How to Protect Yourself When Facing Both SEC and DOJ Scrutiny

You think your cooperating with a civil regulator. Your answering questions. Your producing documents. Your trying to resolve what you believe is a Securities and Exchange Commission investigation - nothing criminal, just regulatory. Meanwhile, the Department of Justice is building a criminal case against you using every word you say, and the SEC isn't allowed to tell you about it.

This is the reality of parallel SEC and DOJ investigations. The SEC investigation IS the criminal investigation. You just dont know it yet.

At Spodek Law Group, we represent clients facing both securities enforcement and federal criminal exposure. We've seen what happens when people treat SEC investigations as purely civil matters. They cooperate extensively. They testify. They hand over emails and documents. And three years later, those same documents and testimony transcripts show up as exhibits at their criminal trial. The cooperation that was supposed to help them becomes the evidence that convicts them.

This article explains how SEC and DOJ coordination actually works, why your SEC testimony becomes criminal evidence, and what you need to do before the SEC contacts you.

The Investigation You Don't Know About

Here's what the SEC Enforcement Manual says: "If asked whether a DOJ investigation is occurring in parallel, SEC staff should make no representation." Read that again. The SEC is instructed to neither confirm nor deny whether you are facing a criminal investigation. You cant get a straight answer to the one question that matters most.

The reason is simple. If you knew DOJ was investigating criminally, you'd invoke your Fifth Amendment right against self-incrimination immediately. And if you invoked your Fifth, the government couldn't gather the testimony they needed to convict you. So the system is designed to keep you in the dark.

Every SEC subpoena includes Form 1662. Buried in that form is a list of "routine uses" for the information your providing. One of those routine uses? "Sharing with the Department of Justice for criminal prosecution." The SEC tells you in writing that they may share everything with criminal prosecutors. But it's disclosed in paperwork that nobody reads, attached to a subpoena you're focused on complying with.

On September 9, 2015, Deputy Attorney General Sally Yates issued a memorandum that changed everything. The Yates Memo explicitly mandates "early and regular communication between civil attorneys and criminal prosecutors handling corporate investigations." The memo goes further: "the civil side will almost certainly share information with the criminal side."

That's not a possibility. Thats policy.

The coordination isn't occasional. It isnt case-by-case. Its systematic. DOJ attorneys and SEC investigators meet regularly on cases involving potential criminal exposure. They share factual information. They coordinate timing. Sometimes they sequence their actions strategically - SEC moves first to gather evidence through civil process, then DOJ follows with criminal charges based partly on what the SEC obtained.

And the entire time, your answering SEC questions believing your resolving a civil regulatory matter.

What is the conviction rate once the DOJ decides to charge in securities fraud cases? 99.6%. By the time they indict, they've already built the case using evidence you handed them during the SEC investigation. The outcome is virtually inevitable.

Why Your SEC Testimony Shows Up at Your Criminal Trial

The mechanism is called an "Access Request." Through Access Requests, DOJ obtains everything the SEC collected during its investigation. Not summaries. Not selected items. Everything. Every document you produced. Every email you turned over. Every word of testimony you gave under oath.

Your civil cooperation becomes the criminal case file.

In the Mathew Martoma case involving SAC Capital, the coordination was explicit. Court documents revealed that "the SEC shared every document it obtained through civil discovery from SAC Capital with prosecutors in the U.S. Attorney's Office for the Southern District of New York." Complete file transfer. Martoma's defense attorney had no idea the extent of the sharing until it was too late. The civil discovery he participated in,,believingg it was an SEC matte,r, became thbasis forof a criminal prosecution that resulted in a 9-year prison sentence.

Thisn'tsnt improper coordination. Tisn'tisnt a violation of policy. This is how the system is designed to function.

The SEC has subpoena power that the DOJ doesn't have before a grand jury is empaneled. The SEC can issue subpoenas, demand documents, and compel testimony during an investigation. The DOJ can only do that after it has presented enough evidence to a grand jury to open a formal investigation. So, the DOJ uses the SEC to gather evidence first.

The SEC investigator wants to build the strongest possible case. If that case has criminal potential, they want the DOJ to prosecute because it makes their enforcement numbers look better. Your cooperating with an agency whose success is measured partly by how many of there cases result in criminal charges. The incentive structure works against you from the start.

