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Securities Fraud: SEC Investigations and Criminal Exposure
The SEC investigation you are responding to is, in all likelihood, already a criminal matter. The distinction between a civil inquiry and a federal prosecution is not a wall. It is a membrane, and by the time most executives perceive that the membrane has been crossed, their own testimony has become the prosecution’s foundation.
The SEC cannot bring criminal charges. The Department of Justice can. But the two agencies coordinate their efforts with a fluency that renders the jurisdictional boundary almost decorative. Documents produced to the SEC travel to federal prosecutors; testimony given under oath in what presents itself as a regulatory proceeding is read aloud at criminal trials. The person seated across from you in a conference room at the SEC’s regional office may be asking questions that were composed, in part, by an assistant United States attorney you have never met.
The letter that initiates this process arrives without ceremony. It is addressed to your counsel, or to you directly, and it does not announce that your liberty is at stake. It announces that the Division of Enforcement is conducting an inquiry. The word “inquiry” performs a kind of sedation. People read it and conclude that the matter is civil, that the consequences are financial, that cooperation is the obvious path. In six cases we handled last year, the client had already produced documents and scheduled testimony before anyone asked whether the Department of Justice had opened a parallel file.
In every instance, they had.
The Wells Notice After the 2026 Manual
A Wells notice is the SEC’s formal statement that its staff intends to recommend enforcement action. Until February of this year, the process for issuing and responding to that notice was governed by a manual last revised in 2017 and, in practice, by customs that varied between offices and from one Associate Director to the next.
The SEC’s February 2026 revisions to the Enforcement Manual changed several elements of this process. Wells notice recipients now receive, ordinarily, four weeks to prepare a submission. A meeting with a member of senior leadership at the Associate Director level or above must be scheduled within four weeks of the submission. Staff must obtain approval from the Office of the Director before issuing the notice, a layer of review that did not previously exist. The Manual now provides that staff should inform recipients of the “salient, probative evidence” gathered during the investigation.
On paper, these are improvements. The defense bar spent years requesting precisely this. The word “ordinarily,” however, does consequential work in the Manual’s text. It preserves the staff’s discretion to compress deadlines when circumstances warrant, and circumstances, in the staff’s estimation, tend to warrant something. The practitioner who reads the 2026 Manual as a guarantee of four weeks and a transparent evidence file will be corrected, eventually, by experience.
What the Wells notice does not disclose is whether the Department of Justice has received a referral. The 2026 Manual includes an updated framework for criminal referrals, but the framework describes when and how the staff should refer, not when and how the staff should inform the subject. The notice tells you that the SEC intends to recommend action; it does not tell you that the evidence supporting that recommendation has already been transmitted to a federal prosecutor’s office.
The Wells submission is drafted for the Commission. It is read by the Department of Justice.
The 2026 Manual now provides that staff will reject submissions that attempt to limit admissibility under Federal Rule of Evidence 408 or prevent the uses described in Form 1662. That provision is new. Its meaning is old: what you write in the Wells submission can and will be examined beyond the civil proceeding. The submission must serve the civil defense without compromising the criminal one, and that constraint makes the document more difficult to compose than most of what the recipient has encountered in commercial life.
Form 1662
Every person who provides testimony or documents to the SEC receives Form 1662. The form discloses that information provided may be shared with other governmental agencies. It discloses that the information may be used in any federal criminal proceeding. It discloses the right to counsel and the privilege against self-incrimination.
What Form 1662 does not disclose is whether the sharing is already occurring. The form states that information can be transmitted to other agencies; it does not state that information is being transmitted. The distinction matters because it determines how a reasonable person would assess the risk of cooperation. A person who knows that a criminal investigation is active makes different decisions than a person who knows only that a criminal investigation is theoretically possible.
The form is a rights disclosure. It does not offer strategic counsel, and the gap between the two is wider than most recipients perceive.
The Fifth Amendment in SEC Proceedings
In a criminal proceeding, silence carries no penalty. A jury cannot be instructed to infer guilt from a defendant’s refusal to testify. The privilege, in that context, is absolute.
