SEC probe shut down without testimony, records, or charges

The SEC comes calling

The SEC opened an investigation into our client’s purchases and sales of a Nasdaq-listed small-cap stock. 

Our client had built a position in the small-cap stock over the course of a few weeks. Shortly after our client’s last purchase, the company announced it was being acquired. Our client sold the stock for a modest profit, triggering an SEC investigation.

A simple but demanding objective

On paper, looking at this from the outside, the circumstances surrounding this case appeared to bear all the hallmarks of textbook insider trading. However, our client was a career small-cap investor with over 30 years of experience. Their disciplined and repeatable process for identifying opportunities was developed and based entirely on publicly available information. Our objective was to prove that point irrefutably.  

Mounting a compelling defense

The Reed Smith team took the fight to the SEC through an attorney proffer that told a simple and powerful story: There was no inside information, period.

Our team provided a comprehensive analysis of our client’s investment strategy, grounded in a rigorous review of publicly available information and focused on key performance metrics. Our team further explained how the client’s decision to purchase the stock was driven by the fact that it satisfied virtually all of their established investment criteria. 

Our defense showed that the purchase did not follow a tip, but rather a process – one that our client had used successfully for decades with many other stocks. 

A few weeks after our attorney proffer, the SEC sent Reed Smith a letter formally terminating the investigation.

The SEC’s issuance of a termination letter, recommending no enforcement action be taken, is one of the most infrequent outcomes in securities enforcement. Only a small fraction of the hundreds of SEC investigations each year result in formal termination letters.

Victory secured

This was a complete victory and exoneration for our client, vindicating their long-held investment model. Reed Smith’s successful advocacy demonstrated that our client appropriately handled the accounting issue and caused no financial harm to investors, and that the investigation should be closed without penalty. 

This had been a “bet the company” situation for our client, with severe consequences if the SEC had decided differently following its year-long investigation. 

Due to the strength of the defense that Reed Smith mounted, no testimony was given and no charges were brought by the SEC. The termination letter confirmed that it would not recommend any enforcement action, fine or penalty against our client. 

At every step, the Reed Smith team explained the process, ensuring that our client understood the strategy and was comfortable with each strategic decision.

The SEC’s swift and rare decision to terminate brought very welcome closure to the matter. 

The content of this publication is for informational purposes and is not intended to cover all developments in the areas discussed. The author, publisher, and distributor are not providing legal advice. You should not act or refrain from acting based on the content without seeking appropriate legal counsel from a properly licensed attorney in your jurisdiction. Portions of the publication may be considered Attorney Advertising under the applicable rules of certain states.