SEC Sets Record Year in Enforcement with $8.2 Billion in Fines

On By Joseph McCafferty
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he Securities and Exchange Commission announced that it filed 583 total enforcement actions in fiscal year 2024, while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history.

That record amount consisted of $6.1 billion in disgorgement and prejudgment interest, also the highest amount on record, and $2.1 billion in civil penalties, the second-highest amount on record. Approximately 56 percent of the $8.2 billion financial remedies ordered is attributable to a monetary judgment obtained following the SEC’s jury trial win against Terraform Labs and Do Kwon, who were charged with one of the largest securities frauds in U.S. history.

The 583 enforcement actions represent a 26 percent decline in total enforcement actions compared to fiscal year 2023. Of those cases, the Commission filed 431 “stand-alone” actions, 93 “follow-on” administrative proceedings, and 59 actions against issuers who were allegedly delinquent in making required filings with the SEC.

“The Division of Enforcement is a steadfast cop on the beat, following the facts and the law wherever they lead to hold wrongdoers accountable,” said outgoing SEC Chair Gary Gensler. “As demonstrated by this year’s results, the Division helps promote the integrity of our capital markets to benefit investors and issuers alike.”

Last month Gensler announced that he would step down as chair of the SEC. President elect Donald Trump has announced that he intends to nominate former SEC Commissioner Paul Atkins, a longtime advocate of deregulation, as the next chairman of the Commission. Market watchers have said that they expect the SEC under Atkins to be far less enforcement minded.

“He has been a strong supporter of the asset management industry and sympathizes with the challenges faced by the industry trying to comply with often-ambiguous SEC rules,” said Brad Bondi, global co-chair of the investigations and white-collar defense practice at Paul Hastings, who served as counsel to Atkins during his time at the SEC.

Protecting Investors

“In fiscal year 2024, the Division continued to vigorously enforce the federal securities laws by recommending to the Commission high-impact enforcement actions addressing noncompliance throughout the securities industry and resulting in robust financial remedies,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “What our numbers do not reflect, however, are countless investigations that may not have resulted in an enforcement action for evidentiary or other reasons, or where we declined to pursue an enforcement action, but that shined a spotlight on potentially problematic conduct. All of this adds up to protecting innumerable investors and promoting trust in our capital markets.”

In addition, in fiscal year 2024, the SEC obtained orders barring 124 individuals from serving as officers and directors of public companies, the second-highest number of such bars obtained in a decade.

In fiscal year 2024, the SEC distributed $345 million to harmed investors, marking more than $2.7 billion returned to investors since the start of fiscal year 2021. The SEC also received 45,130 tips, complaints, and referrals in fiscal year 2024, the most ever received in one year, including more than 24,000 whistleblower tips. The SEC issued whistleblower awards totaling $255 million.

Securing Credit for Self Reporting and Cooperation

In fiscal year 2024, public companies, investment advisers, and broker-dealers self-reported or remediated securities law violations or otherwise cooperated meaningfully with the Division’s investigations, answering the Division’s call to practice a culture of proactive compliance. In response, the Division recommended, and the Commission approved, resolutions imposing reduced civil penalties or even no civil penalties, including in cases involving very large firms.

To help promote investor trust in the securities market, the Division continued and commenced a number of proactive initiatives to address issues of widespread noncompliance, including the following:

Off-Channel Communications

The Division continued its initiative to ensure that regulated entities, including broker-dealers, investment advisers, and credit ratings agencies, comply with the recordkeeping requirements of the federal securities laws. Compliance with those requirements is essential to investor protection and well-functioning markets. In fiscal year 2024, the Commission brought recordkeeping cases resulting in more than $600 million in civil penalties against more than 70 firms, including the Commission’s first cases charging recordkeeping violations against municipal advisors. Since December 2021, the initiative has resulted in charges against more than 100 firms and more than $2 billion in penalties.

Marketing Rule

The Enforcement Division’s ongoing initiative investigating non-compliance with the Marketing Rule resulted in settled charges against more than a dozen investment advisers. The firms were charged for advertising hypothetical performance to the general public without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the advertisement’s intended audience; using untrue or unsubstantiated statements of material fact and/or testimonials, endorsements, or third-party ratings that lacked required disclosures; and advertising misleading performance that was not fair and balanced.

Whistleblower Protection Cases

In fiscal year 2024, the Division recommended, and the Commission authorized, a series of settled enforcement actions to address violations of the Dodd-Frank whistleblower protection rule, which prohibits market participants from taking any action to impede would-be whistleblowers from contacting the SEC, including where firms purported to limit customers’ ability to voluntarily contact the SEC or required employees to waive the right to a possible whistleblower monetary award. The actions included an $18 million civil penalty against J.P. Morgan, the largest penalty on record for a standalone violation of the whistleblower protection rule.

