SEC Announces $25 Million Enforcement Action Over Company’s Use Of Stock Buyback Plans That SEC Alleged Failed To Comply With Rule 10b5-1
On November 14, 2023, the Securities and Exchange Commission announced a settled enforcement action against Charter Communications, Inc. (“Company”) imposing a $25 million civil penalty over allegations that the Company had used stock buyback plans that did not comport with Rule 10b5-1 of the Securities Exchange Act of 1934. The SEC claimed that the Company’s stock buyback plans did not comport with Rule 10b5-1 because the plans contained provisions that allowed the Company to change the total dollar amounts available to buy back stock and the timing of buybacks after the plans took effect; and while Rule 10b5-1 is a safe harbor rather than a standard that must be met, the SEC alleged that the use of buyback plans that did not meet the Rule 10b5-1 standard evidenced insufficient accounting controls in violation of Section 13(b)(2)(B) of the Exchange Act.
SEC Brings Groundbreaking Claims Against Company For Fraud Relating To Data Breach
On October 30, 2023, the Securities and Exchange Commission filed claims against a software company (the “Company”) and its Chief Information Security Officer for alleged fraud and internal control failures relating to known cybersecurity risks and vulnerabilities. SEC v. SolarWinds Corp., et al., No. 23-cv-9518 (S.D.N.Y. Oct. 30, 2023). The SEC’s complaint alleges that the Company made misleading omissions, in connection with its disclosure in December 2020, that it had suffered a cyberattack that compromised its customers’ information.
SEC Sues Company For Unregistered Offerings Of NFTs
On September 13, 2023, the U.S. Securities and Exchange Commission brought a settled enforcement action against Stoner Cats 2 LLC for raising approximately $8 million through an unregistered offering of Non-Fungible Tokens (“NFTs”) that the SEC alleged were securities. This action is another example of the SEC alleging that crypto assets were securities based on the specific manner in which they were offered.
Nine Investment Firms Fined By The SEC For Marketing Rule Violations
On September 11, 2023, the U.S. Securities and Exchange Commission announced settled enforcement actions against nine separate investment advisory firms for alleged marketing rule violations, assessing a total of $850,000 in combined penalties. In each case, the SEC alleged that the firms improperly provided hypothetical performance information on their firm websites without following the requirements of the marketing rule.
SEC Announces Results Of Recent Enforcement Sweep Focused On Insider Ownership Reporting Failures
On September 27, 2023, the Securities and Exchange Commission announced settled enforcement actions against six officers, directors and major shareholders of various public companies for allegedly failing to timely report information about their holdings and transactions in company stock, and simultaneously announced settled actions against five public companies for allegedly contributing to these insiders’ filing failures or for failing to report their insiders’ filing delinquencies. The actions are part of a recent SEC enforcement initiative aimed at ensuring compliance with ownership disclosure rules by company insiders.
SEC Fines International Conglomerate $6.5 Million For FCPA Violations Related To Client Travel And Hospitality Expenses
On August 25, 2023, the Securities and Exchange Commission (“SEC”) accepted an Offer of Settlement (the “settlement”) from 3M Company (“3M”), related to alleged violations of the Foreign Corrupt Practices Act’s (“FCPA”) books and records and internal accounting control provisions (§§ 13(b)(2)(A) – (B) of the Securities Exchange Act of 1934). Without admitting or denying the findings, 3M agreed to pay $6,581,618 to resolve allegations that 3M’s China subsidiary (“3M-China”) improperly accounted for overseas trips it provided to 3M-China’s customers who were employed by Chinese state-owned entities (SOEs). According to the SEC, 3M-China invited SOE customers, who are deemed foreign officials under the FCPA, “to attend overseas conferences, educational events, and health care facility visits … ostensibly as part of 3M-China’s marketing and outreach efforts, but that in fact were often a pretext to provide overseas travel, sightseeing and entertainment … to the Officials to obtain and retain business from the SOE Customers.”
Corficolombiana Pays $80M To Resolve Bribery Probes
On August 10, 2023, the U.S. Securities Exchange Commission (“SEC”) and the Department of Justice (“DOJ”), in coordination with Columbian authorities, announced that Colombian conglomerate Grupo Aval Acciones y Valores S.A (“Grupo Aval”) and its banking subsidiary Corporacion Financiera Colombiana S.A. (“Corficolombiana”) agreed to pay approximately $80 million USD for their alleged involvement in a scheme to pay $23 million USD in bribes to high-ranking government officials in Colombia, in violation of the anti-bribery provisions of the Foreign Corrupt Practices Act (“FCPA”). In resolving these allegations, Corficolombiana entered into a three-year Deferred Prosecution Agreement (“DPA”) with the DOJ, and agreed to pay a $40.6 million USD criminal penalty, up to half of which may be credited against payments to the Columbian government.
