Director Liability in SEC Investigations

What Directors Need to Know About the Risks of Facing SEC Scrutiny

Company executives aren’t the only ones who face liability in federal securities fraud investigations. Members of companies’ boards of directors can face liability as well—and, when necessary, the U.S. Securities and Exchange Commission (SEC) will not hesitate to take action against corporate directors.

But, board members are not the only ones who are at risk. Like corporate executives, they can face civil and criminal prosecution from the U.S. Department of Justice (DOJ) as well.

SEC investigations targeting corporate directors can present substantial risks. This includes risks for the companies involved as well. Corporate boards are in place to help ensure that their companies operate in compliance with the law. When board members violate the law themselves, this will almost always raise questions about their companies’ compliance programs and culture.

Representation for Corporate Directors and Companies During SEC Investigations

At Spodek Law Group, we represent corporate directors and companies in SEC investigations. We have significant experience representing our clients in civil and criminal matters, and we have a proven record of success protecting our clients against unnecessary penalties. Several of our attorneys previously served as federal prosecutors with the DOJ and U.S. Attorneys’ Office, and this experience gives us deep insights into the government’s investigative and prosecutorial methods.

We take an aggressive approach to representing our clients in SEC investigations and other federal enforcement matters. Early intervention is key; and, while many companies and individuals try to take a passive approach during the early stages, we have found that this is a mistake. In our experience, taking a proactive approach is the best way to mitigate our clients’ risks and resolve their investigations as quickly as possible.

Circumstances in Which Corporate Directors Can Face SEC Enforcement Action

When does the SEC target corporate directors for enforcement action? There are several circumstances in which board members can face civil or criminal penalties as the result of an SEC investigation. This includes (but is not limited to) circumstances involving alleged:

• Insider Trading – Insider trading is a major priority for the SEC and other federal authorities. Company executives and board members are subject to strict federal prohibitions on insider trading, and they can face substantial fines and prison time as a result of engaging in transactions based on material nonpublic information (MNPI).

• Misrepresentation of Material Information – Corporate directors can face liability for misrepresentation of material information in companies’ public filings and disclosures. This includes misrepresentations of fact as well as misleading statements of opinion. Board members can face liability for failure to disclose material information in companies’ public filings and disclosures as well.

• Failure to Exercise Due Diligence – In addition to making misrepresentation or omissions in public filings and disclosures, corporate directors can also face liability for failing to make adequate efforts to verify the information that their companies disclose to investors and the public. Board members have an affirmative duty to exercise due diligence; and, while this does not mean that they must conduct their own independent investigations, it does mean that they must not take a passive approach to their companies’ legal compliance obligations.

• Filing False Reports with the SEC – Corporate directors can face liability for filing false reports with the SEC. This applies to all SEC filing requirements. Here too, failing to take adequate measures to verify the accuracy of information is a common issue.

• Corporate Corruption – Corporate corruption and other forms of white collar crime are also high on the SEC’s list of enforcement priorities. While these types of offenses can trigger civil enforcement action from the SEC, they can also trigger criminal prosecutions from the DOJ. If the SEC uncovers evidence of corporate corruption during an investigation, it may refer the matter to the DOJ for further investigation and prosecution.

• Brokerage Fraud – Brokerage fraud can involve criminal, civil, or administrative enforcement action depending on the specific facts and circumstances involved. In some cases, brokers can face liability for their own actions, while in others they can face liability for failing to prevent fraud committed by their companies or the companies with which they contract or otherwise do business.

• Pyramiding – Pyramiding is a form of market manipulation that is prohibited under federal securities laws. While the individual traders who engage in pyramiding can face prosecution, they are not necessarily the only ones who are at risk. In appropriate circumstances, the SEC may pursue civil or administrative enforcement action against corporate directors as well.

• Pump and Dump Schemes – Pump and dump schemes are also prohibited under federal securities laws, and they are also a major priority for the SEC. While the SEC is continuing to focus heavily on cryptocurrency-related pump and dump schemes, the agency is also continuing to closely scrutinize board members’ investment-related activities in all markets.

