Securities and Commodities Enforcement: How to Respond and Win

The SEC's Division of Enforcement opens investigations in two stages. An informal inquiry allows staff to gather information voluntarily. Companies and individuals who receive a formal order or a Wells notice should immediately seek SEC regulations legal counsel to manage document production, prepare the Wells submission, and assess exposure before the SEC makes its charging decision.

The CFTC has broad enforcement authority over the commodity futures markets, swaps markets, and derivatives markets under the Commodity Exchange Act. The CFTC investigates market manipulation, spoofing, front-running, fraud in swap transactions, fraudulent solicitation of commodity pool funds, and failures to register as required commodity professionals. Companies and traders operating in the commodity futures or swaps markets who receive CFTC inquiries or subpoenas should seek futures enforcement legal counsel immediately to assess exposure and develop a coordinated response strategy.

Insider trading is the purchase or sale of a security while in possession of material, nonpublic information in breach of a fiduciary duty or other relationship of trust and confidence. The misappropriation theory from United States v O'Hagan extends insider trading liability to anyone who misappropriates material nonpublic information from an outsider source and trades on it in violation of Section 10(b) of the Securities Exchange Act. Companies and individuals under SEC or DOJ insider trading investigation should seek securities enforcement legal counsel immediately to evaluate the materiality of the information, assess the duty element, and determine whether tipping liability extends to the defendant.

Market manipulation under the Securities Exchange Act and the Commodity Exchange Act prohibits conduct designed to create artificial prices or to deceive market participants about the true supply, demand, or price of a security or commodity. Spoofing is a specific form of manipulation prohibited under the CEA, defined as placing orders with the intent to cancel them before execution to create the false appearance of market depth. Traders and financial institutions under CFTC or DOJ investigation for manipulation or spoofing should seek securities fraud class action legal counsel to evaluate intent evidence and assess criminal exposure before making any statements to investigators.

A securities or commodities enforcement subpoena compels disclosure of documents and information that investigators have already identified as potentially significant. Witnesses required to testify before the SEC or CFTC have the right to be represented by counsel, and invoking Fifth Amendment rights in SEC testimony is legally available but carries significant strategic implications. Companies and individuals responding to SEC or CFTC subpoenas should seek financial fraud legal counsel immediately to manage the production, protect privilege, and assess the testimony strategy.

When a company becomes aware of potential securities or commodities violations, conducting a prompt internal investigation under attorney-client privilege is the most effective way to understand the scope of the problem, control the narrative presented to regulators, and demonstrate the good faith that regulators reward in charging and settlement decisions. The internal investigation must be led by independent outside counsel to preserve its privilege protection. Companies identifying potential securities or commodities violations should seek investment fraud legal counsel immediately to structure the internal investigation and assess whether voluntary disclosure is appropriate.

In Liu v SEC (2020), the Supreme Court held that SEC disgorgement must be limited to net profits and cannot exceed the defendant's actual gain. The SEC and CFTC can also impose civil monetary penalties that equal or exceed the disgorgement amount, creating total financial exposure of twice the gain. Individuals facing disgorgement or industry bar proceedings should seek fraud sentencing guidelines legal counsel to challenge disgorgement calculations, contest the net profit measure, and assess the grounds for opposing an industry bar.

Securities and commodities enforcement rarely stays civil. The DOJ's Securities and Commodities Fraud Section coordinates closely with both the SEC and CFTC, and parallel criminal investigations are initiated in a substantial percentage of significant enforcement cases. Individuals facing SEC or CFTC enforcement actions who are also at risk of criminal prosecution should immediately seek securities act legal counsel to coordinate the civil and criminal defense strategy before any decisions about cooperation or settlement are made.