On November 18, 2021, the Securities and Exchange Commission (the “Commission”) released its Enforcement Results for fiscal year (“FY”) 2021, which spans from October 1, 2020 to September 30, 2021.  The Commission published its results in an abbreviated press-release format with an accompanying addendum, foregoing the more formal annual report format it used in prior years.  Gurbir S. Grewal, who was appointed Director of the Commission’s Division of Enforcement (the “Division”) in July 2021, emphasized a commitment to innovation.  Grewal stated the Division brought “a number of critically important and first-of-their-kind enforcement actions,” and accomplished “record-breaking achievements” for its whistleblower program.  This blog post will review some of the key takeaways, as well as offer predictions for enforcement trends in FY 2022.

Enforcement Statistics

The report revealed mixed numerical trends.  Although the Division brought fewer total enforcement actions, it nevertheless collected a sizeable amount of money in penalties and generously rewarded whistleblowers.  In FY 2021, the Commission filed 434 new enforcement actions of 697 total enforcement actions.  New enforcement actions increased by 7% from FY 2020, but the total number of enforcement actions decreased by 3%.  In fact, the addendum indicates that FY 2021 brought about the lowest number of total enforcement actions in the past five years.  Additionally, while judgments and orders for disgorgements decreased by 33% to $2.4 billion, penalties increased by the same percentage to $1.4 billion.[1] 

Two factors likely impacted the overall trends which led to a reduction in the number of enforcement actions.  First, the Commission, like many organizations, continues to grapple with the challenges posed by the ongoing COVID-19 pandemic, with the majority of Commission staff still working from home.  Investigations, which often move slowly during ordinary times, have likely experienced additional delays as a result of the pandemic.  The second factor is that FY 2021 was a year of transition, with Chairman Gary Gensler assuming office on April 17, 2021, and Director Grewal assuming his post on July 26, 2021.  While the pandemic continues to create challenges for the Commission and other organizations, we do not expect the overall trends concerning fewer enforcement actions to continue in FY 2022, given the Commission’s leadership’s clear mission to conduct a robust enforcement program.

Some other statistics of note are that the Division awarded a record-breaking $564 million to 108 whistleblowers during FY 2021, signifying the increased role that whistleblowers are playing in generating the Commission’s enforcement investigations.  On the other hand, the Division distributed only $521 million to harmed investors, the lowest such amount since FY 2016 ($140 million).  

Actions pertaining to investment advisers and securities offerings comprised the bulk of the Division’s actions, accounting for 23% and 22% of the Division’s total actions, respectively, which are generally consistent with trends from previous years.  On the other end of the spectrum, the Division brought only 28 insider trading actions (4% of the year’s total actions) and 5 actions under the Foreign Corrupt Practices Act (1% of the year’s total actions).

Actions Against Individuals

The Division charged at least one individual in 70% of its 434 new enforcement actions, on par with FY 2020’s 72%.  Like prior years, the Division highlighted its ongoing interest in “Holding Individuals Accountable.”  This year, the Division expressed particular interest in prosecuting misconduct by investment professionals. 

Notably, the Division charged two former leading executives at a large financial institution for misleading investors about the financial health of the firm by allegedly knowingly touting inflated metrics.  One of those individuals settled with the Commission in administrative proceedings and agreed to pay a $2.5 million penalty.  But the other answered the Commission’s civil complaint in federal court.[2]  That case is ongoing.[3]  These actions evidence the Division’s interest in pursuing actions against individual officers even after settling charges with a company.[4]  It would not be surprising to see an even greater percentage of settlements in FY 2022 include settlements with individual respondents.

Another case of note is the Division’s action agency’s first major enforcement action pertaining to “shadow trading.”  Shadow trading involves corporate insiders using nonpublic company information to trade the securities of a company that is correlated to or economically-linked to the performance of the insider’s own firm.  Insiders attempt to take advantage of the fact that comparable companies sometimes experience similar effects on share price after a rival company makes a significant disclosure.  Here, the Commission alleged that an insider for a biopharmaceutical company profitably traded shares of a peer firm based on nonpublic information about the insider’s firm’s upcoming merger with a large pharmaceutical and biotechnology corporation.  The insider allegedly netted over $107,066 on these illegal trades.[5]  The Commission’s innovative theory has proved to hold water in court.  The District Court judge presiding over the case recently denied the defendant’s motion to dismiss, citing Supreme Court guidance discouraging dismissal of insider trading claims “predicated on new or unusual schemes.”[6]      

Innovative Actions, Including in Cryptocurrency and Fintech

As cryptocurrency and fintech continued to make headlines in FY 2021, the Division investigated and charged misconduct in both markets.  The Division’s work in these matters involved some firsts for the agency.

In September 2021, the Division filed suit against BitConnect, an online cryptocurrency lending platform, alleging that the defendants improperly transferred investor funds into digital wallets controlled by BitConnect and its promoters.[7]  According to the Division, BitConnect defrauded investors out of $2 billion.  The Department of Justice (“DOJ”), which brought criminal charges in connection with this case, states that the case is the largest cryptocurrency fraud that the government has ever prosecuted.[8]  The Division’s decision to bring civil charges suggests that it will continue to remain involved in crypto-related misconduct in parallel with the DOJ’s criminal investigations.      

