Securities and Exchange Commission Year in Review: Enforcement Actions and Issues from 2020 - Foley Hoag LLP
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
The Investment Lawyer
Covering Legal and Regulatory Issues of Asset Management
VOL. 28, NO. 1 • JANUARY 2021
Securities and Exchange Commission Year
in Review: Enforcement Actions and Issues
from 2020
By Lisa C. Wood, John W. R. Murray, Christian A. Garcia, and E. Jacqueline Chávez
W
ith a historically tumultuous 2020 largely weighted towards relatively smaller-scale
behind us, we once again take the oppor- actions against investment advisers, retail brokers,
tunity to look back on the Securities and issuers in securities offerings.
Exchange Commission’s (SEC or Commission) This focus almost certainly will change under the
enforcement program during this extraordinary incoming Biden Administration, which will bring
year. Heeding the Confucian dictum, “Study the about a Democratic majority on the Commission,
past, if you would divine the future,” we also look and with it, a realignment of Enforcement’s priori-
ahead to the likely direction of the SEC’s Division ties. Based on enforcement patterns at the outset of
of Enforcement (Division or Enforcement) in 2021, the Obama Administration, the Division is likely to
with our usual caveat that past performance is no take a generally more aggressive approach by ramp-
guarantee of future results. ing up the number of investigations and enforcement
Like the country at large, the SEC was dramati- actions, pushing the boundaries of the securities
cally affected by the onset of the COVID-19 pan- laws, seeking stiffer corporate penalties, and show-
demic, which has forced nearly all of its Staff to work ing a greater willingness to litigate cases that do not
remotely, posing logistical obstacles to Enforcement’s settle. We also anticipate an increased appetite for
work of investigating and litigating. The crisis also significant cases against major financial institutions
appears to have had a marked impact on the num- and other systemically important market actors,
ber of enforcement actions: the agency filed approxi- along with heightened insider trading enforcement,
mately 17 percent fewer cases in fiscal 2020 than the which under the Trump Administration fell to its
year before. lowest level since the 1990s.
While COVID dominated much of In this article, we examine SEC enforcement
Enforcement’s agenda, the Division continued activity and related developments within the agency
to expend much of its energy on cases involving during fiscal year 2020, which ended on September
alleged harm to retail or “Main Street” investors, 30, and explore how these have reflected and shaped
whom Chairman Jay Clayton has prioritized since the Enforcement program. (We also highlight some
his arrival at the Commission in 2017. As a con- noteworthy cases and issues that arose before the
sequence, the enforcement program was once again end of the calendar year.) In particular, we address:2 THE INVESTMENT LAWYER
(1) internal developments of note at the agency, months of the crisis focused on learning how to
including an overview of Enforcement’s perfor- manage the transition to working remotely.2
mance last year, significant personnel changes, The monetary relief that the Division obtained,
sources of conflict among the commissioners, and on the other hand, set a record, amounting to over
the status of Enforcement’s whistleblower program; $4.6 billion in penalties and disgorgement. Of that
(2) external challenges to the SEC’s enforcement amount, disgorgement (including prejudgment
powers; and (3) significant enforcement actions in interest) made up nearly $3.6 billion—again, a
several areas, including investment advisers, bro- record for the Division—and penalties of just over
ker-dealers, insider trading, market manipulation, $1 billion.3 The total, however, was overwhelmingly
Foreign Corrupt Practices Act (FCPA) enforce- attributable to the 5 percent of Enforcement cases
ment, cyber enforcement, issuer reporting, and that resulted in the largest awards, which accounted
public finance. for approximately $3.8 billion of the overall mon-
etary relief obtained. These included the SEC’s
Enforcement in 2020: Continuity closely-watched June 2020 settlement with Telegram
and Change Amid Turbulence Group, Inc. involving the company’s alleged unreg-
istered offering of digital tokens, which resulted in
Enforcement by the Numbers disgorgement of roughly $1.2 billion and a penalty
At the close of each fiscal year, Enforcement of $18.5 million, as well as some notable FCPA
makes the standard disclaimer that its performance actions, which resulted in exceptionally large mon-
should not be evaluated based exclusively on the etary awards. (We discuss these cases in further detail
number of actions it brought during the fiscal year. below.)
