SEC reports Enforcement stats for fiscal 2023 —with big contributions from whistleblowers

The SEC has announced its Enforcement stats for fiscal 2023, which revealed that the SEC filed 784 total enforcement actions, up 3% from the 760 filed in fiscal 2022.  However, the level of financial remedies declined in fiscal 2023 to $4.9 billion from a record $6.4 billion last year. Nevertheless, it was still the second highest amount in SEC history. (Of course, you might recall that Gurbir S. Grewal, Director of the Division of Enforcement, said last year that the SEC didn’t expect to break last year’s records and set new ones every year because they “expect behaviors to change. We expect compliance.”) Of those financial recoveries, in fiscal 2023, the SEC distributed $930 million to harmed investors, representing the second consecutive year of distributions in excess of $900 million. But the standout statistics this year related to the SEC’s whistleblower program, where new records were set with whistleblower awards totaling almost $600 million, and 18,000 whistleblower tips in fiscal 2023, about 50% more tips than were received in fiscal 2022. A new record was also set with a $279 million award to one whistleblower. Overall, in fiscal 2023, the SEC received over “40,000 tips, complaints, and referrals in total,” a 13% increase over last year. According to SEC Chair Gary Gensler, the “investing public benefits from the Division of Enforcement’s work as a cop on the beat….Last fiscal year’s results demonstrate yet again the Division’s effectiveness—working alongside colleagues throughout the agency—in following the facts and the law wherever they lead to hold wrongdoers accountable.” Grewal added that “[i]nvestor protection and enhancing public trust in our markets requires that we work with a sense of urgency, using all the tools in our toolkit. As today’s results make clear, that’s precisely what the Enforcement Division did in fiscal year 2023….Whether it was by leveraging risk-based initiatives, seeking robust remedies, rewarding cooperation, protecting whistleblowers, or returning nearly a billion dollars to harmed investors, the Enforcement Division stood up for the investing public.”

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Perhaps the importance of whistleblowers to Enforcement’s stats might be one reason for the SEC’s recent Enforcement sweep clamping down on impediments to whistleblowers. For example, in Activision Blizzard,  the SEC alleged that the company violated the whistleblower protection rules by requiring, in separation agreements, that former employees “notify the company if they received a request from a government administrative agency in connection with a report or complaint.”  Although the SEC stated that it was “not aware of any specific instances in which a former Activision Blizzard employee was prevented from communicating with Commission staff about potential violations of securities laws or in which Activision Blizzard took action to enforce the notification clause or otherwise prevent such communications,” the SEC nevertheless concluded that the language in the agreements “undermines the purpose of Section 21F and Rule 21F-17(a) to ‘encourag[e] individuals to report to the Commission.’” (See this PubCo post.) Similarly, in this Order against CBRE, Inc., the SEC brought settled charges against the commercial real estate services and investment firm for using an employee release form that the SEC alleged violated Rule 21F-17. (See this PubCo post.)  It’s worth noting that, at this year’s PLI Securities Regulation Institute, a panel advised companies to look everywhere there is a confidentiality provision, not just at separation agreements, for clauses that could be viewed to impede whistleblowers.  “Effort to impede” has been broadly interpreted. (See this PubCo post.)

According to the SEC, of the 784 total enforcement actions, 501 were “original, or ‘stand-alone,’ enforcement actions,” reflecting an increase of 8% over the prior fiscal year. That total also included 121 actions filed against issuers that the SEC alleged were delinquent in making required filings with the SEC. The SEC indicated that the stand-alone enforcement actions “spanned the securities industry, from billion-dollar frauds to emerging investor threats involving crypto asset securities and cybersecurity, and charged violations by diverse market participants, from public companies and investment firms to gatekeepers and social media influencers.” Also included were a number of enforcement actions “addressing conduct that undermines oversight of the securities industry, including actions to protect whistleblowers.”

With regard to financial remedies, the total included about $3.4 billion in disgorgement and prejudgment interest and about $1.6 billion in civil penalties, in both cases, the second highest amounts on record.