In Denying Motion To Dismiss In Terraform Cryptocurrency Case, New York Federal Judge Rejects Key Aspects Of Ripple Ruling, Continuing Uncertainty On How Securities Law Applies To Cryptocurrencies
On July 31, 2023, United States District Court Judge for the Southern District of New York Judge Rakoff, denied cryptocurrency company Terraform Labs, Pte Ltd. (“Company”) and its founder’s motion to dismiss a suit that had been brought against them by the Securities and Exchange Commission (the “SEC”). The SEC sued the Company and its founder in February 2023 after the Company’s algorithmic stablecoin collapsed in May 2022, contributing to multiple bankruptcies. The SEC alleged that the Company and its founder made false and materially misleading statements to entice U.S. investors to purchase and hold on to the Company’s products, which the SEC claimed were unregistered investment-contracts that qualified as securities under Section 5 of the Securities Act of 1933 (the “Securities Act”). SEC v. Terraform Labs Pte. Ltd., 2023 WL 4858299, at *1 (S.D.N.Y. July 31, 2023). The Court held that the SEC had alleged a plausible claim for relief, and enough facts to establish the cryptocurrencies at issue were investment contracts requiring registration under the securities laws.
New York District Court Decides Significant Cryptocurrency Case, Holding That Whether Cryptocurrency Is A Security Turns On When And How It Was Sold
On July 13, 2023, Judge Analisa Torres of the United States District Court for the Southern District of New York issued a decision on the parties’ cross-motions for summary judgment in SEC v. Ripple Labs, Inc., No. 1:20-cv-10832-AT-SN, holding that Ripple Labs, Inc. (the “Company”) unlawfully sold unregistered securities in violation of the Securities Act of 1933 (the “Securities Act”) by selling its cryptocurrency token, XRP, to certain institutional buyers, while at the same time holding XRP was not a security within the meaning of the Securities Act when sold on digital asset exchanges, given the different circumstances and expectations of buyers in those transactions. The Court also held that the Company’s distributions of XRP to employees and third parties for the development of its project did not constitute sales of unregistered securities. This is a pivotal decision for the cryptocurrency market and is a significant win for cryptocurrency exchanges in particular.
Investment Adviser Fined $1.4 Million For Failure To Disclose SPAC Conflicts
On May 31, 2023, the United States Securities and Exchange Commission (SEC) fined a New York investment adviser (Investment Adviser) $1.4 million for allegedly failing to disclose conflicts of interest regarding special purpose acquisition companies (SPACs). In the Matter of RTW Invs., L.P., SEC Administrative Proceeding 3-21473 (May 30, 2023). According to the SEC, Investment Adviser personnel sponsored two separate SPACs while those same personnel simultaneously invested client funds in the SPACs, which the SEC alleged was a conflict of interest that required disclosure. The Investment Adviser neither admitted nor denied the allegations in the SEC’s Order.
Dutch Company Settles Alleged FCPA Violations With SEC For $62M
On May 11, 2023, the Securities and Exchange Commission (“SEC”) announced that Netherlands-based Koninklijke Philips N.V. (“Philips”) will pay more than $62 million to resolve claims that it violated the Foreign Corrupt Practices Act (“FCPA”) with respect to alleged conduct related to its sales of medical diagnostic equipment in China. Admin. Proc. File No. 3-21411. According to the SEC, Philips’ subsidiaries in China used special price discounts with distributors that created a risk that excessive distributor margins could be used to fund improper payments to employees. Philips neither admitted nor denied wrongdoing as part of the settlement.
Supreme Court Holds That Structural Challenges To Agency Administrative Proceedings May Be Brought Directly In Federal Court
On April 14, 2023, the United States Supreme Court issued a unanimous decision in the consolidated cases of Axon Enterprises Inc. v. FTC and SEC v. Cochran, finding that constitutional challenges to the ability of the Federal Trade Commission (“FTC”) and the U.S. Securities and Exchange Commission (“SEC”) to bring certain claims as administrative proceedings can bypass the administrative appeals process and be brought directly in federal court. The Court concluded that the authorizing statutes of the regulatory agencies do not implicitly restrict federal district courts of original jurisdiction to hear any challenges to an agency’s constitutionality. Thus, although the Court did not decide the substance of the petitioners’ constitutional challenges to the agencies’ administrative proceeding processes, it allowed petitioners’ challenges to move forward in federal court.