And heres the part that destroys people: you dont get Miranda warnings during an SEC investigation. Because its "civil," you dont get the protections afforded in criminal proceedings. No right to appointed counsel if you cant afford a lawyer. No requirement that investigators tell you your statements can be used against you criminally. The constitutional protections that apply when police question you about a crime? They dont apply when the SEC questions you about the exact same conduct.

So you testify. And years later, a prosecutor stands in front of a jury and reads your SEC testimony aloud. "Ladies and gentlemen, these are the defendant's own words. Under oath. Admitting that he knew the financial statements were inaccurate."

The testimony you gave trying to resolve a civil matter gets read aloud at your criminal trial. The SEC investigation and the criminal investigation aren't separate. There the same investigation conducted on two parallel tracks, with one agency gathering evidence the other agency will use to prosecute you.

The Martha Stewart Pattern: Acquitted of the Crime, Convicted of the Lie

On December 27, 2001, Martha Stewart sold 3,928 shares of ImClone stock. She avoided $45,673 in losses. Her broker, Peter Bacanovic, had informed his assistant Douglas Faneuil to tell Stewart that ImClone CEO Sam Waksal was selling his shares. Stewart sold immediately.

The SEC and FBI began investigating whether Stewart traded on inside information. On February 4, 2002 - just over a month after the sale - Stewart met with government lawyers and agents. She lied. She said she and Bacanovic had agreed in mid-December that she would sell if ImClone dropped below $60 per share. She said she didn't recall anyone telling her the Waksals were selling there shares.

Both statements were false.

On June 4, 2003, the SEC filed securities fraud charges against Stewart. The DOJ indicted her on nine counts, including conspiracy, obstruction of justice, and making false statements to federal investigators. Stewart resigned as chairman and CEO of Martha Stewart Living Omnimedia the same day.

The trial began in January 2004. On March 5, 2004, the jury convicted Stewart on all four remaining counts: conspiracy, obstruction of justice, and two counts of making false statements. But here's the critical detail: the judge had dismissed the securities fraud charge before trial. Stewart was acquitted of insider trading. She was convicted of lying about it.

She went to prison for five months. She paid a $30,000 fine. She served two years of supervised release. Not because she committed insider trading - the jury never found that she did because she lied to investigators about allegations she was ultimately found not guilty of.

The lie became a separate crime. 18 U.S.C. Section 1001 makes it a federal offense to make false statements to government investigators. Maximum penalty: five years in prison. And the critical part? You can be convicted of violating Section 1001 even if your innocent of the underlying conduct they were investigating.

Being innocent doesn't protect you if you make false statements during the investigation. The investigation itself creates criminal exposure separate from whatever they were investigating in the first place.

This is the Martha Stewart Pattern, and it plays out repeatedly in parallel SEC/DOJ investigations. People panic. They think if they just explain there side, the misunderstanding will be cleared up. They minimize. They shade the truth. They lie about small details thinking it doesn't matter because there innocent of the big accusation.

And those lies become the crime that sends them to prison.

Stewart's timeline shows how fast it happens:

• December 27, 2001: Sold the stock
• February 4, 2002: Lied to investigators
• June 4, 2003: Indicted (less than 18 months later)
• March 5, 2004: Convicted
• October 8, 2004: In federal prison

The sale wasn't criminal. The lie about it was.

The Fifth Amendment Trap - Both Choices Destroy You

You have the right to remain silent. The Fifth Amendment protects you from being compelled to testify against yourself. Thats constitutional law. Thats been settled since 1791.

But in an SEC investigation, that right becomes a trap.

If you invoke your Fifth Amendment right in an SEC proceeding, the SEC can draw an "adverse inference" against you. This comes from Baxter v. Palmigiano, a 1976 Supreme Court case. The Court held that "the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them."

What does that mean in practice? It means if the SEC asks you questions and you invoke the Fifth, the judge can assume the testimony you're withholding would have been unfavorable to you. Your silence becomes evidence of guilt in the civil case.

In SEC v. Colello, the Ninth Circuit upheld an adverse inference drawn against a defendant who invoked his Fifth Amendment right during summary judgment. The court didn't see a problem with it because there was "additional evidence" to support the SEC's case. Your refusal to testify gets added to the pile of evidence against you.

