by T. GormanPosted on Posted in SECActions

It is back to the future for the Division of Enforcement. Going forward the Division will focus on rebuilding trust, long a goal of the program, according to recent comments of its new Enforcement Director (here). One key element of that effort will be based on a return to the use of admissions as part of the settlement process. The standards were not identified. Another goal appears to be a refocusing on gatekeepers, an idea that traces to the founding of the Division. Participation by staff in Wells meetings will only involve the Director and his deputy when there are novel questions of law or fact involved (here). Finally, rumors suggest the staff will return to the Commission offices in January,

SEC

Whistleblowers: The Commission awarded two whistleblowers a total of $40 million, according to an October 15, 2021 announcement.

Comment: The agency reopened the comment period for listing standards tied to the recovery of erroneously awarded compensation. The reopening permits interested parties to comment on the Dodd-Frank Act rule regarding clawbacks of incentive-based compensation. The rule was initially proposed in 2015.

Be careful, be safe this week

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed no civil injunctive actions and one administrative proceeding, exclusive of tag-along and other similar proceedings.

Offering fraud: SEC v. Trikantzopoulos, Civil Action No. 1:20-cv-11156 (D. Mass.) is a previously filed case which named as defendants Vassillkos Trkiantzopoulos and his firm, Navis Ventures LLC. The complaint, filed in June 2020, alleges a scheme centered on real estate ventures that investors were solicited to invest in. The funds were not used as promised, however. To the contrary, the Court earlier concluded that the promised use of the funds was not accurate and the represented returns were not paid. On October 15, 2021 the Court entered final judgments that imposed permanent injunctions prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). Defendant Trikantzopoulos was also directed to pay disgorgement of $109,139, prejudgment interest of $17, 841 and a penalty of $195,046. See Lit. Rel. No. 25243 (October 15, 2021).

Internal controls: In the Matter of Amyris, Inc., Adm. Proc. File No. 3-20624 (October 15, 2021) is a proceeding which names the publicly traded firm as a respondent. In the first two quarters of 2018 Respondent improperly recognized certain royalty payments. As a result, the financial statements for those two quarters to being materially inaccurate. The error occurred because the firm lacked the necessary resources and procedures to ensure that certain items related to the royalty payments were internally communicated to the appropriate section and staff. The Order alleges violations of Exchange Act Section 13(a), 13(b)(2)(A) and 13(b)(2)(B). Since the conduct alleged in the Order, the company has hired multiple, experienced accounting personal, including a CFO, and retained an external consultant to help design and test its internal controls for financial reporting. To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Respondent will also pay a penalty of $300,000.

DOJ

Anti-corruption: The Department announced the initiation of a new hotline for tips to help combat corruption in the northern triangle – El Salvador, Guatemala and Honduras — on October 15, 2021 (here).

FinCEN

Report: The agency issued a report on ransomware trends in Bank Secrecy Act Data. The report, issued pursuant to the Anti-Money Laundering Act of 2020, focuses on pattern and trend information tied to ransomware, according to the October 15, 2021 release (here).

Australia

Report: The Australian Securities and Investment Commission published its 2020-21 Annual Report on October 15, 2021 (here).

Hong Kong

Environment: The Green and Sustainable Finance Cross-Agency Steering Group announced its support for Hong Kong’s Climate Action Plan 2050, announced in a release on October 11, 2021.The plan details a vision for zero carbon emissions and sustainable development. It also details strategies and targets for combating climate change and achieving carbon neutrality (here).

Singapore

Statement: The Monetary Authority of Singapore announced its Monetary Policy Statement, in a release dated October 14, 2021 (here).

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by T. GormanPosted on Posted in SECActions

Last week new enforcement director Gurbir Grewal made his first public remarks at PLI’s SEC Speaks 2021 (October 13, 2021, here). Mr. Grewal is the former Attorney General of New Jersey. He also served in the U.S. Attorney’s Office for the Eastern District of New York.

