From mid-March to mid-May, the SEC received more than 4,000 tips, complaints, and referrals. This, according to one of the SEC Co-Directors of the Division of Enforcement, represented a 35% increase over the same period last year. Additionally, as recently confirmed by the Director of the SEC’s New York regional office, the SEC is actively monitoring these tips, complaints, and referrals because it knows that doing so sends an important deterrence message to market participants. While the SEC has many sophisticated market monitoring and other fraud detection tools, tips and complaints provide the Enforcement Staff with valuable leads, which often develop into investigations and enforcement actions in matters that would otherwise may have remained hidden. Undoubtedly, many of these tips and complaints are either directly related to the COVID-19 pandemic or are indirectly related to the resulting economic turbulence. It is foreseeable that this significant uptick in tips and complaints will lead to a significant increase in the number of investigations and enforcement actions.
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.
As the world is navigating through COVID-19 and as we are focused on our health and well-being as we self-quarantine and engage in social distancing to do our part to stop the spread, our markets remain open, active, and volatile, and the U.S. Securities and Exchange Commission (“SEC”) has recently made clear that they will continue to be an active overseer.
On March 3, 2020, the Supreme Court heard arguments in the case of Liu v. SEC, No. 18-1501. This article summarizes what transpired at the hearing, in which the arguments centered on a challenge to the ability of the U.S. Securities and Exchange Commission (“SEC”) to obtain disgorgement as an “equitable remedy” for securities law violations.
During the oral arguments, the Justices’ questions indicated that they appeared reluctant to entirely do away with disgorgement, but rather their queries focused on whether limitations should be placed on the SEC’s continuing use of disgorgement as an equitable remedy. Specifically, the Justices expressed interest in exploring parameters and limitations regarding how disgorgement is calculated and whether the SEC or defrauded investors are entitled to any disgorged funds.
The SEC and DOJ have long prioritized insider trading prosecutions. Moreover, insider trading cases frequently involve parallel investigations in which the SEC and DOJ share information and coordinate efforts to collect evidence in support of civil and criminal litigation. Despite some setbacks that prosecutors have faced in recent years as insider trading case law has evolved, there is no sign that either the SEC or DOJ is backing down from vigorously enforcing the law prohibiting insider trading. We have previously blogged about the recent case law changes and their effect on civil and criminal investigations. The Bharara Task Force on Insider Trading was created in late 2018 and released its report on January 27, 2020.
The SEC, through its Office of Compliance Inspections and Examinations (“OCIE”), recently issued its most detailed cyber guidance to date. OCIE had previously issued several cybersecurity risk alerts over the past few years. This most recent release, however, offers much more than a risk alert. OCIE’s “Cybersecurity and Resiliency Observations” goes into significantly more detail than OCIE’s prior risk alerts in this area and is fashioned in a vastly different and more user-friendly format. Thus, it is required reading for SEC regulated entities because, rest assured, it will be closely followed and applied by OCIE staff conducting cyber examinations, as well as by the Division of Enforcement’s “Cyber Unit.”
The college football bowl season is upon us, NFL teams are jockeying for playoff seeding, and with the college basketball season underway fans of that game are looking longingly towards March for how their brackets may look for the 2020 tournament. Thus, sports and the gambling associated with it are all around us. In recent years, this gambling has risen from the shadows and is now openly discussed throughout society. So this industry has evolved and continues to evolve, since the times when gamblers needed to travel to Las Vegas or Atlantic City to legally gamble. Over the years, state laws have expanded such that today numerous states allow gambling in some form. Further accelerating this expansion, in the spring of 2018, the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act.
Facing a 35-day government shutdown and new restrictions on the ability to recover disgorgement, it would be perfectly understandable if the SEC’s Division of Enforcement suffered a lackluster year. Nevertheless, according to their recently released Annual Report, the Division of Enforcement defied the odds and turned in an impressive year by most metrics. The full report is available here, but we address several key aspects of the report below.
In fiscal year 2019 (which runs from October to September), the SEC reported a total of 862 enforcement actions, including 526 “standalone” actions filed in either federal court or as administrative proceedings, which was its highest number of standalone actions since 2016. The SEC also filed 210 “follow-on” proceedings seeking the barring of individuals based on actions by other authorities or regulators. This number of “follow-on” proceedings matched the prior year’s total, and was about 10% higher than the number of such actions filed in 2016 or 2017. Though the Report laments the handcuffs placed on the Enforcement Division by the Supreme Court’s ruling in Kokesh v. SEC, which tied recoverable disgorgement to the five-year statute of limitations, the SEC nevertheless secured $3.248 billion in disgorgement – a five-year high. In addition, while 2019’s $1.101 billion in penalties was more than $300 million lower than what was ordered in 2018, it nonetheless surpassed the 2017 numbers, and contributed to a total amount of money ordered paid in 2019 (between disgorgement and penalties) that represented another five-year high for the SEC. Despite these metrics revealing a very solid year for the Enforcement Division, the Report made it a point to highlight that the SEC estimates that it has had to forgo more than $1.1 billion in disgorgement in filed cases as a result of Kokesh.
The strong financial results for 2019 were buoyed by several major actions settled in 2019. Indeed, in separate actions initiated against Mylan, Fiat Chrysler, Hertz, and two other major corporations, the SEC secured more than $200 million in penalties alone. In addition, in actions over the past two years against a variety of financial institutions relating to the early release of the American Depository Receipts, the SEC actions resulted in orders for more than $425 million in disgorgement and penalties. While these large actions contributed to the substantial financial achievements of the SEC in 2019, the report noted that in actions in which money was ordered to be paid the median amount of such total payments rose from $362,858 last year to $554,003 this year.
The SEC’s overall numbers were undoubtedly bolstered by successful implementation and conclusion of its Share Class Selection Disclosure Initiative. The Initiative, which permitted investment advisory firms to self-report failures to disclose conflicts of interest associated with the selection of fee-paying share classes as opposed to low-fee or no-fee share classes, allowed self-reporters to obtain standardized (and relatively favorable) settlement terms. The Initiative generated settlements against 79 advisers in March 2019, and another 16 advisers settled in September 2019. In total, the 95 advisory firms agreed to return more than $135 million to affected investors.
In addition to emphasizing all of these key metrics, the Report reiterated several themes that have been hallmarks of the SEC under Chairman Clayton. At the top of the list is “protecting main street investors,” as evidenced by the Share Class Initiative mentioned above, as well as the continued operation of the SEC’s Retail Strategy Task Force as a source for both providing education and generating new investigations. The Report also highlighted the continuing emphasis that the SEC would be placing on holding individuals accountable for wrongdoing, and highlighted several cases from the past year in which C-level executives were charged in both settled and litigated fraud actions. Digital assets, cryptocurrency, and other distributed ledger technology cases also played a prominent role in the report, as the SEC acknowledged that its enforcement actions in this space “matured and expanded” over the past year. Finally, the Enforcement Division also explained that it was working diligently to accelerate the pace of its investigations. Not only would this faster pace decrease the chance of encountering Kokesh problems when seeking disgorgement, but it also helps speed the pace at which harmed individuals and investors can recover their losses.
In a year in which it lost more than a month due to the government shutdown and just recently regained the ability to hire new staff, the Enforcement Division appeared to work both harder and smarter to generate results that met or exceeded its recent historical benchmarks. Going forward, it will be interesting to see whether the SEC can replicate or improve on these results with the benefit of additional time and a more complete complement of attorneys and other professionals.