The Securities and Exchange Commission (SEC) is a federal agency responsible for protecting investors, regulating the securities market, and facilitating capital formation. If you received a “target letter,” or you otherwise have reason to believe you are the target of an SEC investigation, it is imperative that you understand what is at stake. Understanding SEC investigations requires insight into the role of the SEC and its enforcement powers.

WHAT IS THE ROLE OF THE SEC?

Each year, more than $1 trillion in securities are traded on U.S. equity markets. Numerous federal laws and regulations are in place to ensure that buying and selling securities is fair and transparent for investors. Among other roles, the SEC provides oversight within the securities market and investigates suspected violations of securities laws and regulations.

UNDERSTANDING SEC INVESTIGATIONS: THE ENFORCEMENT DIVISION

Within the SEC, the Enforcement Division acts as the investigative arm of the agency. Although the SEC itself does not prosecute criminal violations, the Enforcement Division does conduct investigations into alleged criminal conduct related to the securities market and works closely with the U.S. Department of Justice (DOJ) and with law enforcement agencies around the world to pursue criminal cases when warranted. An Enforcement Division investigation may also lead to a civil action in federal court or before an administrative law judge.

HOW DO I KNOW IF I AM BEING INVESTIGATED BY THE SEC?

Understanding SEC investigations begins with understanding what triggers an investigation. The SEC routinely monitors the securities market and filings, flagging anything suspicious. More often, however, investigations begin with a consumer complaint, a whistleblower, or even media reports. If you are the target of an SEC investigation, you may receive a “target” letter indicating the nature of the investigation and asking you to contact the Enforcement Division and/or submit documents to the SEC. If you receive a target letter, or otherwise believe you are under investigation by the SEC, consult with an experienced attorney before responding or complying with any requests made by the SEC.

POTENTIAL OUTCOMES OF AN SEC INVESTIGATION

An SEC investigation may be informal or formal, with most being informal. An informal investigation generally involves broad concerns about a company or individual and may result in the SEC taking no action, issuing a warning letter, pursuing formal enforcement action in civil court, or referring the matter to the DOJ for further investigation and possible criminal prosecution. A formal SEC investigation is usually more targeted and involves specific evidence or information indicating a violation of securities laws or regulations. If a formal investigation is underway, you will likely receive a target letter or a subpoena requiring you to produce records or documents.

WHAT SHOULD I DO IF I AM UNDER INVESTIGATION BY THE SEC?

An SEC investigation is a serious matter and can lead to serious consequences if the investigation leads to evidence of a violation of federal law or regulations. Do not ignore a target letter, subpoena, or other indications of an investigation. At the same time, do not respond or comply without first consulting with an experienced federal defense attorney.

The term “white collar crime” refers to non-violent, financially motivated criminal offenses. White-collar crimes are often mistakenly characterized as less serious offenses; however, the truth is that many white-collar crimes can be charged as high-level felonies that carry correspondingly harsh sentences for a conviction. Understanding the various types of white-collar crimes is the first step toward protecting yourself and avoiding a conviction.

WHO INVESTIGATES AND PROSECUTES WHITE COLLAR CRIMES?

In the United States, both state and federal authorities can investigate alleged criminal conduct. The U.S. judicial system then allows a defendant to be prosecuted at the state and/or federal level. While state laws also make a variety of white-collar crimes illegal, it is the federal government that investigates and prosecutes the majority of serious white-collar crimes. Law enforcement agencies such as the Federal Bureau of Investigation (FBI), Securities and Exchange Commission (SEC), and the Internal Revenue Service (IRS) investigate white-collar crimes which are then prosecuted by the U.S. Department of Justice (DOJ).

TYPES OF WHITE COLLAR CRIMES

The term “white collar crime” was first coined about a century ago by a sociologist who defined the term as “a crime committed by a person of respectability and high social status in the course of his occupation.” That definition has not changed substantially in the intervening decades. Today we apply the term “white collar crime” to non-violent criminal offenses that typically use deceit or concealment to obtain a financial, personal, or business gain. Common types of white collar crimes include:

1. Money laundering

Intentionally hiding the source of illegally obtained money by “cleaning” the money such that it eventually appears to be legally obtained profits.

2. Embezzlement

The fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come. Unlike theft, embezzlement starts with a lawful transfer of money or property that then becomes unlawful.

3. Medicare and Medicaid Fraud

A knowing misrepresentation of the truth to obtain unauthorized benefits from the Medicare or Medicaid program.

4. Identity Theft

Wrongfully obtaining and/or using the personal data of another person for financial or personal gain.

5. Cybercrimes and Computer Crime

The use of the internet and/or computer systems to commit other crimes such as fraud, sex trafficking, or dissemination of child pornography.

6. Racketeering/RICO Charges

Federal law makes it a crime for anyone “employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.”

7. Antitrust Violations

Unlawful mergers and business practices that violate federal anti-trust laws including the Federal Trade Commission Act, the Clayton Act, and the Sherman Act.

8. Insider Trading

Using confidential information to gain an unfair advantage while trading on the stock exchange.

9. Ponzi and Pyramid Schemes

Complex schemes that are used to defraud victims of money or property. Ponzi schemes use incoming investor’s money to pay profits to older investors while pyramid schemes involve investors on the bottom of the pyramid paying the investors on the top.

10. Mail and Wire Fraud

Mail fraud requires the mailing of a letter, advertisement, or other correspondence for the purpose of defrauding victims while wire fraud involves an intent to defraud using electronic communications, including a telephone, television, or the internet.

Mail and wire fraud are federal criminal offenses that fall under the category of offenses commonly referred to as “white collar” crimes. Although white collar crimes are non-violent, financially motivated crimes, mail and wire fraud are serious offenses for which you can be sentenced to a lengthy term of imprisonment if convicted. If you are the target of a federal mail or wire fraud investigation, or you have already been charged with either offense, it is in your best interest to consult with an experienced federal criminal defense attorney right away to ensure that your rights and your future are protected.

WHAT IS MAIL FRAUD?

Governed by 18 U.S. Code § 1341, mail fraud is defined as “having devised or intending to devise a scheme to defraud (or to perform specified fraudulent acts), the use of the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts).”

Because mail is considered an instrument of interstate commerce, fraud conducted through the mail falls under the jurisdiction of the federal government. Letters, advertising brochures, or informational flyers related to fraudulent schemes (such as a Ponzi scheme) that are distributed through the mail are common examples of conduct that might be prosecuted as mail fraud.

WHAT IS WIRE FRAUD?

Wire fraud is governed by 18 U.S.C. 1343 and is defined as a crime in which:

• The defendant voluntarily and intentionally devised or participated in a scheme to defraud another out of money or something of value.
• The defendant did so with the intent to defraud.
• It was reasonably foreseeable that interstate wire communications (such as a computer, television, or telephone) would be used.
• Interstate wire communications were in fact used.

A fraudulent email sent out in the hope of getting a target to share personal and/or financial information used to access the target’s financial accounts is a common example of conduct that might be prosecuted as wire fraud by the U.S. government.

WHAT ARE THE POTENTIAL PENALTIES FOR MAIL AND WIRE FRAUD?

Both mail and wire fraud are felony offenses with a potential penalty of up to 20 years in prison and/or a fine of up to $250,000 for each act of fraud. The possible sentence is increased to 30 years in prison and/or a fine of up to $1 million if mail or wire fraud occurs in conjunction with a presidentially declared disaster, or involves a federal financial institution.

ARE THERE DEFENSES TO ACCUSATIONS OF MAIL OR WIRE FRAUD?

Being investigated for or charged with federal mail or wire fraud is cause for concern; however, defenses may be available to you that prevent a conviction. Only an experienced federal mail and wire fraud defense attorney can evaluate the unique facts of your case and decide what defenses apply, but some common defenses employed when a defendant is charged with mail or wire fraud include:

• No knowledge or intent. The prosecution must prove that you had the intent to commit fraud to secure a conviction. If you were an unwitting participant (such as an employee) in a fraud scheme, you can use your lack of knowledge as a defense.
• Mistake of fact. This defense may be available if you genuinely believed that what you were communicating or sending was not fraudulent.
• Illegal search and seizure. If the government procured evidence against you through an illegal search and seizure, your attorney may be able to get that evidence excluded, meaning it cannot be used against you at trial.

