On June 13, 2022, the Securities and Exchange Commission (“SEC”), announced that it had instituted a settled administrative proceeding accusing several investment advisers (the “Advisers”) that focused on robo-advising, and all of which were themselves subsidiaries of a prominent investment adviser, of violating Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Section 15(b) of the Securities Exchange Act of 1934.  Broadly, the SEC accused them of failing to invest client cash in ways that their own analyses showed would be optimal for the clients, and instead retaining cash in a way that benefitted the Advisers.  The Advisers did not admit or deny the SEC’s allegations as part of the resolution, but as part of the settlement agreed collectively to disgorge approximately $52 million and to pay a civil monetary penalty of $135 million and were also required to engage an independent consultant and engage in certain other undertakings.

On March 4, 2021, the Securities & Exchange Commission (“SEC”) publicly announced the formation of a Climate and Environmental, Social and Governance (“ESG”) Task Force within its Enforcement Division.  This task force was reportedly staffed with 22 Enforcement staff members drawn from SEC headquarters, regional offices and specialized units.  The task force was assembled in response to, among other things, SEC Chairman Gary Gensler’s focus on investigating misstatements related to ESG disclosures.  In remarks by Chairman Gensler on July 7, 2021, he described the SEC as focused on “truth in advertising” and confirming that “funds that market themselves as ‘green,’ ‘sustainable,’ ‘low carbon,’ and so on” were in fact operating consistent with those disclosures.  Approximately 14 months later, the ESG Task Force has announced its debut enforcement action by ordering an investment adviser to pay a $1.5 million fine for alleged misrepresentations related to its ESG practices.

On May 18, 2022, a divided panel of the U.S. Court of Appeals for the Fifth Circuit issued a significant decision in George Jarkesy and Patriot28 LLC v. SEC, ruling that the use of administrative proceedings by the Securities and Exchange Commission (“SEC”) was unconstitutional because, among other reasons, the Court found that Congress impermissibly delegated the decision of whether to bring enforcement actions as administrative proceedings or district court actions without providing adequate guidance to the SEC.  The decision is limited to the Fifth Circuit and will undoubtedly be appealed, but it raises significant questions about the use of administrative proceedings even beyond the SEC.

On April 18, 2022, the SEC announced it had reached an $8 million settlement with Rollins Inc. (“Rollins”), a nationwide pest control services company, and its CFO for allegedly engaging in improper accounting practices to boost quarterly earnings per share (“EPS”) to meet consensus quarterly estimates.  The SEC found that the CFO directed the company to make certain adjustments to its records in multiple quarters without performing a generally accepted accounting principles (“GAAP”) analysis or memorializing the basis for the changes.  The changes allegedly caused the EPS to go up a penny, allowing the company to meet analysts’ consensus estimates, and the company often publicly touted the consistency of its earnings growth in its press releases and public filings.  Under terms of the settlement, Rollins neither admitted nor denied the SEC's findings and agreed to pay an $8 million civil penalty, while the CFO agreed to pay a $100,000 civil penalty.  However, the action was brought under Section 17(a)(2) of the Securities Act of 1933 as opposed to Section 10(b) of the Exchange Act of 1934, and although both the company and CFO agreed to the entry of a cease-and-desist order, the CFO was not required to agree to an officer or director bar.

On Tuesday, April 12, the U.S. Securities and Exchange Commission (SEC) fined David Hansen, the former Chief Information Officer of NS8, Inc., a Las Vegas-based fraud detection and prevention software firm, approximately $100,000 for interfering with an employee’s ability to communicate with the SEC in violation of Rule 21F-17(a).  The SEC alleged that Hansen violated the rule by restricting the employee’s access to NS8’s IT systems and monitoring his use of corporate computer systems following the employee providing a tip to the SEC about NS8’s corporate practices.  In dissent, SEC Commissioner Hester Peirce said that the application of Rule 21F-17(a) was inappropriate in this case, arguing that restricting the tipster’s access to IT systems and monitoring their use did not impede their ability to communicate with the SEC and was a reasonable step in preventing unauthorized disclosure of NS8’s data to private parties and the media.

