The SEC’s enforcement numbers are in for its fiscal year ended September 2015, and to no one’s surprise, the agency filed a record number of enforcement cases. As announced on October 22, 2015, the SEC filed 807 enforcement actions – an almost 7% increase over the 755 enforcement actions filed in 2014. These actions resulted in approximately $4.2 billion ordered in disgorgement and penalties, which is up slightly from the $4.16 billion ordered in 2014. The release also highlighted several “first-of-their-kind” cases, as well as the SEC’s increasing use of cutting-edge data analytics to bring cases.
In the category of firsts, the SEC settled charges against private equity firm Kohlberg Kravis Roberts & Co. L.P. (“KKR”) for misallocating $17.4 million in “broken deal” expenses. According to the SEC, KKR incurred $338 million in such broken deal or due diligence expenses in pursuing unsuccessful deals. According to the SEC’s order, KKR did not equitably allocate those expenses, but instead allocated all the expenses to its private equity funds without giving any allocation to the private equity funds' co-investors, which consisted of KKR insiders and some large clients. According to the SEC, KKR failed to adequately disclose this practice, and “unfairly required the funds to shoulder the costs.” To settle, KKR paid nearly $30 million in disgorgement and penalties.
In another first, the SEC charged a bank, The Bank of New York Mellon Corporation (“BNY Mellon”), with FCPA violations. BNY Mellon was charged with providing internships to family members of foreign officials associated with an unidentified Middle Eastern sovereign wealth fund in order to maintain its contracts with the fund. The order also found that BNY Mellon lacked specific controls to curb improper hiring, and the bank paid $14.8 million in disgorgement and penalties to settle these charges.
The SEC also delivered on its stated commitment to employ advanced analytical tools to find misconduct. A recently unsealed complaint shows that the SEC charged 32 defendants in a cyber-hacking scheme that stole and traded on nonpublic corporate earnings reports to amass $100 million in illegal profits. The SEC froze $70 million and secured a $30 million settlement against two of the defendants. Andrew Ceresney, Director of the SEC’s Division of Enforcement, noted that the agency’s “use of innovative analytical tools to find suspicious trading patterns and expose misconduct demonstrates that no trading scheme is beyond our ability to unwind.”
Other significant cases include a continued focus on financial fraud cases and misconduct by investment advisors, including (1) a suspension order in 128 inactive penny stocks issued as part of the ongoing initiative, Operation Shell-Expel, to suspend trading in ever-increasing pump-and-dump schemes; (2) an order against BlackRock Advisors, LLCfor failing to disclose conflicts of interest, which resulted in $12 million settlement; and (3) a settlement with First Eagle Investment Management, LLC for improper use of assets to pay for fund share distributions that resulted in a $40 million settlement.
The Bottom Line: The SEC is delivering on its promises to assert its presence in emerging areas of first impression and to use new, advanced technologies to root out perceived misconduct.