Helping Clients Defend Against SEC Actions
Do you wonder how the SEC receives information that leads it to open an investigation? Good question. An investigation may be sparked in a myriad of ways. Years ago, it might have been from a Wall Street Journal or New York Times article in the morning paper that sparked the curiosity of an SEC staff attorney. Today, it might be a tweet or an Instagram post that causes a staff member to want to dig deeper. There’s a famous story about how the Ivan Boesky insider trading scandal of the 1980s was initiated by a single telephone call late on a Friday afternoon to an SEC staff attorney who, realizing that he had stumbled into a huge case, immediately opened an investigation that eventually led to criminal indictments (by the US Attorney’s Office) and the exposure of very senior traders at the top of Drexel Burnham Lambert and Shearson Lehman Brothers (now long-gone, venerable names in the industry), among other securities firms. But serendipity is unreliable and the SEC has tried to add some structure to organizing the information it receives that might lead to worthwhile investigations. Some of its information sources are described below.
The SEC’s best information about potential securities fraud has always come from insiders with information to report. Established under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s Office of the Whistleblower (https://www.sec.gov/whistleblower) was established to administer a program to provide monetary awards to eligible individuals (“whistleblowers”) who come forward with high-quality original information that lead to enforcement actions in which over $1,000,000 in sanctions is obtained by the SEC. The range for awards is between 10% and 30% of the money collected. Usually, but not always, individuals in possession of such information are current or former company employees. The monetary incentive is intended to encourage employees to make reports to the SEC that lead to significant awards against (primarily) companies who violate the securities laws.
Tips and Complaints
The SEC’s online Tips, Complaints, and Referrals system can be used by anyone to submit a tip or complaint about potential securities law violations at https://www.sec.gov/tcr. The same online portal is used for whistleblower reports; the only difference between submitting a whistleblower claim or a tip or complaint in which no monetary reward is sought is that a whistleblower must answer "yes" to the question "Are you filing this tip under the SEC’s whistleblower program?" on the "About You" page of the online questionnaire and must also complete the whistleblower declaration at the end of the questionnaire. All others simply answer “no.” Once input into the system, a tip or complaint is reviewed and then routed to appropriate Enforcement staff (either in the SEC’s Washington DC headquarters or one of its regional offices) for further investigation, to other SEC Divisions (e.g., Market Regulation, Corporation Finance, Trading & Markets, etc.), to a different federal or state agency, or to the SEC’s Office of Investor Education and Advocacy (“OIEA”), based on the nature of the information and the potential violations provided or questions asked. SEC Enforcement staff members are required to periodically search the TCR system to see whether there are any new sources of information related to their ongoing matters.
The time-honored “direct contact” route, when a member of the SEC staff receives information in person or on the phone from a member of the public regarding potential violations. Staff members who receive information this way may use the information to commence an investigation.
Self-Regulatory Organizations (“SROs”) include equity and option exchanges, such as the New York Stock Exchange, the Chicago Board of Options Exchange, or the Financial Industry Regulatory Authority. SROs monitor their own markets and regulate and enforce violations of their own exchange rules and regulations and the federal securities laws. If the SRO discovers potential violations and believes it does not have jurisdiction over the conduct or the party, it will refer the potential violations to the SEC for investigation.
Public Company Accounting Oversight Board
The Public Company Accounting Oversight Board (“PCAOB”) was established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies and the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws. The PCAOB also has its own enforcement department, which from time to time may forward tips it receives to the SEC’s enforcement staff. This is normally done through the Enforcement Chief Accountant’s office, which makes an initial assessment regarding whether future investigation is warranted.
The SEC may receive complaints from members of Congress on behalf of constituents. Most of these letters get to SEC enforcement staff via the SEC’s Office of Legislative Affairs or the Office of the Chairman and then assigned to the appropriate SEC division or regional office. As one might expect, the Chairman’s Office carefully tracks responses to congressional letters.
State Securities Regulators
State securities regulators, who enforce state securities laws (known as “blue sky laws”), may refer information to the SEC when they believe federal laws might be implicated or the information relates to multi-state issues (state regulators may also share information directly with one another and they often act together through the North American Securities Administrators Association, an organization that predates the creation of the SEC). Most state securities regulators have relationships with the SEC regional office covering the territory in which they are located and they will usually direct their referrals to that office. The SEC staff may share information in such cases with their state counterparts.