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Notably, in fiscal 2023, the level of disgorgement was more than double the amount ordered in civil penalties.  By comparison, in fiscal 2022, civil penalties were $4.2 billion, the highest on record, while disgorgement was only $2.2 billion. As reported by the WSJ, Grewal, speaking at a conference last year, highlighted the fact that the SEC imposed more penalties than disgorgements, which, in his view, “demonstrated that ‘the potential consequences of violating the law are significantly greater than the potential rewards.’… He added that the SEC ordered more than twice as much in disgorgements as it did in penalties for the five fiscal years before the last one.  ‘So while disgorgement was slightly down from the prior year…it is the first time that the amount ordered to be paid in penalties has been double the amount ordered to be paid in disgorgement,’ he said. ‘The increased penalty-to-disgorgement ratio nonetheless demonstrates that the risk-reward calculation is not what it was even a few years ago.’” Fiscal 2023 apparently represents a return to past practices.

The press release specifically highlighted a number of actions and results during the year, including the judgment in federal court ordering Vale S.A., a mining company and one of the largest iron ore producers in the world, to pay a combined civil penalty, disgorgement, and prejudgment interest totaling $55.9 million to settle charges that Vale made false and misleading claims about the safety of its dams. In January 2019, one of its major dams collapsed, killing 270 people and causing enormous environmental and social harm. Vale lost more than $4 billion in market cap. The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. (See this PubCo post.)

The SEC also pointed to several “industry-shaping initiatives,” including one to promote recordkeeping that involved eleven actions.  The sweep enforcement action involved charges against six insiders for failing to file Forms 4 (Section 16(a) short-swing trading reports) and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis and five public companies for contributing to those failures. Using data analytics, the SEC staff identified the insiders charged as “repeatedly filing these reports late,” some delayed “by weeks, months, or even years.”  The parties agreed to pay more than $1.5 million combined in civil penalties to settle the cases.  (See this PubCo post.)

The press release also emphasized the SEC’s practice of consistently rewarding “meaningful cooperation to efficiently promote compliance across the securities industry. Rewarding parties that cooperate encourages other firms to proactively self-police, self-report, and remediate potential securities law violations and to provide meaningful cooperation with the Division’s investigations.” One case singled out was against GTT Communications, Inc., a multinational telecommunications and internet service provider, for failure to disclose material information about unsupported adjustments that had the effect of reducing cost of revenue and increasing reported operating income by at least 15% in three quarters. Because of GTT’s prompt self-reporting, remedial measures and substantial cooperation, the SEC did not impose a civil penalty.  (Notably, however, GTT was delisted from the NYSE, terminated its Exchange Act registration and filed for bankruptcy.) (See this PubCo post.)

According to the SEC, in fiscal 2023, about two-thirds of the SEC’s cases involved individual accountability. The SEC also obtained orders barring 133 individuals from serving as officers and directors of public companies, the highest number of officer and director bars obtained in a decade.  Actions cited here included settled charges against the former CEO of McDonald’s alleging that he made false and misleading statements to investors about the circumstances of his termination. The SEC imposed a five-year officer and director bar and a $400,000 civil penalty (as well as disgorgement of funds, which the company had already recouped). (See this PubCo post.)  The SEC also cited a settled action against the former controller of Pareteum, a telecommunications and cloud software company,  for engaging in an alleged fraudulent revenue recognition scheme.  He was barred from serving as an officer or director and prohibited from appearing or practicing before the SEC as an accountant. A complaint was also filed against the former CFO and former Chief Commercial Officer. (See this PubCo post.)

And, of course, the SEC brought actions last year charging public companies with inaccurate and misleading disclosures.  In fiscal 2023, charges against public companies involved a wide range of alleged misconduct, such as fraud, accounting misstatements and, an Enforcement favorite, deficient controls. The SEC cited as illustrative the case against Fluor Corporation, a global engineering, procurement and construction company listed on the NYSE, in connection with alleged improper accounting on two large-scale, fixed-price construction projects that caused it to materially overstate its earnings, as well as improper internal accounting controls. Fluor agreed to pay a $14.5 million civil penalty to settle the charges. (See this PubCo post.) Also cited is a settled action against Newell Brands Inc., a consumer products company, for providing misleading disclosure about a prominently featured non-GAAP financial measure about its core sales growth. Newell was also charged with improper internal accounting and disclosure controls. Newell agreed to pay a $12.5 million civil penalty to settle the charges.  (See this PubCo post.) And there were a slew of actions against electric vehicle companies, including actions against  XL Fleet and Hyzon Motors, Inc., for making materially misleading statements regarding revenue projections, sales or product launches. Hyzon was also charged with improper internal accounting and disclosure controls. (See this PubCo post.)

The list goes on, with actions regarding market abuse, crypto, cybersecurity (see this PubCo post), ESG (see this PubCo post), public finance abuse (see this PubCo post), unregistered offerings and more.