Brazilian Mining Company To Pay $55.9 Million To Settle SEC Charges Of Misleading ESG Disclosures
On March 28, 2023, the Securities and Exchange Commission (“SEC”) submitted a settlement agreement (“settlement”) to the United States District Court of the Eastern District of New York with Brazilian mining company Vale S.A. (“Vale” or “Company”). Under the settlement, without admitting or denying the findings, the Company will pay a total of $55.9 million to resolve charges brought against it by the SEC on April 28, 2022, regarding the Company’s allegedly false and misleading representations in its environmental, social, and governance (“ESG”) disclosures. The SEC averred in its complaint that the Company concealed the unsafe condition of its dams, which caused its ESG disclosures to be materially false and misleading for investors. See SEC v. Vale S.A., Case No. 22-cv-2405-LDH-SJB (Mar. 28, 2023).
DOJ And SEC Charge Individual For Insider Trading Through Use Of 10b5-1 Trading Plans
On March 1, 2023, the Department of Justice (“DOJ”) unsealed an indictment against the founder, CEO, and Chairman of a publicly traded health care company (the “Company”), alleging that he had illegally executed trades pursuant to Rule 10b5-1 trading plans while in possession of material nonpublic information. The Securities and Exchange Commission (“SEC”) filed a concurrent civil suit against defendant for the same activity. In each case, the government alleged that defendant improperly used his 10b5-1 plans by entering into them while in possession of material nonpublic information and triggering sales shortly thereafter, without any form of cooling-off period.
SEC Charged McDonald’s For Public Disclosure Violations Related To The Board’s Exercise Of Discretion Respecting The Former CEO’s Termination And Charged The Former CEO For Fraud
On January 9, 2023, the Securities Exchange Commission issued a cease-and-desist order against McDonald’s Corporation and the Company’s former CEO Stephen Easterbrook related to Easterbrook’s departure. The SEC’s order alleged that the Company failed to disclose in a Form 8-K that it exercised discretion in terminating Easterbrook “without cause,” and allowed him to retain more than $40 million in equity-based compensation that would have been forfeited if the company had terminated him “for cause;” and further alleged that Easterbrook withheld information about his relationships with Company employees in an internal investigation. Without admitting or denying the findings, the Company and Easterbrook consented to the entry of the Order. See In re Easterbrook & McDonald’s Corp., No. 3-21269 (Jan. 9, 2023).
SEC Brings Enforcement Action Over Company’s Alleged Failure To Track Information About Workplace Misconduct Relevant To Risk Factor Disclosures About Employee Retention
On February 3, 2023, the Securities and Exchange Commission (“SEC”) announced a settled enforcement action against video game maker Activision Blizzard Inc. (the “Company”) for an alleged failure to maintain procedures designed to collect employee complaints of workplace misconduct and analyze them for disclosure purposes. The SEC found that the lack of such procedures violated the Company’s obligation to maintain procedures designed to ensure that information required to be disclosed in the Company’s SEC reports was in fact timely reported. In addition, the SEC’s enforcement action alleged that the Company had improperly impeded former employees from communicating directly with the SEC staff about possible securities law violations by requiring those employees, through a clause in their separation agreements, to notify the Company of any requests from an administrative agency in connection with a report or complaint. Without admitting or denying the findings, the Company agreed to pay a $35 million civil penalty, but Commissioner Hester Peirce issued a spirited dissent arguing that the SEC’s allegations did not in fact amount to securities law violations.
SEC Announces Year-End Enforcement Results, Emphasizing Record-Setting Penalty Awards
On November 15, 2022, the Securities and Exchange Commission (“SEC”) released its summary of enforcement actions for the 2022 fiscal year, which ended on June 30, 2022. The SEC announced that it filed 760 enforcement actions, a nine percent increase over 2021. The actions resulted in orders of a record-breaking $6.439 billion to be paid to the SEC, including roughly $4.2 billion in penalties. The SEC noted that the high numbers reflect its “sense of urgency to protect investors, hold wrongdoers accountable and deter future misconduct in our financial markets.”
SEC And CFTC Orders Concerning Electronic Communications
On September 27, 2022, the SEC announced charges against affiliates of 11 financial institutions (15 broker-dealers and one investment adviser) for allegedly failing to maintain and preserve electronic communications and allegedly failing to reasonably supervise from January 2018 through September 2021. See SEC Press Release 2022-174
(Sept. 27, 2022). On the same day, the CFTC announced charges against affiliates of the same 11 financial institutions for allegedly failing to maintain, preserve, or produce required records, and allegedly failing to supervise matters related to their businesses as swap dealers and futures commission merchants.
