Magazine article The CPA Journal

Trends in SEC Enforcement: What CPAs Need to Know

Magazine article The CPA Journal

Trends in SEC Enforcement: What CPAs Need to Know

Article excerpt

Over the past decade, the SEC has aggressively pursued investigations and prosecutions related to accounting and auditing liability. At the same time, the SEC's standard operating procedures for conducting and prosecuting private, formal investigations have undergone drastic changes. Properly navigating SEC enforcement actions is more crucial than ever, necessitating the counsel and advice of experienced attorneys to develop winning strategies that put an issuer in the best position to successfully fend off or even defeat the action.

Background Primer on SEC Enforcement Actions

A private, formal SEC investigation begins with the full commission issuing a formal order of investigation, without dis- closing to the public that the investigation is under way. The order provides the staff assigned to the matter with full subpoena power throughout the United States. The staff subpoenas documents from the participant (or respondent) organization or individuals being investigated, as well as third parties with knowledge (e.g., accountants, auditors, customers). The staff also subpoenas witnesses to give sworn testiThe mony, akin in many ways to a civil deposition. Similar to a criminal investigation, the SEC staff does not share its investigative file with counsel for the respondent; rather, counsel only has access to the materials and testimony in which it participates. Importantly, the SEC seeks only civil remedies and penalties; it does, however, always have the option of referring matters it thinks deserving to the Department of Justice for criminal investigation.

SEC investigations often take months or even years to complete. At the conclusion of its investigation, the staff often sends a Wells notice to the respondents notifying them that the SEC has concluded that they should be charged with violation of the securities laws. The Wells notice identifies the specific statutes or regulations allegedly violated and may offer some factual detail in support. The staff often has a Wells notice call with counsel, providing additional factual detail as necessary. Once the Wells notice is issued, respondents generally have 30 days to file a Wells submission-a legal brief setting forth legal and factual arguments as to why no charges should be brought. The full commission is presented with these materials and makes a determination as to 1) whether charges should be filed, 2) what specific charges should be filed, and 3) in which venue- federal district court or an administrative proceeding before an administrative law judge. Importantly, once a Wells notice is issued, there is an 80% chance that an enforcement action will be prosecuted (Jean Eaglesham, "SEC drops 20% of Probes After 'Wells Notice,'" Wall Street Journal' October 9,2013, lOyjPUD). Thus, the best course of action is to avoid a Wells notice completely.

Trends in SEC Enforcement Actions

Use of Pre-Wells Notice White Papers in SEC Investigations Generally speaking, a respondent has no formal opportunity to address the SEC staff s legal and factual positions until a Wells notice is issued. The Wells notice, if disclosed voluntarily for business or legal reasons, may attract significant media attention and can spur immediate stock price and sales declines, as well as investor and consumer reaction. Over the past several years, the SEC has offered respondents the opportunity to be more active participants in the pre-Wells notice investigation process through the submission of white papers on issues or questions raised during the course of the investigation. It is not clear whether this shift is part of a formal mandate or simply favored by current senior officials. In any event, these white papers are written submissions on legal or factual issues raised by the staff and may contain factual and legal arguments, as well as supporting material such as relevant documents and expert reports.

The white paper process is, generally speaking, voluntary. …

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