SEC Enforcement Report Signals Increased Enforcement, Lingering Limitations from Kokesh
Last week on November 6, 2019, the SEC Enforcement Division released its annual report on the Commission’s enforcement activities for the fiscal year. This article discusses prominent takeaways from the report, and what these and other findings mean for companies under the SEC’s jurisdiction.
Increased Enforcement. 2019 saw a marked increase in civil enforcement compared with 2018, with 526 standalone enforcement actions in 2019 compared with only 490 in 2018. The report touted that this increase occurred despite a near total shutdown at the SEC for 35 days at the beginning of the year due to the federal government shutdown and the ensuing lapse in appropriations. Notably, this increase in enforcement comes after several years of comparably diminished enforcement under the Trump Administration compared to enforcement under the Obama Administration. For reference, in 2016, the SEC brought 548 enforcement actions—a number that remains a high for the last five years. With the administration change in 2017, the SEC’s total enforcement actions dropped to 446 in 2017.
Of those 526 enforcement actions, more than half (57%) concerned investment advisory or investment company issues, or securities offerings (up from 47% in 2018). Issuer reporting/accounting made up 17% of the Commission’s matters (nearly matching 2018’s figure of 16%), 7% of actions concerned broker-dealers (down from 13% in 2018), 12% involved insider trading and market manipulation (6% for each, down from 17% for both in 2018), and 6% involved Foreign Corrupt Practices Act Enforcement and Public Finance (3% for each, matching 2018’s figures).
As for monetary penalties, the Commission collected $4.349 billion in total during 2019, including $3.248 billion in disgorgement of ill-gotten gains and $1.101 billion in monetary penalties. Though the report noted that, as in previous years, 5% of enforcement actions accounted for the bulk of the SEC’s enforcement activity, including 30% of all monetary penalties and disgorgements obtained by the SEC, these figures still amount to a monetary increase of approximately 10% over 2018. The figures show an increase in the median disgorgement and penalties awarded as well, with the median disgorgement ordered being $694,663 and the median total money ordered paid (i.e. disgorgement plus penalties) being $554,033 (up from about $363,000 in 2018). These figures show that everyone is paying more to the SEC, not just those embroiled in more high-profile cases.
“Noteworthy” Enforcement. The SEC’s report highlighted what it considered to be “noteworthy” enforcement actions against financial institutions, high-ranking corporate executives, and individuals allegedly involved in financial misconduct. These included charges against many financial institutions, including Bank of New York Mellon, JPMorgan Chase, Citibank, and Merrill Lynch for “improperly handling ‘pre-released’ American Depositary Receipts[.]” BB&T Securities also faced charges for its acquisition of a firm that misled its clients regarding the value of that firm’s in-house brokerage services.
The report also noted that the Commission settled actions against prominent companies like Facebook, Nissan, and Fiat Chrysler’s U.S. subsidiary. The Commission settled with Facebook for a $100 million civil penalty after alleging that the company misled users regarding the use of their personal data. Fiat settled its charges regarding alleged inflated monthly sales for a $40 million civil penalty, and Nissan settled charges related to alleged false financial disclosures regarding $140 million of CEO compensation for a $15 million civil penalty and additional measures imposed against individual directors and executives.
On the individual accountability front, charges were filed against both current and former CEOs, CFOs, and other executives for conduct ranging from schemes to overstate revenue, to violations of the Foreign Corrupt Practices Act. The report also highlighted that the Commission brought charges against 42 individuals for insider trading.
Initial Coin Offerings. The report noted that the Commission had continued its policing of fraud and registration requirements in the cryptocurrency space, but emphasized the Commission’s active enforcement of non-fraud matters, including those related to issuer compliance and violations related to securities registration requirements. The report both noted that the Commission was working to establish a framework for future resolutions, and that June 2019 saw the Commission file its first contested litigation against a digital asset issuer for “solely non-fraud, registration violations” which the report emphasized “reinforce[es] the seriousness with which the Commission views registration violations in the ICO space.”
FCPA Enforcement. The SEC brought 18 FCPA actions against 15 entities and 5 individuals in 2019. In total, FCPA enforcement actions accounted for only 3% of the SEC’s total enforcement actions. Prominent FCPA enforcement actions included charges against Microsoft for violations of the internal accounting controls and recordkeeping provisions of the FCPA for conduct in Hungary, Thailand, Saudi Arabia, and Turkey; and charges against Deutsche Bank AG for violations of the internal accounting controls and recordkeeping provisions related to hiring practices.
Ongoing Challenges from Kokesh. The report noted that the Supreme Court’s 2017 decision in Kokesh v. SEC, which held that the Commission’s disgorgement claims are subject to a five-year statute of limitations, has “caused the Commission to forgo approximately $1.1 billion dollars in disgorgement in filed cases.” Moreover, the report stated that the decision has caused the Commission to shift its resources to prioritize those investigations “which hold the most promise for returning funds to investors,” signaling a shift in focus to more recent behavior and away from more stale misconduct.
The issue of SEC disgorgement continues to be pressed, as the Supreme Court granted certiorari in Liu v. Securities and Exchange Commission on November 1, 2019 to determine the issue of whether the SEC can seek and obtain disgorgement as a form of equitable relief for a securities violation at all, given that the Court held in Kokesh that such disgorgement is a penalty. Though the report did not mention the upcoming case, it has the potential to impact significantly how the Commission seeks to enforce securities laws.
What This Means For You
The SEC Enforcement Division’s Annual Report provides key insights into the Commission’s ongoing priorities, and sheds light on how these priorities might shift in the future. A few key takeaways are noted below.
First, the report indicates that after a significant decrease in enforcement activity during the early years of the Trump Administration, the Commission appears to be ramping back up to more normal levels of enforcement.
Second, the Commission’s recent focus on enforcement actions against individuals shows that the Commission’s emphasis on individual responsibility, and on the idea that corporations act because people take actions, remains a priority.
Third, because Kokesh limits the time parameters of actionable conduct, corporate counsel can expect the Commission’s enforcement staff to move investigations along more quickly. Companies involved in negotiations with the Commission, or considering self-disclosure, should pay attention to these developments, and those in the upcoming Supreme Court case in Liu.
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