• Misrepresentations to Federal Agents – In addition to misrepresentations that can lead to administrative, civil, or criminal enforcement action, misrepresentations to federal agents during SEC investigations can lead to prosecution under 18 U.S.C. Section 1001. This statute provides for fines and up to five years of federal imprisonment for making false statements to federal agents during the course of an investigation.

Ultimately, the risks that corporate directors face during SEC investigations depend on the specific allegations at issue. In all cases, however, board members must engage experienced defense counsel early in the investigative process. While it may be possible to resolve the matter without formal enforcement action, the risks of facing enforcement action can increase substantially if targeted board members are not proactive about defending themselves.

Potential Penalties in SEC Investigations Targeting Corporate Directors

While the potential penalties that corporate directors can face depend on the specific allegations at issue, they are substantial in all cases. Potential penalties in SEC investigations targeting corporate directors include:

• Administrative Penalties – The SEC can impose administrative penalties for various forms of misconduct. For example, FINRA can impose fines, restitution, and trading prohibitions for violation of the agency’s broker-dealer regulations.

• Civil Penalties – The SEC also has powers to impose civil penalties in criminal enforcement proceedings. This includes fines and injunctions.

• Criminal Penalties – If a corporate director’s SEC investigation leads to a criminal prosecution by the DOJ, the director can face fines and federal prison time. This is true for both misdemeanor and felony prosecutions.

Again, these consequences are on top of the potential consequences for the company involved. For example, if a board of directors is found to have failed to adequately oversee their company’s compliance program, this can have significant financial and reputational consequences for the company itself.

Defense Counsel for Corporate Directors Facing SEC Investigations

Engaging defense counsel promptly is essential for corporate directors facing SEC investigations. When our legal team represents board members during these investigations, we work to:

• Intervene in the SEC’s Investigation – We will intervene in the SEC’s investigation to communicate your representation and begin working to protect you against unnecessary consequences.

• Identify All Relevant Allegations – We will work quickly to determine exactly why you are under investigation and what (if any) allegations the SEC is prepared to pursue.

• Assess the Risks Involved – Once we know why you are under investigation, we will then be able to assess the specific risks that are involved.

• Build a Comprehensive Defense Strategy – With this information in hand, we will then build a comprehensive defense strategy focused on protecting you (and your company) against unnecessary consequences.

• Protect You and Your Company as Efficiently as Possible – Our goal is to protect you and your company as efficiently as possible. Avoiding unnecessary complications and delays is key to an efficient and favorable result.

FAQs: Facing SEC Scrutiny as a Corporate Board Member

When Can Board Members Face Liability Due to Their Companies’ Illegal Activities?

Corporate board members can face liability due to their companies’ illegal activities in a variety of circumstances. While this includes cases in which board members themselves are implicated in these activities, it also includes cases in which board members fail to take adequate measures to prevent their companies’ illegal activities from taking place.

What Are the Possible Consequences of Facing an SEC Investigation as a Board Member?

The possible consequences of facing an SEC investigation as a board member can range from administrative penalties to substantial criminal fines and prison time. In some cases, the SEC may refer board members’ cases to the DOJ, and the DOJ may then pursue criminal prosecution under a variety of federal statutes.

What Should I Do if I Am Under Investigation by the SEC?

If you are under investigation by the SEC as a corporate board member, you should promptly engage federal defense counsel to represent you. At Spodek Law Group, we provide experienced legal representation for board members nationwide.

Can Board Members Face Federal Prosecution for Failing to Exercise Adequate Oversight?

Yes, board members can face federal prosecution for failing to exercise adequate oversight. While this is a risk that many board members overlook, it is a risk that can have severe consequences.

Do I Need an Attorney if I Am Facing an SEC Investigation as a Board Member?

Yes, if you are facing an SEC investigation as a board member, you need to engage experienced federal defense counsel as soon as possible. At Spodek Law Group, we can get to work on your defense immediately.

Speak with a Senior Federal Lawyer at Spodek Law Group in Confidence

Are you an independent board member who is concerned about facing liability in an SEC investigation? If so, we encourage you to contact us promptly for more information. To speak with a senior federal lawyer at Spodek Law Group in confidence, please call 908-643-7005 or tell us how we can reach you online today.