Following a record-breaking year in 2015, SEC enforcement activity in fiscal year 2016 continued to reach new highs. All indications point to much the same, if not a stronger and more innovative enforcement division, in the year ahead.
In all, according to its latest enforcement results, the SEC filed a record 868 enforcement actions exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, all at a time when the agency continues to enhance its use of data to detect illegal conduct and expedite investigations. In comparison, the agency brought 807 enforcement actions in 2015, and 755 in 2014.
The new single-year record for SEC enforcement actions, ending September 2016, included the most ever cases against investment advisers or investment companies (160), as well as the most ever independent or standalone cases involving investment advisers or investment companies (98). The agency said it also brought a record 548 standalone or independent enforcement actions and obtained judgments and orders totaling more than $4 billion in disgorgement and penalties.
FY 2016 also brought a host of first-of-their-kind SEC actions in FY 2016, including:
A September 2016 case against EY for auditor independence failures predicated on close personal relationships with audit clients;
A June 2016 case against brokerage firm Alfred Fried & Company solely for failing to file Suspicious Activity Reports;
A June 2016 case against private equity fund advisory group Blackstreet Capital Management for acting as an unregistered broker; and
A March 2016 case against municipal adviser Central States Capital Markets, its CEO, and two employees for violating the fiduciary duty for municipal advisers created by the Dodd-Frank Act, which requires advisers to put their municipal clients’ interests ahead of their own.
FCPA enforcement. The SEC also brought a record 21 enforcement actions for violations of the Foreign Corrupt Practices Act in FY 2016. The largest FCPA enforcement actions were brought against Amsterdam-based telecommunications-company VimpelCom and publicly traded alternative investment and hedge fund firm Och-Ziff Capital Management Group, each of which paid hundreds of millions of dollars to settle the charges.
“Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”
Mary Jo White, Chairman, SEC
In February, VimpelCom and its wholly owned Uzbek subsidiary, Unitel, agreed to pay more than $795 million in total fines and penalties after admitting to paying bribes through various executives and employees to an Uzbek government official to enter and continue operating in the Uzbek telecommunications market. The companies structured and concealed the bribes through various payments to a shell company that certain VimpelCom and Unitel management knew was beneficially owned by the foreign official. In total, VimpelCom paid more than $114 million in bribery payments between 2006 and 2012.
In the Och-Ziff case, the company and its wholly-owned subsidiary, OZ Africa Management, in September agreed to pay a combined $412 million in criminal and regulatory penalties in connection with a widespread scheme involving the bribery of officials in Africa. That case marked the first time a hedge fund was held to account for violating the FCPA.
Notably, in FY 2016 the SEC entered into non-prosecution agreements (NPAs) with two unrelated companies—internet services provider Akamai Technologies and building products manufacturer Nortek—both of which self-reported the misconduct promptly and cooperated extensively with the ensuing SEC investigations. Prior to these settlements, the SEC had entered into only one other NPA, back in 2013.
No area of enforcement, however, continues to elicit more angst from compliance, legal, and audit executives than the agency’s increasing focus on holding gatekeepers accountable. As this past year demonstrated, the SEC also has its sights set on auditing firms, consultants, and attorneys.
In FY 2016, the SEC brought charges against auditing firms, including Grant Thornton and Ernst & Young, for violating auditor independence rules. It also brought charges against Apex Fund Services, a firm providing administrative services to private funds, for missing or ignoring clear indications of fraud while it was retained to keep records and prepare financial statements and investor account statements for two client funds.
SEC FY 2016 ENFORCEMENT RESULTS
Below is an excerpt from the Securities and Exchange Commission’s fiscal year 2016 enforcement results.
The Securities and Exchange Commission announced that, in fiscal year 2016, it filed 868 enforcement actions exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations.
The new single year high for SEC enforcement actions for the fiscal year that ended Sept. 30 included the most ever cases involving investment advisers or investment companies (160) and the most ever independent or standalone cases involving investment advisers or investment companies (98). The agency also reached new highs for Foreign Corrupt Practices Act-related enforcement actions (21) and money distributed to whistleblowers ($57 million) in a single year.
The agency also brought a record 548 standalone or independent enforcement actions and obtained judgments and orders totaling more than $4 billion in disgorgement and penalties.
The SEC’s most significant enforcement actions in fiscal year 2016 include:
Insider trading and beneficial ownership reporting-related charges against Leon G. Cooperman and his firm Omega Advisors.
Insider trading charges against William “Billy” Walters and his source Thomas C. Davis, a former Dean Foods Company board member.
