by T. GormanPosted on Posted in SECActions

The PCAOB has focused on its enforcement program over the years. Nevertheless, the Board is required to maintain its disciplinary proceedings on a non-public basis until they are completed. Cornerstone Research has published a report analyzing trends in enforcement actions filed by the PCAOB titled Public Company Accounting Oversight Board Enforcement Activity, 2023 Year in Review (here).

Basic enforcement statistics begin with the number of actions. In 2023 the PCAOB filed a total of 46 cases. That number is composed of 37 auditing actions and 9 matters related to the Board’s oversight which includes items such as registration and reporting. The total number of actions last year reflects an increase over each of the prior years, tracing back to 2018. For example, in 2022 a total of 42 actions were filed while in 2021 there were 21 cases initiated. The average over the entire period for which Cornerstone published data was 27.

The auditing actions filed last year were almost evenly divided between U.S. and non-U.S. respondents. Specifically, in 2023 the Board filed 19 such actions against U.S. Respondents and 18 which named non-U.S. firms. In the prior year the split between U.S. and non-U.S. firms was again also almost evenly split but was reversed — 14 actions involved U.S. respondents while 15 did not.

Interestingly, only 11% of the auditing actions referenced a restatement. Similarly, no auditing actions referred to a material weakness in internal controls. That consistent with prior years. It alsocontrasts sharply, however, with the findings in SEC enforcement actions. There the SEC reported the highest number of enforcement actions citing an announced restatement and/or material weakness in internal control in FY 2022 and 2023 in recent years.

In 2023 the mix of Respondents in Board actions changed. In that year there were 19 actions filed against individuals and 34 involving firms. In contract, in 2022 there were 26 actions filed involving individuals and 17 involving firms.

In 2023 the majority of auditing actions alleged violations of auditing standards. Most of the actions also included claims regarding ethics and independence standards and quality control standards or both. In addition, about 25% of the auditing actions filed in 2023 alleged violations of auditor independence, a contrast to the prior year where there were no such claims.

Finally, in 2023 the Board imposed monetary penalties against all respondents. In contrast, penalties were imposed on 95% of respondents in 2022.

 

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by T. GormanPosted on Posted in SECActions

Insider trading is a long-standing staple of SEC enforcement. The Commission has traditionally been quite aggressive in this area. The courts have typically been accommodating, adopting theories crafted by the agency and writing them into law based on Exchange Act Section 10(b).

Perhaps the most interesting point about this long-standing trend is that Section 10(b) does not contain the phrase “insider trading.” Rather, the Section talks in terms of schemes and devices. The Commission’s latest case in this area does mention insider trading insider trading but does differ significantly from the standard Commission involve trading action. SEC v. Panuwat, Civil Action No. 4:21-cv-06322 (N.D. Cal. Verdict April 5, 2024).

Defendant is Matthew Panuwat, formerly a business development executive at Medivation Inc., a mid-sized oncology-focused biopharmaceutical firm. On August 18, 2016, Mr. Panuwat learned from the CEO of his employer that Large Parma firm would acquire the company that employed him.

Shortly after learning about the planned takeover, Mr. Panuwat purchased short-term stock options in the shares of Incyte Corporation that were out-of-the-money. He did not purchase shares of Medivation, his employer and the subject of the take-over tip he had received. Incyte was, another a mid-sized oncology biopharmaceutical firm like his employer.

Two days after the option purchase – August 22, 2016 – Medivation announced it would be acquired by Large Parma firm. The share price of Medivation’s stock increased 20% over the course of the day. The share price of Incyte, whose options Mr. Panuwat had purchased, increased about 8% in value. The options Mr. Panuwat had purchased increased by about 20% in value, giving him trading profits of $107,066.

On April 5, 2024, a jury returned a verdict in favor of the Commission, concluding that Mr. Panuwat was liable for violating Exchange Act Section 10(b) by engaging in insider trading. Remedies will be determined at a later date by the Court. This appears to be the first case initiated by the Commission charging insider trading in which the securities traded were not those which were the subject of the tip.

 

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