On March 30, 2022, the Securities Exchange Commission (“SEC”) published its long-awaited proposed rules and rule amendments applicable to special purpose acquisition companies (“SPACs”) for comment by May 31.  The stated purpose of the proposed rules, which would impose significant changes to the rules affecting SPACs, is to “more closely align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an initial public offering.”

On February 22, 2022, the Securities and Exchange Commission (SEC) announced that John-Michael Havrilla, a former Director of Investor Relations of PAVmed Inc. (PAVmed), a medical device company, had agreed to settle claims of insider trading.  The SEC simultaneously filed a complaint in the Southern District of New York, together with a consent agreement and proposed final judgment wherein Havrilla, without admitting or denying liability, agreed to the imposition of a permanent injunction, civil penalties of $160,230, and a five-year officer or director ban.

On Monday, February 14, 2022, the Securities and Exchange Commission (SEC) charged cryptocurrency lending company BlockFi Lending LLC (“BlockFi”) with failing to register the offers and sales of its retail crypto lending product, violating the registration provisions of the Investment Company Act of 1940, and making certain material misrepresentations regarding the level of risk associated with its product.  To settle the charges, BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of the lending product—BlockFi Interest Accounts (“BIAs”)—and bring its business within the provisions of the Investment Company Act within 60 days.  BlockFi also agreed to pay an additional $50 million in fines to 32 different states to settle similar charges.

On January 14, 2022, Judge William Orrick of the United States District Court for the Northern District of California issued an order denying a former biopharmaceutical company executive’s motion to dismiss and allowing the Securities and Exchange Commission (“SEC”) to proceed with a first-of-its-kind insider trading action against a corporate insider for misappropriating confidential nonpublic information related to his employer’s upcoming merger to purchase securities issued by a third company that was not involved in the transaction.

On December 21, 2021, the Securities and Exchange Commission (SEC) announced that Nikola Corporation—a publicly traded company that develops, manufactures, and sells electric trucks—had agreed to a $125 million settlement agreement to end the SEC’s investigation into claims that the company, both directly and through its former CEO, Trevor Milton, had deceived investors about the company’s ability to build hydrogen-powered vehicles and other issues.  As part of the settlement, Nikola neither admitted nor denied the claims against it, and agreed to continue cooperating with the SEC in its separate investigation into Milton himself.  The SEC previously brought a suit against Milton, who was also charged by the Department of Justice (“DOJ”), and that case remains pending.

On December 13, 2021, U.S. District Court Judge Claude Hilton, of the Eastern District of Virginia, dismissed the Securities and Exchange Commission’s (“SEC’s”) insider trading action against Christopher Clark before the defense put on its case-in-chief.  The Court agreed with defendant’s arguments that the SEC’s evidence was insufficient as a matter of law, even though the SEC was able to present evidence of what it claimed to be (1) suspicious trading patterns, (2) a close relationship with a corporate insider; and (3) communications patterns corresponding to the trading.  Absent actual evidence of a tip, or testimony supporting the SEC’s theory, the Court agreed with defendant that the SEC’s case was simply too speculative.  As the SEC increasingly seeks to use data analytics and circumstantial evidence to prove insider trading cases, the decision is a reminder that Courts may at times decide that more is needed.

On December 17, 2021, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) announced that each had entered into an agreement with J.P. Morgan Securities (the “Company”) to resolve issues related to the Company’s books-and-records obligations.  The agencies alleged that, over a period of several years, the Company failed to maintain and preserve copies of certain communications pursuant to recordkeeping rules for broker-dealer firms, swap dealers and future commission merchants – including WhatsApp and text messages on employee personal devices.  The Company admitted that its conduct was not in compliance with Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-4(b)(4) and 171-4(j) thereunder as well as Section 4(s)(h)(1)(B) of the Commodity Exchange Act and Regulations 166.3 and 23.602, and agreed to pay a total of $200 million to resolve the allegations ($125 million to the SEC and $75 million to the CFTC).

On November 18, the U.S. Securities and Exchange Commission (“SEC”) announced its enforcement results for the 2021 fiscal year, which ended on September 30, 2021.  The SEC reported that it filed 434 new enforcement actions in FY2021, a 7% increase over FY2020.  But perhaps the most striking thing about the SEC’s enforcement results for the year was its whistleblowing statistics.  The SEC has now awarded over $1 billion in whistleblower awards, and the SEC highlighted those figures in its press release—announcing that “[t]he SEC’s whistleblower program was critical to these efforts and had a record-breaking year.”

