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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. 

Chief Compliance Officer, a Former SEC Staffer, Indicted for Stealing Confidential Investigation Information


The U.S. Attorney for the Eastern District of New York has indicted the former Chief Compliance Officer of a private equity firm for obstructing justice and illegally accessing confidential government information.  According to the indictment and press accounts, the defendant misused his position and access as an SEC employee to obtain information about a pending investigation of the private equity firm while negotiating his new position.  The firm itself is being investigated for sales practice violations. The defendant faces more than 20 years in prison.

This case is Exhibit A for why there should be limits on the revolving door between the regulators and firms they are charged with regulating.  An inherent conflict of interest exists when a former regulator represents a firm being examined or investigated.  The Project On Government Oversight (POGO) published a report in 2013 titled “Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture,” outlining the scope of the problem.  At the very least, we would recommend a 12-month cooling-off period before a private firm could hire a former regulator and an outright ban if the firm is currently under investigation. 

SEC Bars and Fines State-Registered Adviser for Options Cherry-Picking Scheme


The SEC barred a state-registered adviser from the industry and assessed over $400,000 in fines, disgorgement and interest for allocating options trades that benefited himself and his wife to the detriment of clients.  The adviser utilized an omnibus trading account at a third party broker-dealer to allocate profitable trades to his personal accounts and unprofitable trades to clients.  According to the SEC, during the relevant 7-month period, the personal accounts had a net positive 45.2% one-day return, but the client accounts had a net negative 45.0% one-day return, a statistically significant difference that could not be explained by random chance.  The SEC accused the adviser of securities fraud under the Securities Act (Rule 10b-5) and the Advisers Act (Section 206).

OUR TAKE: If you operate a state-registered (or unregistered) adviser, don’t assume the SEC doesn’t have the regulatory means to uncover and prosecute wrongdoing.  The feds still have jurisdiction over the securities markets and any person providing investment advice.

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. 

Execs Face Up to 5 Years in Prison for Lying to SEC

Two former employees of a biotech have pleaded guilty to criminal charges of obstructing an SEC investigation.  The Justice Department accuses one of the defendants with testifying falsely before the SEC about his manipulative purchases and sales of the OTC-traded biotech.  The other employee is accused of providing a back-dated document to the SEC with the intent to obstruct the SEC’s investigation.  The two defendants face prison sentences of up to 5 years for obstructing an agency proceeding. 

Although the SEC only has civil enforcement powers, it can (and will) bring in the Justice Department if you lie to SEC investigators.  Better to take your civil medicine (fine or industry bar) than to wind up a guest of the state. 

Broker-Dealer Fined for Failing to Produce Emails

The SEC fined and censured a broker-dealer for failing to produce requested emails as part of an enforcement investigation related to potential money laundering activities.  Despite repeated requests, the respondent could not produce emails for a 4-month period relevant to the subject activity.  The firm initially represented that it produced all required emails, but ultimately found 40,000 missing emails from 30 employees maintained on a back-up email archive.  The SEC noticed that the document production omitted emails from the correspondent firm through which the potential money laundering activity occurred.  Rule 17a-4(j) of the Exchange Act requires broker-dealers to promptly furnish to the SEC any required records.  The SEC also charged the firm with failing to file Suspicious Activity Reports.

OUR TAKE: Don’t tell the SEC that you have complied with their document requests unless you have conducted adequate internal due diligence.   The Enforcement staff will not look kindly on reckless or intentional misrepresentations during investigations.  Also, lying to the staff can result in criminal penalties.


CEO Hid Solicitation Payments and Then Lied to Clients and the SEC



The CEO of an investment adviser admitted wrongdoing and agreed to pay over $575,000 and an industry bar for paying undisclosed solicitation fees.  The CEO also faces criminal charges for misleading SEC enforcement investigators, thereby obstructing proceedings of a federal agency.  The respondent admitted to paying a lawyer-friend a referral fee without disclosure to the referred client as required by Rule 206(4)-3 of the Advisers Act.  The pair conspired to conceal the payments through sham legal invoices.  Upon hearing rumors of securities enforcement, the respondent sent false emails to clients claiming that the SEC had cleared the firm of any wrongdoing.  The CEO’s firm agreed to pay disgorgement but avoided more damaging penalties because it discovered the conduct, disciplined the CEO, and reported the conduct to the SEC.  The lawyer-solicitor was also fined and barred from the industry.

OUR TAKE: Failure to disclose the solicitation payments would have resulted in a disgorgement penalty and enhanced disclosure.  Lying to clients and the SEC triggered the criminal prosecution and the increased fines and industry bar.


Fund Manager Pleads Guilty to Obstruction of Justice for Lying During ALJ Hearing


A private fund manager has pled guilty to obstruction of justice for misstatements made during an SEC administrative hearing.  The SEC charges that the respondent misled investors about the use of funds and profitability of fund investments.  During the ALJ hearing, the SEC alleges that the respondent lied under oath that he did not control a related company.  The SEC asserts that the respondent set the company up in his son’s name because of the SEC investigation.

OUR TAKE: SEC investigations and hearings should not be taken lightly.  Misstatements can lead to prison time.