The number of total enforcement actions filed by the Securities and Exchange Commission (SEC) fell in fiscal year 2021 (FY2021), according to the agency’s annual enforcement report published Thursday.
The agency filed 697 total enforcement actions for the fiscal year, which ended Sept. 30. This total represents a 3 percent decrease over the total actions filed in FY2020.
A separate report this week on FY2021 SEC enforcement activity, released jointly by the NYU Pollack Center for Law & Business and Cornerstone Research, highlighted the number of enforcement actions filed by the agency against public companies and their subsidiaries hit its lowest total in seven years. The SEC’s enforcement data backs that finding up.
“We have seen declines in filing activity after a change of administration in the past,” said Sara Gilley, a vice president at Cornerstone Research and co-author of its report. “The decrease in actions from FY2020 to FY2021, when Gary Gensler took over as the SEC’s chair, is consistent with the trends seen in 2013 and 2017, other years in which a new SEC chair was sworn in.”
According to the SEC’s report, enforcement actions in FY2021 included 434 new actions (a 7 percent increase over FY2020); 120 actions against issuers who were delinquent in making required filings with the agency; and 143 “follow-on” administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.
A shift in focus
“This year has seen a number of critically important and first-of-their-kind enforcement actions, as well as record-breaking achievements for our whistleblower program, which we expect will lead to even more successful actions in the future,” said new SEC Enforcement Division Director Gurbir Grewal in a press release.
First-of-their-kind enforcement actions brought by the agency in FY2021 included:
- Charges in the crypto space involving securities using decentralized finance (DeFi) technology;
- An enforcement action involving Regulation Crowdfunding;
- An action concerning violations of a non-solicitor municipal advisors rule that took effect in 2016;
- Enforcement against firms failing to timely file and deliver Form CRS; and
- An action against an alternative data provider, in which the SEC charged App Annie and its co-founder and former CEO with engaging in deceptive practices.
Also of note in FY2021 was the first charging of a public company (Cheesecake Factory) for misleading investors about the financial effects of the pandemic and the first action against participants in a special purpose acquisition company (SPAC) transaction.
The SEC awarded a record total of $564 million to 108 whistleblowers during the fiscal year, surpassing $1 billion in payouts over the life of the program (since FY2011).
Additionally, the SEC noted in FY2021 it “obtained judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties, which represented a respective 33 percent decrease and 33 percent increase over amounts ordered in the prior fiscal year in these categories.”
Grewal signaled he looks forward to the agency continuing its proactive enforcement efforts and sharpening its focus in additional areas, including gatekeeper accountability. In FY2021, cases cited by the SEC concerning gatekeeper accountability included:
- The suspension of two former KPMG auditors for improper professional conduct during an audit of the now-defunct College of New Rochelle;
- Charges against a CPA for failing to register his firm with the Public Company Accounting Oversight Board and failures in auditing and reviewing the financial statements of a public company client;
- Charges against an audit firm partner for allegedly engaging in an accounting fraud case the agency brought against biotech company MiMedx Group in 2019; and
- Charges against two attorneys for allegedly engaging in a scheme to fraudulently facilitate the sale of millions of shares of microcap securities to retail investors.
Companies that faced Foreign Corrupt Practices Act (FCPA) charges this past fiscal year were:
- Goldman Sachs for its role in the 1MDB bribery scheme, resulting in the firm paying more than $1 billion to the SEC to settle.
- Deutsche Bank for internal control failures relating to its payments to third-party intermediaries, resulting in $43 million paid to the SEC in disgorgement and prejudgment interest.
- Advertising group WPP for violating the anti-bribery, books and records, and internal accounting controls provisions of the FCPA, resulting in a more than $19 million settlement.
- Brazilian meatpackers for engaging in an extensive, multiyear bribery scheme, resulting in a nearly $27 million settlement.
Throwback stance on admissions
The SEC’s enforcement data does not show numbers on admissions of guilt. According to Cornerstone Research’s report, however, the number of defendants in public company or subsidiary actions that admitted guilt decreased to zero in FY2021 after dropping from five in FY2019 to two in FY2020.
“For the first time in 10 years, no public company or subsidiary defendants admitted guilt in FY2021,” said report co-author Stephen Choi, who is Bernard Petrie Professor of Law and Business at New York University School of Law and director of the Pollack Center for Law & Business. “It will be interesting to see if this trend changes, as the SEC recently announced a policy to seek admissions in certain cases as a way to improve the deterrent value of enforcement actions.”
In 2013, then-SEC Chair Mary Jo White reversed the agency’s longstanding practice of incentivizing companies and individuals to settle civil enforcement actions by allowing them to enter into consent agreements on a “neither admit nor deny” basis. White had established defendants would have to admit to facts in certain cases, but the policy was abandoned under the Trump administration by then-SEC Chair Jay Clayton.
Grewal and Enforcement Deputy Director Sanjay Wadhwa have indicated the agency intends to pick up where White left off. Gensler has as well.
“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law, and so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest,” Grewal stated at an SEC Speaks virtual forum in October. “Admissions, given their attention-getting nature, also serve as a clarion call to other market participants to stamp out and self-report the misconduct to the extent it is occurring in their firm.”
Wadhwa described under what circumstances the agency will seek settlement admissions, including cases of “egregious” wrongdoing or where a company obstructed an SEC investigation.
Grewal added the SEC will weigh all its options when misconduct—such as misuse of nonpublic information, record-keeping violations, or obfuscation of evidence from the SEC or other government agencies—occurs.
“For example, if we learn that, while litigation is anticipated or pending, corporations or individuals have not followed the rules and maintained required communications, have ignored subpoenas or litigation hold notices, or have deliberately used the sort of ephemeral technology that allows messages to disappear, we may well conclude that spoliation of evidence has occurred and ask the court for adverse inferences or other appropriate relief,” he said.
“These rules are not just check-the-box exercises for compliance departments; they are important to ensure that the SEC and other law enforcement agencies can understand what happened and make appropriate prosecutorial decisions,” Grewal added. “When that doesn’t happen, there can and should be consequences.”
All things considered, the SEC has signaled FY2022 could shape up to be a much busier year not just for enforcement activity but also gatekeeper accountability—and, as an extension of that, a busier year for chief compliance officers and in-house counsel.