And it gets worse. Those who invoke the Fifth Amendment during an SEC deposition may invite a prosecution. Courts have noted that "the mere fact they invoked the Fifth itself creates an 'inference' of wrongdoing that the SEC will highlight in (public) papers filed with the courts."

So if you invoke the Fifth to protect yourself criminally, the SEC publicizes your invocation in court filings. The Financial Industry Regulatory Authority (FINRA) sees those filings. FINRA uses the adverse inference as partial basis for barring you from the securities industry. Your career ends before criminal charges are even filed.

But if you dont invoke the Fifth and you answer the SEC's questions, those answers become evidence that DOJ uses against you in the criminal prosecution. Your testimony - given in a civil proceeding where you were trying to resolve a regulatory matter - gets read aloud at your criminal trial.

So your choices are:

• Testify → Hand prosecutors the evidence they need to convict you
• Invoke the Fifth → Lose the civil case by adverse inference, get barred from the industry by FINRA, and destroy your career while protecting yourself criminally

There is no good option. There is only damage control.

The Fifth Amendment was designed to protect people from self-incrimination. But in the parallel SEC/DOJ investigation context, exercising that right incriminates you in the civil proceeding while protecting you in the criminal one. And refusing to exercise it protects you in the civil case while incriminating you criminally.

The constitutional right that's supposed to shield you becomes the thing that forces you to choose which proceeding you lose.

Defense attorneys face this impossible calculus every day. If parallel criminal exposure exists - or might exist - you have to decide whether to sacrifice the civil case to protect criminally, or sacrifice criminal protections to try to win the civil case. And you have to make that decision without knowing for certain whether DOJ is actually investigating, because the SEC is instructed to "make no representation."

Your making life-altering strategic decisions based on incomplete information, knowing that both available options result in catastrophic consequences.

What 21.6 Months of "Cooperation" Actually Builds

The average SEC investigation takes 21.6 months from opening to first enforcement action. Thats according to the SEC Division of Enforcement's FY 2020 annual report. For complex financial fraud and issuer disclosure cases, the average climbs to 34 months. Almost three years.

Think about what happens during that time. Your producing documents. Your sitting for testimony. Your answering questions. Your cooperating because you believe cooperation demonstrates your trying to resolve the matter. You believe it shows good faith.

What your actually doing is building DOJ's case for them.

Twenty-one point six months is a long time. Long enough to produce thousands of pages of documents. Long enough to sit for multiple days of testimony. Long enough to answer hundreds of questions under oath. Long enough to forget exactly what you said in month three when they ask you again in month eighteen.

And here's what the statistics dont capture: investigations that close without action. The SEC has no deadline to finish investigating. No requirement to tell you its over. No obligation to say "we've concluded our investigation and determined no enforcement action is warranted." Some investigations drag on for years before disappearing without a word.

So you dont know if your still under investigation. You dont know if the case is closed. You dont know if DOJ is reviewing the file the SEC built. Your in legal limbo, and the uncertainty itself is damaging.

Meanwhile, DOJ is watching. There reviewing Access Requests. There seeing what the SEC is gathering. And there making a decision: is this worth prosecuting criminally?

By the time you learn DOJ is involved, the case is already built. Your testimony has been transcribed. Your documents have been organized into exhibits. The timeline has been established. The evidence has been gathered, catalogued, and analyzed. All thats left is the indictment.

The Rare Theranos Exception

In the Ramesh "Sunny" Balwani case involving Theranos, something unusual happened. On June 14, 2019, U.S. District Judge Edward J. Davila denied the DOJ's request to stay the SEC case pending resolution of the criminal prosecution. Usually, DOJ files a motion to stay the civil case, arguing that allowing it to proceed would prejudice the criminal defendant's rights. Courts almost always grant the stay.

But Judge Davila found that the DOJ's request came too late and would prejudice Balwani unfairly. The court noted the extensive coordination between SEC and DOJ and found that allowing DOJ to benefit from SEC's evidence gathering while simultaneously blocking Balwani from defending the civil case was fundamentally unfair.

The decision was rare. It revealed something courts usually dont acknowledge: the coordination between SEC and DOJ can work to fundamentally prejudice defendants. One agency gathers evidence. The other agency uses it to prosecute. The defendant is stuck in the middle, unable to defend effectively in either proceeding because strategies that help in one destroy you in the other.

