SEC Parallel Proceedings: Civil and Criminal Investigations

SEC Parallel Proceedings: Civil and Criminal Investigations

The person who cooperates most willingly with an SEC civil investigation is, in a considerable number of cases, the person who furnishes the evidence for their own criminal prosecution. This is not a paradox. It is the design of the system, and it has operated this way since United States v. Kordel in 1970, when the Supreme Court affirmed that parallel civil and criminal proceedings on the same conduct are permissible absent a showing of substantial prejudice. The cooperation that an individual offers under the assumption of a regulatory matter becomes, once the Department of Justice receives the referral, the raw material of an indictment. What changes is not the information. What changes is who reads it.

The difficulty is structural. The SEC possesses civil discovery powers that the DOJ, bound by grand jury rules and the constraints of criminal procedure, does not. A subpoena from the Enforcement Division can compel production of documents and sworn testimony in settings where the procedural safeguards available in a criminal investigation do not apply. The individual across the conference table perceives a regulator. The regulator perceives a case file that may, depending on what the testimony contains, end up on a federal prosecutor’s desk in the Southern District.

And often already has.

The 2026 Enforcement Manual and Criminal Referrals

In February 2026, the SEC’s Division of Enforcement released a revised Enforcement Manual, the first comprehensive update since 2017. Among the revisions, the Manual formalizes a criminal referral framework that had, until this point, operated without published criteria. SEC staff must now evaluate six factors before referring a matter to the DOJ or other criminal authorities: the harm or risk of harm occasioned by the conduct, the potential gain to the defendant, whether the defendant possessed specialized knowledge or licensing, the defendant’s awareness that the conduct was harmful or unlawful, any history of recidivism or pattern of misconduct, and whether DOJ involvement would provide additional meaningful protection to investors.

For standard, nonurgent matters, the Enforcement Director must be notified and must authorize the referral before it proceeds. This is new. The previous practice permitted referrals at the Associate Director level with no standardized criteria and limited senior oversight.

One might regard this as transparency. I am less certain. The six factors, read together, describe the conditions under which most significant SEC investigations already result in criminal referral. Formalization creates the appearance of a threshold without altering where that threshold sits. The factors that weigh most heavily (specialized knowledge, awareness of harm, pattern of conduct) are present in nearly every case involving a licensed professional or registered entity. The Manual tells you how the decision will be made. It does not tell you something you could not have inferred from the last decade of enforcement actions.

The Fifth Amendment in Civil Proceedings

Before the formal order arrives, before the staff attorney asks the first question on the record, the individual under investigation confronts a choice that no procedural framework resolves. The Fifth Amendment privilege against self-incrimination applies in SEC civil proceedings. A witness may decline to answer any question whose response could furnish a link in the chain of evidence in a criminal case. That right is real.

Its exercise carries consequences the Constitution does not prevent.

In civil proceedings, the factfinder is permitted to draw an adverse inference from the invocation of the Fifth Amendment. Baxter v. Palmigiano, decided by the Supreme Court in 1976, established that the privilege does not forbid such inferences against parties who refuse to testify in response to probative evidence. The Ninth Circuit extended this principle in SEC v. Colello, holding that a district court did not err in drawing an adverse inference at the summary judgment stage where additional evidence supported the Commission’s claims. In SEC v. Jasper, the same circuit confirmed that courts need not tailor their adverse inference instructions on a question by question basis; a blanket invocation can produce a blanket inference.

The arithmetic, then, is as follows. You testify in the civil proceeding and the testimony becomes available to criminal prosecutors through the SEC’s routine information sharing practices. You decline to testify and the civil court draws an inference that you had something to conceal. In neither posture do you occupy safe ground. The question is which exposure you elect to bear, and the answer depends on facts that, at the time the decision must be rendered, you may not possess (whether a criminal investigation is running in parallel, how far along it is, what the prosecutors already have through other channels).

There are exceptions to this calculus, though in practice they tend to confirm the rule. A court may stay the civil proceeding pending the outcome of the criminal matter. SEC v. HealthSouth Corp. in the Northern District of Alabama granted such a stay on the reasoning that the defendant should not be placed in the position of either waiving Fifth Amendment rights or asserting the privilege and thereby losing the civil proceeding. The D.C. Circuit’s en banc decision in SEC v. Dresser Industries acknowledged the possibility of a stay but treated it as the exception, not the default, holding that absent specific evidence of agency bad faith or malicious governmental tactics, the mere existence of parallel proceedings does not warrant special protection.

The cold reality is this: if a criminal prosecution succeeds, the SEC civil case is resolved on summary judgment as a matter of course, because the conviction at the higher burden of proof establishes the elements the Commission needed at the lower one. The adverse inference from invoking the privilege may, standing alone, prove insufficient to carry a civil case to judgment. But it is sufficient to devastate a defense that depends on the factfinder’s confidence in the defendant’s account. Silence in a civil proceeding does not function the way it functions in a criminal courtroom. In a criminal courtroom, the jury receives an instruction. In a civil courtroom, the silence speaks.

