On November 2, 2020, the Securities and Exchange Commission’s Division of Enforcement released its 2020 Annual Report. According to the report, the Division brought 715 enforcement actions, including 405 “standalone” actions (72% of which included charges against individuals). The Division won every proceeding that it litigated to a verdict or decision. It won around $3.6 billion in disgorgements and around $1.1 billion in penalties and distributed over $600 million to harmed investors. The total award value of $4.68 billion was a $330 million (8%) increase from 2019. Despite this, 5% of cases involving the largest financial remedies accounted for the majority of financial remedies obtained, and the total numbers of cases brought was down 17% from 2019.
The Division’s actions covered a range of legal issues and often involved fascinating factual backgrounds. For example, the Division brought actions against: three former KPMG audit partners who improperly shared answers to internal training exams covering accounting and auditing principles; actor Steven Seagal, for failing to disclose payments he received for promoting an initial coin offering, or ICO, conducted by Bitcoiin2Gen; and a couple who engaged in a nearly billion-dollar Ponzi scheme relating to mobile solar generators.
Enforcement Approaches and Remedies
The Division’s Report signaled its willingness to pursue enforcement through a range of powers and strategies, including the following:
- Tackling Wrongdoing During the Coronavirus
In March 2020, the SEC set up a special Coronavirus Steering Committee, began over 150 Covid-related investigations, and sought trading suspensions of 20 issuers. The SEC brought actions against companies regarding the distribution of supposed rapid result finger-prick tests, the sale of thermal scanning equipment that would detect fevers, the acquisition and supply of N95 masks, and the development of a Covid-19 blood test. The SEC also brought an action against a penny stock trader conducting a fraudulent pump-and-dump scheme involving misleading statements on an online forum, including that a company had developed an approved Covid-19 blood test.
- Improving Outstanding Collections
The SEC created the Office of Bankruptcy, Collections, Distributions, and Receiverships to, among other things, collect outstanding monetary judgments more efficiently.
- Employing a Risk-based Analytic Approach to Identify Potential Violations
The SEC noted its Earnings Per Share Initiative, which uncovers potential accounting and disclosure violations aimed at covering unexpectedly weak performances, and its Market Abuse Unit, which detects suspicious trading patterns.
- Reducing Punishments for Cooperative Parties
The SEC continued to encourage wrongdoers to cooperate with the agency, including by imposing no penalty on the Colorado registered investment adviser Transamerica Asset Management, Inc., because it cooperated closely with the SEC.
- Making Use of Bars, Suspensions, Asset Freezes, Emergency Relief, and Undertakings
The SEC obtained over 475 bars or suspensions against market participants, 24 asset freezes, and trading suspensions for 196 issuers. For example, it obtained an asset freeze against Telegram Group Inc. after it raised over $1.7 billion in an unregistered international digital token offering, a TRO preventing ongoing illegal offerings on the secondary market, and a $1.2 billion settlement.
In June 2020, the U.S. Supreme Court affirmed, in SEC v. Liu, the authority of courts to order disgorgement. However, the SEC must reflect net profits in its disgorgement orders and account for legitimate expenses. As a result, the SEC noted that it “anticipates changes in the balance between the penalties and disgorgement that the Division seeks” and may recommend higher penalties in some cases where the statutory scheme permits.
The Range of Claims and Violations Addressed
The Division brought actions for numerous kinds of violations, but its standalone cases largely involved securities offerings (32% of cases), investment advisory/investment company issues (21%), issuer reporting and accounting/auditing matters (15%), and broker-dealer actions (10%). The SEC also brought cases for insider trading (8%), market manipulation (5%), public finance violations (3%), and Foreign Corrupt Practices Act actions (2%). Notably, there was an 11% increase in actions involving securities offerings but a 15% reduction in investment adviser/investment company actions, compared with 2019.
Fraud, Misstatements & Disclosure Wrongdoing
The SEC brought many actions for violating issuer disclosures, accounting, and offerings standards. For example, the Division brought an action against SCANA Corp., two of its former top executives, and South Carolina Electric & Gas Co. for false and misleading statements about a nuclear power plant expansion that was ultimately abandoned. It also brought actions against Fiat Chrysler Automobiles N.V. for misleading disclosures about an internal audit of its emissions control systems, and against Wells Fargo & Co. for misleading investors while opening accounts for customers without their permission.
Insider trading continued to be a focus of enforcement for the SEC. For example, the Division charged a former finance manager and family members at Amazon.com Inc. for insider trading prior to earnings announcements.
The SEC received over 23,650 whistleblower tips, complaints and referrals in 2020 (almost 7,000 more than in 2019), a majority of which came during the pandemic. Actions from these tips led to over $2.5 billion in financial remedies, and the SEC awarded $175 million to 39 whistleblowers (the highest dollar amount and highest number of individuals awarded), including $114 million to a single whistleblower.
Broker-dealers & Investment Advisers
The Division brought actions against broker-dealers for a variety of violations. It brought an action against JonesTrading Institutional Services LLC for failing to preserve business related text messages on the personal devices of its registered representatives. It also acted against a registered broker-dealer and investment adviser for failing to deliver final prospectuses to purchasers in a public sale of around $150 million in FuelCell stock. The SEC also brought conflict of interest-related actions, such as its actions against SCF Investment Advisors, Inc., for failing to disclose conflicts related to revenue sharing from cash sweep money market funds, and against Morningstar Credit Ratings for permitting the integration of its ratings analysts into its business development efforts.
Foreign Corrupt Practices Act
The SEC continued to bring actions against companies and individuals committing bribery in violation of the FCPA. For example, the SEC brought actions against consumer loan company World Acceptance Corporation for bribing Mexican officials, and against a former executive of a financial services company who oversaw a bribery scheme to win a government contract in the Republic of Ghana.
The SEC’s 2020 Annual Report signaled its commitment to enforcing securities laws and punishing wrongdoing, despite the ongoing Coronavirus pandemic. The Securities & Capital Markets team at Michael Best has experts who can advise parties on complying with securities laws and represent companies and individuals in connection with matters brought by the SEC and other financial regulators. Please do not hesitate to contact a member of our team for additional information