Welcome to the latest edition of Fenwick and West’s Securities Litigation and Enforcement Newsletter. In this newsletter, we look at SEC enforcement trends for 2016, starting with a recap of key SEC enforcement developments from 2015.
This issue of the newsletter was written and edited by securities litigation partners Catherine Kevane and Michael Dicke, formerly the head of enforcement for the SEC’s San Francisco office, and by associates Kaitlin Keller and Shannon Raj.
Before kicking off our discussion of significant SEC enforcement cases in several areas, we note a few overarching themes from 2015—a year of aggressive and innovative SEC enforcement—which we see continuing into 2016.
Aggressive Enforcement. SEC top leadership continued to push for aggressive enforcement, which led to a record number of cases filed and to near-record penalties being assessed in 2015.
The numbers further reveal that the SEC remains focused on accounting, issuer disclosure, and audit cases. In 2015, the SEC filed nearly double the number of such cases brought in 2013.1 The nature of the cases also signaled a tougher, more searching inquiry into the conduct of outside auditors and individual audit partners, as we discussed in our last newsletter.
Innovative Cases. The types of cases brought in 2015 included a sizeable number of first-of-their kind cases, including
- the first case against a public company alleging that the firm’s confidentiality agreements impeded whistleblowing to the SEC;
- the first case in which an audit firm was forced to admit wrongdoing as part of an SEC settlement;
- the first case applying Dodd-Frank provisions limiting the sale of security-based swaps against a Silicon Valley startup; and
- the first case against a private equity adviser for misallocating broken deal expenses.
New Tools. In 2015, the SEC continued to develop and sharpen the tools at its disposal.
- Since the advent of the SEC’s Dodd-Frank whistleblower program in July 2010, the number of awards and the amount of the whistleblower bounties have continued to increase. In March, the SEC announced the first-ever award to a former company officer, finding that the officer met the exception for corporate officers to be eligible for bounties because the officer had first reported the issue internally and insufficient action had been taken to resolve the issue.
- The continued and deliberate shift to bring more cases in the SEC’s own administrative courts has expanded to increasingly include cases against non-registrants who, before Dodd-Frank, largely had not found themselves subject to the SEC’s in-house courts.
- The SEC’s investment in “big data” and emphasis on data-driven analysis has also translated into enforcement cases. As Chair Mary Jo White noted, the strong 2015 enforcement results were aided significantly by the “[t]he Enforcement Division’s leveraging of data, quantitative analytics, and the expertise of our other divisions.” The data initiative demonstrates the increasing collaboration between the Division of Enforcement and the SEC’s Division of Economic and Risk Analysis. In addition, in 2013, the Enforcement Division also launched its own internal group dedicated to harnessing data analytics, dubbing the group the Center for Risk and Quantitative Analytics (“CRQA”). The so-called “quants” and other experts also have been embedded in specialized enforcement units, notably the Market Abuse Unit, as well as the Financial Reporting and Audit Task Force. These initiatives have helped the agency crack an international insider trading ring that stole market-moving information by hacking into newswire services, and led to several high-profile enforcement actions this past year. See, e.g., “SEC Charges 32 Defendants in Scheme to Trade on Hacked News Releases,”; “SEC Charges Bitcoin Mining Companies”.
Every Action Has an Equal and… Newton’s third law also came into play in 2015, with the SEC’s aggressive tactics provoking pushback from some quarters.
The municipal securities industry continued its steady criticism begun in 2014 of the Enforcement Division’s Municipalities Continuing Disclosure Cooperation Initiative (“MCDC”), which requires municipal bond issuers and underwriters to self-report violations of an Exchange Act rule requiring issuers to provide continuing disclosure about certain financial and other data. See “GFOA’s Watkins: MCDC Cost Issuer; SEC Initiative ‘An Abuse of Power,’” The Bond Buyer, June 2, 2015. On February 2, 2016, the SEC completed its MCDC initiative, announcing that, in total, 72 underwriters—representing approximately 96 percent of the market share for municipal underwritings—were charged with providing inaccurate information to investors about compliance with continuing disclosure obligations.
Much of the pushback this past year was focused on the perceived due process unfairness stemming from the SEC’s increased use of its administrative courts, rather than filing cases in federal district court. Numerous defendants in SEC administrative proceedings sought relief in federal court, seeking to stay the administrative proceedings. To date, most of those challenges have been rejected, but two district courts have ruled on fairly technical grounds that the appointment of the SEC’s administrative law judges is unconstitutional, and stayed the administrative proceedings. See Duka v. SEC, 2015 WL 4940057 (S.D.N.Y. Aug. 3, 2015); Hill v. SEC, 2015 WL 4307088 (Dist. Ga. June 8, 2015). Under fire, the Commission in September announced that it will amend its rules governing administrative proceedings, but this did little to calm critics.
Finally, perhaps the sharpest rebuke to the SEC occurred in December, when the Third Circuit Court of Appeals reversed a decision by the full Commission, finding that that Commission “misread” key evidence. The court held that when the Commissioners overrule on appeal one of their own ALJs, the federal appeals court’s review would be “slightly less deferential than it would be otherwise.” The court then marched through the evidence and pointedly identified numerous instances where the evidence was “thin” or did not support the Commission’s reading. The court concluded that “the Commission abused its discretion” and vacated the Commission’s order.