SEC proceedings invert this. The Supreme Court held in Baxter v. Palmigiano that the Fifth Amendment does not prohibit adverse inferences against parties in civil actions who refuse to testify. In practice, invoking the privilege in an SEC proceeding allows the trier of fact to conclude that your answer would have been unfavorable. Silence, in the SEC’s forum, is not neutral.
The bind this creates for the subject of a parallel investigation is severe. Testify before the SEC, and your words travel to the Department of Justice, where they become evidence in a criminal case you may not know exists. Invoke the Fifth, and the SEC draws an adverse inference that weakens your civil defense and, in some circumstances, accelerates the staff’s decision to refer the matter for prosecution. The SEC’s own Enforcement Division has treated the invocation of the privilege as a factor supporting a criminal referral, a position that transforms a constitutional protection into a mechanism for escalation.
There is no clean path through this. I wish there were.
Whether the court system intended this architecture or merely failed to prevent it from becoming one is a question worth considering. The textbook answer is to seek a stay of the civil proceedings pending resolution of the criminal matter, and courts do grant stays where the overlap is substantial. But the SEC resists stays with a consistency that suggests institutional reflex, and the passage of time during a stay creates its own difficulties: witnesses relocate, documents degrade, and the statute of limitations on the civil claims continues to run even as the criminal investigation expands into territory the original subpoena did not contemplate.
The approach we take is to make the Fifth Amendment decision on a question-by-question basis rather than invoking a blanket privilege. A blanket invocation invites the broadest possible adverse inference. A selective invocation, where the witness answers questions that carry no criminal exposure and asserts the privilege only where a direct answer would furnish a link in the chain of criminal evidence, limits the inference to the specific areas of genuine risk. This requires preparation that is, candidly, exhausting: counsel must map every question to its potential criminal implication before the testimony begins, which means counsel must possess a working theory of what the criminal case would look like if one were brought. We construct that theory before the first document is produced, and we revise it as the investigation reveals what, if we are being precise, it was always going to reveal.
Whether this approach would hold in the Third Circuit as reliably as it has in the Second is a question I cannot answer with certainty. The case law on selective invocation is developed but not uniform, and the practical outcome depends as much on the administrative law judge assigned to the matter as on the precedent.
The Parallel Investigation
In something like forty percent of the parallel investigations we have worked, the client’s initial counsel had not considered the criminal dimension. The engagement letter referenced the SEC. The strategy sessions addressed the SEC’s theory of liability and the range of civil remedies. The Department of Justice appeared nowhere in the file until it appeared in the form of a grand jury subpoena.
And by that point, the client had already provided testimony, produced documents, and made statements that (read charitably) were incomplete and (read uncharitably, which is how a prosecutor reads them) were false. The Fifth Amendment right that the client possessed at the outset of the investigation had been waived, not by formal invocation, but by the act of answering questions in a proceeding the client’s own attorney had classified as civil. The confession of cooperation (which functions the way a fire door functions in a building where someone has removed the hinges: the frame is present, the mechanism is absent) had already been offered. The criminal exposure that had not appeared in the engagement letter had become the only exposure that mattered.
Cooperation Under the 2026 Framework
The 2026 Enforcement Manual formalizes a cooperation framework the SEC had applied inconsistently since the Seaboard Report in 2001. Self-reporting credit is now available when a company reports misconduct before the staff learns of it from other sources. The Manual provides examples of what the SEC considers effective remediation: clawing back compensation, strengthening controls, retaining compliance consultants, making corrective disclosures. The Cooperation Committee, formally recognized for the first time, now oversees all cooperation agreements.
The incentive structure is intelligible: cooperate early, cooperate completely, and the civil penalties may be reduced or eliminated. The SEC can exercise discretion to impose no civil penalty at all in cases of extraordinary cooperation.
The problem is that cooperation in the civil proceeding and cooperation in the criminal proceeding are not the same act. A company that self-reports and provides full cooperation may earn credit in the civil matter while handing federal prosecutors the evidence required to indict individual officers. The executive who authorized the self-report (who may have believed, reasonably, that the company’s interests and the executive’s interests were aligned, and who may not have been told by the company’s outside counsel that the alignment was temporary and conditional and would dissolve the moment the government decided to treat the executive as a witness rather than a principal) may discover that the company’s cooperation credit was purchased with the executive’s liberty. The Manual’s cooperation framework addresses the entity’s civil exposure; it does not, and cannot, address the individuals’ criminal exposure.