If you received a target letter from the Department of Justice, or you have another reason to believe you are a suspect in an insider trading investigation, you need to take the allegations and the situation seriously. You may think of insider trading as a relatively harmless crime. You may even wonder if insider trading is a felony because you think of it as a minor offense. You need to understand that not only is insider trading a felony, but it carries a lengthy term of imprisonment if you are convicted.

WHAT IS INSIDER TRADING

The term “insider trading” is usually used to refer to buying or selling a security while in possession of important non-public information about the security. Not only does insider trading result in a breach of fiduciary duty, but it can also lead to prosecution by the U.S. federal government for securities fraud.

WHAT IS SECURITIES FRAUD?

Because there is not a specific federal statute prohibiting “insider trading,” activities believed to fall under the definition of insider trading are typically charged as securities fraud. The Securities Exchange Act of 1934 Section 10(b) makes it unlawful to:

• Employ any device, scheme, or artifice to defraud.
• Make any untrue statement of a material fact or omit to state a material fact.
• Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Securities fraud, according to the United States Code (18 U.S.C. § 1348), occurs when someone “knowingly executes, or attempts to execute, a scheme or artifice…

• To defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities…OR
• To obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery…

IS INSIDER TRADING A FELONY?

Insider trading is one of many non-violent, financially motivated, crimes referred to as “white collar” crimes. Although the public often thinks of these crimes as less serious criminal offenses, the U.S. government aggressively prosecutes these crimes. One reason for this is the staggering amount of money lost to white-collar crimes each year. In 2022 alone, consumers reported losing almost $9 billion because of white-collar crimes, according to the Federal Trade Commission (FTC).

Like other white-collar crimes, insider trading (securities fraud) is prosecuted as a felony when the federal government decides to pursue such allegations. In fact, you face up to 25 years in federal prison along with a fine of up to $5 million per offense if you are convicted of securities fraud.

The United States operates under a federalist form of government, meaning we have a strong central government along with semi-autonomous state governments. This also means we have both a federal judicial system and individual state judicial systems. If you are prosecuted and convicted of a crime by the U.S. federal government, you will be sentenced using the Federal Sentencing Guidelines. As such, every defendant in a federal prosecution should understand how the Federal Sentencing Guidelines work and how they might be applied to your situation.

WHY DO WE HAVE THE FEDERAL SENTENCING GUIDELINES?

Within the federal court system, there are 94 District Courts at the bottom of the judicial system pyramid. These courts act as trial-level courts when a defendant is prosecuted by the U.S. Attorney’s Office (federal prosecutors). Prior to the enactment of the Federal Sentencing Guidelines, each District Court had considerable discretion when sentencing defendants, leading to wide disparity in the sentences handed down for seemingly similar crimes. In 1984, the United States Sentencing Commission (USSC) was established as part of the Sentencing Reform Act. 

The USSC, in turn, created the Federal Sentencing Guidelines in 1987. Initially, application of the Guidelines was viewed as mandatory; however, they are now considered to be advisory only. Nevertheless, most federal judges stick close to the Guidelines when imposing a sentence unless a compelling reason is provided for a departure from the recommended sentence.

HOW DO THE FEDERAL SENTENCING GUIDELINES WORK?

All federal criminal offenses are assigned an offense level from one to 43 with level 43 offenses being reserved for the most serious crimes under the federal criminal code. In addition, each defendant is assigned a criminal history category from I to VI. A defendant’s placement in a category is determined by “points” that represent prior convictions with placement in Category I, meaning you have virtually no criminal history, and Category VI indicates a lengthy and usually violent criminal history.

The Federal Sentencing Guidelines provide a suggested sentencing range in months determined by where the offense level intersects with the defendant’s criminal history category. For example, a defendant convicted of a crime with an offense level of 20 and whose lack of criminal history puts him in Category I will have an advisory sentence of 33–41 months. That same defendant would be facing a sentence of 70–87 months with a Category VI criminal history.

WHAT DOES AN “UPWARD/DOWNWARD DEPARTURE” FROM THE GUIDELINES MEAN? 

Not only are the Guidelines officially intended to be “advisory” only, but there are well-accepted reasons to increase or decrease a defendant’s advisory sentence. Common reasons for increasing a defendant’s sentence, referred to as an “upward departure”, include:

• Death or physical injury occurred as a result of the defendant’s criminal conduct.
• Extreme psychological injury occurred because of the defendant’s criminal conduct.
• Possession and/or use of a weapon during the commission of the crime.
• Abduction or unlawful restraint of a victim.
• The criminal conduct resulted in the disruption of a governmental function.
• The defendant was/is a member of a gang.
• The criminal conduct caused property loss not already accounted for in the sentence.