The Remarks

The focus of Mr. Gurbir’s remarks was trust. Specifically, only a small percentage of Americans have “any significant level of confidence in banks, technology companies or big business,” he noted. With many people either losing or lacking trust in key institutions the question becomes what role the Commission can play is bolstering confidence and trust.

The reason for the loss of faith in key institutions does not trace to a single source, according to the Director. One cause, however, may be “the repeated lapses by large businesses, gatekeepers, and other market participants,” he noted. That trend may be amplified by the belief of some that there are two sets of rules, one for the big and powerful and another for everyone else. That is something that the Commission and its enforcement staff can address through thee key points the Director suggested: 1) corporate responsibility; 2) gatekeeper accountability; and 3) crafting appropriate remedies.

First, corporate responsibility is critical. The initial focus here is the statutes passed by Congress and the Rules crafted by the agency. Compliance here is not a question of “check the box” and move on. These statutes and rules are “important to ensure that the SEC and other law enforcement agencies can understand what happened and make appropriate prosecutorial decisions,” according to Mr. Gurbir.

Disclosure of material events in a timely and accurate fashion is also essential. This type of disclosure builds confidence in the markets. Since it “not only enable[s] average investors to make informed investing decisions, but also [to] ensure that informed investors are able to hold management and boards accountable when they fall short” in key areas such as cybersecurity.

Second, gatekeeper accountability is critical to rebuilding investor trust. “When gatekeepers are living up to their obligations, they serve as the first lines of defense against misconduct. But when they don’t investors, market integrity and public trust all suffer,” the new Director stated. When those with gatekeeper responsibilities encourage others to play in the grey areas of the statutes and rules, it undermines the role and trust.

Finally, the enforcement division can help build trust by crafting appropriate remedies. Preventing a future reoccurrence of misconduct, in addition to punishing misconduct, is important to building public trust, according to the new Director. This begins with reinstating the use of admissions. The circumstances under which admissions might be demanded were not detailed.

The Division also intends to use remedies such as the officer and director bar. In view of its broad statutory authority, the agency can and will seek such an order even if the person was not at the time employed by a public company. The theory behind this approach appears to be that where the individual may become and officer or a director of a public company, a bar may be appropriate.

The potential increase in the use of bars will be paralleled with continuing, and perhaps increased use of conduct based injunctions. Those injunction can, as in recent cases, be crafted to fit the precise circumstances of the case.

Two points round out the approach. One is the use of undertakings. The use of this approach, which frequently keys to remedial and compliance efforts, may be expanded. It may also tie to the second point which focuses on the Wells process and how settlements are negotiated. Moving forward the Division Director and his Deputy will limit their participation in these meetings to matters which involve new and perhaps novel issues of fact or law. Other cases will be resolved with members of the staff involved in the actual case. This approach may streamline and shorten settlement discussions which appears to be the purpose.

Comment

Increasing trust in the integrity of the markets is clearly a worthy goal. Eliminating situations where companies and individuals continually push the edge of the conduct that is acceptable also appears to be an appropriate approach. Indeed, the securities laws were designed to bring an new ethics to the market place. If in fact the new approach will be fashioned on this goal, it may in fact increase confidence in the markets, a prospect which should hold benefits for all.

At the same time, the new approach may have a hard-edged undertone that can undercut these goals. The use of admission such as those demanded in criminal cases, if expanded beyond the limited circumstances in which they were utilized in the past, may increase the difficulty of settlement and slow the resolution of cases. If officer and director bars become a key remedy in a wide variety of cases along with conduct-based injunctions, settlement for an agency that has traditionally relied on resolving most actions on filing may be delayed or result in increased litigation again, not necessarily a productive approach for creating increased trust in the markets.

Overall, the key to the new approach may not be the comments made during the speech. Rather, the critical question for the new Director is likely to be how the program is administered. If new trust is to be built in the markets based at least in part on the Commission’s enforcement program, that will begin with the manner in which the program is administered. It is easy and perhaps appropriate to be tough in obvious situations. It is not easy, however, to foster a culture of fairness that is in fact fair and creates the appearance of fairness. The goal is worthy. Achieving it is worthy. The process is more than difficult, but clearly possible.

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