SEC Brings Actions Against Underwriters In First-Ever Municipal Bond Disclosure Cases
On September 13, 2022, the Securities and Exchange Commission (“SEC”) filed suit in the United States District Court for the Southern District of New York against an underwriter for allegedly failing to comply with the regulatory requirements of the Exchange Act’s Rule 15c2-12 (17 C.F.R. § 240.15c2-12), which provides a limited exception to certain disclosure requirements where underwriters have a reasonable belief that the municipal securities are being sold only to sophisticated investors that are each buying the securities for a single account. See SEC v. Oppenheimer & Co., Inc., S.D.N.Y. No. 1:22-cv-7801 (Sept. 13, 2022). The SEC also initiated settled enforcement actions with three other firms for similar alleged violations. This is the first time that the SEC has initiated municipal-bond disclosure cases.
SEC Brings Enforcement Action Against Investment Advisor For Allegedly Failing To Disclose Conflicts Of Interest In SPACs Into Which It Invested Client Funds
On September 6, 2022, the Securities and Exchange Commission announced that New York-based, registered investment advisor Perceptive Advisors LLC (“Investment Advisor”) had agreed to pay a $1.5 million civil penalty for allegedly failing to disclose conflicts of interest regarding ownership of its personnel in sponsors of special purpose acquisition companies (SPACs). According to the SEC, the Investment Advisor used private client funds to facilitate transactions benefitting SPACs in which the Investment Advisor’s personnel and other clients had financial interests but failed to disclose the alleged conflicts resulting from those interests.
Second Circuit Overturns $1 Million Whistleblower Award For Improper Jury Instruction
On August 5, 2022, the United States Court of Appeals for the Second Circuit overturned a judgment of approximately $1 million awarded to a purported whistleblower after a jury determined in 2017 that the financial institution unlawfully terminated the employee in retaliation for his refusal to change certain aspects of his research reports related to commercial mortgage-backed securities. In narrowing the universe of alleged whistleblowers who may be entitled to relief for retaliation, the Second Circuit held that the trial judge failed to inform the jurors as to the critical burden whistleblowers bear under the Sarbanes-Oxley Act: namely, that a whistle-blower must prove that their employer intended the alleged employment action to be retaliatory.
SEC And DOJ Bring First Ever Charges For Cryptocurrency Insider Trading Tipping Scheme
On July 21, 2022, the Securities and Exchange Commission (“SEC”) filed a complaint and the Department of Justice (“DOJ”) unsealed an indictment against Ishan Wahi, a former Coinbase employee, his brother, Nikhil Wahi, and friend, Sameer Ramani, for alleged insider trading. SEC v. Ihan Wahi, Nikhil Wahi, and Sameer Ramani, 2:22-cv01009 (W.D. Wa. July 21, 2022); United States v. Ishan Wahi, Nikhil Wahi, and Sameer Ramani, 22-cr-392 (S.D.N.Y. 2022). Both the complaint and indictment concern the same underlying conduct by Wahi, who allegedly provided dozens of tips to his brother and friend over several months to purchase certain digital assets tied to cryptocurrencies (the “digital assets”) shortly before they were publicly listed on Coinbase’s exchange.
Second Circuit Rejects SEC Request To Revisit Holding That “Scheme Liability” Requires Conduct Beyond Misstatements And Omissions
On July 15, 2022, a panel of the United States Court of Appeals for the Second Circuit ruled against the Securities and Exchange Commission (“SEC”) in an interlocutory appeal the SEC had brought seeking to expand the scope of “scheme liability” under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder. SEC v. Rio Tinto plc, No. 21-2042 (2d Cir. Jul. 15, 2022). Specifically, the SEC had urged the Second Circuit, in a case it had brought against a mining company and certain of its former executives (the “Defendants”), to hold that the Supreme Court’s decision in Lorenzo v. SEC, 139 S. Ct. 1094 (2019), abrogated the Second Circuit’s prior decision in Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005), which had found that a defendant can only be liable for scheme liability under Rule 10b-5(a) and (c) where they engage in misleading conduct beyond misstatements and omissions. The Second Circuit panel ruled that Lentell remains good law, and that any expansion of the scheme liability provisions of Rule 10b-5(a) and (c) would need to come either from the Second Circuit en banc or the Supreme Court.
