sec subpoenas 101

Receiving a Securities and Exchange Commission ("SEC") subpoena is a new and uncomfortable
experience for most market participants. An SEC subpoena is an indication that the Division of
Enforcement is investigating potential violations of the federal securities laws. SEC subpoenas
can be issued to a variety of persons many of which may not suspected as securities law
violators.
Most market participants understand that the Securities and Exchange Commission (the "SEC") is
a law enforcement agency. SEC Actions can involve a case in federal court or an administrative
action. They can be informal or pursuant to an SEC formal order of investigation. SEC actions are
common in the penny stock markets and the SEC frequently pursues shell packers, unregistered
brokers stock promoters, investor relations firms, attorneys and auditors in connection with penny
stock schemes.

Any SEC subpoena should be taken seriously and not ignored. When a formal order of
investigation is obtained, the SEC's Division of Enforcement can issue subpoenas and compel
witnesses to testify and produce books and records.
The SEC's Enforcement Division functions as the enforcement arm of the SEC. It is the Division
of Enforcement that commences investigations of potential securities law violations, by
recommending that the SEC bring SEC actions in federal court or before an administrative law
judge, and by prosecuting the cases on the SEC's behalf.
The SEC's Division of Enforcement investigates potential violations of the federal securities laws
and collects evidence of securities law violations. Often times, the SEC makes referals to the
Justice Department for criminal prosection. The SEC obtains evidence from a variety of sources
including market surveillance activities, investors, whistleblowers, other Divisions and Offices of
the SEC, self-regulatory organizations such as the Financial Industry Regulatory Authority
("FINRA"), other securities industry sources, and news and/or media reports.
The SEC Division of Enforcement's information gathering process involves the use of informal
inquiries, witness interviews, examination of brokerage, transfer agent and other records,
reviewing trading data, and other sources.
After an investigation, the Division of Enforcement's staff presents their investigative findings to
the SEC for its review.
Common SEC Violations that Lead to Investigations include:
Securities fraud Misrepresentation or omission of important information about a company or its
securities

Manipulative Trading Manipulating the market prices of securities

Conversion of customers' funds or securities
Violating broker-dealers' responsibility to treat customers fairly
Insider trading (violating a trust relationship by trading on material, non-public information about a
security)
Selling unregistered securities
Whether the SEC brings a case in federal court or before an administrative law judge depends on
various factors. When warranted, the SEC may bring both a civil and administrative proceeding.
Potential defendants in SEC actions will receive a wells notice. A Wells Notice is sent to subjects
of a SEC investigation when Enforcement staff has substantially completed its investigation and
intends to recommend that an enforcement be pursued. Under SEC Rules, in response to such a
notice, the recipient is entitled to make a Wells submission presenting facts and arguments
intended to dissuade the staff from taking further action. If the staff goes forward with its
recommendation the SEC will review the recommendation and the Wells submission and then
decide whether to authorize an enforcement proceeding.
SEC Civil Actions
If it determines that violations of the securities laws has occurred, the SEC's Division of
Enforcement files a complaint with a U.S. District Court and asks the court for a sanction or
remedy. Often the SEC asks for an injunction that prohibits any further acts or practices that
violate the securities laws. In addition, the SEC often seeks civil monetary penalties, or
disgorgement. The court may also bar or suspend an individual from serving as a corporate
officer or director. A person who violates the court's order may be found in contempt and be
subject to additional fines or imprisonment.
Administrative Actions
The SEC can seek a variety of sanctions through the administrative proceeding process.
Administrative proceedings differ from civil court actions in that they are heard by an
administrative law judge, who is independent of the SEC. The administrative law judge presides
over a hearing and considers the evidence presented by the Division staff, as well as any
evidence submitted by the subject of the proceeding. Following the hearing the administrative law
judge issues an initial decision that includes findings of fact and legal conclusions. The initial
decision also contains a recommended sanction. Both the Division staff and the defendant may
appeal all or any portion of the initial decision to the SEC. The SEC may affirm the decision of the
administrative law judge, reverse the decision, or remand it for additional hearings. SEC
administrative sanctions include cease and desist orders, suspension or revocation of brokerdealer and investment advisor registrations, censures, bars from association with the securities
industry, civil monetary penalties, and disgorgement.
Issuers and market participants should seek the advice of a qualified securities attorney prior to
responding to an SEC subpoena to ensure the process goes smoothly.