On November 19, 2021, the Securities and Exchange Commission (“SEC”) announced that an affiliate of McKinsey & Company (“McKinsey”), McKinsey Investment Office Partners, Inc. (“MIO”), had agreed to pay an $18 million penalty for alleged compliance failures in its handling of material nonpublic investment information (“MNPI”).  While the SEC did not allege that MIO had ever improperly used material nonpublic investment information in executing trades, it alleged that MIO’s procedures were inadequate to account for the risk that certain members of its investment committee had access to such information due to other roles they had with McKinsey.  MIO neither admitted nor denied the allegations in resolving the matter through an administrative proceeding.

On October 13, 2021, SEC Enforcement Director Gurbir Grewal and Deputy Enforcement Director Sanjay Wadhwa appeared at the Practicing Law Institute’s “The SEC Speaks” conference, an annual conference where Commission leaders provide updates on current initiatives and priorities of the Commission for the coming year.  Director Grewal and Deputy Director Wadhwa’s remarks signaled some potentially significant policy changes, particularly in terms of how they will measure corporate compliance programs and cooperation levels, when the SEC will allow settling defendants to “neither admit nor deny” the allegations brought by the SEC, and the overall autonomy granted to the front-line enforcement staff.   While the impact of any such policy change is uncertain, and will need to be assessed over time, it is an unmistakable shift in tone from the prior administration.

On September 17, 2021, the Securities and Exchange Commission (“SEC”) vacated $1.6 million in fines and penalties that the Financial Industry Regulatory Authority (“FINRA”) had previously levied against Scottsdale Capital Advisors Corp. (“Firm”) and three of its officers (“Applicants,” collectively).  In 2015, FINRA alleged that the Firm failed to maintain appropriate internal controls and executed sales of unregistered microcap securities for its foreign financial institution customers.  The next year, following a disciplinary hearing, FINRA imposed a $1.5 million fine on the Firm, a lifetime bar on one of the Firm’s officers, and a $50,000 fine and a two-year suspension on the two remaining Firm officers.  In reviewing FINRA’s findings on appeal by the Applicants, the SEC overturned the sanctions after determining that FINRA’s National Adjudicatory Council (“NAC”) applied incorrect legal standards, failed to adequately explain the basis of its conclusions, and conflated applicable regulations in its case against the Firm.

On August 17, 2021, the Securities and Exchange Commission (“SEC”) charged a former executive of California-based biopharmaceutical company Medivation Inc. with violating § 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 for allegedly relying upon inside information he obtained through the course of his employment at Medivation to purchase stock of a different company, Incyte Corp., a practice that some academics have dubbed “shadow trading.”  According to the SEC’s complaint—filed in the United States District Court for the Northern District of California—Matthew Panuwat, the then-head of business development at Medivation, purchased short-term, out-of-the money stock options in Incyte Corp., a biopharmaceutical company similar to Medivation, immediately after learning that Medivation would soon announce its upcoming acquisition by Pfizer.  The SEC claims that Panuwat knew that investment bankers engaged by Medivation had cited Incyte as a comparable company in their valuation analysis and that the announcement of Medivation’s sale to Pfizer would likely cause Incyte’s stock price to increase.  This is one of the SEC’s first enforcement actions based on this novel theory, and Panuwat may be expected to vigorously contest not only the facts but the legal underpinnings of the SEC’s complaint.

On August 6, 2021, the U.S. Securities and Exchange Commission (“SEC”) announced that it reached a $13 million settlement in a cease-and-desist proceeding against Blockchain Credit Partners (“the Company”) and its two owners.  The Company marketed itself as a “decentralized finance” (“DeFi”) technology company that sold two kinds of digital assets: (1) “mTokens,” which were sold as accruing 6.2% interest, and (2) DMM Governance (“DMG”) tokens designed to give holders certain voting rights, a share of excess profits, and the ability to profit from DMG resales in the secondary market.  In its cease-and-desist order (the “Order”), the SEC concluded that both mTokens and DMG tokens were securities because they were offered and sold as investment contracts, claimed that the Respondents violated Section 5(a) and 5(c) of the Securities Act for selling these securities without registering them, and further claimed that the Respondents made certain material misstatements and omissions in connection with the sale of the securities in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder.

