Fewer SEC enforcement cases in 2020, record-breaking whistleblower cases
The number of enforcement cases brought by the Securities and Exchange Commission dropped in fiscal year 2020, though signs point to a busy future for the enforcement division.
That is what came from the SEC’s Division of Enforcement’s annual report late Monday. Fiscal year 2020 saw 715 SEC enforcement actions, down from 862 cases the previous year. Securities lawyers with experience at the SEC say the drop was due to the pandemic slowing some investigations and a summer Supreme Court decision that limited the SEC’s ability to obtain disgorgement.
Public finance cases made up just 3% of total standalone enforcement cases. Of the 12 cases brought by the public finance unit, 10 were administrative proceedings and two were civil lawsuits filed in federal court.
"This year's report highlights enforcement's extraordinary efforts across the country to identify wrongdoing and take meaningful action to protect American investors from misconduct, including in the face of the many challenges imposed by COVID-19," said SEC Chairman Jay Clayton.
Though there was a decrease in enforcement cases, an uptick in whistleblower cases could mean a busy enforcement staff in the next year or two.
“They have more whistleblower cases and have more new cases, so a very active enforcement staff for the next year or two should be anticipated,” said Kathleen Marcus, shareholder at Stradling law firm.
The amount of whistleblower awards exceeded prior years, with about 37% of the total numbers of individuals awarded over the entire life of the whistleblower program, which was created in 2011. In fiscal 2020, the SEC issued awards of about $175 million to 39 people, more than any other year in the program’s history. On Oct. 22, the SEC issued the largest award in its history, about $114 million, to a single whistleblower.
Over the past year, the SEC was slowed by transitioning to work from home in March to help stop the spread of COVID-19, but also because of logistics, Marcus said.
“COVID slowed some investigations, not necessarily because the staff transitioned to work-from-home, but because the logistics of managing investigations became more challenging from virtual testimony to delays in obtaining documents,” Marcus said.
The U.S. Supreme Court’s decision in Liu v. SEC may have also slowed the pace. On June 22, 2020, the court ruled 8-1 that the SEC can continue to obtain disgorgement, but the court narrowed that remedy. The finding stemmed from a case in which the SEC alleged that a couple defrauded Chinese investors to fund a cancer-treatment center in California.
“The court upheld disgorgement as an available remedy, but held that disgorgement awards must be limited to wrongdoers’ net profits as opposed to their gross illicit gains,” according to a Harvard Law School analysis.
The SEC staff then needed to find a consistent approach following the decision, Marcus said.
“It was not uncommon for the SEC to seek gross illicit gains, so the Liu decision gave the defense bar a major discussion point in settlement negotiations, and the SEC staff needed to think through the implications of Liu on a litany of cases so they could attempt to apply a consistent approach,” Marcus said.
The SEC’s Director of Enforcement Stephanie Avakian said the decision was important for the SEC.
“However, it also imposed some limitations and left open some questions,” Avakian said.
Dave Sanchez, partner at Norton Rose Fulbright, said the change in the number of enforcement cases isn’t statistically significant, highlighting that usually just 3 to 5% of enforcement cases are public finance.
The pace of the investigations increased in fiscal 2020. The median time to file an enforcement action was 21.6 months, a five-year best, the SEC said. The SEC also reduced the average amount of time it takes to complete investigations from 37 months to 34 months.
“In the municipal cases that they’re bringing, a lot of it relates to activity from 2015, 2016, so you’re still seeing a very long lag time between conduct and charges,” Sanchez said.