As political leaders continue to debate how to address climate change, the SEC is poised to take (enforcement) action. In the latest example of how the Biden Administration is influencing the priorities of the SEC, the agency recently announced the creation of a Climate and Environmental, Social and Governance (ESG) Task Force in the Division of Enforcement. According to the SEC, the task force’s “initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” The task force will also focus on investment adviser and funds, analyzing their ESG strategies for disclosure and compliance issues.
As the cannabis industry continues to evolve and generate capital raising and investment opportunities, the SEC Division of Enforcement will continue to closely keep watch and target the bad actors that new market opportunities such as this inevitably and unfortunately attract. Along those lines, investors looking to purchase stock in supposed cannabis company, Covalent Collective, may have found vindication in the recent judgment against Geoffrey Thompson, of Frankfurt, Illinois. Thompson is now permanently barred from engaging in the issuance, purchase, offer, or sale of any security, except in connection with his own personal account. On January 20, 2021, the United States District Court for the Northern District of Illinois (Case No. 1:20-cv-05205), ruled in favor of the United States Securities & Exchange Commission (SEC), in connection with its complaint targeting Thompson. Although Thompson did not admit or deny the allegations, he consented to the entry of the final judgment against him, which also ordered him to pay over half a million dollars collectively in disgorgement, prejudgment interest and civil penalties.
On January 18, 2021, the incoming President’s Transition Team announced additional key administration post nominees, including Mr. Gary Gensler as SEC Chair. The announcement specifically provided the following regarding Mr. Gensler’s background:
Congress recently overrode President Trump’s veto of the $740 billion 2021 National Defense Authorization Act (“NDAA”) and signed it into law. While the focus of the NDAA is not on the U.S. Securities and Exchange Commission (“SEC”), the NDAA does include a provision that gives the SEC, for the first time ever, statutory authority to seek disgorgement in federal court for securities enforcement matters. Further, the NDAA also provides for a 10-year statute of limitations for the SEC to seek such disgorgement for scienter-based violations, extending and doubling the current 5-year statute of limitations.
Last week, on December 16, 2020, Chinese-based coffee chain Luckin Coffee Inc. (“Luckin”) agreed to a $180 million settlement with the United States Securities and Exchange Commission (“SEC”). Luckin’s American Depositary Shares traded on the Nasdaq until July 13, 2020. The settlement stems from allegations that Luckin defrauded investors by materially misstating revenues, expenses, and net operating losses. The SEC’s complaint alleges that these fraudulent accounting actions were taken in an attempt by Luckin to increase profitability and meet earnings estimates.
The case is a reminder of risks associated with investing in U.S. listed companies with Chinese operations, which the SEC flagged in a June 2011 bulletin and a December 2018 cautionary public statement. The case follows a number of SEC enforcement proceedings brought in 2011-2012 featuring trading halts or delistings of at least 50 companies in those years.
This edition of the Enforcement Highlights financial services enforcement movie reviews is a sequel to the initial set of reviews issued with the blog’s re-launch several months ago. Like any sequel, we are hopeful that it will be as well received as the original edition; like the Godfather Part II. Once again, we have selected several movies for coverage. We start with a discussion of a holiday movie controversy, take a deep dive into a holiday classic, and then turn to recommendations of non-holiday movies to watch over the holiday season.
In a 30-day period, the U.S. Securities and Exchange Commission (“SEC”) has released guidance in three ways regarding certain views on the important role and potential liability risks of chief compliance officers (“CCOs”). SEC Commissioner Hester M. Peirce first raised these topics in a speech to the National Society of Compliance Professionals, advocating for greater clarity regarding the SEC’s decisions to impose individual liability on compliance professionals and challenging the wisdom of charging chief compliance officers “based on mere negligence.” Hester M. Peirce, When the Nail Fails—Remarks before the National Society of Compliance Professionals (Oct. 19, 2020). Book-ended thirty days later, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a “Risk Alert” titled OCIE Observations: Investment Adviser Compliance Programs (“OCIE Compliance Risk Alert”). That same day, OCIE Director Peter Driscoll gave a speech that served as the Opening Remarks at National Investment Adviser/Investment Company Compliance Outreach 2020, titled The Role of the CCO – Empowered, Senior and With Authority, Peter Driscoll (Nov. 19, 2020). It is unprecedented for the SEC to discuss this important topic utilizing several platforms in such a short period. Taking notice of this, below we analyze the guidance provided by each. We also observe that the SEC’s focus on the role of compliance is not new but that sometimes the SEC’s support for compliance has not appeared to extend beyond OCIE. Cf. Lori Richards’ (then-OCIE Director) October 2007 Speech “Working Towards a Culture of Compliance: Some Obstacles in the Path” (observing that an effective compliance program required management support, a “seat at the table” for the CCO, adequate compliance staffing relative to the size and risks of the firm’s business, and “tone at the top” from the CEO down); with Luis A Aguilar’s (then SEC Commissioner) June 2015 Speech “The Role of the Chief Compliance Officers Must be Supported” (defending recent SEC enforcement actions against CCOs and explaining that those CCOs acting in “good faith” should not fear 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.