Criminal Defense Lawyers

Can the SEC Investigation Lead to Jail

The SEC cannot send you to jail. They don’t have the authority. The Securities and Exchange Commission is a civil enforcement agency – they can sue you, fine you, bar you from your industry, and disgrace you publicly, but they cannot put you in prison. That power belongs exclusively to the Department of Justice. Here’s what nobody explains clearly: the SEC can hand the DOJ everything they need to do it. Your civil testimony becomes evidence at your criminal trial – testimony you gave without a criminal defense lawyer present because you thought it was just a civil matter.

By the time you learn that a parallel criminal investigation has been running alongside your SEC inquiry, you’ve already provided the prosecution with everything they need. The federal conviction rate for securities fraud is 93 percent. That’s not a typo. If you’re indicted, you have about a seven percent chance of acquittal. Federal prosecutors don’t charge cases they’re uncertain about. They only move forward when the evidence is overwhelming – often evidence you voluntarily provided during the “civil” investigation.

This isn’t a theoretical risk. It happens constantly. Martha Stewart went to prison not for insider trading, but for lying about it during an investigation. Bernie Madoff got 150 years. Samuel Waksal got over seven years. The path from SEC investigation to federal prison is well-worn, and most people walk down it without understanding what’s happening until it’s far too late to change course.

The SEC Cannot Send You to Jail (But They Can Do Something Worse)

Lets be clear about what the SEC can and cant do. The SEC’s enabling statutes limit them to civil enforcement – they can file lawsuits in federal court, bring administrative proceedings before their own judges, and refer cases to criminal authorities. They cannot bring criminal charges. Period. Thats not there jurisdiction.

But what they can do is arguably worse. The SEC can build the criminal case against you while pretending its just civil. In the vast majority of criminal securities fraud prosecutions, the SEC’s Enforcement staff works closely with criminal authorities – whether thats DOJ, the FBI, or state law enforcement. These parallel investigations are “entirely appropriate under the law” according to the SEC itself. They conduct investigations independently but in cooperation with criminal prosecutors.

Heres the kicker. You might not know the criminal investigation exists. The SEC is not required to tell you that the DOJ has “taken an interest” in your case. While your answering questions to what you beleive is a civil regulatory agency, prosecutors are building a criminal case using the same evidence. The SEC investigation is the criminal investigation – you just dont know it yet.

How Your Civil Testimony Becomes Criminal Evidence

The mechanism that destroys most defendants is something called an “Access Request.” The DOJ can file an Access Request to obtain copies of documents and information the SEC collected during its investigation. Everything you voluntarily provided – your testimony, your documents, your explanations, your attempts to cooperate – flows directly to criminal prosecutors without any additional subpoena. They dont need to ask you again. They already have it.

It gets worse. SEC rules explicitly allow for the sharing of information with other goverment agencies. This isnt some rare exception – its common practice. The DOJ Yates Memorandum from 2015 actualy encourages “early and regular communication between civil attorneys and criminal prosecutors.” The memo states that “the civil side will almost certainly share information with the criminal side.” Thats not a possibility. Thats policy.

SEC staff members are regularly detailed to the Justice Department to assist in criminal investigations and prosecutions. The same people investigating you civily may be working directly with the prosecutors building your criminal case. When you cooperate with the SEC, you may literally be handing evidence to the person who will prosecute you.

The 93% Problem

Federal prosecutors win 93 percent of there cases. In the 2018 data analyzed by Pew Research, 90% of federal criminal cases ended with the defendant pleading guilty. The U.S. Attorney’s Office dismissed 8% of cases. The remaining 2% – just 1,879 out of roughly 80,000 defendants – went to trial. Of those, only 320 recieved acquittals.

Think about what that means. If your charged federaly with securities fraud, the outcome is statisticaly predetermined. Federal prosecutors dont bring cases they might loose. They wait until the evidence is overwhelming, then they charge. By the time you see an indictment, the goverment has already decided you will be convicted – and historicaly, their right about 93% of the time.

For securities fraud specificaly, the numbers are similar. About 86.6% of convicted securities fraud offenders are sentenced to prison. The average sentence is 38 months – over three years. But thats the average. Bernie Madoff got 150 years. Samuel Waksal got seven years and three months plus a $4 million fine. The sentences for major fraud are measured in decades, not months.

The Fifth Amendment Trap: Damned Either Way

So you know the parallel criminal investigation exists. You understand your cooperation is building a case against you. The obvious answer is to invoke the Fifth Amendment and refuse to testify, right? Here’s the trap nobody warns you about.

In criminal proceedings, the court must instruct the jury that it cannot draw an inference of guilt from your refusal to testify. Thats a fundamental constitutional protection. But in civil cases – including SEC investigations – the Fifth Amendment does not forbid “adverse inferences.” The court can, and will, assume that the testimony you’re witholding would have been unfavorable to you. Your silence becomes evidence of guilt in the civil case.

