investigation can lead to criminal charges, and it does so with a regularity that the word “can” fails to convey.

The more consequential question is when counsel enters the picture and what that counsel perceives. Every response to an SEC subpoena, every document produced, every line of testimony must be evaluated for its effect on the civil matter and for how it would appear in a criminal trial. The two proceedings are not sequential. They are concurrent, even when only one is visible.

A consultation is where the assessment begins. It costs nothing. It assumes nothing. It is the point at which the civil and criminal dimensions of an SEC inquiry become, for the first time, legible to the person at their center.