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SEC Enforcement Division Hits New High with $4.3 Billion in Monetary Penalties in Fiscal 2019


The SEC Enforcement Division ordered over $4.3 Billion in monetary penalties for the fiscal period that ended September 30, thereby setting a modern record, according to its 2019 annual report.  Total penalties exceeded amounts ordered during each of the prior four years.  The SEC also brought 826 total actions and 526 standalone actions, surpassing totals for 2015, 2017 and 2018 and nearly equaling the 868 cases filed in 2016.   The most cases (191; 36% of total) were brought against investment advisers and investment companies.  The Enforcement Division continues to prioritize charging individuals (69% of cases) and to pursue referrals to law enforcement (400 investigations).  The SEC also imposed 595 bars and suspensions.  The Co-Directors lauded the Division: “By any measure, we believe the Division had a very successful year.”

Regardless of administration, the SEC Enforcement Division continues to set new enforcement records.  Nothing suggests any changes for the current fiscal year.  If you haven’t received the memo, it’s time to get your compliance house in order. 

SEC Judge Draws Negative Inference When Respondent Invokes Fifth Amendment

An SEC Administrative Law Judge determined to infer adverse conclusions to questions that a respondent refused to answer by invoking his Fifth Amendment privilege against self-incrimination.  The respondent refused to answer every question in the proceeding including background and foundational questions.  He also did not invoke the Fifth Amendment during the SEC’s investigation.  The ALJ explained that an administrative proceeding as well as a district court could draw such adverse inferences in order to prevent a witness from gaining an unfair litigation advantage.

The Fifth Amendment to the U.S. Constitution states that no person “shall be compelled in any criminal case to be a witness against himself” (emphasis added).  A court or an ALJ cannot make you testify if it would compromise your case in a parallel criminal action, but the judge can draw negative conclusions from invoking the Fifth.  In other words, don’t invoke the Fifth Amendment just to be petulant in front of an ALJ.  Consult your counsel to determine whether invoking the Fifth makes litigation sense given your civil and criminal predicament. 

SEC Commissioner Questions Informal Staff Guidance

SEC Commissioner Hester Peirce recently criticized unpublished staff guidance that operates as de facto legal precedent without going through a process that ensures transparency and accountability.  Referring to the securities regulatory framework as a “compliance minefield” where the wrong move can be a “matter of professional life or death,” Ms. Peirce questioned the propriety of informal staff positions about specific products or types of businesses.  She characterized sub rosa staff guidance as secret law that binds firms without legislative authority, effective oversight, or consistency. 

We agree that unpublished staff guidance can result in industry favoritism and (perceived) unfairness.  The next question is how the SEC addresses Ms. Peirce’s very legitimate concerns. 

Supreme Court Ruling Challenges Decisions by ALJs Not Properly Appointed

The U.S. Supreme Court has ruled that the SEC must approve the appointment of Administrative Law Judges, thereby invalidating the appointment of ALJs appointed by SEC staff members.  The Constitution’s Appointments Clause requires officers of the United States to be appointed by the President, a court of law, or a head of department.  The Supreme Court opined that ALJs are “officers” and not mere employees because ALJs occupy a continuing office and exercise powers similar to a trial judge (e.g. discovery, subpoenas, admissibility, sanctions).  The Court ordered a new hearing before an ALJ appointed by the SEC.

OUR TAKE: This decision opens the door to a re-hearing in every case decided by an ALJ not appointed by the SEC.  Many industry observers and respondents have questioned the fairness of the ALJ process given that the SEC hardly ever loses a case.


SEC ALJ Rejects Attorney-Client Privilege in Reliance-on-Counsel Defense

An SEC Administrative Law Judge has ruled that once a respondent waives attorney-client privilege by raising reliance-on-counsel as an affirmative defense, the client also waives privilege with respect to successor counsel.  The respondent claimed as an affirmative defense that it relied on outside counsel’s advice on the interpretation of state law, the main issue in the SEC case, and subsequently filed a malpractice action.  The respondent then tried to assert privilege with respect to communications with successor counsel.  The ALJ rejected the assertion of privilege because the affirmative defense constituted an implied privilege waiver that extended to “all communications with counsel relating to the same subject matter, even communications with other counsel.”  To hold otherwise would allow the respondent to abuse the privilege by using it as a shield and a sword, depending on the circumstances.  The ALJ also ordered the respondents to show cause why the successor counsel should not be disqualified because of its inherent conflict of interest as a potential defendant in another malpractice case.

OUR TAKE: The SEC does not particularly like the attorney-client privilege (See e.g. “SEC’s Enforcement Director Warns Defense Lawyers about Tactics.”)  Respondents should know that the Enforcement Division and the ALJs will seek to pierce the privilege when possible, making the reliance-on-counsel defense very difficult.