On September 30, 2020, the Securities and Exchange Commission (SEC) closed its books on FY2020 and, on November 2, released its 2020 Annual Report. Analysts have begun reviewing SEC enforcement actions to reach conclusions about the types of financial activities the SEC targeted this year, and to make predictions about financial activities that the SEC will target in 2021.
In 2020, the SEC’s Division of Enforcement investigated and recommended taking action against crimes involving securities markets, financial fraud, insider trading, broker-dealer and investment advisor misconduct, and more. Of particular note, in FY2020 the SEC placed a premium on individual accountability, and pioneered the use of data analytics to identify and investigate fraud. Of course, financial markets did not escape the impact of the COVID-19 global pandemic, which prompted the SEC to create a Coronavirus Steering Committee to address pandemic-related crimes.
SEC lawyers filed several cases that targeted C-level business executives individually for crimes involving the misuse of corporate financial reserves, revenue recognition, and disclosure malfeasance. In 72% of standalone enforcement actions, the SEC charged CEOs, CFOs, accountants, auditors, and other gatekeepers individually for fraud and violations of reporting and internal accounting controls.
In 2020, the SEC used data analytics to identify financial misconduct, including accounting and disclosure violations that were used to mask weak performances. The Earnings Per Share (EPS) Initiative identified improper accounting practices that resulted in a quarterly EPS that exceeded analyst estimates.
Cognizant of the fiduciary duty that investment professionals and retail investors owe to their clients, the SEC targeted conflict of interest disclosures, and specifically the use of cash sweep arrangements. Advisers who are dually-registered or have an affiliated broker-dealer have a conflict of interest when recommending one case investment over another. To comply with the law, advisers must make full and fair disclosures of their conflicts of interests.
The Enforcement Division also investigated claims surrounding the transparency of fee structures.
Recognizing the investigation and enforcement challenges posed by the COVID-19 pandemic, as well as the opportunities for criminal activities it created, in March the SEC formed a steering committee to coordinate the Enforcement Division’s response to the coronavirus. Financial stresses caused by the pandemic exposed preexisting improprieties in accounting and disclosure, and businesses tried to use the current economic situation to cover them up.
The SEC reviewed public filings in industries that were highly impacted by COVID-19, seeking to identify suspicious filings that may have been used to disguise prior financial problems as being related to the coronavirus pandemic.
In March and June of 2020, the SEC’s Division of Corporation Finance offered guidance on how companies should disclose the impact of COVID-19. While the SEC recognized the difficulties posed by the pandemic, it also expects managers to explain their views of the future impact of the pandemic and how they are planning for future uncertainties caused by COVID-19.
The SEC Enforcement Division filed 17% fewer cases in 2020 than it did in 2019. However, these cases resulted in record-breaking amounts of penalties and disgorgement. In FY2019, the SEC brought 862 cases that resulted in $4.3 billion in disgorgement and penalties. In FY2020, the SEC filed 715 cases that resulted in $4.68 billion in disgorgement and penalties.
While it is difficult to speculate about future enforcement actions, the SEC saw an increased number of Tips, Complaints, and Referrals (TCRs) in FY2020, and aggressively investigated and prosecuted fraud claims. This suggests that the SEC will continue to have an ample number of new and continuing investigations, and will aggressively pursue enforcement actions in FY2021.
Expect the SEC Enforcement Division to continue to focus on investigating and prosecuting cases involving insider trading and investor fraud, and targeting fund managers and other investment professionals. Specifically, the SEC will emphasize cases alleging:
If you believe you are under investigation or have been charged with a federal financial crime, you need an experienced federal criminal defense attorney on your side.
New York City criminal defense attorney Hope Lefeber has been defending people accused of committing federal financial crimes for over 30 years. She started her career as an attorney with the SEC, where she learned first-hand how the government prosecutes fraud cases. Today, she uses that experience to defend people who have been accused of financial crimes in federal court.
Ms. Lefeber has represented high-profile clients in and around New York City who have been charged with federal financial crimes. Her former clients include executives at Fortune 500 companies, investment professionals, lawyers, doctors, professors, educators, students, medical professionals, corporations, non-profits, and people from all walks of life who have been accused of crimes in federal court.
If you believe you might be under investigation for a financial crime, the best thing you can do is to get a knowledgeable and experienced federal criminal defense attorney on your side as quickly as possible. Hope Lefeber should be your first call.
When you work with Hope Lefeber, you will find her to be meticulously prepared and aggressive in her defense of her clients.
Read more about Ms. Lefeber’s legal victories and testimonials from other people Hope Lefeber has helped, then contact us today by calling 610-668-7927 to schedule a free, confidential consultation to discuss your case.