Nutter Securities Enforcement Update: 2022 SEC RetrospectivePrint PDF
2022 was a busy year for the SEC’s Enforcement Division. This 2022 Retrospective highlights some of the year’s notable cases, largest settlements, new and noteworthy theories, and court decisions worth remembering.
Not all mega-settlements are groundbreaking, but award size says a lot about the SEC’s priorities. Amounts shown are the total of disgorgement and penalties.
- Barclays Capital Inc., Rel. 34-95921; Citigroup Global Markets Inc., Rel. 34-95920; Goldman Sachs & Co. LLC, Rel. 34-95922; Morgan Stanley & Co. LLC, Rel. 34-95924; Credit Suisse Securities (USA) LLC, Rel. 34-95925; and 10 others (Sept. 27, 2022) – Charges of failure to supervise and retain employee “off-channel” communications, meaning business communications on services not authorized or monitored by the firm. $1.1b.
- Allianz Global Investors US, LLC, Rel. IA-6027 (May 17, 2022) – Charges of misrepresentations to investors about, and of failure to implement, a risk mitigation strategy in managed products. $990m.
- The Boeing Company, 33-11105 and Dennis A. Muilenburg, Rel. 33-11106 (Sept. 22, 2022) – Charges of misstatements by the company and its former CEO about 737 flight safety following two fatal crashes. $200m (+ $1m against CEO).
- Barclays PLC and Barclays Bank PLC, Rel. 33-11110, 34-95944, AAER-4344 (Sept. 29, 2022) – Charges that the bank sold $17 billion of its securities above the amount registered. $200m.
- Charles Schwab & Co., et al., Rel. 34-95087, IA-6047 (June 13, 2022) – Charges of failure to disclose pre-set minimum cash holdings in a “no fee” account where the respondent earned spread on cash. $180m+.
- Ernst & Young, LLP, Rel. 34-95167, AAER 4313 (June 28, 2022) – Charges that a significant number of audit professionals cheated on the CPA exam by using and sharing answer keys, and that the firm failed to share certain information with investigators. $100m.
- Equitable Financial Life Insurance Company, Rel. 33-11083 (July 18, 2022) – Charges that fee disclosures on 403(b) account statements misleadingly omitted fees on fund options within the plans. $50m.
- Morgan Stanley Smith Barney LLC, Rel. 34-95832, IA-6138 (Sept. 20, 2022) – Charges of failure to ensure protection of customer information when decommissioning data centers. $35m.
- UBS Financial Services Inc., Rel. 34-95168, IA-6060 (June 29, 2022) – Charges of a failure to train financial advisors about, and failure to disclose to advisory customers, risks of “Yield Enhancement Strategy.” $23m+.
- Deloitte Touche Tohmatsu Certified Public Accountants, LLP, Rel. 34-95938, AAER-4342 (Sept. 29, 2022) – Charges that the Chinese affiliate of global accounting firm failed to perform audit confirmation steps on Chinese operations of U.S. issuers. $20m.
New and Notable
The SEC touted many enforcement actions and settlements involving new or rarely litigated provisions of the securities laws. These are worth remembering:
- Shadow Insider Trading. SEC v. Panuwat, Civ. A. No. 21-cv-06322-WHO (N.D. Cal. Jan. 14, 2021) – District court declines to dismiss the first insider trading charges based on “shadow trading,” i.e., trading one company’s stock based on nonpublic information about another company in the same industry. Trial expected in 2024.
- Family Office Collapse. SEC v. Hwang, Press Rel. No 2022-70 (April 27, 2022) (“Archegos”): In a rare case against a “family office” exempt from Advisers Act registration, the SEC charged the respondents with using security-based swaps with multiple banking counterparties to manipulate the market in underlying securities, and with causing billions of dollars in losses to counterparties when the share prices collapsed in March 2021. Litigation is ongoing.
- ESG Representations. BNY Mellon Investment Adviser, Inc., Rel. IA-6032, IC-34591 (May 23, 2022) – In a settled matter, the respondent was charged with making material misstatements and omissions in mutual fund prospectuses and to the funds’ boards about its affiliated subadviser’s performance of ESG quality reviews as part of its investment research process.
- Investment Company Exchange Offers. RiverSource Distributors, Inc. Rel. 34-94978, IC-34592 (May 25, 2022) – In a settlement of rare charges of violating Section 11 of the Investment Company Act, a variable annuity underwriter was charged with promoting contract exchange offers that were subject to a commission charge. $5m settlement.
- Regulation Best Interest. SEC v. Western International Securities, Inc., et al., Press Rel. No. 2022-110 (June 16, 2022) – First charges against a broker-dealer for Reg Best Interest violations, in this case sales of unrated, high risk debt securities to retail investors. Litigation is ongoing.
