SEC Charges Texas School District and Former CFO with Fraud Related to Bond

On March 16, 2022, the Securities and Exchange Commission charged Crosby (Texas) Independent School District (Crosby) and its former Chief Financial Officer, Carla Merka, with misleading investors in a $20 million municipal bond sale, which was issued to pay down outstanding construction liabilities and fund new construction projects.

The SEC’s civil complaint alleges that Crosby failed to disclose $11.7 million in payroll and construction liabilities in connection with the January 2018 sale. The complaint also alleges the school district falsely reported that its general fund had $5.4 million in reserves in its 2017 fiscal year financial statements. According to the Complaint, Merka, who had ultimate authority over Crosby’s fiscal year 2017 financial statements and was its highest-ranking executive with financial or accounting experience, was aware that Crosby’s financial statements significantly underreported its existing liabilities and that she knowingly included the statements in the bond offering documents. In August 2018, seven months after the bond sale, Crosby’s leadership disclosed its financial difficulties. The disclosure led to employee layoffs for the school district and the downgrading of Crosby’s bonds.

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SEC Proposes New Cybersecurity Risk Management Rules for Registered Investment Advisers and Funds

On Wednesday, the Securities and Exchange Commission announced proposed new cybersecurity risk management rules and amendments for investment advisers and investment companies. The proposed rules are designed to address concerns about advisers’ and funds’ cybersecurity preparedness and incident response in an effort to strengthen client and investor protection. The proposed rules include the following:

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The SEC’s Renewed Focus on Accounting Misconduct

Two recent enforcement actions by the U.S. Securities and Exchange Commission (SEC), including a recent settled action against Kraft Heinz Co. (“Kraft”), underscore the agency’s renewed and continuing focus on accounting and financial reporting misconduct.

Two weeks ago, the SEC announced its third and latest enforcement settlement through its data-driven EPS (Earnings Per Share) Initiative. The EPS Initiative, run by the SEC’s Enforcement Division, used data analytics to detect potential reporting violations. The EPS Initiative has resulted in two prior actions. On September 28, 2020, the SEC publicly disclosed the EPS Initiative with two settlements, as discussed previously in this blog here.

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SEC “Sweep” of Public Companies’ & Registrants’ Responses to the SolarWinds Cyberbreach

As publicly reported late last week, the Securities and Exchange Commission’s Division of Enforcement (SEC) sent voluntary requests for information to a range of public companies and investment firms seeking voluntary disclosure of information related to last year’s SolarWinds cyberattack. Specifically, the SEC is seeking information related to whether the companies and firms were exposed to the SolarWinds cyberattack and any remedial measures the companies and firms implemented in response.

SolarWinds, an IT, network, and systems software developer, disclosed in a filing with the SEC in December 2020 that a cyberattack had infiltrated its Orion monitoring product, which could allow the attacker to compromise the server on which the Orion product runs. SolarWinds disclosed that it believed that nearly 18,000 Orion customers downloaded the product containing the vulnerability and that it had notified all 33,000 users of the product that a cyberattack had taken place. The SolarWinds cyberattack was unprecedented in its scope and sophistication—including compromising nine U.S. federal agencies—leading the United States and other governments to blame the attack on an outside nation state actor.

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Chair Gensler Overhauls PCAOB

On Friday June 4, 2021, Securities and Exchange Commission Chair Gary Gensler removed the head of the Public Company Accounting Oversight Board (PCAOB), an independent agency created by the Sarbanes-Oxley Act of 2002 that is charged with setting standards and overseeing audits of public companies and broker-dealers. The move is part of a broader overhaul of the PCAOB announced by the SEC that includes soliciting nominations for all five of the PCAOB’s board positions, including board positions currently filled by members whose terms have not yet expired.

The removed chair of the PCAOB, William Duhnke III, was appointed by former President Trump and had held the position since January 2018. In 2020, President Trump called for the PCAOB to be folded into the SEC by 2022, losing its independent watchdog status. In a recent lawsuit filed against Duhnke, the PCAOB’s former chief risk officer alleged that Duhnke shared President Trump’s sentiment and called the PCAOB a “frivolous organization” that should be combined with the SEC.

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SEC’s Director of Enforcement Unexpectedly Resigns Just Days after Taking the Job: Reminiscent of Previous Resignation by former Chairman Harvey Pitt

Alex Oh, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler’s pick for the agency’s Director of the Division of Enforcement, unexpectedly resigned on Wednesday amid growing criticism for her decades-long work as a private corporate defense lawyer. Ms. Oh’s hiring was announced on April 22, 2021, less than a week before her resignation.

Ms. Oh’s resignation followed a ruling on Monday from Judge Royce C. Lambeth of the Federal District of Columbia reprimanding ExxonMobile’s legal team, which included Ms. Oh, for their conduct in a class action lawsuit brought by Indonesia villagers against Exxon alleging human rights abuses. According to the ruling, Exxon’s defense team characterized the lawyers for the villagers as “agitated, disrespectful and unhinged” during a deposition. Judge Lambeth ordered Exxon’s lawyers to show why penalties were not warranted for those comments.

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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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SEC Enforcement Expanding Efforts Regarding Coronavirus Impacts

As we described several weeks ago, the SEC across the agency is going to be vigilant in its efforts to regulate, examine and enforce the federal securities laws regarding coronavirus/COVID-19. More recently, the SEC Division of Enforcement (“SEC Enforcement”) has stepped to the forefront of these efforts.

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