Big penalties, admissions fuel record SEC enforcement year

Civil penalties alone in FY2022, which ended Sept. 30, totaled almost $4.2 billion—also a record, the SEC said in its report accompanying Tuesday’s announcement. Disgorgement, at $2.2 billion, decreased by 6 percent year-over-year.

In FY2021, the agency netted more than $3.8 billion total in penalties, interest, and disgorgement. That year saw the appointment of a new chair in Gary Gensler, who named Gurbir Grewal to lead enforcement efforts in June 2021.

About $937 million was returned to harmed investors in FY2022, compared to $521 million in FY2021.

The SEC’s overall enforcement activity of 760 actions in FY2022 was an increase of 9 percent over 697 in FY2021 but still down from a high of 862 in FY2019.

Most of the enforcement actions during last fiscal year, 462, were new or standalone cases. The remainder of actions were follow-ups to previous cases, such as going after delinquent filers and issuing orders barring individuals from future board activity. FY2021 saw 434 new actions and FY2019 saw 526, according to the report.

Standalone actions largely concerned the behavior of investment advisers and companies (26 percent). About 16 percent involved issuers, auditing, or accounting and 10 percent were aimed at misconduct among broker dealers.

More than two-thirds of the standalone actions in FY2022 included individual defendants or respondents. The SEC charged a number of executives under the Sarbanes-Oxley Act (SOX), including those at Granite Construction, requiring them to return bonuses and compensation.

The “robust” enforcement by the agency this past fiscal year was intentional, said Grewal during an SEC forum on enforcement.

Grewal, the former attorney general of New Jersey, has warned businesses since taking the job he planned to step up enforcement at the agency. He repeated Tuesday aggressive enforcement is necessary to curb misconduct, restore public trust in markets, and convince slackers to come into compliance.

“Penalties must be adequate to deter misconduct. We sought to recalibrate penalties and get away from the idea that penalties are just a business expense,” Grewal said.

Though the agency has no plan to let up, “We don’t expect to break these records and set new ones each year because we expect behaviors to change,” Grewal added. “We expect compliance.”

Grewal pointed to the SEC’s cases against JPMorgan Chase and a group of 11 other banks, investment firms, and their affiliates cited for employees sending work-related communications on their personal phones and not saving the messages as required as an example of how it is using enforcement to push the industry to change. The firms paid more than $2 billion in total penalties between the SEC and Commodity Futures Trading Commission and admitted the violations.

The penalty amounts were large enough to make “clear that fines were not just a cost of doing business,” Grewal said, adding, “Other firms take note.”

“Admissions are incredibly powerful,” he continued, and firms “should expect us to seek further admissions” next year, he warned.

Notable enforcement cases

Allianz Global Investors U.S. in May admitted the SEC’s findings it schemed to hide the true risks of options trading. The firm was ordered to pay more than $1 billion to settle fraud charges.

“We don’t expect to break these records and set new ones each year because we expect behaviors to change. We expect compliance.”

Gurbir Grewal, Director, SEC Enforcement Division

In June, Ernst & Young was ordered to pay $100 million, the largest penalty the agency has imposed against an audit firm. EY audit professionals were found to have cheated on the ethics portion of certified public accountant (CPA) exams and courses required to maintain their licenses.

The SEC imposed a $200 million penalty against Barclays and Barclays Bank in September for overissuing securities. The agency ordered the bank to do a total audit of its internal compliance procedures related to Section 5 of the Securities Act and to adopt changes necessary to comply.

Whistleblower results

FY2022 was the SEC’s second highest year for the number and amount of whistleblower awards since the program launched in August 2011, according to the agency’s whistleblower report released Tuesday.

The SEC paid out approximately $229 million across 103 whistleblower awards in FY2022. The agency in FY2021 delivered record totals of $564 million paid to 108 whistleblowers.

The agency received a record number of whistleblower tips in FY2022 at 12,322, more than the 12,210 tips the year prior.

Since the program’s start, whistleblower-related enforcement has brought $6.3 billion in sanctions to the agency, including more than $1.5 billion in disgorgement that has or will be returned to investors, the SEC said.

The largest whistleblower award in FY2022 was $40 million split between two individuals, followed by a $37 million bounty awarded to two joint whistleblowers.

“Regardless of whether a whistleblower is a corporate insider, a main street investor, or an unrepresented claimant, the commission vigorously safeguards their identity while rewarding eligible individuals who identify bad actors in our markets,” said Creola Kelly, chief of the SEC’s Office of the Whistleblower, in the report.

The amount awarded to a whistleblower is based on SEC rules, which allow up to 30 percent of the monetary sanctions collected. The agency gave the full 30 percent award to more than 90 percent of whistleblowers in FY2022, it said.

Under the Dodd-Frank Act, it’s illegal to retaliate against whistleblowers, a law the SEC enforced twice in 2022 and a total of 16 times since the program began, according to the agency.