New Records in SEC Enforcement Actions

John C. Wander is a partner in the Shareholder Litigation & Enforcement practice at Vinson & Elkins LLP. This post is based on a Vinson & Elkins publication authored by Mr. Wander, Jeffrey S. JohnstonClifford Thau, and Olivia D. Howe.

In late October, the Securities and Exchange Commission announced that under the leadership of chair Mary Jo White and enforcement director Andrew Ceresney, the SEC has continued to ramp up enforcement activity. In its 2015 fiscal year, the SEC reported filing a total of 807 actions for the year—including 507 independent enforcement actions, 168 follow-on actions, and 132 actions for delinquent filings—resulting in $4.19 billion in monetary penalties and disgorgements.

Ms. White touted the SEC’s accomplishments saying “[t]he Enforcement Division’s leveraging of data, quantitative analytics and the expertise of our other divisions contributed significantly to this year’s very strong results.” She also noted that,

“[v]igorous and comprehensive enforcement protects investors and reassures them that our financial markets operate with integrity and transparency, and the commission continues that enforcement approach by bringing innovative cases holding executives and companies accountable for their wrongdoing sending clear warnings to would-be violators.”

The SEC’s announcement touted a number of areas of enforcement focus that we expect will continue to be the SEC’s priority going forward. Those of note include:

  • Combating Financial Fraud: The SEC nearly doubled its enforcement actions related to financial reporting and audit fraud over the last two years. Financial reporting was a key priority for the SEC in FY 2015 and included a number of actions targeting both companies and executives.
  • Gatekeepers: The SEC also increased its focus on gatekeepers, holding advisors, attorneys, accountants, and brokers responsible for their failure to comply with professional standards. In September, the SEC resolved two matters of note. The first was a first-of-its-kind action against BDO USA, LLP and five of the firm’s partners alleging that the firm issued false and misleading unqualified audit opinions. The firm admitted wrongdoing and paid $2.1 million to settle the charges. In the second, the SEC targeted MusclePharm Corp.’s former audit committee chair, who was accused of misinterpreting SEC rules and failing to rely on an outside expert. He was personally sanctioned $30,000.
  • Insider Trading: The SEC highlighted its use of data and analytical investigation tools, crediting the technology with facilitating the charges brought in many of the 87 insider trading cases in FY 2015. These included charges against 32 people for taking part in a scheme to profit from stolen nonpublic information about corporate earnings announcements.
  • Municipal Securities: Fifty-eight municipal underwriting firms settled with the SEC in FY 2015. The SEC brought two first-ever actions related to municipal securities: 1) an action for pricing-related fraud in the primary market for municipal securities against Edward Jones; and 2) actions against 13 dealers for effecting customer transactions in amounts below the minimum denomination set for the issue.
  • Complex Financial Instruments: Two first-ever actions were brought against complex financial institutions: 1) an action brought against a big three credit rating agency; and 2) an action applying Dodd-Frank provisions limiting the sale of security-based swaps. The SEC also filed enforcement actions against three residential mortgage-backed securities traders.
  • FCPA: In FY 2015, the SEC looked beyond the provision in the FCPA focused on the bribery of foreign officials and instituted actions related to violations of the FCPA’s books and records provision and the lack of adequate internal controls. This included the first-ever action against a financial institution for violations of the FCPA, and the first-ever action related to hiring practices.
  • Whistleblowers: The SEC reported awarding eight whistleblowers with a total of approximately $38 million in FY 2015, and settled its first “pretaliation” case. The case involved alleged violations of Rule 21F-17 in connection with certain internal confidentiality agreements with employees that the SEC alleged could impede employee communications with the SEC. The SEC is on-record in numerous speeches, holding the settlement out as a message to registrants to consider the scope and language of any agreements binding employees to maintain company confidences.
  • Demanding Admissions in Important Cases: The SEC continues to focus on obtaining admissions of wrongdoing in significant actions. In FY 2015, the SEC obtained such admissions in actions brought against an accounting firm, a broker-dealer, and several financial institutions.

The SEC is also touting its significant litigation success in FY 2015. In total, the SEC won 11 administrative proceedings and all six of its jury or bench trials.

FY 2015 saw rigorous enforcement of the federal securities laws in every corner of the marketplace. We expect that trend to continue. Companies can prepare for an active SEC enforcement division by focusing on internal controls and fostering a culture of compliance.

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