October 13, 2023
Demystifying SEC Investigations
Woodruff Sawyer recently released the first in a two-part series meant to demystify SEC investigations for directors and officers. Part one focuses on the investigative stage and begins with this note about the sheer volume of tips and investigations the Division of Enforcement receives and addresses annually:
The SEC receives tens of thousands of enforcement tips every year. SEC Enforcement has almost 1,500 staffers and about 1,500 open investigations at any given time across the country. […] SEC Enforcement lawyers can and will open an investigation any time they believe it is possible that a securities law violation has occurred. In practice, this means that they can open investigations freely, at any time, and for any legitimate, non-discriminatory reason.
The post explains that there are a few “procedural paths” the investigation can take and which path the Division of Enforcement chooses can be indicative of the Division’s initial expectations about the investigation:
An encounter with the SEC can fall anywhere on a wide spectrum of pain, from expensive procedural annoyance to substantive existential threat. […] [T]he bureaucratic posture of an investigation can be important: The posture can hint at whether the government is just kicking the tires and may walk away after a limited review or whether they are likely to dig in for the long haul.
Through a helpful flow chart, the post describes those two initial paths — opening a “matter under inquiry (MUI)” or an investigation — and their implications and then summarizes the subsequent documents phase and possible testimony phase. Maybe most importantly, the post describes the ways that a government investigation differs from private litigation and has this reminder to manage the expectations of all involved:
Once a formal order exists, you should be prepared for a long road ahead. On average, it takes about two years from the time the SEC opens an investigation to the time it brings a case. (This statistic doesn’t include investigations closed without charges; unfruitful investigations also often drag on for years.) Over the course of an investigation, you will see flurries of activity and then long periods of inactivity and uncertainty. While the government considers the documents you’ve produced and mulls over the next steps, it won’t provide the company with much information about where things are headed.
– Meredith Ervine