On January 8, 2021, the SEC issued a cease-and-desist order, Release No., 90875 (available here), formally resolving proceedings against Deutsche Bank AG. Deutsche Bank agreed to pay over $125 million as part of a global resolution of allegations that it violated the Foreign Corrupt Practices Act of 1977 (FCPA), in connection with its use of third-party intermediaries, business development consultants, and finders engaged to advance Deutsche Bank’s global business development efforts. The terms of Deutsche Bank’s universal settlement with the SEC and the U.S. Department of Justice included payment of more than $120 million, $43 million of that to resolve charges brought by the SEC, and the remainder in the form of criminal penalties paid to the Department of Justice.
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.
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.
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.