The Pandemic Has Caused the Number of SEC Enforcement Actions to Decline Sharply in FY 2020

The SEC’s Division of Enforcement issued its annual report on November 2, 2020. According to the report, fiscal year 2020 saw the SEC file a total of 715 enforcement actions, representing a whopping 17% drop from the 862 enforcement actions it brought during the 2019 fiscal year. Indeed, the FY 2020 figure was the lowest in the past six years.  The number of SEC enforcement actions filed against public companies (61) declined to a six-year low, representing the lowest number since 2014.

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ESG, Enforcement and Effective Disclosure

Please join the Faegre Drinker team for a three-part webinar series providing updates on year-end financial reporting and the 2021 proxy season. This session will cover:

  • Discuss current trends and considerations related to ESG oversight and disclosure
  • Review SEC enforcement activity and lessons learned
  • Review best practices in annual report and proxy disclosures
  • Update on other hot topics heading into the annual meeting season

Register.

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Two Recent SEC Cases Involving Cryptocurrency Offerings

Ever since the creation of Bitcoin in the late 2000s, the SEC has warned that, depending on the circumstances, “initial coin offerings” (ICOs) involving digital tokens or coins may be subject to regulation under the federal securities laws.1 The SEC has provided “facts and circumstances” guidance regarding whether a particular cryptocurrency offering involves a security. See, e.g., the SEC’s Framework for “Investment Contract Analysis of Digital Assets.” But officials have opined that cryptocurrencies sold only to be used to purchase a good or service, such as Bitcoin or Ethereum, may not be securities.2

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SEC Enforcement in 2020, the Election & Future of the SEC

In Faegre Drinker’s “Enforcement Highlights” inaugural podcast, Jim Lundy moderates a panel with fellow SEC and Regulatory Enforcement partners Mike MacPhail and David Porteous, Capital Markets Team Co-Leader Beth Diffley, and Investment Management Group partner Jillian Bosmann to discuss the pandemic’s impact on the SEC’s Division of Enforcement and the potential impacts of the 2020 election on the SEC and its future.

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Aggressive SEC and DOJ Parallel Charges for Accounting Fraud

The number of public company and accounting fraud cases filed under SEC Chair Jay Clayton has declined. The SEC, however, continues to selectively pursue these types of cases. In the latest example, in aggressive parallel actions, on October 8, 2020, the SEC filed charges against SAExploration Holdings, Inc. (“SAE”) and four of its former executives – CEO and Chairman Jeffrey Hastings, CFO and General Counsel Brent Whiteley, CEO and COO Brian Beatty, and VP of Operations Michael Scott – with an accounting fraud that inflated company revenues and concealed the true nature of the relationship between SAE and one of its large customers.

In February 2020, SAE issued restated financial statements reaching as far back as 2014 which, among other things, corrected a $100 million overstatement of revenue and resulted in a $35 million reduction in the value of the company’s assets.  Perhaps unsurprisingly, in August 2002, SAE filed a voluntary Chapter 11 bankruptcy petition in the Southern District of Texas.

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FCA: Working from Home Heightens Insider Trading Risks

In an October 12 speech, the Director of Market Oversight for the Financial Conduct Authority (FCA) emphasized the need to adapt insider trading controls to account for changes in working conditions due to COVID-19 restrictions.

The Director’s speech started by discussing that global economic conditions have heightened the need for companies to raise capital, and that the UK has seen a significant portion of this activity, with the FCA citing the fact that “the UK saw a greater volume of follow-on equity issuance than the next 7 major European bourses combined.” At the same time, working conditions of financial professionals has changed dramatically since March 2020 with many now working from home in response to the COVID-19 pandemic. While this situation presents novel issues for firms and professionals, the FCA emphasized the need for firms to adapt and implement effective insider trading controls. The Director emphasized, “[a]t a time where capital raising activity is vital to fuel much needed economic activity, we must be crystal clear that behaviours that risk disrupting that activity will not be tolerated.”

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CFTC Record Enforcement Year and Director Departure

On October 6, 2020, the Commodity Futures Trading Commission (“CFTC”) issued a release describing its record-breaking enforcement year.[1] The release noted that in fiscal year 2020 (“FY2020”),[2] the CFTC filed more enforcement actions than any other year in the history of the agency. CFTC Chairman Heath P. Tarbert stated “[w]e are tough on those who break the rules, and this historic year only further underscores this point.”

The most recent headlines emphasize the CFTC’s enthusiasm in pursuing spoofing-related actions.  Of note, the CFTC ordered a registrant and affiliates associated with one of the largest bank holding companies to pay a record $920 million for spoofing and manipulation that spanned over eight years.[3] This penalty comes as the largest monetary relief in the agency’s history. In September alone, the CFTC announced three other spoofing settlements with fines totaling nearly $1.8 million, and brought charges against a trading firm and two of their traders.[4]

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SEC Settles Enforcement Action against Private Equity Firm for Beneficial Ownership Reporting Violations

On September 17, 2020, the SEC announced the imposition of a cease-and-desist order against private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson), an SEC-registered investment manager, in connection with alleged violations of reporting obligations under Section 13(d) of the Securities Exchange Act of 1934 (Exchange Act).  The SEC alleged that Welsh Carson had failed to timely amend a Schedule 13D report – commonly known as a beneficial ownership statement – after its investment position changed from an intent to acquire and restructure a company to an intent to liquidate its entire position in the company.  In connection with the entry of the SEC’s cease-and-desist order, Welsh Carson agreed to pay a civil penalty of $100,000.

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