SEC Enforcement Releases Its Annual Report: Filed Cases Down But Agency Obtains Record Monetary Relief

On November 2, 2020, the SEC’s Division of Enforcement issued its Annual Report for fiscal year 2020.  The Report provides a useful look at Enforcement’s accomplishments, priorities, and challenges over the past year.  Notably, the number of SEC enforcement actions fell by approximately 17 percent from fiscal 2019 – a likely result, at least in part, of the impact of the COVID-19 pandemic on Enforcement’s operations.  The total amount of penalties and disgorgement the SEC obtained, however – nearly $4.7 billion in total – set a record, including disgorgement of just under $3.6 billion, the highest in the agency’s history.

As in prior years, these amounts were highly concentrated in a small number of cases that involved the largest disgorgement and penalty orders.  In fiscal 2020, several exceptionally large settlements helped to boost the monetary relief figures, including the SEC’s settled action in June against Telegram Group, Inc. for an allegedly unregistered offering of digital tokens, resulting in the company’s agreement to disgorge $1.2 billion, and a number of significant Foreign Corrupt Practices Act (FCPA) actions, which led to especially sizeable disgorgement awards.

Enforcement’s priorities remained broadly consistent with the “Main Street” investor focus of SEC Chairman Jay Clayton, who has made retail investors the centerpiece of the enforcement program since he arrived at the Commission in 2017.  The Division continued to target fraudulent securities offerings, violations by investment advisers/investment companies (particularly for incomplete or misleading disclosures), issuer reporting/audit and accounting violations, and broker-dealer misconduct.  Together, these categories accounted, by a wide margin, for the majority of the SEC’s “standalone” actions (cases other than “follow-on” administrative proceedings seeking an industry bar based on the outcome of an action brought by the SEC or other enforcement agency or regulator and actions to deregister public companies).

Recent events, however, make it unlikely that the retail investor theme will continue to dominate the enforcement agenda in the same way in 2021.  Since the Annual Report was issued, the Nation elected a new president, and Clayton announced that he will resign from the Commission at the end of this year.  With a Democratic administration will come a Democratic SEC chair, and almost certainly, new enforcement priorities.  In particular, we expect to see a generally more aggressive Enforcement Division, and consequently, an uptick in the number of investigations and enforcement actions, an increased willingness to pursue untested or uncertain legal theories, and an increased appetite to litigate cases that do not settle.  We also anticipate a greater focus on major financial institutions and other systemically important market actors, and a heightened interest in insider trading, which has fallen dramatically under the Trump Administration.

Other notable highlights from the Annual Report:

  • Not surprisingly, the pandemic affected the SEC’s enforcement priorities and productivity. Early in the crisis, the SEC formed the Coronavirus Steering Committee to coordinate investigations involving COVID-related microcap fraud, insider trading, financial fraud, and issuer disclosure violations.  Enforcement obtained multiple trading suspensions and brought several cases against issuers and individuals suspected of providing misinformation about potential treatments and other pandemic-related goods and services.
  • The SEC spent a significant amount of time grappling with the challenges of a remote work environment and, as a result, spent less time investigating and bringing cases. As the Report acknowledges, Enforcement spent the early months of the pandemic adjusting to virtual investigative testimony, depositions, and interviews.
  • The breakdown by percentage of categories of standalone actions was generally consistent with fiscal 2019: 32 percent involved securities offerings; 21 percent involved investment advisory and investment company issues (a marked decrease from 36 percent in fiscal 2019); 15 percent were issuer reporting or audit and accounting cases; 10 percent involved broker-dealers; 8 percent were for insider trading; 5 percent were for market manipulation; 3 percent involved public finance; and 2 percent were FCPA cases.
  • Consistent with Enforcement’s stated priority of holding individuals accountable, 72 percent of its standalone cases involved charges against individual defendants or respondents.
  • It was a record year for the SEC’s Whistleblower Program, which awarded approximately $175 million in awards to 39 individuals for tips that led to successful enforcement actions. Both figures are high-water marks for the Program.
  • The average length of an investigation increased slightly to 24.1 months. Shortening this time span has been a priority for the Division.  The mean length of financial fraud and issuer disclosure cases, which typically take longer than other categories, fell from 37 to 34 months.

We will continue to provide updates on the enforcement program as it evolves under the incoming Biden Administration.

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