A hedge fund operator accused of securities fraud was recently sentenced to three months in prison for obstruction of justice. The charges stemmed from lying to investigators during a deposition conducted by the Securities and Exchange Commission (SEC).

Niket Jain, a managing member of an investment company, Aberon Capital Management, was charged with conspiracy to commit securities and wire fraud, securities fraud, wire fraud, and obstruction of justice. Prosecutors alleged that Jain provided false representations to two investors in a fund controlled by Aberon regarding the fund's performance.

Late last year, Jain pled guilty to one count of obstruction of justice pursuant to a plea agreement with federal prosecutors.  However, New York District Judge P. Kevin Castel declined to follow the recommendation of the U.S. probation office and sentence Jain to time served. Instead, he sentenced Jain to three months in prison, along with a fine of $15,000 and one year of supervised release. Judge Castel seemingly agreed with prosecutors who argued it was important to "send a message to people in the financial industry" that the only way financial professionals can fulfill their obligations to regulators "is for witnesses to tell the truth." According to Judge Castel, "It becomes in this case important to deliver the message that the crime is deserving of meaningful punishment.”

When an SEC Investigation Can Lead to Jail Time

The Jain case provides valuable lessons for firms and individuals under the SEC’s purview. Of the utmost importance, lying to investigators is the quickest way for the situation to go from bad to worse.

When the SEC launches an investigation, it first develops the facts to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. Once armed with a formal order of investigation, the staff of the SEC’s Enforcement Division can compel witnesses by subpoena to testify and produce books, records, and other relevant documents.

Being the target of a SEC investigation can be extremely stressful, even if you’re fairly confident that you haven’t done anything wrong. To avoid unintended criminal liability, it is imperative to be truthful and cooperate with investigators. Of course, that doesn’t mean that you should not aggressively seek to protect your legal rights.

In the case above, the defendant ultimately faced criminal liability not for securities fraud, but lying to investigators. When confronted with a SEC investigation (or even an examination), there are steps you can take to help ensure a more favorable outcome:

• Resist temptation: Firms may be tempted to be less than forthcoming, particularly if they suspect that SEC investigators may find something they don’t like. However, this will only lead to greater problems. Do not destroy your documents and don't delete your emails.
• Involve legal counsel: Make sure your attorneys have experience and expertise in dealing with government investigations specifically by this agency.
• Document the process: Firms should keep track of all documents provided to the SEC using a list or spreadsheet.
• Monitor interaction: It is imperative to make sure that anyone speaking with the SEC is open and honest with the information that they provide. To stay on top of the situation, it is often a good idea to de-brief employees who speak with examiners.

Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can authorize the staff to file a case in federal court or bring an administrative action. Enforcement can also refer potential criminal cases to criminal law enforcement authorities for investigation or coordinate SEC investigations with criminal investigations involving the same conduct. While the SEC can‘t by itself impose criminal sanctions, if a person is convicted of a criminal violation of the securities laws, a court may sentence that person to serve time in jail.

In some cases, the targets of an SEC investigation can reach a settlement with SEC enforcement officials or a plea agreement with federal prosecutors. While this will be greatly influenced by the facts of the case, how targets of an investigation (or a witness) conduct themselves during the investigation can often play a role in the result of the matter.

If you have questions, please contact us

If you have any questions or if you would like to discuss these issues further,
please contact Dan Brecher or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.