Late last week, the Securities and Exchange Commission (SEC) announced its enforcement results for fiscal year 2015, reporting a record number of enforcement actions and the highest amount of fines collected by the SEC to date. Through September 30, the SEC filed 807 enforcement actions − 507 federal securities law violations and 300 delinquent issuers or administrative proceedings seeking bars against individuals based on criminal convictions or civil injunctions. Together with SEC penalties and disgorgement orders totaling $4.2 billion, the SEC set new highs over last year's totals ($4.16 billion and 755 actions). Note that the SEC did not offer a breakdown of the number of U.S. District Court actions versus administrative proceedings, even with a recent push to file more administrative proceedings. The SEC did provide in its press release that it won all six of its District Court jury or bench trials while enjoying "strong success in administrative proceedings."
What is notable is the increase in the types of actions pursued by the SEC, described as "first-of-their-kind" cases. In fiscal year 2014, expanding upon what SEC Chair Mary Jo White called the SEC's "enforcement footprint," the SEC successfully pursued first-of-their-kind cases involving high frequency trading firms, whistleblower anti-retaliation authority, and broker-dealer policies and procedures. This year, the SEC continued with Chair White's "vigorous and comprehensive enforcement" and again pursued several first-of-their-kind cases, including cases against the following:
- A private equity adviser for misallocating broken deal expenses
- An underwriter for pricing-related fraud in the primary market for municipal securities
- A "Big Three" credit rating agency for securities fraud (Section 17(a)(1) of the Securities Act) in connection with its ratings of commercial mortgage-backed securities
- A dark pool for violations arising from its disclosure of order types to its subscribers
- A financial institution for violating the Foreign Corrupt Practices Act
- An auditing firm that was required to admit wrongdoing for dismissing red flags and issuing false and misleading unqualified audit opinions
- An issuer for violating an SEC rule prohibiting impeding whistleblower communication with the SEC
At SEC Speaks 2015, Chair White promised increased focus on areas such as financial reporting, gatekeepers, affinity fraud, insider trading, municipal securities, and microcap fraud. True to her word, the SEC did just that in 2015. The announcement also noted enforcement actions involving a number of significant financial fraud and issuer disclosure matters, including actions against companies and executives, as well as holding attorneys, accountants, and other gatekeepers accountable for failures to comply with professional standards. Additionally, the SEC filed several actions to halt international investment frauds, including those that targeted immigrant communities and charged 87 parties in cases involving trading on the basis of inside information. The SEC also continued to devote resources to combat market manipulation and microcap fraud and uphold standards in municipal securities. The press release highlighted several other significant areas:
- Ensuring exchanges, traders and other market participants operated fairly
- Uncovering misconduct by investment advisers and investment companies
- Cracking down on misconduct involving complex financial instruments
- Combating foreign corrupt practices
- Standing up for whistleblowers
- Demanding admissions in important cases enhancing public accountability
Looking forward, Director of Enforcement Andrew Ceresney stated that the SEC would "pave new ground in the new fiscal year." The SEC will certainly strive to exceed its 2015 enforcement numbers in 2016. But it may be better to evaluate the SEC's "vigorous and comprehensive enforcement" by focusing on the "first-of-their-kind" cases rather than the number of enforcement actions and associated penalties and disgorgement.
According to a study conducted by Emory University law professor Urska Velikonja, the professor proposed that the SEC's methods calculating its annual enforcement statistics are "deeply flawed" and inflated to project strength. These methods include double-counting and pursuing a high number of cases that do not require much investigation. The SEC disputes the claims. Regardless of who is right, the SEC continues to show increased enforcement action and seeks strong yearly results by being aggressive and creative in utilizing the enforcement tools at its disposal, coupled with its leveraging of data, quantitative analytics and expertise.
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