Disclosures of Holdings and Transactions by Insiders and Investment Managers

The federal securities laws require certain insiders and market participants to disclose their securities holdings and transactions. Compliance with those laws is essential for investors to make informed investment decisions.

In fiscal year 2024, the SEC announced settled charges against more than two dozen entities and individuals for failures to timely report information about their holdings and transactions in public company stock or for contributing to filing failures by their officers and directors. The SEC also settled charges against 11 institutional investment managers for failing to disclose certain securities holdings in reports they were required to file because they have discretion over more than $100 million in certain securities.

Robust Financial Remedies

In fiscal year 2024, the Division’s investigations led to orders imposing robust financial remedies in litigated and settled matters.

For example, after a jury verdict finding Terraform Labs and founder Do Kwon liable for fraud, defendants agreed to a final judgment ordering them to pay more than $4.5 billion in disgorgement, prejudgment interest, and civil penalties, the highest remedies ever obtained by the SEC following a trial.

In addition, the Commission filed settled charges with strong financial remedies against:

  • Morgan Stanley for a multi-year fraud involving the disclosure of confidential information about the sale of large quantities of stock known as “block trades.”  The firm agreed to pay approximately $166 million in disgorgement and prejudgment interest and an $83 million civil penalty to resolve the SEC’s charges;
  • FirstEnergy Corp. for a multi-year political corruption scheme in which FirstEnergy and affiliates made payments to an entity controlled by a state legislator in exchange for official action benefitting FirstEnergy. FirstEnergy agreed to a pay a $100 million civil penalty to resolve the SEC’s charges;
  • SAP for violations of the Foreign Corrupt Practices Act arising out of bribery schemes in South Africa, Malawi, Kenya, Tanzania, Ghana, Indonesia, and Azerbaijan. The company agreed to pay disgorgement and prejudgment interest of more than $98 million to resolve the SEC’s charges. Up to $59 million will be offset by payments from SAP to the South African government in connection with its parallel investigations into the same conduct; and
  • Advisory firm Macquarie for overvaluing approximately 4,900 largely illiquid collateralized mortgage obligations held in 20 advisory accounts and for executing hundreds of cross trades between advisory clients that favored certain clients over others. The firm agreed to pay disgorgement and prejudgment interest of $9.8 million and a $70 million civil penalty to resolve the SEC’s charges.

Major Fraud

In fiscal year 2024, the Division continued to focus on holding individuals and entities accountable for preying on investors.

  • The Division’s investigations led to charges alleging frauds ranging from Ponzi schemes targeting specific communities to billion dollar frauds with thousands of victims;
  • The SEC charged Xue Lee (aka Sam Lee) and Brenda Chunga (aka Bitcoin Beautee) for their involvement in an allegedly fraudulent crypto asset pyramid scheme known as HyperFund that raised more than $1.7 billion from investors worldwide;
  • The SEC charged Cynthia and Eddy Petion and their company, NovaTech Ltd., for allegedly operating a fraudulent scheme that raised more than $650 million in crypto assets from more than 200,000 investors worldwide;
  • The SEC charged five unregistered brokers and their companies in connection with an alleged pre-IPO fraud scheme that raised at least $528 million from more than 4,000 investors around the world; and
  • The SEC charged Abraham Shafi, the founder and former CEO of Get Together Inc., a privately held social media startup known as “IRL,” for raising approximately $170 million from investors by allegedly fraudulently portraying IRL as a viral social media platform that organically attracted the vast majority of its purported 12 million users.

Emerging Technologies and Emerging Risks

Fiscal year 2024 saw heightened investor risk from emerging technologies and cybersecurity incidents and from market participants using social media to exploit elevated investor interest in emerging investment products and strategies. The Division kept pace, investigating noncompliance and false or misleading disclosures involving artificial intelligence, social media, cybersecurity, crypto, and more.

Artificial Intelligence

  • The SEC charged QZ Asset Management for allegedly falsely claiming that it would use its proprietary AI-based technology to help generate extraordinary weekly returns while promising “100%” protection for client funds; and
  • The SEC settled charges against investment advisers Delphia and Global Predictions with making false and misleading statements about their purported use of AI in their investment process.