On July 29, 2021, the Department of Justice (“DOJ”) announced the unsealing of a criminal indictment against Trevor Milton, the founder, former CEO, and former Chairman of Nikola Corporation, a company that went public in March 2020 through a merger with a special purpose acquisition company (“SPAC”), for allegedly knowingly misleading investors about the company’s ability to build electric and hydrogen-powered vehicles and other green technology.  The SEC filed a parallel civil action against Milton based on the same facts.

On Monday, July 19, 2021, the SEC announced that it had settled an action involving an alleged failure to prevent what the SEC contended were unsuitable investments by the respondent’s clients in a volatility-linked exchange-traded product (ETP).  As part of the settlement, the respondent agreed to pay a civil penalty of $8 million and disgorgement and prejudgment interest of $112,274.

On July 13, 2021, the SEC announced its settlement with Stable Road Acquisition Corp. (“Stable Road”), a special-purpose acquisition company (“SPAC”); its CEO; its sponsor; and its proposed merger target, Momentus Inc. (“Momentus”), an early-stage space technology company.  The resolution was based on alleged violations of the federal securities laws stemming from material misstatements and omissions related to Momentus’s space technology and national security concerns surrounding Momentus’s former CEO.  The SEC has brought charges against and is litigating against Momentus’s former CEO, who was not a party to the settlement.

On April 15, 2021, the Securities and Exchange Commission (“SEC”) announced a joint award of just over $50 million to a pair of whistleblowers, which represents the second-largest award in the whistleblower program’s history.  The SEC’s press release noted that the two recipients reported on “violations that involved highly complex transactions [that] would have been difficult to detect” without the information they provided.  This $50 million award continues a record-setting pace for the whistleblower program.  The SEC has now awarded over a quarter of a billion dollars to whistleblowers in the first seven months of fiscal year 2021 (“FY2021”) alone, which kicked off with an award of $114 million in October 2020—the largest in the program’s history.

Following the Securities and Exchange Commission (“SEC”) September 2020 amendments to the rules governing its whistleblower program, which we previously discussed in this newsletter, the SEC is on track to shatter its previous records of awards paid out to whistleblowers.  Halfway into its fiscal year (“FY2021”), which started in October 2020, the SEC has already awarded nearly $200 million to whistleblowers, surpassing last year’s record of $175 million paid out to whistleblowers.  And the awards have been sizable:  At the start of FY2021, the SEC issued a record $114 million dollar award; and so far this month, the SEC has already issued two multi-million dollar awards.  If this pace continues, the SEC will be on pace to award in one year the same total amount that it had awarded over the previous nine years, since the inception of the whistleblower program, combined.  In terms of the number of awards paid out, the SEC is also likely to have a banner year:  it has paid out 31 awards so far in FY2021, compared to 39 awards paid out last year.
 

On March 4, 2021, the Securities and Exchange Commission announced the creation of a Climate and ESG Task Force in the Division of Enforcement.  SEC Press Release 2021-42 (March 4, 2021).  The task force, led by Kelly L. Gibson, the Acting Deputy Director of Enforcement, and comprising 22 members, will aim to “develop initiatives to proactively identify ESG-related misconduct.”  Id.  The task force’s initial focus will be the identification of material gaps and misstatements in issuers’ disclosure of climate risks, and “will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”  Id.  It is not clear why the SEC concluded that this specific subject matter merits its own task force, and it is worth noting that recent investigations of climate disclosures by other regulators have faced significant challenges.
 

On March 3, 2021, the Securities and Exchange Commission’s Division of Examinations announced its examination priorities for this year.  Each year, the SEC publishes its list of examination priorities to identify areas that it believes present potential risks to investors and the integrity of the U.S. capital markets, and this year’s list is largely as expected.  It reflects an intent to focus on conflicts of interest and questions of whether investment advisors are fulfilling their fiduciary duties, information security and business continuity (something that took on particular importance in the last year as firms were forced to adapt to the pandemic), and various other perennial topics of interest.  The only “new” priority is one that dovetails with other recent announcements from the Commission—an addition of “enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change.”