Cornerstone Research and the NYU Pollack Center issued their annual report titled SEC Enforcement Activity: Public Companies and Subsidiaries for 2021 (here). The Report identifies trends in a subsection of the actions filed by the Commission.

Cases: Not surprisingly the Report concludes that the number of actions brought against public companies and their subsidiaries slowed last year to 53. That is the lowest number of cases brought in this area since fiscal 2014. It is also 15% lower than fiscal 2020 and 32% lower than the average over the past five fiscal years.

The actions filed in fiscal 2021 were about evenly split between those that involved reporting and disclosure cases and those which fell into other areas. Specifically, about 27 cases involved reporting and disclosure questions while 26 fell into the “other” category.

The two largest groups of cases filed last year involved investment advisers and the Foreign Corrupt Practices Act. Approximately 26% of the cases fell into the former category while 8% were in the latter. Only 4% of the total involved broker-dealers.

Cooperation: This was a key issue analyzed in the Report. During the last fiscal year 58% of the actions that settled noted cooperation. That is consistent with the average from fiscal 2012 through fiscal 2020. At the same time 40% of the defendants in the category had no cooperation noted. That is the highest percentage since fiscal 2017. Last year 94% of the settlements involved the imposition of a penalty. That is largely consistent with the trend over the past 10 years during which the average was only less than 90% in two instances, 2012 and 2013.

Monetary sanctions: During fiscal 2021 approximately $1.8 billion in monetary settlements were imposed. That amount is comparable to the result for fiscal 2012 through 2020. About 46% of that amount came from disgorgement and prejudgment interest. The remainder was from penalties and other monetary relief. About 87% of the disgorgement and prejudgment interest came from administrative proceedings. That is significantly higher than the average if 58% from 2021 through 2020. In contrast only about 6% of the disgorgement and prejudgment interest came from civil injunctive actions. In contrast, of the 14% that were filed as civil injunctive actions, only 1 was settled while the remaining 6 are in litigation.

Venue: About 87% of the actions filed last year were administrative proceedings. In contrast, of the 14% filed as civil injunctive actions only 1 case was settled at the time of filing while the other 6 are in litigation.

Sample: The actions that constituted the data base for the report involved only cases against public companies and their subsidiaries. The public companies traded in the over-the-counter markets or on a major exchange. About 98% of those cases were settled at the time of filing. In contrast of the 14% filed as civil injunctive actions, only 1 case was settled at the time of filing.

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Market professionals are a current focus of Commission enforcement actions. While this is consisted with the “gatekeeper focus” mentioned by Chair Gensler recently, it is hardly new. A focus on gatekeepers as a way to leverage scarce resources traces to the earliest days of the Division of Enforcement. The theory is straight forward: If those with access to clients — attorneys, accountants and market professionals — comport with their professional obligations it helps stem the numerous instances in which unsuspecting members of the public place their trust in professionals only to get fleeced. The Commission’s most recent action in this area involved a former broker and a series of managed investment funds. SEC v. Burrell, Civil Action No. 1:21-cv-09422 (S.D.N.Y. Filed November 15, 2021).

Named as defendants are Joshua Burrell and Activated Capital, LLC. Mr. Bunnell is the founder and managing principal of Activated. Previously, he was a registered representative associated with a registered broker-dealer. Activated managed a fund that invested in properties in “Opportunity Zones” known as Fund II.

Opportunity Zones were established by Tax Cuts and The Jobs Act of 2017. Investors who have capital gains can put their funds into these Zones, which are economically disadvantaged, and obtain certain tax benefits. Activated promoted interests in Fund II. It also managed other funds.

From early 2019 through early 2021 Defendants raised about $6.3 million from fourteen investors for Fund II. When Mr. Burrell began marking interests in Fund II he made a series of misrepresentations. First, the investments were to be made in the name of Fund II which purchased Opportunity Zone properties. In many instances, however, Mr. Burrell misappropriated the funds. Properties were purchased in the name of other Activated entities.

In addition, the operating documents contained misrepresentations. The documents stated that investors would be paid distributions from funds generated by the underlying properties. In fact, distributions were made through the use of Ponzi like payments.

Finally, investors were told that Fund II had an outside custodian and that the principals of Activated had invested in it. Neither statement was true. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lt. Rel. No. 25263 (November 15, 2021).

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