CFO Liability in SEC Cases
Serving Clients in the U.S. and Internationally
When the U.S. Securities and Exchange Commission (SEC) launches an investigation, company executives can face a variety of risks. This is especially true for chief financial officers (CFOs). In recent years, the SEC has been increasingly willing to pursue enforcement actions on a personal level, and CFOs have found themselves in the Commission’s crosshairs with increasing frequency.
The SEC has a variety of enforcement tools at its disposal. While most enforcement actions target companies, the SEC can target CFOs and other company executives directly. These enforcement actions can lead to civil or criminal penalties, and they can involve allegations ranging from false or misleading statements to insider trading.
5 Examples of Charges CFOs Can Face in SEC Enforcement Actions
What are some examples of the charges that CFOs can face in SEC enforcement actions? Here are just five of the many allegations that can lead to both civil and criminal charges under federal securities law:
- Making false or misleading statements to investors or the SEC
- Failing to comply with disclosure obligations under the securities laws
- Insider trading in company securities (including trading shares based on material nonpublic information regarding company finances)
- Falsifying financial records and/or failing to maintain adequate accounting procedures
- Failing to implement and maintain adequate internal controls
Again, these are just examples. In addition to the allegations listed above, CFOs can face a multitude of other allegations as well. Even if a CFO’s conduct is entirely aboveboard, simply failing to ensure compliance with the securities laws can potentially lead to prosecution by the SEC. This is why it is critical that CFOs give due attention to compliance, and that they engage experienced defense counsel as soon as they learn of an SEC investigation or enforcement action.
Why Does the SEC File Enforcement Actions Against CFOs?
Why does the SEC file enforcement actions against CFOs? As the SEC explains:
“The SEC brings civil enforcement actions against individuals and companies alleged to have committed accounting fraud, offered fraudulent or unregistered securities, manipulated markets, and a host of other offenses. In civil enforcement actions, the SEC seeks monetary penalties, the disgorgement of illegal profits, and injunctions to prevent future misconduct. In addition, in certain cases, the SEC seeks bars that prevent wrongdoers from serving as public company officers or directors.”
Importantly, as we mentioned above, the SEC can seek criminal penalties in addition to civil penalties in the appropriate cases. For example, the SEC might file a criminal case against a CFO based on allegations of accounting fraud, securities fraud, or the Foreign Corrupt Practices Act (FCPA) violations. The SEC may also seek to prosecute a CFO for making false or misleading statements to federal authorities or obstructing the SEC’s investigation.
But, again, the SEC’s options are not limited to criminal prosecution. The Commission can—and often does—file civil enforcement actions as well. These cases can lead to civil monetary penalties, disgorgement, and other forms of relief, and CFOs can face the same types of allegations. In both civil and criminal cases, allegations against CFOs can lead to bars that prevent further employment or service as an officer or director of a public company.
Potential Defenses During SEC Investigations and Enforcement Proceedings
Due to the substantial risks that can result from facing charges as a CFO, it is important to understand all potential defenses you have available. This starts with knowing that you do not have to testify during an SEC investigation or enforcement proceeding. While you may be compelled to provide a statement, you have a constitutional right to remain silent, and you do not need to make any statements that could potentially be self-incriminating.
Even if you haven’t done anything wrong, defending against an SEC investigation requires a strategic approach. There are a number of ways to defend against allegations of civil or criminal offenses, and asserting the right defense (or defenses) requires a clear understanding of the allegations involved.
With this in mind, some common defenses in SEC enforcement matters include (but are not limited to):
Lack of Knowledge or Intent
Most allegations of fraud and other securities law violations require evidence of knowledge or intent. If you did not knowingly or intentionally engage in any unlawful conduct, this fact could provide a complete defense to the SEC’s charges. However, there are some exceptions, and even if you did not intend to break the law, you may still have a duty to correct false or misleading statements to the investing public or the SEC.
Failure of Proof
Another common defense to SEC investigations and enforcement proceedings is failure of proof. If the SEC cannot prove that you violated the law, it cannot secure a conviction or obtain civil monetary penalties. While this may seem like a simple defense strategy, it is still important to engage experienced defense counsel who can poke holes in the SEC’s allegations and make it clear that the Commission does not have the evidence it needs to pursue charges.
Affirmative Defenses
In addition to challenging the SEC’s evidence, asserting affirmative defenses can also be an important defense strategy. For example, if your company had adequate internal controls in place, you may be able to defend against allegations related to the company’s financial statements or disclosures. Affirmative defenses are subject to various statutory and regulatory requirements, and asserting them effectively requires an in-depth understanding of the applicable laws and regulations.
Procedural Defenses
Procedural defenses can also be important in SEC investigations and enforcement proceedings. For example, if the SEC violated your constitutional rights during its investigation, or if it failed to comply with the applicable rules and procedures, this could render the evidence against you inadmissible in court. While procedural defenses can be complex, they are often critical to protecting CFOs during the investigative and enforcement stages.
Privilege and Confidentiality
CFOs also have the right to assert privilege and confidentiality in appropriate circumstances. For example, if the SEC demands that you provide documents that are protected by the attorney-client privilege, you do not have to comply with the Commission’s demands. Similarly, if the SEC asks questions that would require you to disclose confidential information, you can—and should—assert your privilege.
What Should CFOs Do if They are Facing an SEC Investigation?
If you are a CFO and you are facing an SEC investigation, your first step should be to engage experienced defense counsel. An experienced SEC defense lawyer will be able to help you understand your rights and obligations, and will be able to develop a strategy for responding to the SEC’s investigation.
At Spodek Law Group, we have extensive experience representing CFOs and other company executives in SEC investigations and enforcement proceedings. We have represented clients in a wide range of industries, and we have helped them avoid both civil and criminal liability. Our experience includes representing CFOs in cases involving allegations of accounting fraud, securities fraud, insider trading, FCPA violations, and more.
If you are facing an SEC investigation, we can help you. We will work with you to understand your situation, develop a defense strategy, and protect your rights throughout the investigative and enforcement stages. We will also work to resolve the investigation as quickly and efficiently as possible, so you can get back to doing your job.
In addition to representing CFOs in SEC investigations, we also represent clients in other types of federal investigations and enforcement actions. We have experience representing clients in investigations conducted by the U.S. Department of Justice (DOJ), the fbi.gov/">Federal Bureau of Investigation (FBI), the Internal Revenue Service (IRS), and other federal agencies. We also have experience representing clients in civil litigation, including securities litigation and other types of complex commercial litigation.