- Regulation S-ID. JP Morgan Securities, Rel. 34-95367, Rel. IA-6073; UBS Financial Services, Rel. 34-95368, Rel. IA-6074; and TradeStation Securities, Rel. 34-95369 (July 27, 2022) – Settlements of first charges against broker-dealers for violating Reg S-ID, for failing to adopt or implement procedures to identify and respond to red flags for customer identify theft. (See also, Morgan Stanley [failure to protect PII].)
- Municipal Securities Private Offerings. Jefferies LLC, Rel. 34-95749; BNY Mellon Capital Markets LLC Rel. 34-95750; TD Securities (USA) LLC Rel. 34-95751; and SEC v. Oppenheimer & Co., Lit. Rel. No. 25505 (Sept. 13, 2022) – First charges against underwriters for failure to confirm compliance with MSRB rules for private municipal debt offerings, which require verification that qualified buyers are not reselling or purchasing for the accounts of others. Three firms settled; one litigation matter is ongoing.
- SOX 304 Clawbacks. SEC v. Granite Construction, Inc., and SEC v. Swanberg, Lit. Rel. No. 25507 (Sept. 15, 2022) – In separate administrative proceedings related to a public company’s $12 million financial reporting settlement, the former CEO and CFOs were not charged with misconduct and agreed to return more than $1.4 million, $327,000, and $176,000, respectively, in compensation “clawbacks” under Section 304 of the Sarbanes-Oxley Act.
- Investment Adviser Proxy Voting. Toews Corporation, Rel. IA-6139 (Sept. 20, 2022) – A divided SEC approved this settlement of charges that a registered investment adviser cast proxy votes of issuers of securities held in the RIA’s managed mutual funds without taking steps to determine if the votes were in its clients’ best interest. The respondent had directed a third-party proxy voting service to vote all proxies in favor of management proposals and against shareholder proposals, and did not itself review any of the proxy materials for those votes. Commissioners Peirce and Uyeda dissented.
- Cooperation. In the Matter of Cronos Group, Inc., Rel. 33-11123, 34-96137, AAER-4357 (Oct. 24, 2022) – In a settled matter cited by SEC staff as a “gold standard” for firm cooperation, the SEC charged the respondent, a cannabis distributor, with improper revenue recognition in connection with simultaneous purchase and sale transactions with the same parties, and with failing to timely record impairment charges in connection with goodwill and intangible assets of a U.S. reporting unit. The settlement requires the company to retain an independent compliance consultant but, in consideration of the respondent’s self-reporting, cooperation, and remedial measures, the Commission did not impose a civil penalty.
- Mutual Fund Pricing. SEC v. Infinity Q Diversified Alpha Fund, Lit. Rel. No. 25575 (Nov. 10, 2022) – In a settled matter involving a rare mutual fund collapse, the SEC charged the fund with reporting falsely inflated NAVs due to deliberate mispricing of its holdings, primarily unlisted equity and OTC derivatives, by the adviser’s Chief Investment Officer. The fund’s board applied to the SEC for permission to suspend redemptions in order to facilitate liquidation of the fund.
Reining In Federal Agencies
Three important decisions are re-shaping the authority of federal administrative agencies. Upcoming Supreme Court decisions in Cochran and Axon Enterprise, expected this spring, may do more of the same.
- West Virginia v. E.P.A., 597 U.S. -- (2022) – In a decision that could affect SEC authority to issue regulations about “major policy decisions,” the Supreme Court held that a federal agency exceeds its authority when it enacts “major policy decisions” through regulation absent “‘clear congressional authorization’ for the power it claims,” even if there is a “plausible textual basis” for the regulation.
- Jarkesy v. S.E.C., No. 20-61007 (5th Cir. May 18, 2022) – A sharply divided Fifth Circuit panel held that SEC administrative proceedings before an ALJ are unconstitutional because (1) respondents have a constitutional right to a jury trial for fraud-like claims; (2) respondents have a constitutional right to a jury trial when the SEC seeks civil penalties; and (3) SEC administrative law judges are unconstitutionally appointed because they are “inferior officers” but cannot be removed by the President. The Fifth Circuit later refused en banc review, setting up a possible Supreme Court challenge.
- Community Fin. Serv. Assoc. of America, Ltd. v. CFPB, No. 21-50826 (5th Cir. Oct. 19, 2022) – In a case that could lead to challenges of actions of other “self-funded” agencies, the Fifth Circuit invalidated the Consumer Financial Protection Bureau’s (CFPB) Payday Lending Rule because the CFPB’s “self-funding” mechanism does not satisfy the Constitution’s requirement that Congress appropriate its funds.
Court Decisions of Note
Finally, the SEC has a strong track record in court, but its press releases do not capture every decision of importance.