As we have observed, however, that metric does pro- The breakdown of standalone enforcement
vide an indication of the Division’s aggressiveness in actions by category remained broadly consistent
pursuing its priorities. Last year, it also served as a with fiscal 2019 (in approximate percentages): 32
measure of Enforcement’s success in maintaining its percent involved securities offerings; 21 percent
operations and effectiveness during the pandemic. involved investment advisory and investment com-
By these standards, the Division’s performance pany issues; 15 percent were issuer reporting or audit
in fiscal 2020 was mixed. It brought 715 cases last and accounting cases; 10 percent involved broker-
year, down from 862 in fiscal 2019, and the low- dealers; 8 percent were insider trading actions; 3 per-
est number since 2015, when Enforcement began cent involved municipal finance; and 2 percent were
reporting this statistic in its annual report.1 Of those FCPA cases.4 As to Enforcement’s oft-stated goal of
cases, 405 were “standalone” actions in federal court individual accountability, approximately 72 percent
or administrative proceedings before the SEC, as dis- of its standalone cases in fiscal 2020 were brought
tinguished from “follow-on” administrative proceed- against individual respondents or defendants.5
ings, which seek industry bars based on the outcome Enforcement also reported mixed results with
of actions brought by the SEC, criminal authorities, respect to the speed of its investigations. In fiscal
or other regulators, and from proceedings to dereg- 2020, the average time to complete an investigation
ister public companies (mainly microcap issuers) and file an enforcement action was 24.1 months,
that were delinquent in making their required SEC a slight increase from 2019.6 Financial fraud and
filings. Enforcement Director Stephanie Avakian issuer disclosure cases, however, which typically
attributed the decrease, in part, to the effects of the move more slowly than other investigations, took,
pandemic, noting that much of the Enforcement on average, 34 months, down from 37 months in
Staff spent “the bulk of [their] time” in the early the previous fiscal year.VOL. 28, NO. 1 • JANUARY 2021 3
With respect to its goal of returning ill-gotten Berman, reached a deal whereby Berman resigned and
funds to harmed investors, in fiscal year 2020, the was succeeded by his deputy, Audrey Strauss, until a
Commission reimbursed approximately $602 mil- successor could be confirmed. US Senate Judiciary
lion to victims, roughly half of the figure of nearly Committee Chair Lindsey Graham has stated that
$1.2 billion in fiscal 2019.7 The US Supreme Clayton’s nomination will not advance without the
Court’s decision last year in Liu v. SEC (discussed customary “blue slips” from New York’s Senators,
below),8 in which the Court determined that dis- both of whom have opposed the nomination.15 The
gorgement should benefit harmed investors, will former Chairman remained at the Commission until
ratchet up pressure on Enforcement to improve his departure at the end of 2020.16
upon this statistic. In furtherance of this objective, In August 2020, the Commission gained a new
the Commission created the Office of Bankruptcy, member, Caroline Crenshaw, following the February
Collections, Distributions, and Receiverships within resignation of Commissioner Robert Jackson, who
the Enforcement Division, which it intends to use rejoined the faculty at New York University School
to streamline the Commission’s processes and pro- of Law. Crenshaw, an SEC Staffer since 2013, was
cedures for collecting outstanding monetary judg- sworn in to her new position in August as the sec-
ments to return to investors.9 ond of two Democratic commissioners.17 (Under
the Securities Exchange Act, no more than three
Continuing Effects of Kokesh v. SEC commissioners may be of the same political party.)
The Commission continues to experience fall- Crenshaw had served as counsel to Jackson and to
out from the US Supreme Court’s 2017 decision in former Commissioner Kara Stein, and previously
Kokesh v. SEC.10 There, the Supreme Court held that worked in the Office of Compliance Inspections
because disgorgement often serves as a punitive rem- and Examinations (OCIE) and the Division of
edy, the Commission’s ability to seek disgorgement Investment Management. She is also a captain in the
is subject to the five-year statute of limitations set US Army Reserve, Judge Advocate General’s Corps.
