Stock Lawyer SEC Enforcement and Litigation 1 — Questions and Answers
Question 1: What are the two main types of enforcement proceedings the SEC can bring against securities law violators?
- Criminal prosecutions and administrative proceedings
- Civil injunctive actions in federal court and administrative proceedings before the SEC (Correct answer)
- Grand jury proceedings and civil class actions
- Congressional referrals and FINRA arbitrations
Correct answer: Civil injunctive actions in federal court and administrative proceedings before the SEC
The SEC can bring civil injunctive actions in federal district court seeking injunctions, disgorgement, and civil penalties, or administrative proceedings before an SEC administrative law judge.
Question 2: What is a 'Wells Notice' in SEC enforcement?
- A court order requiring a company to preserve evidence
- A formal notification from the SEC staff that they intend to recommend enforcement action and giving the recipient an opportunity to respond (Correct answer)
- A subpoena for documents in an SEC investigation
- An SEC order freezing assets pending investigation
Correct answer: A formal notification from the SEC staff that they intend to recommend enforcement action and giving the recipient an opportunity to respond
A Wells Notice is a formal notice from SEC enforcement staff informing a subject that they intend to recommend an enforcement action, giving the recipient a chance to submit a 'Wells Submission' explaining why charges should not be brought.
Question 3: What remedy is 'disgorgement' in SEC enforcement actions?
- A criminal prison sentence for securities fraud
- An equitable remedy requiring a defendant to return ill-gotten gains from securities violations (Correct answer)
- A civil fine paid to the US Treasury
- An injunction barring future trading by the defendant
Correct answer: An equitable remedy requiring a defendant to return ill-gotten gains from securities violations
Disgorgement is an equitable remedy that requires defendants to return profits gained through securities violations to compensate harmed investors, and was significantly reformed in Liu v. SEC (2020) to be limited to net profits.
Question 4: Under the Dodd-Frank Act, what financial incentive does the SEC's whistleblower program offer?
- A flat $1 million reward for any successful enforcement action
- Awards of 10-30% of sanctions collected when the SEC obtains more than $1 million based on original information (Correct answer)
- Tax exemptions for income earned from whistleblowing
- Immunity from all civil liability for information disclosed
Correct answer: Awards of 10-30% of sanctions collected when the SEC obtains more than $1 million based on original information
The SEC's whistleblower program awards between 10% and 30% of total monetary sanctions collected when the SEC obtains sanctions exceeding $1 million based on original information voluntarily provided by the whistleblower.
Question 5: What is an 'Officer and Director Bar' in SEC enforcement?
- A legal requirement that bars attorneys from representing both officers and directors simultaneously
- An SEC remedy prohibiting a person from serving as an officer or director of a public company following a securities violation (Correct answer)
- A FINRA rule barring broker-dealers from employing convicted felons
- A court order preventing executives from selling shares
Correct answer: An SEC remedy prohibiting a person from serving as an officer or director of a public company following a securities violation
An officer and director bar is an SEC remedy, available in civil proceedings, that prohibits a violator from serving as an officer or director of any SEC-reporting public company, typically imposed for serious misconduct.
Question 6: What is the purpose of the SEC's 'Whistleblower Protection Program' anti-retaliation provisions under Dodd-Frank?
- To shield the SEC's enforcement staff from lawsuits by defendants
- To prohibit employers from retaliating against employees who report potential securities violations to the SEC (Correct answer)
- To protect SEC witnesses from media harassment
- To prevent short sellers from targeting companies that report competitors to the SEC
Correct answer: To prohibit employers from retaliating against employees who report potential securities violations to the SEC
Dodd-Frank's anti-retaliation provisions prohibit employers from firing, demoting, harassing, or otherwise discriminating against employees who provide information to the SEC about potential securities violations.
Stock Lawyer SEC Enforcement and Litigation 1
What are the two main types of enforcement proceedings the SEC can bring against securities law violators?