ESG, Enforcement and Effective Disclosure

Please join the Faegre Drinker team for a three-part webinar series providing updates on year-end financial reporting and the 2021 proxy season. This session will cover:

  • Discuss current trends and considerations related to ESG oversight and disclosure
  • Review SEC enforcement activity and lessons learned
  • Review best practices in annual report and proxy disclosures
  • Update on other hot topics heading into the annual meeting season


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SEC Enforcement in 2020, the Election & Future of 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.

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Aggressive SEC and DOJ Parallel Charges for Accounting Fraud

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.

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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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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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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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