SEC Continues to Prioritize COVID Fraud Cases

On September 25, 2020, the SEC filed a civil injunctive action against a microcap company, Arrayit Corp., and its President and Chief Science Officer for falsely stating in March-April 2020 that Arrayit had developed a COVID-19 blood test when it had not yet purchased materials to make a test. The SEC further alleged that the test had been submitted for emergency approval, and falsely boasted to investors that there was a high demand for the test.

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SEC Enforcement’s First Public Company Cases Resulting from its EPS Initiative

On September 28, 2020, the U.S. Securities and Exchange Commission (the “SEC”) announced two settlements against public companies and individual charges against the former controller and chief accounting officer and the former chief financial officer of one of the companies. In its accompanying public announcement, the SEC advised that “The actions are the first arising from investigations generated by the Division of Enforcement’s EPS Initiative, which utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.”  This initiative exemplifies the harnessing of “Big Data,” i.e., large data sets that may be analyzed computationally to reveal patterns, trends, and associations.

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CCO Barred for Altering Reports to Mislead SEC Staff

Recently, the U.S. Securities and Exchange Commission (the “SEC”) charged a dually registered firm and its Chief Compliance Officer (“CCO”) with multiple violations of the Investment Advisers Act of 1940 (“Advisers Act”). The charges included allegations against the CCO that she altered documents in an attempt to mislead SEC examination staff and failures to comply with enhanced policies and procedures adopted as a result of a prior examination by FINRA. The SEC charged the firm with willfully violating Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require, in part, that registered investment advisors “[a]dopt and implement written policies and procedures reasonably designed to prevent violation” of the Advisers Act and its rules. The CCO was charged with willfully aiding and abetting the firm’s violations. The firm and the CCO were fined $1.7 million and $45,000, respectively, and the CCO was barred from the industry.

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Regulatory Enforcement Movie Streaming – A Thumbs Up

Stepping away from the more serious task of covering the “Enforcement Highlights” of financial regulators, such as the U.S. Securities and Exchange Commission, and taking into account that we have not been able to go to the movies all summer, here, in no particular order, are five movies that touch on our industry and are definitely worth streaming to watch one more time:

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Liu v. SEC Decision Leaves Ambiguity on Disgorgement Limitations – How to Measure ‘Business Expenses’ Deductible From ‘Illegal Profits’

While the U.S. Supreme Court’s decision in Liu v. SEC limited the SEC’s disgorgement power, it also left open certain complicated issues that are now subject to interpretation.1 As we previously summarized, in an 8–1 vote, the Court held that disgorgement is a permissible equitable remedy for securities fraud under § 78u(d)(5), provided the amount does not exceed a wrongdoer’s net profits and the money is returned to harmed investors.2

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Two Stones, One Bird: SEC’s Double Whammy Against Advisory Firm

In a pair of settlements announced on July 28, 2020, the SEC charged VALIC Financial Advisors (the “Firm”) with two separate sets of violations that allowed the Firm to obtain millions of dollars in fees without providing adequate disclosures about their practices and without having adequate compliance policies and procedures to disclose or protect against conflicts of interest presented by these practices. In total, the Firm agreed to pay approximately $40 million to settle both administrative proceedings. The SEC’s cases arise out of its initiatives:

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The SEC’s Efforts Against Public Companies & Corporate Officers Continue

SEC Chairman Jay Clayton has repeatedly touted his focus on “Main Street.” In doing so, he unleashed the Division of Enforcement’s Asset Management specialty unit on the investment advisory industry and finalized and implemented the “Reg BI” rulemaking, the SEC’s most significant sales practice regulatory development for the brokerage industry in decades. But the Division of Enforcement did not slow down its efforts in one of its core focus areas: the investigation and civil prosecution of accounting fraud by public companies and their senior officers.

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What’s New, and Comings & Goings at the SEC

What’s New:  The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert titled “Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers” on August 12, 2020. This Risk Alert addressed the following topics:

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