So your choices are: Cooperate with the SEC and potentialy hand prosecutors the evidence they need to convict you criminaly. Or invoke the Fifth, protect yourself from criminal prosecution, but get destroyed in the civil case through adverse inference. There is no winning move. There is only damage control, and the right choice depends entirely on factors you may not even know about – like wheather a criminal investigation already exists.

The Martha Stewart Lesson: When the Cover-Up Becomes the Crime

Martha Stewart saved $45,673 by selling her ImClone stock before the FDA announcement. Thats the amount of losses she avoided. For this, she was investigated by the SEC and ultimately prosecuted by the DOJ.

Heres the part most people miss: Martha Stewart was never convicted of insider trading. She was convicted of conspiracy, making false statements, and obstruction of agency proceedings. The crime wasnt the trade – it was lying about it afterward. She spent five months in federal prison plus five months of home detention. She paid a $30,000 fine and $137,019 in civil penalties. Her career was nearly destroyed.

The message is brutal: the cover-up is often worse then the crime. Obstruction of justice under 18 U.S.C. 1519 carries up to 20 years in prison. Thats potentially more then the underlying securities violation. Destroying, altering, or falsifying records during a federal investigation – even “small” changes, even “corrections” – can result in criminal charges seperate from whatever the SEC was originaly investigating.

Lead prosecutor James Comey said at the time that Stewart’s case was “about lying – lying to the FBI, lying to the SEC, and lying to investors.” The $45,673 she saved became irrelevant. The lie became the crime. And the crime sent her to prison.

What “Criminal Referral” Actually Means

Following SEC investigations, Division staff present there findings to the SEC Commissioners for review. The Commissioners can authorize staff to file a civil case in federal court, bring an administrative action, or refer the case to the DOJ for criminal prosecution. Thats the formal process.

But the reality is more complex. Criminal investigations often run parallel to SEC investigations from the begining – before any formal referral. The DOJ dosent wait for the SEC to finish and then decide weather to prosecute. Both agencies investigate simultaniously, share information, and coordinate strategy. The “referral” may simply formalize what has been happening behind the scenes for months or years.

In FY 2015, 134 criminal actions were brought in connection with conduct investigated by the SEC. That same year, the SEC shared information about 498 investigations with other enforcement authorities. The pipline from SEC investigation to criminal prosecution is active and well-used.

The Sentence You’re Really Facing

Lets talk about what prison actually looks like for securities fraud convictions. The average sentence is 38 months according to U.S. Sentencing Commission data – thats over three years. The average decreased from 46 months in fiscal year 2020 to 38 months in fiscal year 2024, but its still measured in years, not months.

The maximum penalties are far higher. A Securities Exchange Act violation carries up to 20 years imprisonment. A Securities Act violation carries up to 5 years. A Sarbanes-Oxley securities fraud violation carries up to 25 years. Money laundering – often charged alongside securities fraud – can add decades more.

Bernie Madoff recieved 150 years. Samuel Waksal, the ImClone CEO at the center of the Martha Stewart case, got seven years and three months plus over $4 million in fines. These arent theoretical maximums – their actual sentences handed to actual people for securities violations that started as SEC investigations.

Three Ways to Survive (And the One Way Most People Fail)

If your facing an SEC investigation, you need to understand exactly where you stand before you say a word. Here are the three paths forward – and the mistake that destroys most people.

First path: early criminal assessment. Before cooperating with the SEC in any way, you need a lawyer who understands both civil and criminal exposure. The question isnt just “what does the SEC want?” Its “is there a parallel criminal investigation I dont know about?” The answer to that question determines everything about your strategy.

Second path: strategic cooperation. Cooperation can reduce sentences – the SEC credited cooperation in 75% of public company investigations in FY2024. But cooperation must be strategic, protected by counsel, and designed with criminal exposure in mind. Blind cooperation isnt cooperation – its self-incrimination.

Third path: Fifth Amendment invocation with eyes open. Sometimes the right answer is to invoke the Fifth and accept the adverse inference in the civil case to protect yourself criminaly. This destroys your civil defense but may be necessary. Only someone who understands both proceedings can advise you when this is the right choice.

The fatal mistake? Treating the SEC investigation as “just civil.” The moment you start cooperating under the assumption that this is a regulatory matter – not a potential criminal case – you’ve already handed prosecutors what they need. By the time you realize the truth, the 93% conviction rate is staring you in the face, built on evidence you voluntarily provided.

The SEC cannot send you to jail. But your cooperation with them can. Get the right lawyer before you answer a single question. The difference between walking away and spending years in federal prison often comes down to what you said – or didnt say – in the first weeks of the investigation. Your future is being decided right now.