A $415 million enforcement action against Merrill Lynch for violating customer protection rules by misusing customer cash and putting customer securities at risk. The firm also admitted wrongdoing.
A $267 million enforcement action against J.P. Morgan wealth management subsidiaries, for failing to disclose conflicts of interest to clients. The firms also admitted wrongdoing.
FCPA cases against the Och-Ziff hedge fund and its CEO and CFO and against VimpelCom Ltd. in which the companies paid hundreds of millions of dollars to settle the charges.
The agency also brought impactful first-of-their-kind actions in fiscal year 2016, including charges against: a firm solely for failing to file Suspicious Activity Reports when appropriate; an audit firm for auditor independence failures predicated on close personal relationships with audit clients; municipal advisors for violating the fiduciary duty for municipal advisors created by the 2010 Dodd-Frank Act and the municipal advisor antifraud provisions of the Dodd-Frank Act; a private equity adviser for acting as an unregistered broker; and an issuer of retail structured notes for misstatements and omissions. In addition, fiscal year 2016 included a first-of-its-kind trial victory: the first federal jury trial by the SEC against a municipality and one of its officers for violations of the federal securities laws.
Source: Securities and Exchange Commission
Consolidated audit trail. The SEC’s record enforcement year comes at a time when the agency continues to adopt new and innovative ways to uncover securities law violations and aid in investigations. Several charges brought against individuals in FY 2016, for example, “involved complex insider-trading rings, which were cracked by enforcement’s innovative uses of data and analytics to spot suspicious trading,” the SEC said.
“Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases and expanding the playbook bringing novel and significant actions,” SEC Chair Mary Jo White said in a statement announcing the agency’s fiscal year 2016 enforcement results.
The SEC’s ability to harness data and technology to more effectively oversee market participants got an even bigger boost on Nov. 15, when the agency voted to approve a national market system (NMS) plan to create a single, comprehensive database—the Consolidated Audit Trail (CAT)—that will enable regulators to more efficiently and accurately track trading in equity and option securities throughout the U.S. markets.
“Through the CAT, regulators will have more timely access to a comprehensive set of trading data, enabling us to more efficiently and effectively conduct research, reconstruct market events, monitor market behavior, and identify and investigate misconduct,” White said.
The plan, submitted jointly by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to the Commission, would increase the effectiveness of market research and monitoring, event reconstruction, and the ability to identify and investigate market misconduct.
The SEC said it has modified several provisions of the NMS plan in response to public comments and recommendations from self-regulatory organizations. Some of these modifications include strengthening security requirements, tightening synchronization standards, and adding additional members to the governance committee.
Whistleblower trends. The SEC’s Office of the Whistleblower also had a historic year. In 2016, awards to whistleblowers surpassed the $100 million mark, totaling more than $111 million to 34 whistleblowers. In FY 2016 alone, the agency issued awards totaling over $57 million—higher than all award amounts issued in previous years combined.
The ten highest awards issued by the SEC to whistleblowers each totaled more than $1 million, with the largest exceeding more than $30 million. Six of the ten highest whistleblower awards were made in FY 2016.
In addition, the SEC brought charges against multiple companies for violations of Securities Exchange Act Rule 21F-17, which prohibits the use of confidentiality agreements to silence or discourage potential whistleblowers from contacting the SEC. Sounding a warning to other companies, the SEC’s Office of the Whistleblower said that confidentiality, severance, and other kinds of agreements that stifle a would-be whistleblower from reporting information to the agency will continue to be a top enforcement priority in 2017.
Also this year, the SEC brought a first-of-its-kind enforcement action—a stand-alone whistleblower retaliation case—against casino-gaming company International Game Technology (IGT) for firing an employee with several years of positive performance reviews after the employee reported to senior management and the SEC that the company’s financial statements might be distorted. “As this case demonstrates, strong enforcement of the anti-retaliation protections is a critical component of the SEC’s whistleblower program,” the OWB’s annual report stated.
“Identifying fact patterns of retaliation, such as that in the IGT case, will also continue to be a focus for OWB in the upcoming fiscal year,” said Jane Norberg, chief of the Office of the Whistleblower.
In the last three consecutive fiscal years, the SEC has continued to reach record highs, bring first-of-their-kind enforcement actions and more broadly enhance whistleblower protections. With the recent approval of CAT and the agency’s growing reliance on data analytics to uncover securities law violations, and with a closer eye on the lapses of gatekeepers, 2017, much like the years that have preceded it, portends to be another busy year for the SEC Enforcement Division and the Office of the Whistleblower alike.