Self-reporting credit, the Manual notes, will rarely be appropriate for conduct that has already received media attention. This matters because media coverage of securities irregularities tends to arrive before the company’s internal investigation is complete. The company that waits for certainty before reporting may discover that certainty arrived after the window closed.
Timing and the Decision to Engage Counsel
Most people contact a securities defense attorney after the process has already begun. The subpoena has been served. The Wells notice has arrived. The board has been informed. By that point, decisions have been made that constrain the available defenses.
The document hold was implemented, but three weeks after the preservation obligation arguably attached. The initial production included materials that should have been withheld on privilege grounds. An employee gave an informal interview to SEC staff without counsel present, believing it was voluntary and low-stakes, and produced statements that were accurate in their general outline but imprecise in ways that will matter.
These are not catastrophic errors. They are the errors that occur when the civil frame dominates the early response and the criminal frame is not applied until the window for preventing damage has closed. We begin the engagement with a unified theory because the firms that separate the civil and criminal workstreams are, in our experience, the firms whose clients are most surprised when the indictment arrives.
The Scope of Statutory Exposure
Securities fraud under 15 U.S.C. § 78ff carries a statutory maximum of twenty years. Wire fraud under 18 U.S.C. § 1343 carries the same. Conspiracy and obstruction charges add more. The sentencing guidelines calculate offense levels based on loss amounts, and in securities matters those figures tend to produce guideline ranges that surprise people who assumed they were facing a regulatory problem.
But the statutes that carry the heaviest sentences are not always the ones that produce convictions. Martha Stewart was acquitted of the securities fraud charges against her. She was convicted of making false statements to federal investigators under 18 U.S.C. § 1001. The statements she made during what she understood to be a civil inquiry became the basis for a criminal prosecution on conduct distinct from the conduct the SEC had originally examined. The investigation itself generates criminal exposure independent of the underlying securities violation.
The converse is less commonly observed but equally significant. A person who committed fraud can, with competent representation from the earliest stage, sometimes prevent the matter from expanding into a criminal prosecution by managing the investigation process in a manner that does not furnish prosecutors with additional charges. The underlying conduct is fixed. The investigation conduct is not. The decisions made between the first subpoena and the last day of testimony determine, in a meaningful number of cases, whether the matter resolves civilly or becomes something else entirely.
The Enforcement Climate in 2026
Six months into the Atkins chairmanship, the SEC’s enforcement posture has contracted in scope but not in seriousness. The staff has been reduced. The remaining resources are concentrated on cases involving material harm to investors: accounting fraud, insider trading, material misrepresentations. The Cross-Border Task Force, announced in September 2025, targets manipulation schemes by foreign issuers. The January 2026 settlement with an agri-business company, a resolution exceeding forty million dollars that concluded both civil and criminal probes, suggests the cases the SEC chooses to bring will be the cases it intends to win.
In 2019, before the current wave of enforcement reforms, the assumption among most practitioners was that a reduced SEC meant a forgiving SEC. That assumption proved wrong then. I am less certain it will prove wrong now, though the early signals are not encouraging for anyone who has received a subpoena in the last six months.
The Supreme Court’s grant of certiorari in Sripetch v. SEC, argued on April 20 of this year, will determine whether the SEC must demonstrate that investors suffered pecuniary harm before obtaining disgorgement. The Second Circuit requires such a showing; the First and Ninth Circuits do not. A decision is expected before the term concludes this summer. Either outcome will reshape the settlement calculus for parties under investigation.
You sign the engagement letter and then you discover what the engagement required. That is the nature of securities defense: the scope of the problem reveals itself over time, and the decisions that matter most are the ones made before the scope is visible. A first conversation with counsel costs nothing and presumes nothing; it is the point at which the problem can still be defined on terms that account for every outcome, including the ones that arrive without announcement.