SEC Brings Its First Regulation Best Interest Enforcement Action
On June 15, 2022, the Securities and Exchange Commission (“SEC”) filed a complaint in the U.S. District Court for the Central District of California against registered broker-dealer Western International Securities, Inc. (“Western”) and five of its registered representatives (the “Registered Representatives”), alleging that they had violated the Best Interest Obligation under Rule 15l-1(a) of the Securities Exchange Act of 1934 (“Regulation Best Interest” or “Reg BI”) in connection with their recommendations to retail customers to purchase certain unrated debt securities. This is the first action brought by the SEC to enforce Reg BI, and the litigation could lead to important legal rulings clarifying its scope.
SEC Brings Action Against Investment Advisers For Allegedly Misleading Robo-Adviser Clients About Hidden Fees
On June 13, 2022, the Securities and Exchange Commission (“SEC”), announced that it had instituted a settled administrative proceeding accusing several investment advisers (the “Advisers”) that focused on robo-advising, and all of which were themselves subsidiaries of a prominent investment adviser, of violating Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Section 15(b) of the Securities Exchange Act of 1934. Broadly, the SEC accused them of failing to invest client cash in ways that their own analyses showed would be optimal for the clients, and instead retaining cash in a way that benefitted the Advisers. The Advisers did not admit or deny the SEC’s allegations as part of the resolution, but as part of the settlement agreed collectively to disgorge approximately $52 million and to pay a civil monetary penalty of $135 million and were also required to engage an independent consultant and engage in certain other undertakings.
SEC ESG Fines Investment Adviser For Alleged ESG Misstatements In ESG Task Force’s First Enforcement Resolution
On March 4, 2021, the Securities & Exchange Commission (“SEC”) publicly announced the formation of a Climate and Environmental, Social and Governance (“ESG”) Task Force within its Enforcement Division. This task force was reportedly staffed with 22 Enforcement staff members drawn from SEC headquarters, regional offices and specialized units. The task force was assembled in response to, among other things, SEC Chairman Gary Gensler’s focus on investigating misstatements related to ESG disclosures. In remarks by Chairman Gensler on July 7, 2021, he described the SEC as focused on “truth in advertising” and confirming that “funds that market themselves as ‘green,’ ‘sustainable,’ ‘low carbon,’ and so on” were in fact operating consistent with those disclosures. Approximately 14 months later, the ESG Task Force has announced its debut enforcement action by ordering an investment adviser to pay a $1.5 million fine for alleged misrepresentations related to its ESG practices.
Fifth Circuit Holds SEC Administrative Proceedings Are Unconstitutional
On May 18, 2022, a divided panel of the U.S. Court of Appeals for the Fifth Circuit issued a significant decision in George Jarkesy and Patriot28 LLC v. SEC, ruling that the use of administrative proceedings by the Securities and Exchange Commission (“SEC”) was unconstitutional because, among other reasons, the Court found that Congress impermissibly delegated the decision of whether to bring enforcement actions as administrative proceedings or district court actions without providing adequate guidance to the SEC. The decision is limited to the Fifth Circuit and will undoubtedly be appealed, but it raises significant questions about the use of administrative proceedings even beyond the SEC.
SEC Announces Settled Enforcement Action Alleging Management Of Earnings Figures To Meet Analyst Estimates
On April 18, 2022, the SEC announced it had reached an $8 million settlement with Rollins Inc. (“Rollins”), a nationwide pest control services company, and its CFO for allegedly engaging in improper accounting practices to boost quarterly earnings per share (“EPS”) to meet consensus quarterly estimates. The SEC found that the CFO directed the company to make certain adjustments to its records in multiple quarters without performing a generally accepted accounting principles (“GAAP”) analysis or memorializing the basis for the changes. The changes allegedly caused the EPS to go up a penny, allowing the company to meet analysts’ consensus estimates, and the company often publicly touted the consistency of its earnings growth in its press releases and public filings. Under terms of the settlement, Rollins neither admitted nor denied the SEC's findings and agreed to pay an $8 million civil penalty, while the CFO agreed to pay a $100,000 civil penalty. However, the action was brought under Section 17(a)(2) of the Securities Act of 1933 as opposed to Section 10(b) of the Exchange Act of 1934, and although both the company and CFO agreed to the entry of a cease-and-desist order, the CFO was not required to agree to an officer or director bar.
