On October 11, 2016, the SEC announced its enforcement results for fiscal year-end September 30, 2016 (FYE 2016). In FYE 2016 the SEC filed a record 868 enforcement actions, including against companies and executives for reporting violations, misconduct by companies and gatekeepers, fraud actions and more resulting in judgments and orders totaling more than $4 billion in disgorgement and penalties.
The actions also included a record number of enforcement proceedings against investment advisors and investment companies, a trend I expect to continue in the coming year as the SEC continues to crack down on the failure to adequately disclose all fees associated with investments into and operations of funds, as well as related party transactions.
Consistent with prior speeches and messaging, SEC Chair Mary Jo White made the following quote in the release announcing the enforcement results: “By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions. Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”
In a speech in February of this year, Chair White focused on enforcement, stating that the SEC “needs to go beyond disclosure” in carrying out its mission. That mission, as articulated by Chair White, is the protection of investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. In 2015 the SEC brought a record number of enforcement proceedings and secured an all-time high for penalty and disgorgement orders, which record has been bested in FYE 2016. The primary areas of focus included cybersecurity, market structure requirements, dark pools, micro-cap fraud, financial reporting failures, insider trading, disclosure deficiencies in municipal offerings and protection of retail investors and retiree savings.
The SEC Division of Enforcement likewise is pleased with their results. Andrew J. Ceresney, Director of the Division of Enforcement, stated, “Through their hard work and steadfast dedication to our mission, the Division’s committed staff have helped protect investors and made our markets fairer and more reliable.”
Highlights of FYE 2016 SEC Enforcement
The SEC notes that in FYE 2016 it brought several first-of-its-kind actions, including: (i) against a firm solely for failing to file Suspicious Activity Reports (SARs) (see my blogs HEREÂ and HEREÂ for more on SARs); (ii) against an audit firm for auditor independence failures based on personal relationships with audit clients; (iii) municipal advisors for violations of fiduciary and antifraud provisions created by Dodd-Frank; (iv) against a private equity advisor for acting as an unlicensed broker-dealer; (v) against an issuer for misstatements and omissions related to the issuance of structured notes.
In addition, in FYE 2016 the SEC won a jury trial against a municipality and one of its officers for violations of the federal securities laws. The SEC also continued its use of data and analytics to uncover market manipulation and insider trading violations. In FYE 2016, the SEC brought 78 insider trading cases.
Moreover, the SEC continues to crack down on attorneys, accountants and other gatekeepers.This is an extremely important aspect of the enforcement ecosystem, especially in the small- and micro-cap space. Attorneys, accountants, transfer agents, and broker-dealers that are active in the OTC Markets environment play an important role in improving and protecting the OTC Marketplace to the extent that they are reasonably capable in any given fact situation. In December 2015 the SEC issued an advance notice of proposed rulemaking and concept release on proposed new requirements for transfer agents. The proposal would add significant obligations on transfer agents, some of which I agreed with and others I did not. See my blog HERE on the subject. The SEC has not taken further action on this notice as of yet.
In its publication on FYE 2016 enforcement results, the SEC noted that it brought actions against gatekeepers for “failures to comply with professional standards.” A common theme in these actions is missing or ignoring clear indications of fraud or red flags. Examples of such actions include: (i) against auditors for ignoring red flags and fraud risks in conducting audits for annual reports to be filed with the SEC; (ii) violations of auditor independence rules; (iii) against a private fund administrator who missed or ignored clear indications of fraud in preparing and maintaining fund accounting records; (iv) against a consultant for improperly evaluating internal control deficiencies (this was a first-of-its-kind action as well); and (v) against EB-5 lawyers for acting as unregistered brokers.
In addition to enforcement matters I have written about such as HERE, micro-cap fraud and market manipulation continued to be a significant area of enforcement, as it always will. The SEC suspended trading in 199 micro-cap issuers in FYE 2016. The SEC’s use of technology and data also helped uncover elaborate foreign market manipulation and trading schemes, including such as against a United Kingdom resident for intruding into online brokerage accounts of U.S. investors and making unauthorized trades.
Private offering fraud matters were also the target of multiple enforcement actions. Multiple private offering fraud actions were brought by the SEC in FYE 2016, including actions targeting certain population sectors such as seniors.
The SEC also brought action and collected record fines against market participants, including a $35 million penalty against Barclay’s and a $54 million penalty against Credit Suisse for violations in the operations of each of their alternative trading systems (ATSs). Merrill Lynch faced a $12.5 million fine for failure to have adequate risk controls in place before providing customers with access to the market, and Morgan Stanley was charged $1 million for inadequate written policies and procedures related to the protection of customer records and information.
Investment advisers and investment companies faced an unprecedented level of scrutiny in FYE 2016. In addition to many highly publicized cases related to hidden fees and undisclosed related party transactions, the SEC brought actions for fraud, such as against Aequitas Management for hiding its rapidly deteriorating financing condition after raising $350 million from investors.Thirteen investment advisory firms were charged with repeating false claims made by an investment manager firm highlighting the importance of independent due diligence and responsibilities. Investment funds also faced violations related to improper trading activity, including prearranged trades favoring certain clients.
Other areas that the SEC specifically continued to target for enforcement proceedings include Whistleblower protections (see HERE) and Foreign Corrupt Practices Act violations.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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