Just as there are commonly accepted reasons to increase a sentence, there are also reasons to decrease a defendant’s advisory sentence. This is referred to as a “downward departure” and may be justified if:

• The defendant provided “substantial assistance” to authorities in solving this or another crime.
• The victim contributed to or provoked the defendant’s conduct.
• It is shown that the defendant was coerced, was under duress, or suffered from diminished capacity at the time of the commission of the crime.
• The defendant voluntarily disclosed or admitted to the commission of the crime.

When the federal government is involved in the investigation and prosecution of a drug crime, you can rest assured that significant resources and manpower will be dedicated to the case and that the defendant faces harsh penalties if convicted. If you are under investigation for federal drug crimes or are facing federal drug charges, you need an experienced federal criminal defense attorney on your side as soon as possible to protect your rights and your future.

WHAT IS THE DIFFERENCE BETWEEN STATE AND FEDERAL DRUG CRIMES?

In the United States, both the federal government and each state government may enact and enforce criminal laws. As such, a criminal offense may be prosecuted at the state level, the federal level, or both. In the case of federal drug charges, the federal government typically has jurisdiction because the “criminal conduct crosses state lines.”

WHAT ARE FEDERAL DRUG CHARGES?

Title 21 of the United States Code (USC), commonly referred to as the “Controlled Substance Act (CSA), governs most federal drug crimes, making it illegal to:

• Manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense a controlled substance OR
• Create, distribute, or dispense, or possess with intent to distribute or dispense, a counterfeit substance.

Under the CSA, controlled substances are categorized into five schedules based on medical use, potential for abuse, and the likelihood of abuse and/or dependence. Schedule I drugs are those with no currently accepted medical use and a high potential for abuse while Schedule V drugs are used for medical treatment and have the lowest potential for abuse/dependence.

WHAT ARE THE POTENTIAL PENALTIES IF I AM CONVICTED OF A FEDERAL DRUG CRIME?

If you are convicted of a federal drug crime, the penalties you face will depend on several factors, including the type and amount of drugs involved, whether you have a criminal history, and the presence of aggravating or mitigating factors.

By way of example, a conviction for distributing 100 grams of heroin, 5 grams of methamphetamine, or 500 grams of cocaine as a first-time offender carries five to 40 years in prison and a fine of up to $5 million. The potential penalties increase to 10 years to life in prison and a fine of up to $10 million for a kilogram of heroin, 50 grams of methamphetamine, or five kilograms of cocaine. Your sentence may also be increased if there was a firearm involved, you sold drugs to a minor or near a school, or someone was injured during the commission of the crime.

Many controlled substance offenses carry a mandatory minimum sentence if convicted. The average sentence for drug trafficking in 2022 was 78 months in prison, and almost two out of three defendants were subject to mandatory minimum sentencing, according to the U.S. Sentencing Commission.

DO I HAVE A DEFENSE TO FEDERAL DRUG CHARGES?

While being targeted in a federal drug investigation or facing federal drug charges can be frightening, you may have a viable defense. Only an experienced federal criminal defense attorney can review the facts of your case and determine what defensive strategies might apply; however, some common defenses in a federal drug crime prosecution include:

• Excluding illegally obtained evidence. Evidence obtained during a search of your vehicle, home, business, or person, may be excluded if that evidence was not obtained pursuant to a valid warrant and the prosecution is unable to prove that an exception to the warrant required applied.
• Challenging the credibility or reliability of informants. While law enforcement officers may use informants during a drug investigation, an informant must be reliable and credible. A common defense strategy is to arrack the reliability and/or credibility of an informant.
• Reasonable doubt. The prosecution must prove every element of a criminal offense beyond a reasonable doubt for the defendant to be convicted. Sometimes, the prosecution’s case is weak enough that the best defense is simply to point out the prosecution’s failure to meet its burden.
• Substantial assistance. If it appears that a conviction cannot be avoided, providing “substantial assistance” to the prosecution is one way to decrease your sentence.