SEC Commissioner’s Dissent Highlights Challenges In Responding To Whistleblowers
On Tuesday, April 12, the U.S. Securities and Exchange Commission (SEC) fined David Hansen, the former Chief Information Officer of NS8, Inc., a Las Vegas-based fraud detection and prevention software firm, approximately $100,000 for interfering with an employee’s ability to communicate with the SEC in violation of Rule 21F-17(a). The SEC alleged that Hansen violated the rule by restricting the employee’s access to NS8’s IT systems and monitoring his use of corporate computer systems following the employee providing a tip to the SEC about NS8’s corporate practices. In dissent, SEC Commissioner Hester Peirce said that the application of Rule 21F-17(a) was inappropriate in this case, arguing that restricting the tipster’s access to IT systems and monitoring their use did not impede their ability to communicate with the SEC and was a reasonable step in preventing unauthorized disclosure of NS8’s data to private parties and the media.
SEC Proposes New SPAC Disclosure Rules
On March 30, 2022, the Securities Exchange Commission (“SEC”) published its long-awaited proposed rules and rule amendments applicable to special purpose acquisition companies (“SPACs”) for comment by May 31. The stated purpose of the proposed rules, which would impose significant changes to the rules affecting SPACs, is to “more closely align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an initial public offering.”
SEC Announces Settled Insider Trading Action Against Former Director Of Investor Relations
On February 22, 2022, the Securities and Exchange Commission (SEC) announced that John-Michael Havrilla, a former Director of Investor Relations of PAVmed Inc. (PAVmed), a medical device company, had agreed to settle claims of insider trading. The SEC simultaneously filed a complaint in the Southern District of New York, together with a consent agreement and proposed final judgment wherein Havrilla, without admitting or denying liability, agreed to the imposition of a permanent injunction, civil penalties of $160,230, and a five-year officer or director ban.
Cryptocurrency Company Fined $100M In Novel Action Concerning Registration Obligations For Crypto Lending Product
On Monday, February 14, 2022, the Securities and Exchange Commission (SEC) charged cryptocurrency lending company BlockFi Lending LLC (“BlockFi”) with failing to register the offers and sales of its retail crypto lending product, violating the registration provisions of the Investment Company Act of 1940, and making certain material misrepresentations regarding the level of risk associated with its product. To settle the charges, BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of the lending product—BlockFi Interest Accounts (“BIAs”)—and bring its business within the provisions of the Investment Company Act within 60 days. BlockFi also agreed to pay an additional $50 million in fines to 32 different states to settle similar charges.
California District Court Allows Novel SEC Insider Trading Theory To Proceed
On January 14, 2022, Judge William Orrick of the United States District Court for the Northern District of California issued an order denying a former biopharmaceutical company executive’s motion to dismiss and allowing the Securities and Exchange Commission (“SEC”) to proceed with a first-of-its-kind insider trading action against a corporate insider for misappropriating confidential nonpublic information related to his employer’s upcoming merger to purchase securities issued by a third company that was not involved in the transaction.
Company Acquired By SPAC Agrees To Pay $125 Million To Settle SEC Probe Months After CEO Was Charged With Fraud
On December 21, 2021, the Securities and Exchange Commission (SEC) announced that Nikola Corporation—a publicly traded company that develops, manufactures, and sells electric trucks—had agreed to a $125 million settlement agreement to end the SEC’s investigation into claims that the company, both directly and through its former CEO, Trevor Milton, had deceived investors about the company’s ability to build hydrogen-powered vehicles and other issues. As part of the settlement, Nikola neither admitted nor denied the claims against it, and agreed to continue cooperating with the SEC in its separate investigation into Milton himself. The SEC previously brought a suit against Milton, who was also charged by the Department of Justice (“DOJ”), and that case remains pending.
Federal Court Dismisses SEC Insider Trading Case, Holding That Suspicious Trading Plus Evidence Of Relationship And Communications With Insider Are Insufficient Basis To Get To A Jury
On December 13, 2021, U.S. District Court Judge Claude Hilton, of the Eastern District of Virginia, dismissed the Securities and Exchange Commission’s (“SEC’s”) insider trading action against Christopher Clark before the defense put on its case-in-chief. The Court agreed with defendant’s arguments that the SEC’s evidence was insufficient as a matter of law, even though the SEC was able to present evidence of what it claimed to be (1) suspicious trading patterns, (2) a close relationship with a corporate insider; and (3) communications patterns corresponding to the trading. Absent actual evidence of a tip, or testimony supporting the SEC’s theory, the Court agreed with defendant that the SEC’s case was simply too speculative. As the SEC increasingly seeks to use data analytics and circumstantial evidence to prove insider trading cases, the decision is a reminder that Courts may at times decide that more is needed.
