For those attempting to forecast the probable contours of the SEC's enforcement program in 2019, the first place to turn is the Division of Enforcement's 2018 track record. Five trends from 2018 are likely to be particularly important in 2019.
First, although there was a Republican-appointed majority on the Commission throughout 2018, the number of new enforcement actions was consistent with prior years. According to the Enforcement Division's annual report, the SEC filed 821 actions in fiscal 2018. This was an increase from 2017 and exceeded the average of 809 actions filed in the three preceding years. Similarly, there were 490 "stand-alone" actions (the most significant new cases) filed in fiscal 2018, more than in 2017 and consistent with the average of 500 such actions filed in the three preceding years.
Second, almost 50% of the SEC's new enforcement cases in fiscal 2018 dealt with either offering violations (27%) or violations by investment advisors or investment companies (22%). This is consistent with Chairman Clayton's emphasis on protecting individual retail investors, who are often the victims of corporate offering frauds or violations of fiduciary duties by investment managers. Both types of SEC actions increased in absolute number and in percentage-of-total-actions from 2017 to 2018 and can be expected to continue as priorities for the Enforcement Division in 2019. Additionally, misconduct by advisors and broker-dealers will be a high-visibility issue throughout 2019 due to the SEC's effort to finalize regulations clarifying advisors' fiduciary duties and requiring brokers to act in the "best interest" of retail customers.
Third, although the SEC recovered $2.5 billion in "disgorgement" (the illicit gains obtained by fraudsters) in 2018, this was less than in any of the three prior years. This decline was almost certainly the result of the decision in Kokesh v. SEC (2017), where the Supreme Court held that the SEC could reach back only five years before the time of filing to recover disgorgement. The negative impact of Kokesh will be felt in 2019 as well. Indeed, the SEC estimates that in cases already filed, Kokesh will reduce the amount recovered as disgorgement by as much as $900 million. Kokesh will also affect how the Enforcement Division investigates new matters in 2019, i.e., the Division is likely to expedite investigations to ensure that cases with the potential for significant disgorgement are filed within five years from the first violation. For potential whistleblowers, Kokesh makes prompt reporting even more important.
Fourth, digital assets and initial coin offerings ("ICOs") became a focus of SEC enforcement in 2018 and this effort will grow in 2019. In fiscal 2018 the SEC filed more than a dozen enforcement actions involving digital assets and ICOs. According to the Enforcement Division's annual report, there are also 225 ongoing cyber-related investigations. As the SEC shifts further from articulation of its position on digital assets to a posture of aggressive enforcement, many of those investigations will result in filed cases in 2019.
Fifth, in 2018 the SEC continued its pursuit of individual violators, even in the context of corporate fraud. Seventy-two percent of the SEC's new stand-alone actions in fiscal 2018 included charges against at least one individual. Defendants included senior corporate officers (including the CEOs of Tesla and Theranos), accountants, auditors, a Congressman, and a professional football player. Approximately 550 individuals were suspended or barred from all or portions of the financial industry. The SEC also obtained monetary judgments against more than 500 individuals, an increase of 9% over 2017. This emphasis on individual liability is part of an articulated, long-term priority within the Enforcement Division and is likely to continue throughout 2019.
While these five trends will certainly shape the SEC's enforcement program in 2019, the impact of two other 2018 developments (neither of which is reflected in the 2018 enforcement data) is more difficult to predict. After the Supreme Court ruled in June 2018 in Lucia v. SEC that the five SEC administrative judges were not properly appointed, the SEC determined that approximately 200 cases handled by these judges had to be reassigned and reconsidered. That process could impose a resource constraint on the Enforcement staff in 2019 and slow new investigations. On the other hand, the SEC's whistleblower program reached full maturity in 2018 with the award of approximately $168 million to 13 whistleblowers, an amount greater than has been awarded in all prior years combined. The impressive size of these awards is likely to attract even more whistleblower activity in 2019, thereby providing the Enforcement Division with more potential enforcement actions from which to choose. While the interaction and ultimate impact of these two developments is uncertain, it may be that in 2019 the SEC will bring somewhat fewer new actions, but those actions may rest on a stronger evidentiary record or target higher-profile violators, with the potential for greater monetary recovery.
The foregoing is provided by Whistleblower Aid, Inc. for general information purposes and is not intended to be, and should not be, taken as legal advice. See https://whistlebloweraid.org/contact/#whistleblower-contact for guidance on how to contact Whistleblower Aid.
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