- Cryptocurrency Registration. SEC v. LBRY, Inc., No. 1:21-cv-00260-PB (D.N.H. Nov. 7, 2021) – In ongoing litigation, a district court granted summary judgment to the SEC on charges that the defendants engaged in an unregistered securities offering of a digital token called LBC. In holding that LBC was a security, the court found that LBRY promoted LBC as an investment, and that LBC’s non-financial or “consumptive” uses for some purchasers did not overcome their investment purpose.
SEC v. Ripple Labs, Inc., et al., No. 20-cv-10832 (S.D.N.Y. March 11, 2022) – In ongoing litigation, a court denied the SEC’s motion to strike an affirmative defense that the defendant lacked fair notice that its digital asset was a security under the securities laws.
- Court Pushback on “Standard” SEC Remedies. SEC v. McDermott, Lit Rel. No. 25570 (Nov. 3, 2022) – In a litigated action, a district court declined to enter an “obey the law” injunction and assessed a smaller civil penalty than the SEC requested. After a trial, a jury found that an RIA firm and its principal failed to disclose certain conflicts of interest and failed to seek best execution in connection with recommendations of certain unit investment trusts (UITs) to fee-based advisory clients in violation of Advisors Act Sections 206(1), 206(2), and 209(f). In its final judgment, the court rejected the SEC’s standard request for injunctions against future violations. The court ordered the defendants to pay disgorgement of $143,379 and $50,983.60 in prejudgment interest, which were the amounts requested by the SEC. The court assessed penalties of $160,000, less than the $480,000 requested by the SEC.
SEC v. Lemelson et al., Civ. A. No. 10-cv-11026 (D. Mass. March 30, 2022) – After a trial in which the jury found that the defendant violated Exchange Act Section 10(b) but did not violate IA Section 206(1) or (2), the court denied the SEC’s request for civil penalties of $1.4 million and disgorgement and interest of $865,124. Instead, the court enjoined the defendants from violating Section Act 10(b) and Rule 10b-5 for five years and imposed a Tier III civil penalty in the amount of $160,000.
- Scheme Liability Elements Clarified. SEC v. Rio Tinto plc, et al., No. 21-2042-cv (2d Cir. July 15, 2022) – In a decision that clarifies the elements of so-called “scheme liability” charges, the Second Circuit held that claims of participation in a fraudulent scheme require the SEC to allege that the defendant took actions beyond misrepresentations or misleading omissions. This applies to charges under Securities Act subsections 17(a)(1) and (a)(3) and subsections Exchange Act Rule 10b-5(a) and (c), and reaffirms the holding of Lentell v. Merrill Lynch, 396 F. 3d 161 (2d Cir., 2005).
- Disgorgement Criteria Further Defined. SEC v. Liu, No. 21-56090 (9th Cir. Aug. 22, 2022) – Following remand from the Supreme Court’s ruling affirming but limiting the SEC’s authority to seek disgorgement, the Ninth Circuit affirmed the District Court’s decisions not to deduct certain third-party vendor and other payments from the disgorgement award and to apply joint and several liability to the defendants.
- Statute of Limitations Based on Date of Charge, Not Conduct. SEC v. Sharp, Civ. A. No. 1:21-cv-11276-WGY (D. Mass. Sept. 6, 2022) – In the first case on the retroactivity of Congress’s extension of the statute of limitations from five to 10 years on SEC enforcement actions seeking disgorgement or penalties, the court held that the SEC may bring new charges seeking disgorgement for acts that took place up to 10 years prior to the filing of the action, even if the conduct took place prior to the Congressional action. The statute expressly applies “to any action or proceeding that is pending on or commenced on or after” January 1, 2021.
- State Fiduciary Rule for Broker-Dealers Invalidated. Robinhood Financial LLC v. Galvin, et al., A. No. 2184cv00884 (Mass. Super. Ct.) (March 30, 2022) – The court held that the Massachusetts Securities Division exceeded its statutory authority in adopting a state Fiduciary Duty Rule imposing a fiduciary duty on broker-dealers when providing investment advice, because such a rule would change prior common law without clear legislative authority. The judge imposed a stay on his decision to allow the Securities Division to appeal.
- Reg FD Enforced. SEC v. AT&T Inc, Civil A. No. 1:21-cv-01951-PAE (S.D.N.Y, Sept. 8, 2022) – In a rare Reg FD enforcement action against a publicly traded company and investor relations personnel, the court denied all parties’ motions for summary judgment. The SEC alleges that the defendants selectively disclosed key metrics to Wall Street analysts in an attempt to lower the consensus earnings estimate, in violation of Reg FD’s prohibition on selective disclosure of material information. The court rejected the defendants’ arguments that the information provided was not material and that it was discernable from publicly available information but held that the issue of scienter was for the jury. The case settled in December for a $6.25m penalty.
The Nutter Securities Enforcement Update is a periodic summary of noteworthy recent securities enforcement activity, settlements, decisions, and charges. For more information on these cases or about how they may impact you, contact your Nutter attorney.
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