SEC And CFTC Bring $200 Million Settled Action Against Financial Institution For Alleged Violations Of Record-Keeping Requirements Due To Employee Off-Platform Communications Including WhatsApp And Text Messages
On December 17, 2021, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) announced that each had entered into an agreement with J.P. Morgan Securities (the “Company”) to resolve issues related to the Company’s books-and-records obligations. The agencies alleged that, over a period of several years, the Company failed to maintain and preserve copies of certain communications pursuant to recordkeeping rules for broker-dealer firms, swap dealers and future commission merchants – including WhatsApp and text messages on employee personal devices. The Company admitted that its conduct was not in compliance with Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-4(b)(4) and 171-4(j) thereunder as well as Section 4(s)(h)(1)(B) of the Commodity Exchange Act and Regulations 166.3 and 23.602, and agreed to pay a total of $200 million to resolve the allegations ($125 million to the SEC and $75 million to the CFTC).
SEC Enforcement In FY 2021 Included Significant Actions In Traditional And Emerging Areas And Over $1 Billion In Whistleblower Awards
On November 18, the U.S. Securities and Exchange Commission (“SEC”) announced its enforcement results for the 2021 fiscal year, which ended on September 30, 2021. The SEC reported that it filed 434 new enforcement actions in FY2021, a 7% increase over FY2020. But perhaps the most striking thing about the SEC’s enforcement results for the year was its whistleblowing statistics. The SEC has now awarded over $1 billion in whistleblower awards, and the SEC highlighted those figures in its press release—announcing that “[t]he SEC’s whistleblower program was critical to these efforts and had a record-breaking year.”
Consulting Firm Settles Allegations That It Had Inadequate Procedures For Handling Of MNPI Between Units
On November 19, 2021, the Securities and Exchange Commission (“SEC”) announced that an affiliate of McKinsey & Company (“McKinsey”), McKinsey Investment Office Partners, Inc. (“MIO”), had agreed to pay an $18 million penalty for alleged compliance failures in its handling of material nonpublic investment information (“MNPI”). While the SEC did not allege that MIO had ever improperly used material nonpublic investment information in executing trades, it alleged that MIO’s procedures were inadequate to account for the risk that certain members of its investment committee had access to such information due to other roles they had with McKinsey. MIO neither admitted nor denied the allegations in resolving the matter through an administrative proceeding.
Comments At SEC Speaks Conference Suggest Heightened Bar For Cooperation Credit, Return Of Admissions Policy, And Increased Autonomy For Front-Line SEC Enforcement Staff
On October 13, 2021, SEC Enforcement Director Gurbir Grewal and Deputy Enforcement Director Sanjay Wadhwa appeared at the Practicing Law Institute’s “The SEC Speaks” conference, an annual conference where Commission leaders provide updates on current initiatives and priorities of the Commission for the coming year. Director Grewal and Deputy Director Wadhwa’s remarks signaled some potentially significant policy changes, particularly in terms of how they will measure corporate compliance programs and cooperation levels, when the SEC will allow settling defendants to “neither admit nor deny” the allegations brought by the SEC, and the overall autonomy granted to the front-line enforcement staff. While the impact of any such policy change is uncertain, and will need to be assessed over time, it is an unmistakable shift in tone from the prior administration.
SEC Vacates $1.6 Million In FINRA Fines Against Broker-Dealer And Officers
On September 17, 2021, the Securities and Exchange Commission (“SEC”) vacated $1.6 million in fines and penalties that the Financial Industry Regulatory Authority (“FINRA”) had previously levied against Scottsdale Capital Advisors Corp. (“Firm”) and three of its officers (“Applicants,” collectively). In 2015, FINRA alleged that the Firm failed to maintain appropriate internal controls and executed sales of unregistered microcap securities for its foreign financial institution customers. The next year, following a disciplinary hearing, FINRA imposed a $1.5 million fine on the Firm, a lifetime bar on one of the Firm’s officers, and a $50,000 fine and a two-year suspension on the two remaining Firm officers. In reviewing FINRA’s findings on appeal by the Applicants, the SEC overturned the sanctions after determining that FINRA’s National Adjudicatory Council (“NAC”) applied incorrect legal standards, failed to adequately explain the basis of its conclusions, and conflated applicable regulations in its case against the Firm.
