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  • Writer's pictureDaniel Goelzer

SEC Enforcement Targets Individuals but Rewards Company Cooperation

In fiscal year 2023, Securities and Exchange Commission enforcement actions against public companies and their subsidiaries rose 34 percent and the Commission barred 133 individuals from serving as officers or directors of public companies.  However, while the focus on individual corporate officials increased, monetary settlements in public company enforcement cases were the lowest in the last 8 fiscal years.  At least in part, the lower monetary penalties may have resulted from the Commission’s policy of “rewarding” companies that cooperate in an investigation.  Sixty-nine percent of public company or subsidiary defendants that settled with the Commission cooperated in the investigation, and 13 percent of cooperators were able to settle without any monetary penalty.

 

These are some of the findings of two annual reports on SEC enforcement activity – the SEC Division of Enforcement summary of its 2023 cases and the Cornerstone Research/NYU Pollack Center analysis of 2023 SEC enforcement actions against public companies and their subsidiaries.  Together, they paint a picture of an active and aggressive enforcement program that is focused – along with other priorities -- on public company disclosure and on the culpability of individuals for corporate violations.  The prior editions of these two reports were discussed in SEC Disclosure Enforcement is in High Gear, November-December 2022 Update.

 

SEC Division of Enforcement Press Release

 

On November 14, the SEC issued a detailed press release announcing the fiscal year 2023 results of its enforcement program.  An addendum to the press release containing underlying enforcement statistics is also available. 

 

During FY 2023 (ended September 30, 2023), the SEC filed 784 enforcement actions, a 3 percent increase over the prior year.  Monetary payments ordered in SEC actions (i.e., civil penalties, disgorgement, and pre-judgment interest) totaled $4.949 billion, the second-highest annual amount in SEC history, but down from the record-setting $6.439 billion in fiscal year 2022. The 2023 total includes $1.580 billion in civil penalties (compared to the all-time high of $4.19 billion in 2022) and $3.369 billion in disgorgement of illegally obtained gains and prejudgment interest (compared to $2.25 billion in 2022). 

 

The SEC’s announcement makes several points related to cases involving public company disclosure and actions against public company officers and auditors:

 

  • Public company disclosure.  The SEC’s release states that “[a]ccurate disclosures by public companies are foundational to the securities markets.”  Fiscal 2023 SEC disclosure cases involved, among other things, fraud, accounting misstatements, and deficient controls.  The release cites examples of these cases, including charges against Fluor Corporation for accounting errors that caused it to materially overstate its earnings; against Newell Brands Inc. for misleading investors about its core sales growth, and against four electric vehicle companies for materially misleading statements regarding revenue projections, sales, or product launches.

 

  • Individual accountability.  Individual – as opposed to solely corporate – responsibility for disclosure and other types of company violations has been an SEC enforcement theme for several years.  The SEC’s release notes that approximately two-thirds of the SEC’s 2023 cases involved charges against one or more individuals and that the SEC obtained 133 orders barring individuals from serving as officers or directors of public companies. Examples in the release of conduct that resulted in officer/director bars are: (1) a former Wells Fargo executive was barred as part of a settlement of fraud charges for misleading investors about the success of Wells Fargo’s core business; (2) the former CEO of McDonald’s was barred for five years for making false and misleading statements about the circumstances leading to his termination from McDonald’s; and (3) telecommunications company Pareteum Corp.’s former controller was barred (and also denied the privilege of appearing or practicing before the Commission as an accountant) as part of a settlement in a matter relating to his role in an allegedly fraudulent revenue recognition scheme.

 

  • Gatekeepers.  Another longstanding SEC enforcement theme is that “gatekeepers,” such as accountants, auditors, and other professionals, have investor protection responsibilities and will be held accountable when they fail to fulfil their obligations,  The SEC release describes enforcing these responsibilities as “a critical part of the Division’s mission” and describes three 2023 examples, all involving accounting firms:  (1) Marcum LLP was charged with systemic quality control failures and violations of audit standards in connection with its audit work for special purpose acquisition company (SPAC) clients; (2) Prager Metis was charged for allegedly violating auditor independence rules and aiding and abetting its clients’ violations of federal securities laws; and (3) Crowe U.K. LLP, its CEO, and a senior audit partner were charged in connection with the firm’s allegedly deficient audit of a SPAC merger target.