That 21.6-month average? Its not investigation time. Its evidence-building time. And every month you cooperate, your making DOJ's job easier.

The Decision You Have to Make Before the SEC Calls

The time to protect yourself isn't after the SEC has contacted you. Its before.

If your a corporate officer, if you work in finance, if your involved in any capacity with securities transactions or public company disclosures, you need to understand this: the SEC investigation and the criminal investigation are not separate. Assume parallel criminal exposure exists until proven otherwise. That single assumption changes everything about your strategy.

When the SEC calls, your first instinct is to cooperate. To explain. To provide context. To show that any irregularities were honest mistakes, not intentional fraud. That instinct is dangerous.

Before you respond to any SEC inquiry - before you produce a single document, before you answer a single question - you need counsel who handles both securities enforcement AND federal criminal defense. Not a regulatory lawyer who deals with SEC matters. Not a white-collar criminal attorney who handles DOJ cases. You need someone who operates in both worlds simultaneously, because your case exists in both worlds simultaneously.

Cooperation is not always the right strategy. Sometimes the rational approach is to invoke your Fifth Amendment right, accept the adverse inference in the civil case, and protect yourself criminally. Sometimes its to negotiate a tolling agreement that pauses the statute of limitations while you try to resolve the matter without creating a testimonial record. Sometimes its to fight both cases aggressively, forcing the government to prove every element without your cooperation.

But you cant make that decision without understanding the full landscape. And you cant understand the full landscape if you treat the SEC investigation as separate from criminal exposure.

At Spodek Law Group, we've represented clients in parallel SEC and DOJ investigations for years. We've seen the coordination firsthand. We've read the Access Request responses. We've watched SEC testimony become DOJ trial exhibits. We know how the system works because we operate inside it.

Todd Spodek has built a practice around understanding the intersection of civil securities enforcement and criminal prosecution. When the SEC contacts you, your not just facing a regulatory inquiry. Your potentially facing a federal criminal investigation that could result in decades of prison exposure. The strategy has to account for both possibilities from the start.

The Martha Stewart case should terrify anyone facing SEC scrutiny. She avoided $45,673 in losses. Thats not a massive insider trading case. But she lied to investigators, and that lie sent her to federal prison. The investigation creates criminal exposure separate from whatever conduct triggered the investigation.

What You Need to Do

Assume criminal exposure exists. Even if the SEC letter says "civil investigation," even if they tell you its "just regulatory," assume DOJ is watching.

Hire counsel immediately. Before you respond. Before you produce documents. The first conversation you have with investigators sets the tone for everything that follows. If you make statements before understanding the risks, those statements become evidence you cant take back.

Dont lie. Ever. If you dont want to answer a question, invoke your Fifth Amendment right. If your not sure about a detail, say your not sure. The Martha Stewart Pattern repeats because people panic and shade the truth. The lie becomes the crime.

Understand that cooperation is a strategic choice, not an obligation. The question isnt whether you CAN invoke Fifth Amendment rights - its whether you SHOULD, given the specific facts of your case and the relative risks in the civil versus criminal contexts.

The SEC investigation IS the criminal investigation. You just dont know it yet. By the time you realize DOJ is involved, you've already spent months building there case. Every document you produced. Every question you answered. It all goes into DOJ's file.

The decision is this: are you going to treat SEC contact as a civil regulatory matter, or recognize it for what it actually is - a potential federal criminal investigation conducted through civil process?

At Spodek Law Group, we help clients navigate this impossible situation. We evaluate both the civil and criminal exposure. We assess whether cooperation makes sense or whether protecting Fifth Amendment rights is the better strategy. We negotiate with both agencies simultaneously. And we fight when fighting is the right approach.

The phone number is 212-300-5196. If the SEC has contacted you, if your facing parallel investigations, if your trying to figure out whether to cooperate or invoke your rights, call us. The consultation is confidential. The advice is informed by years of handling these exact cases. And the strategy is built around protecting you in both the civil and criminal contexts simultaneously.

Because you can't protect yourself if you don't understand what your actually facing. And what your facing isnt just an SEC investigation. Its a potential federal criminal prosecution that's being built using your own words.