The Division also charged Robinhood Financial LLC, a popular California-based financial services company known for offering consumers access to the stock market, exchange-traded funds, and cryptocurrencies on its mobile app.  The Commission alleged that Robinhood misled users about the true costs of its investment orders and that Robinhood’s trade prices were inferior to those of its competitors.  Robinhood settled the matter, agreeing to pay a $65 million civil penalty.  Agency officials warned that firms seeking to innovate within the fintech space still need to comply with disclosure requirements: “There are many new companies seeking to harness the power of technology to provide alternative ways for people to invest their money.  But innovation does not negate responsibility under the federal securities laws,” said Erin E. Schneider, Director of the Commission’s San Francisco Regional Office.[9] 

In FY 2022, industry watchers will continue to keep an eye on the Commission’s lawsuit against Ripple Labs.  The Division brought suit in December 2020, alleging that both the former and current CEOs of the company raised over $1.3 billion through unregistered sales of XRP, a form of cryptocurrency developed by Ripple.  The Commission argues that the sales clearly involved securities and did not satisfy any exemption from registration.  The case is currently in a contentious discovery phase.  Earlier this month, the magistrate judge directed the Commission to produce certain documents despite the Commission’s claims that the documents fall under the “deliberative process privilege.”  Some of the documents ordered to be produced include notes from meetings between the Commission and third parties.  The order was only a partial loss for the Commission, however, as the court agreed that many documents were privileged.[10]  The case serves as an important test of how courts construe whether crypto assets are securities that should be regulated by the Commission.

Alternative Data

The Division brought its first enforcement action against an alternative data provider, App Annie, Inc., and its co-founder and former CEO and Chairman Bertrand Schmitt.  Alternative data providers sell data on mobile app performance, such as number of downloads, frequency of use, and revenue generation for a company’s app.  Companies do not typically disclose this information in their financial statements, giving rise to the term “alternative data.”  The Commission alleged that App Annie and Schmitt promised individual companies that they would not sell confidential app data to customers, assuring them that App Annie would aggregate and anonymize the data before incorporating it into their statistical models.  According to the Commission, App Annie sold non-anonymized data, violating its promises of confidentiality.  The Division settled this first-of-its-kind matter; App Annie will pay a $10 million penalty, and Schmitt will pay $300,000.[11]       

Rewarding Whistleblowers

The Division protected and rewarded whistleblowers during FY 2021.  It issued a record-breaking $114 million award to a whistleblower who repeatedly attempted to raise concerns internally before finally alerting the Commission and other agencies of ongoing wrongdoing.[12]  The Division also charged an investment adviser, GPB Capital, for retaliating against a known whistleblower and including language in separation agreements that discouraged former employees from approaching the Commission.[13]

Tougher Approaches to Enforcement

Since joining the Commission in July of 2021, Director Grewal has outlined several key priorities which we expect to have a significant impact on enforcement matters in FY 2022.  Grewal’s notable priorities include:

• “robust enforcement of laws and rules concerning required disclosures, misuse of nonpublic information, violation of record-keeping obligations, and obfuscation of evidence from the SEC or other government agencies”;[14]
• Holding gatekeepers accountable, including attorneys, accountants and CCOs;
• Crafting appropriate remedies, including requiring more admissions of wrongdoing, seeking stiffer penalties, and seeking officer and director bars when appropriate to serve as a deterrent; and,
• Providing greater deference to staff in determining whether and when enforcement charges are appropriate by, for example, not granting every request from respondents for meetings with the Director of Enforcement to reconsider enforcement recommendations.

The Commission also announced in February 2021 that it would no longer approve settlement offers conditioned on waivers of collateral consequences, such as waivers of “bad actor” disqualifications from participating in securities offerings, which had become an historical practice.  Instead, the Commission will now require settling parties to go through the ordinary process of requesting waivers from the Division of Corporation Finance after settlement with the Division of Enforcement.  These initiatives are all consistent with Grewal’s and Gensler’s stated objectives of implementing a more forceful enforcement program.[15]

Main Takeaways

As noted, the Commission dealt with both internal transitions in leadership and the ongoing effects of the COVID-19 pandemic during FY 2021.  Despite reporting a low number of total enforcement actions, the Division still engaged in robust and successful enforcement, recovering over $1.4 million in penalties, the largest amount since FY 2016.  With new leadership now firmly in place, we can expect the total number of enforcement actions to increase during FY 2022, focused on both traditional areas as well as relatively new areas. 

The Division has also demonstrated an ability to apply its extensive experience monitoring traditional securities platforms to new ones.  Even in the face of technological changes, the Division continues to successfully enforce the fundamental principles of securities regulation: individual accountability, complete and honest disclosures to investors, and protecting whistleblowers’ rights.  Actors within fintech and cryptocurrency industries should closely monitor compliance with all Commission regulations. 

Looking ahead, we can expect the Division to continue keeping a keen eye on cryptocurrency, warning investors of the risks accompanying participation in this volatile space.  Traditional firms should also continue to rigorously review and enforce their compliance, particularly with investor disclosures and internal whistleblower procedures.

The full press release and accompanying addendum are available here.