SEC Brings Insider Trading Charges Based On Novel Theory
On August 17, 2021, the Securities and Exchange Commission (“SEC”) charged a former executive of California-based biopharmaceutical company Medivation Inc. with violating § 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 for allegedly relying upon inside information he obtained through the course of his employment at Medivation to purchase stock of a different company, Incyte Corp., a practice that some academics have dubbed “shadow trading.” According to the SEC’s complaint—filed in the United States District Court for the Northern District of California—Matthew Panuwat, the then-head of business development at Medivation, purchased short-term, out-of-the money stock options in Incyte Corp., a biopharmaceutical company similar to Medivation, immediately after learning that Medivation would soon announce its upcoming acquisition by Pfizer. The SEC claims that Panuwat knew that investment bankers engaged by Medivation had cited Incyte as a comparable company in their valuation analysis and that the announcement of Medivation’s sale to Pfizer would likely cause Incyte’s stock price to increase. This is one of the SEC’s first enforcement actions based on this novel theory, and Panuwat may be expected to vigorously contest not only the facts but the legal underpinnings of the SEC’s complaint.
SEC Settles “First-Of-Its-Kind” Action Over “Decentralized Finance” Technology, Alleging Fraud And Unregistered Sales Of Securities
On August 6, 2021, the U.S. Securities and Exchange Commission (“SEC”) announced that it reached a $13 million settlement in a cease-and-desist proceeding against Blockchain Credit Partners (“the Company”) and its two owners. The Company marketed itself as a “decentralized finance” (“DeFi”) technology company that sold two kinds of digital assets: (1) “mTokens,” which were sold as accruing 6.2% interest, and (2) DMM Governance (“DMG”) tokens designed to give holders certain voting rights, a share of excess profits, and the ability to profit from DMG resales in the secondary market. In its cease-and-desist order (the “Order”), the SEC concluded that both mTokens and DMG tokens were securities because they were offered and sold as investment contracts, claimed that the Respondents violated Section 5(a) and 5(c) of the Securities Act for selling these securities without registering them, and further claimed that the Respondents made certain material misstatements and omissions in connection with the sale of the securities in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder.
DOJ And SEC File Securities Fraud Charges Against Founder Of Company Acquired By A SPAC
On July 29, 2021, the Department of Justice (“DOJ”) announced the unsealing of a criminal indictment against Trevor Milton, the founder, former CEO, and former Chairman of Nikola Corporation, a company that went public in March 2020 through a merger with a special purpose acquisition company (“SPAC”), for allegedly knowingly misleading investors about the company’s ability to build electric and hydrogen-powered vehicles and other green technology. The SEC filed a parallel civil action against Milton based on the same facts.
Financial Institution Settles SEC Claims Related To Allegedly Unsuitable Investments In Complex Exchange-Traded Product
On Monday, July 19, 2021, the SEC announced that it had settled an action involving an alleged failure to prevent what the SEC contended were unsuitable investments by the respondent’s clients in a volatility-linked exchange-traded product (ETP). As part of the settlement, the respondent agreed to pay a civil penalty of $8 million and disgorgement and prejudgment interest of $112,274.
SEC Announces Settled Enforcement Action In Connection With SPAC Business Combination
On July 13, 2021, the SEC announced its settlement with Stable Road Acquisition Corp. (“Stable Road”), a special-purpose acquisition company (“SPAC”); its CEO; its sponsor; and its proposed merger target, Momentus Inc. (“Momentus”), an early-stage space technology company. The resolution was based on alleged violations of the federal securities laws stemming from material misstatements and omissions related to Momentus’s space technology and national security concerns surrounding Momentus’s former CEO. The SEC has brought charges against and is litigating against Momentus’s former CEO, who was not a party to the settlement.
SEC Announces New Enforcement Task Force On Climate And ESG
On March 4, 2021, the Securities and Exchange Commission announced the creation of a Climate and ESG Task Force in the Division of Enforcement. SEC Press Release 2021-42 (March 4, 2021). The task force, led by Kelly L. Gibson, the Acting Deputy Director of Enforcement, and comprising 22 members, will aim to “develop initiatives to proactively identify ESG-related misconduct.” Id. The task force’s initial focus will be the identification of material gaps and misstatements in issuers’ disclosure of climate risks, and “will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.” Id. It is not clear why the SEC concluded that this specific subject matter merits its own task force, and it is worth noting that recent investigations of climate disclosures by other regulators have faced significant challenges.
SEC’s 2021 Examination Priorities Reveal Few Surprises
On March 3, 2021, the Securities and Exchange Commission’s Division of Examinations announced its examination priorities for this year. Each year, the SEC publishes its list of examination priorities to identify areas that it believes present potential risks to investors and the integrity of the U.S. capital markets, and this year’s list is largely as expected. It reflects an intent to focus on conflicts of interest and questions of whether investment advisors are fulfilling their fiduciary duties, information security and business continuity (something that took on particular importance in the last year as firms were forced to adapt to the pandemic), and various other perennial topics of interest. The only “new” priority is one that dovetails with other recent announcements from the Commission—an addition of “enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change.”