Relationship Investment Scams

  • The SEC charged multiple entities and individuals in connection with two relationship investment scams involving fake crypto asset trading platforms NanoBit and CoinW6. The SEC’s two complaints allege that the defendants solicited investors via social media apps, lied to them to gain their trust and confidence, and then stole their money. These charges are the SEC’s first enforcement actions alleging these types of scams.

Cybersecurity

  • The SEC settled charges against The Intercontinental Exchange, Inc. and nine wholly owned subsidiaries, including the New York Stock Exchange, for failing to timely inform the SEC of a cyber intrusion as required by Regulation Systems Compliance and Integrity;
  • The SEC settled charges against transfer agent Equiniti Trust Company LLC, formerly known as American Stock Transfer & Trust Company LLC, for failures to ensure that client securities and funds were protected against theft or misuse, which led to losses of millions of dollars in client funds; and
  • The SEC settled charges against R.R. Donnelley & Sons for disclosure and internal control failures relating to cybersecurity incidents.

Crypto

  • The SEC settled charges against Silvergate Capital for false and misleading disclosures to investors about the strength of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program and the monitoring of crypto customers, including FTX, by its wholly owned subsidiary, Silvergate Bank; and
  • The SEC settled charges against Barnbridge DAO, a purportedly decentralized autonomous organization, for failing to register its offer and sale of structured crypto assets offered and sold as securities.

Individual Accountability

Charging individuals for securities law violations, where appropriate, is essential for accountability and deterrence and for enhancing public trust in the markets. Fiscal year 2024 enforcement actions against individuals included the following:

  • Following a jury verdict finding Terraform Labs and founder Do Kwon liable for fraud, Do Kwon agreed to a final judgment ordering him to pay financial remedies of more than $200 million and imposing an officer and director bar.
  • The former CEO and former Chief Risk Officer of Silvergate Capital settled charges for misleading investors about the strength of the compliance program and the monitoring of crypto customers by Silvergate’s wholly owned subsidiary. The individuals agreed to five-year officer-and-director bars and civil penalties of $1 million and $250,000 respectively, as part of the resolution. In addition, the SEC charged the former CFO with misleading investors about the company’s losses from expected securities sales.
  • The CEO of formerly registered investment adviser Mass Ave settled charges arising out of false and misleading statements about Mass Ave’s flagship fund. To settle the SEC’s charges, the CEO, who is also the chief investment officer and portfolio manager at MassAve, agreed to pay a $250,000 civil penalty and was suspended for 12 months from industry-related work.
  • The former head of Morgan Stanley’s equity syndicate desk settled charges connected to a multi-year fraud involving the disclosure of confidential information about the sale of large quantities of stock known as “block trades.” As part of the resolution, the former head agreed to an order requiring him to pay a $250,000 civil penalty and imposing associational, penny stock, and supervisory bars.
  • The SEC permanently suspended Benjamin Borgers, the managing partner of audit firm BF Borgers from appearing and practicing as an accountant before the Commission as part of a resolution of an alleged fraud affecting hundreds of SEC filings. Borgers also agreed to pay a $2 million civil penalty as part of the resolution;
  • The former CEO and former Senior Vice President of Cassava Sciences agreed to be subject to officer-and-director bars of three and five years, respectively, to settle charges related to misleading statements about the results of a clinical trial for the company’s purported therapeutic for the treatment of Alzheimer’s disease. They also agreed to pay civil penalties of $175,000 and $85,000, respectively; and
  • The SEC charged now-defunct digital pharmacy startup Medly Health’s former CEO, former CFO, and former head of RX Operations with fraudulently overstating Medly’s revenue in connection with capital raising efforts that netted the company more than $170 million.

Public Company Misstatements

It is foundational to the proper operation of the securities markets that public companies provide materially accurate information to investors. In fiscal year 2024, the Division investigated misstatements by public companies leading to a number of enforcement actions, including:

  • Settled charges against Cassava Sciences for misleading statements about the results of a Phase 2 clinical trial for its purported therapeutic for the treatment of Alzheimer’s disease;
  • Settled charges against Ideanomics for misleading statements about the company’s financial performance; and
  • Charges against former executives of Kubient for their alleged roles in a scheme in which the company allegedly overstated and misrepresented its revenue in connection with public stock offerings.

Safeguarding Material Nonpublic Information

The Division investigated market abuse and potential abuse of material nonpublic information (MNPI) in fiscal year 2024, including by using advanced data analytics and technology. The Division’s investigations resulted in enforcement actions addressing a range of violations, including:

The SEC’s 2024 fiscal year includes the period from October 1, 2023 to September 30, 2024.   end slug

Joseph McCafferty is editor & publisher of Compliance Chief 360°

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