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News November 2, 2015 Issue

SEC Sets New Record: 807 Enforcement Actions in Fiscal Year 2015

The SEC engine continues to generate record results as the agency shovels more coal into its hard-driving enforcement furnace. Total figures for fiscal year 2015 top those for FY2014, just as FY2014 total figures topped those for FY2013.

The agency, in the fiscal year that ended this September, filed 807 enforcement actions that brought in approximately $4.2 billion in disgorgement and penalties, the SEC said October 22. That compares to 755 enforcement actions that brought in approximately $4.16 billion in disgorgement and penalties in FY2014, and 676 enforcement actions that brought in approximately $3.4 billion in FY2013.

Of the 807 FY2015 actions, 507 – another record – were independent actions for violations of federal securities laws, the agency said. The remaining 300 were actions either against issuers that were delinquent in their filings, or follow-on administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions or other orders.

A number of the cases brought in FY2015 were first-of-their-kind cases, including one against a private equity adviser for misallocating broken-deal expenses, and another involving an SEC rule that prohibits the use of confidentiality agreements to impede whistleblower communication with the SEC.

The agency was not shy about crediting much of its enforcement record to the agency’s increasing use of electronic analytical tools and experts. Mining these databases has resulted in actions like the ongoing SEC crackdown against Rule 105 violators, and contributed to the recent first enforcement action in the agency’s cherry-picking initiative. Among the actions tied to data analysis that was highlighted in the FY2015 enforcement results list were several involving insider trading.

"Vigorous and comprehensive enforcement protects investors and reassures them that our financial markets operate with integrity and transparency, and the Commission continues that enforcement approach by bringing innovative cases holding executives and companies accountable for their wrongdoing sending clear warnings to would-be violators," said SEC Chair Mary Jo White. "The Enforcement Division’s leveraging of data, quantitative analytics and the expertise of our other divisions contributed significantly to this year’s very strong results."

The value of statistics

Some, however, question whether the SEC relies too much on enforcement figures to demonstrate its success. SEC commissioner Michael Piwowar, in a speech just before FY2014’s enforcement results were issued, said that statistics like the number of enforcement actions and monetary sanctions are "flawed metrics" when it comes to measuring enforcement effectiveness (ACA Insight, 10/27/14).

The effectiveness of the agency’s enforcement program should be measured in how much it reduces fraud, rather than the number of successful prosecutions or fines collected, Piwowar said. "Most Americans would be outraged if we measured the effectiveness of traffic safety efforts primarily based on the number of tickets issued by police officers and the amount of monetary fines collected. Rather, we look to a more important metric – whether the number of deaths from traffic accidents has increased or decreased.

"When the agency and the media make the number of enforcement actions a key measure, it is bound to create pressure on the staff to increase those numbers year after year," he said. "It harks back to the adage, ‘what gets measured gets done.’ But we need to make sure that the focus is on measuring outcomes, not outputs."

"The SEC seems focused too much on statistics, such as the number of cases and the size of the fines," said Rogers & Hardin partner Steven Councill. "It should focus more on the quality of cases, and should especially be pursuing fraudsters rather than making statistics out of advisers who have technical, non-fraud violations. The SEC brings too many actions against the so-called gatekeepers (attorneys, consultants and accountants), who are good people trying to do their jobs. These actions will not deter future violations, but rather increase the problem by deterring good people from taking these gatekeeper jobs."

"The 2015 SEC statistics underscore the fact that the SEC – under White – has and will continue to pursue an aggressive enforcement program with respect to asset management firms," said Ropes & Gray counsel David Tittsworth.

One reason for the increased enforcement, Tittsworth said, is White’s "broken windows" philosophy of enforcement, under which the Division of Enforcement has pursued a wide variety of cases involving both large and small asset management companies, as well as large and small violations. He attributed the increased enforcement of asset managers in particular to the creation of the Division’s Asset Management Unit in 2009, when Mary Shapiro chaired the Commission. The unit, he said, "is devoted to an active agenda of focusing on asset management cases."

"While Republican commissioners like Michael Piwowar and (former commissioner) Daniel Gallagher have resisted certain aspects of SEC enforcement, they have not had the votes to stop White from her active enforcement agenda," Tittsworth said. "All SEC-registered advisory firms – from traditional wealth management and institutional shops to hedge fund and private equity firms – need to be very mindful of the SEC’s continuing focus on the asset management profession. It will continue as long as White chairs the agency."

FY2015 enforcement highlights

The list of enforcement actions the agency included in its announcement covers a wide range of areas, including actions against advisers and broker-dealers, cases where the agency said it "stood up" for whistleblowers, action involving complex financial instruments, and cases involving alleged market manipulation. The SEC also noted that it "won all six" of the cases it tried in U.S. district court in FY2015, "and enjoyed strong success" in those cases brought as administrative proceedings.

Among the groups of actions it listed were:

  • "Uncovering misconduct" by advisers and broker-dealers. The SEC patted itself on the back for, among other things, bringing three "first-ever" cases: One against Kohlberg Kravis Roberts for allegedly misallocating broken-deal expenses (ACA Insight, 7/13/15), another against BlackRock Advisors (ACA Insight, 4/27/15) for allegedly failing to report a material compliance matter to a fund board, and the third against First Eagle Investment Management (ACA Insight, 9/28/15) and an affiliated distributor for allegedly improperly using fund assets to pay for distribution-related services, also known as "distribution in guise."
  • Protecting whistleblowers. The agency brought a first-ever action against KBR (ACA Insight, 4/13/15) for alleged violating a rule prohibiting the use of confidentiality agreements or other actions to impede a whistleblower from communicating with the SEC. Overall, in FY2015, it awarded eight whistleblowers with, collectively, $38 million, including $600,000 to one who provided "key original information" that led to the success of the agency’s enforcement action against Paradigm Capital Management (ACA Insight, 6/23/14) and its owner, in a case that was initially brought in FY2014.
  • Successful litigation. Among the six federal district court cases the agency lauded was its prosecution of adviser Charles Kokesh (ACA Insight, 11/17/14) for allegedly defrauding four business development companies of "tens of millions of dollars." Kokesh ultimately had to pay more than $55 million in disgorgement, interest and civil money penalties.
  • Holding gatekeepers accountable. The SEC noted that it took actions in FY2015 to hold attorneys, accountants, consultants and other "gatekeepers" in compliance with professional standards. Among those it listed were Deloitte & Touche and eight auditing firms for various brokerage firms for allegedly violating independence rules.

"The Division’s hard work, tremendous energy, and efficiency uncovered significant misconduct during the past fiscal year, and helped bring a significant number of high-impact, first-of-their-kind actions," said Division of Enforcement director Andrew Ceresney. "I continue to be proud of the Division’s record of accomplishments, and we have already continued to pave new ground in the new fiscal year."