Did you know the SEC’s Division of Enforcement has been around since 1972? It was formed in order to consolidate enforcement efforts within the SEC. The Enforcement Division performs investigations into possible violations of the federal securities laws and prosecutes enforcements in court or other administrative proceedings, but don’t worry – they cannot put you in jail (that’s up to the Justice Department!). However, the Enforcement Division can issue orders to prohibit any future violations (and I promise you, you don’t want to violate those orders), impose fines, issue cease and desist orders, suspend trading, and even suspend/prohibit individuals from acting as a corporate officer or director!
And did you know that the Enforcement Division publishes an annual report (for the period October 1 – September 30), which summarizes the Division’s activity for the year (such as areas of focus, types of cases, disgorgement and penalties, etc.)? If you’ve never read one, you should check it out. I personally find them interesting – it’s like you’re reading the Division’s private diary! This year’s report was especially interesting considering the onset of the COVID-19 pandemic and how the SEC adjusted its efforts to address those challenges. And even though the pandemic led to unprecedented economic times and caused numerous challenges throughout many industries, the SEC was not going to give any passes on any requirements, especially on disclosures.
Here are some highlights from the Enforcement Division’s 2020 annual report:
- a Coronavirus Steering Committee was formed to coordinate investigations specific to areas of microcap, insider trading, financial fraud, and issuer disclosure resulting from COVID-19
- From March – September 2020, over 16,000 tips/complaints/referrals were received (which was a 71% increase compared to the same time period in 2019)
- The Division opened more than 150 COVID-related inquiries and investigations
- $175 million in whistleblower awards were issued to 39 individuals (200% increase in the number of individuals awarded over the next-highest year)
- 715 enforcement actions, over 475 bars/suspensions against market participants, and 196 issuers had security trading suspended
- $4.68 billion in disgorgement and penalties (the highest amount ever!)
Remember, the SEC’s mission is to protect investors. The Division’s report stated “COVID-19 made Fiscal Year 2020 the most challenging year in recent memory. But the Division demonstrated its agility and its commitment to the SEC’s mission as it moved quickly to address the ongoing crisis. This rapid response protected investors and helped preserve the integrity of our markets.”
The basis of the enforcement program is to ensure that both entities and individuals are held accountable for their misconduct. Many enforcement actions are highlighted in the report, but I wanted to highlight a few enforcement actions that have occurred subsequent to the 2020 annual report being released:
- The Cheesecake Factory: In this December 2020 enforcement action, the company was fined $125,000 for mis-leading COVID-19 disclosures. This action was kind of a big deal as this was the first enforcement action against a public company for not properly disclosing the pandemic’s financial impact on its business. The takeaway here is that a company must be materially consistent with its disclosures; the Cheesecake Factory excluded the fact that only 16 weeks of cash was left on-hand and that they also had a negative cash flow rate. They had also planned to default on their April 2020 rent, which they had made in private communications, but did not disclose that fact in any public filings. Also take note, this enforcement action came eight months after their first quarter filings, so it’s never too late for the SEC to take action!
- Luckin Coffee: In this December 2020 enforcement action, Luckin was fined $180 million for “defrauding investors by materially misstating the company’s revenue, expenses, and net operating loss in an effort to falsely appear to achieve rapid growth and increased profitability and to meet the company’s earnings estimates.” In summary, Luckin reported $310 million in fake revenue and used three different purchasing schemes as well as creating a fake database for these fictitious sales transactions. In addition to the fine, Luckin, a Chinese-based coffee company, was also required to de-list their securities from the NASDAQ exchange back in June 2020. The takeaway here, the SEC does not tolerate fraud!
- General Electric (GE): In this December 2020 enforcement action, GE was fined $200 million for disclosure violations. The company did not properly disclose the fact that they had reduced cost estimates in one segment, which caused a deferred revenue balance to increase, so to offset the increase in the deferred revenue balance they implemented some factoring of receivables in another segment. GE’s financial statements did not have to be restated (i.e., there was no “bad” accounting), but it goes to show how important it is for disclosures to not be misleading for investors (or it will cost you!).
If you’d like to learn more about SEC enforcement actions, or any other SEC hot topics, we are once again partnering with Parker + Lynch Consulting and hosting a FREE webinar: SEC Update and Hot Topics on Thursday, April 22nd at 1pm EST. We hope to see you there!
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