Form 1662 and the Disclosure Problem

The SEC provides Form 1662 to every individual from whom it seeks testimony, whether the testimony is voluntary or compelled by subpoena. The form discloses the right to counsel, the right to decline to answer in voluntary settings, and the penalties for perjury and obstruction. It recites the “routine uses” of information collected, including the statement that the SEC makes its files available to other governmental agencies, among them the DOJ and various United States Attorneys’ Offices.

In 2019, in a conference room in downtown Manhattan, a compliance officer for a midsize broker dealer reviewed this form for the first time while the SEC staff attorney waited. The form ran to four pages. The officer signed the acknowledgment in under ninety seconds.

The Ninth Circuit addressed the sufficiency of this disclosure in United States v. Stringer. The district court had dismissed criminal indictments against defendants who argued that the SEC concealed the existence of a parallel DOJ investigation, conducting what amounted to a civil proceeding designed to gather criminal evidence. The Ninth Circuit reversed. It held that Form 1662’s recitation of routine uses (which included the express statement that information could be employed in criminal proceedings) constituted sufficient notice. The SEC, the court determined, was free to decline to reveal the existence of a parallel criminal investigation. Staff attorneys who refused to answer defense counsel’s direct questions about DOJ involvement were not, in the court’s analysis, engaged in affirmative deception.

The practical consequence of Stringer is that one must assume, in every SEC investigation of any significance, that the DOJ is already present. The form on the table says as much, if you read it with the understanding that its warnings are not hypothetical. Most recipients do not. Form 1662 is composed in the register of legal boilerplate, and the provisions that matter most (that information will be shared with criminal authorities, that testimony may be used in federal court) are embedded in dense paragraphs that read as procedural rather than urgent. The form exists to document that the government told you. It does not exist to ensure you understood what you were told.

Whether a document that permits comprehension but does not facilitate it constitutes adequate notice is a question the courts have answered in the affirmative and that practitioners continue to regard with some discomfort.

Stays and Procedural Alternatives

Courts possess discretion to stay civil proceedings when a parallel criminal investigation is pending. They rarely exercise it. The factors courts consider include the extent of prejudice to the moving party, the burden a stay would impose on the opposing party, the interests of the court in efficient management of its docket, and the public interest. The defendant’s most favorable posture for a stay request is post-indictment, when the danger that civil testimony will be marshaled for criminal prosecution reaches its most acute point and the likely duration of the stay becomes more predictable.

Alternatives to a full stay exist. Courts have narrowed the scope of civil discovery, issued protective orders limiting disclosure, restricted the stay to particular subjects, or permitted discovery to proceed only to counsel. In SEC v. Dresser Industries, the D.C. Circuit catalogued these intermediate measures while affirming that a complete halt of the civil proceeding requires a showing the courts are not inclined to accept.

The calculus changes if the government itself seeks the stay. The DOJ has, on occasion, requested a pause in private civil litigation where it concluded that discovery in the civil case could compromise its criminal investigation. These requests tend to succeed because the court credits the government’s stated interest in protecting investigative integrity, and the practical result is a civil plaintiff’s case held in suspension for as long as the criminal matter requires.

What Cooperation Purchases

The 2026 Enforcement Manual’s expanded cooperation framework promises credit for entities and individuals who self-report misconduct, remediate, and assist the staff’s investigation. Self-reporting credit, the Manual specifies, is appropriate when the entity discloses the misconduct before the staff discovers it through other means or before the threat of outside disclosure becomes imminent. The standard for a non-prosecution agreement has been elevated from “limited and appropriate circumstances” to “exceptional circumstances,” and Cooperation Committee approval is now required.

This framework rewards early action. The difficulty is that cooperation in a civil investigation, if a parallel criminal proceeding exists, produces a record that the criminal side of the government can access. The testimony you provide to the SEC in the spirit of cooperation is testimony the DOJ may use. The documents you produce under a cooperation theory are documents a prosecutor may read. I have yet to encounter a cooperation framework that reconciles this tension, though they continue to be drafted as if the civil and criminal sides of the government occupy separate rooms with locked doors between them. The doors have never been locked. The 2026 Manual’s own section on cooperation with criminal authorities confirms that the Enforcement Division coordinates with the DOJ and shares investigative materials where appropriate, a formulation whose breadth is the quiet part the framework does not emphasize.

The question that remains, for any individual or entity that receives a formal order of investigation or an invitation to provide voluntary testimony, is not whether to cooperate. It is how much of a record to create, in what form, and with what understanding of where the record may travel. Counsel who treats the SEC’s civil inquiry as distinct from any criminal exposure is counsel who has not read Form 1662 with the attention the form, if we are being precise, was designed not to receive.

A first consultation with this firm costs nothing and assumes nothing. It is the beginning of a diagnosis, and in this area, the timing of the diagnosis determines what remains available to treat.