 

  • Cooperation.  The SEC rewards companies that bring securities law violations to its attention or otherwise cooperate in enforcement investigations.  This seems to have been particularly important in fiscal 2023 (and may be one reason for the decline in fines and penalties).  As the SEC press release notes, “Rewarding parties that cooperate encourages other firms to proactively self-police, self-report, and remediate potential securities law violations and to provide meaningful cooperation with the Division’s investigations.”  Public companies that settled cases involving disclosure violations but avoided monetary penalties due to their cooperation included:

 

GTT Communications, Inc. (charged with failing to disclose material information about unsupported adjustments that increased GTT’s reported operating income by at least 15 percent). The SEC “credited GTT with promptly self-reporting, undertaking affirmative remedial measures, and providing substantial cooperation to the SEC.” 

 

View, Inc. (charged with failing to disclose $28 million in warranty-related liabilities).  “[A]fter self-reporting the conduct, View provided assistance to Division staff by, among other things, providing detailed financial analyses and explanations and summaries of factual issues; proactively identifying key documents and witnesses; and following up on several requests from the staff without requiring subpoenas.” See SEC Accounting Enforcement Continues Apace, July 2023 Update.

 

  • Environmental, social, and governance cases.  The SEC release states that “ESG issues are increasingly important to investors, resulting in a growth of ESG-branded investment products and an increased focus on ESG by public companies.”  The examples provided of 2023 public company ESG disclosure cases include the SEC’s charges against Activision Blizzard Inc. for failing to maintain disclosure controls and procedures to collect and analyze employee complaints of workplace misconduct.  See ESG Meets Disclosure Controls in an SEC Enforcement Action, February-March 2023 Update.

 

Cornerstone Research/NYU Pollack Center Report

 

On November 15, Cornerstone Research and the New York University Pollack Center for Law & Business released SEC Enforcement Activity: Public Companies and Subsidiaries—Fiscal Year 2023 Update, their annual report on SEC enforcement actions against public companies and their subsidiaries.  Cornerstone and the Pollack Center also issued a press release summarizing their report.

 

The Cornerstone/Pollack Center report finds that the SEC filed 91 enforcement actions public companies and their subsidiaries in fiscal 2023 – a 34 percent increase over 2022.  However, despite the increase in cases, monetary settlements in public company and subsidiary actions decreased 50 percent, to $1.3 billion, the lowest total in the last eight fiscal years.  The decrease in penalties appears in part to be the result of the increased tendency for public companies to cooperate with SEC investigations – 13 percent of public company defendants/respondents that cooperated were able to settle without a monetary penalty, more than triple the average no-penalty rate from 2014 to 2022.

 

As in prior years, “Issuer Reporting and Disclosure” was the most common category of allegation against public companies in FY 2023.  The 41 reporting/disclosure cases (45 percent of all actions filed) was the highest yearly number in the database, which began in 2009.  Allegations in the Broker Dealer classification were the second most common type of charge (19 percent).  (Presumably, a number of the cases tracked by Cornerstone/Pollack Center involve the securities broker-dealer subsidiary of a public holding company.)  Foreign Corrupt Practices Act charges were involved in 12 percent of cases against public companies. 

 

The Cornerstone/Pollack Center report sheds light on the role that cooperation has come to play in the SEC’s enforcement program.  The SEC noted cooperation in its investigation by 69 percent of public company and subsidiary defendants that settled in fiscal 2023 – higher than the FY2014-2022 average of 61 percent.  Moreover, 16 public company or subsidiary defendants admitted guilt, tying 2022 for the highest number of such admissions; 15 of these admissions were in broker-dealer cases.  (Defendants generally settle without admitting or denying the Commission’s allegations although, over the past decade, the Commission has become more insistent on admissions in certain cases.)    As to the rewards for cooperation, 87 percent of the settlements of cooperating defendants included a monetary amount, compared to 94 percent for noncooperators – i.e., 13 percent of cooperators avoided any monetary sanction.   

 

Comment:  The risk of SEC enforcement is rising with respect to disclosures that the SEC views as inaccurate, incomplete, or misleading.  Audit committees should keep this risk in mind, especially when confronted with what appear to be accounting “close calls” or management efforts to omit or downplay unfavorable information.  For companies embroiled in an SEC investigation, the Commission’s record of rewarding cooperation should be a consideration in deciding how to respond.

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