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.
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.
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.
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.
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.
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:
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
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: