Stock Lawyer SEC Enforcement and Litigation 2 — Questions and Answers
Question 1: What is the primary statute the DOJ uses to criminally prosecute securities fraud?
- The Securities Act of 1933
- 18 U.S.C. § 1348 (the Sarbanes-Oxley securities fraud statute) and wire/mail fraud statutes (Correct answer)
- The Securities Exchange Act of 1934
- The Investment Advisers Act of 1940
Correct answer: 18 U.S.C. § 1348 (the Sarbanes-Oxley securities fraud statute) and wire/mail fraud statutes
The DOJ primarily uses 18 U.S.C. § 1348 (securities fraud enacted by SOX), along with wire fraud (18 U.S.C. § 1343) and mail fraud statutes, which carry up to 20 years imprisonment for securities fraud.
Question 2: What does it mean for the SEC to issue a 'cease and desist' order?
- An order requiring a company to stop all trading in its securities
- An administrative order directing a respondent to stop violating securities laws and not commit future violations (Correct answer)
- An order freezing a company's assets during investigation
- An order requiring a company to cease operations pending an audit
Correct answer: An administrative order directing a respondent to stop violating securities laws and not commit future violations
A cease and desist order is an administrative remedy the SEC can issue requiring the respondent to stop current violations and refrain from future violations of securities laws, without going to federal court.
Question 3: What is the 'cooperation credit' in SEC enforcement and why is it significant?
- A credit given to companies that allow SEC inspectors to access their offices without subpoenas
- Reduced penalties or charges for individuals or companies that voluntarily cooperate with SEC investigations (Correct answer)
- A financial credit given to informants who testify against defendants
- An exemption from enforcement for first-time violations
Correct answer: Reduced penalties or charges for individuals or companies that voluntarily cooperate with SEC investigations
The SEC awards cooperation credit — in the form of reduced charges, penalties, or deferred prosecution — to individuals and companies who voluntarily provide substantial assistance to the SEC's investigation of securities violations.
Question 4: What is 'market manipulation' under Section 9 of the Securities Exchange Act?
- Any trading activity that moves stock prices more than 5% in one day
- Intentional conduct designed to artificially affect the price or volume of securities, such as wash sales or matched orders (Correct answer)
- Any short selling of securities within 30 days of an IPO
- High-frequency trading strategies that affect market prices
Correct answer: Intentional conduct designed to artificially affect the price or volume of securities, such as wash sales or matched orders
Section 9 prohibits specific market manipulation tactics, including wash sales (simultaneous buy and sell to create artificial trading volume) and matched orders (coordinated trades with others to manipulate prices).
Question 5: What is a 'Deferred Prosecution Agreement' (DPA) in the context of securities enforcement?
- An agreement to delay prosecution until a second violation occurs
- An agreement where the DOJ agrees to defer criminal prosecution if a company meets certain conditions including compliance reforms and cooperation (Correct answer)
- An SEC agreement allowing a company to settle without admitting wrongdoing
- A court order deferring sentencing for a securities fraud defendant
Correct answer: An agreement where the DOJ agrees to defer criminal prosecution if a company meets certain conditions including compliance reforms and cooperation
A DPA is a negotiated agreement between the DOJ and a company where prosecution is deferred for a set period in exchange for the company paying fines, admitting facts, cooperating with the government, and implementing compliance reforms.
Question 6: What is an 'SEC Monitor' or 'Compliance Monitor' and when is one typically imposed?
- An SEC employee who reviews company disclosures quarterly
- An independent third party appointed to oversee a company's compliance program following an SEC enforcement settlement (Correct answer)
- A court-appointed receiver who takes control of a company after securities fraud
- A FINRA-appointed supervisor for broker-dealers on probation
Correct answer: An independent third party appointed to oversee a company's compliance program following an SEC enforcement settlement
An independent compliance monitor is a condition of many SEC and DOJ settlement agreements, tasked with reviewing and reporting on the company's compliance program improvements and ensuring the company adheres to settlement terms.
Stock Lawyer SEC Enforcement and Litigation 2
What is the primary statute the DOJ uses to criminally prosecute securities fraud?