2021 Was a Mixed Year For the SEC’s Division of Enforcement, But All Signs Point to Increased Enforcement Activity in 2022

In addition, the SEC ordered a total of $1.45 billion in fines, a 33% increase over the $1.09 billion in fines ordered in 2020. And perhaps not surprisingly, the SEC ordered almost 33% less in disgorgement in 2021, almost certainly as a result of the U.S. Supreme Court’s Liu decision last year, which limited disgorgement to a wrongdoer’s net profits. Money distributed to harmed investors was down nearly 50 percent at $602 million, the lowest since FY 2016. At the same time, the SEC boasted a record year for its whistleblower program, awarding a total of $564 million to 108 whistleblowers and surpassing $1 billion in awards over the life of the SEC’s whistleblower program. The two highest whistleblower awards amounted to $114 and $110 million.

The Director of the SEC’s Enforcement Division, Gurbir S. Grewal, alluded to ongoing COVID-19 pandemic-related obstacles and noted that FY 2021 featured “a number of critically important and first-of-their-kind enforcement actions, as well as record-breaking achievements for [the SEC’s] whistleblower program, which [is expected to] lead to even more successful actions in the future.” SEC Chair Gary Gensler emphasized  the SEC Enforcement Division’s commitment to serving as the “the cop on the beat for America’s securities laws.”

Inaugural types of enforcement actions included charges against:  (1) a decentralized finance (“DeFi”) lender and executives for raising $30 million through fraudulent offerings; (2) an individual for selling “insider tips” on the dark web; (3) a municipal advisor firm for violations of Municipal Securities Rulemaking Board Rule G-42 in connection with duties owed to charter school clients; (4) a crowdfunding portal and others for fraudulent and unregistered offerings; (5) a data provider in the mobile app industry for deceptive practices and material misrepresentations; (6) 27 financial firms for untimely filing and delivery of client or customer relationship summaries to retail investors on Form CRS; and (7) an order and execution management system (“OEMS”) provider for operating as an unregistered broker-dealer.

The SEC also remained committed to an array of traditional enforcement actions in FY 2021 — 23 percent of the SEC’s total actions were against investment advisors and investment companies, 22 percent were classified as securities offering actions, 17 percent were for delinquent filings, and 16 percent were against broker-dealers. Example enforcement actions in “key priority areas” include:

• Insider Trading and Market Manipulation: As part of the SEC’s emphasis on targeting individual wrongdoing, the Report highlights misconduct by ordinary employees — quantitative analysts, hedge fund traders, and the chairman of a public company — for insider trading on confidential information, wash trading in the options of certain “meme” stocks, and other unlawful stock sales. Insider trading actions accounted for 4 percent of the SEC’s total actions and 6 percent of the SEC’s civil and standalone actions for the year. The SEC’s own data analytics tools uncovered the fraud underlying two such actions.
• Financial Fraud and Issuer Disclosure: The SEC continued to police misconduct concerning the financial reporting process. Highlights include: charges against a company for improper disclosures about the impact of the COVID-19 pandemic on its operations and financial condition; a $9 million settlement for charges against a company for misleading disclosures about the bases of its revenue growth and omissions of known uncertainties about future revenue; charges against a company for deceptive failures to timely impair its goodwill after months of declining stock prices; and a $100 million settlement for concealed theft of millions of dollars by executives. Notably, the SEC refrained from imposing penalties in cases where companies cooperated with the SEC’s investigation and undertook remedial efforts, such as replacing key personnel, developing internal audit functions, enhancing policies and procedures, and instituting new tracking and review processes. The Report emphasizes an action against a special purpose acquisition corporation (“SPAC”), its sponsor, its CEO, and its proposed merger target and the target’s former CEO for misleading claims about the target’s technology and national security risks related to the target’s former CEO, which led to a settlement of over $8 million in penalties.
• Misconduct in Cryptocurrency Markets: The SEC continued crypto-related enforcement against companies and individuals for unregistered or fraudulent offerings of digital asset securities and unlawful touting of digital asset securities. One action against Ripple Labs Inc. and two of its executives sought injunctive relief, disgorgement, and civil penalties for an unregistered offering worth $1.3 billion.  Another charged a crypto lending platform and its executives for an alleged $2 billion fraud. Securities offerings at-large accounted for 33 percent of the SEC’s civil and standalone actions.
• Foreign Corrupt Practices Act (“FCPA”) Violations: While FCPA violations accounted for only 1 percent of the SEC’s total actions in FY 2021, the Report emphasizes charges against four large companies for violations of the anti-bribery, books and records, and internal accounting controls provisions of the FCPA that resulted in settlements between $7 million and $1 billion.

Additionally, to “swiftly . . . protect investors,” the SEC took “emergency action” in numerous cases, including by freezing assets and obtaining temporary restraining orders.

The Report fails to highlight a key development in 2021: the SEC’s Climate and ESG Task Force, which was created in March 2021 to “develop initiatives to proactively identify ESG-related misconduct.”  Nonetheless, ESG-related matters will likely be a top priority in FY 2022.

The SEC’s enforcement actions in FY 2021 “spanned the securities markets,” and the decrease in total enforcement actions and monetary collection is not a sign of leniency, but rather a COVID-19 pandemic-related side effect. And contemporaneously with the Annual Enforcement Report, the SEC also issued its annual report on its Whistleblower Program, noting that whistleblower tips skyrocketed – the SEC received 12,210 tips in fiscal 2021, a 76 percent increase over the prior fiscal year. This level of whistleblower activity forebodes a significant increase in enforcement activity.  Thus, in FY 2022, companies should build well-rounded compliance programs, focus on internal controls and required disclosures, and stay alert in a fast-developing regulatory environment, especially pertaining to ESG and DeFi.