Although the SEC does not have criminal prosecution powers, it has the discretion to refer matters to the U.S. Attorney once it uncovers securities wrongdoing. If the DoJ can make a federal criminal case because of fraud or theft, an investment adviser can end up a guest of the state for several years.
Although the SEC only has civil enforcement powers, it can (and will) bring in the Justice Department if you lie to SEC investigators. Better to take your civil medicine (fine or industry bar) than to wind up a guest of the state.
OUR TAKE: Over the last several years, the state securities regulators have expanded examinations and enforcement along with the SEC and FINRA, making it much more difficult for any adviser or broker-dealer to avoid regulatory scrutiny. It’s worth noting that many state securities regulators have criminal enforcement authority.
OUR TAKE: Once a formal enforcement proceeding commences, any misstatements under oath can lead to criminal proceedings for perjury or lying to a regulator. It’s always wise to ensure that the lawyer defending the enforcement action has sensitivity to the possible criminal prosecution implications. An enforcement action may results in fines and industry bars, but criminal proceedings could result in jail time.
A state-registered adviser faces civil and criminal charges for cherry-picking trades in a manner that benefited him over clients. The SEC asserts that the respondent, the adviser’s Managing Partner and Chief Compliance Officer, placed omnibus trades before earnings announcements and then allocated the trades after the announcement such that profitable trades were allocated to his personal account and unprofitable trades were allocated to clients. The SEC alleges that the respondent unlawfully made $1.3 Million in profits on more than 200 trades. In addition to violations of the Advisers Act’s fiduciary provisions, the SEC also alleges violations of Section 10 and Rule 10b-5 for fraud in the sales of securities. The respondent has been barred from the industry and faces monetary penalties as well as criminal prosecution.