forth in 28 U.S.C. § 2462. Enforcement reported In August, Commissioner Hester Peirce, a
that in fiscal 2019, the decision caused it to forego Republican, was sworn in for an additional term that
approximately $1.1 billion in disgorgement in filed will expire on June 5, 2025.18 Rounding out the cur-
cases.11 It has responded to Kokesh by prioritizing rent Commission are Democrat Allison Herren Lee,
actions within the five-year statute of limitations.12 whose term runs to June 5, 2022, and Republican
This approach appears to have borne fruit in fiscal Elad Roisman, whose term expires on June 5, 2023.19
year 2020, given the record disgorgement amount The Division of Enforcement saw the departure
the SEC reported for last year.13 of its Co-Directors, Steven Peikin and Stephanie
Avakian. Peikin resigned in August to rejoin private
Major Personnel Changes practice, 20 and Avakian left the SEC in December.21
The SEC saw several noteworthy staffing devel- Marc Berger, who had been the Director of the
opments in 2020, both at the Commission-level and SEC’s New York Regional Office, was named
within the Division of Enforcement. In a dramatic Deputy Director of Enforcement in August, and
development, then-Chairman Clayton’s position became Acting Director upon Avakian’s departure.22
at the helm of the agency became uncertain amid Richard Best, who had previously served as Regional
reports in June 2020 that Attorney General William Director of the SEC’s Salt Lake City and Atlanta
Barr sought to replace the sitting US Attorney for Regional Offices, was named as Berger’s successor
the Southern District of New York with Clayton.14 in New York. In the Philadelphia Regional Office,
Ultimately, Barr and the then-US Attorney, Geoffrey G. Jeffrey Boujoukos resigned as Director in
Copyright © 2021 by CCH Incorporated. All Rights Reserved.4 THE INVESTMENT LAWYER
February to move back into private practice, and outspoken voice in the debate, issuing two public
was replaced by Kelly Gibson, previously Associate dissents in 2020 that bluntly criticized settlements
Regional Director in that office. in two closely-watched cases against Telegram
Enforcement’s Cyber Unit, which was formed Group, Inc. and Unikrn, Inc. (We discuss both in
in 2017 to focus on cyber-related misconduct, had further detail below.) Speaking in July at Singapore
a rotation in leadership in December 2019, when Blockchain Week, Peirce described the Telegram
Kristina Littman, previously a Senior Advisor to settlement as “the unsatisfying culmination of an
former Chairman Clayton, was named Chief.23 She enforcement action that I did not support from the
succeeds Robert Cohen, who left the Commission beginning.”25 In September, she issued a public state-
for private practice in August 2019. ment on the Unikrn case criticizing the Commission
Beyond Enforcement, the SEC named its first for “failing to challenge ourselves to experiment with
Chief Data Officer, Austin Gerig, in January 2020. new approaches to regulation” and “risk[ing] surren-
His appointment reflects the Commission’s increas- dering the fruits of innovation.”26 Such broadsides
ing commitment to cultivating in-house expertise are unusual for the SEC, which has traditionally
in the management and use of data to support its sought to maintain an appearance of collegiality, if
enforcement, examinations, and policymaking. In not unanimity, in its enforcement decisions.
the Enforcement realm, the use of data analytics has Another publicly-aired ideological disagree-
become a standard tool in spotting potential insider ment played out in connection with the SEC’s
trading and issuer disclosure violations. Gerig, who September 2020 amendments to, and guidance on,
holds a PhD in physics, previously served as Assistant the rules governing its Whistleblower Program in a
Director of the Office of Data Science in the Division highly controversial 3-2 vote that split along party
of Economic and Risk Analysis (DERA).24 lines (also discussed in further detail below). Among
other changes, the SEC clarified that the rules give
Ideological and Political Divisions it discretion to reduce the largest awards based on
Manifest their size, a controversial step that engendered
As is typical, disagreements about enforcement’s intense opposition from whistleblower attorneys and
powers coalesced among commissioners around advocates.
largely ideological and political lines. These were Notably, the amendments were accompanied
especially evident in the wake of two significant set- by dueling public statements from all five com-
tlements last year in cases the SEC brought against missioners. Then-Chairman Clayton wrote that
issuers who sold digital tokens in “initial coin offer- the amendments “recognize the responsibility that
ings” (ICOs). Since the emergence of these financial Congress gave [the SEC] to determine the amount
products, the Commission has consistently taken of awards” and provide “additional transparency
the view that these digital assets can constitute secu- into [the SEC’s] award determination process.”27
rities, which are subject to the registration require- Commissioner Lee, however, contended that instead
ments of Section 5 of the Securities Act of 1933, of “fixing what is broken,” the amendments “run
and has brought a series of successful enforcement the risk of breaking what works,” adding bluntly:
actions against issuers that conducted unregistered “Whistleblowers deserve better.”28
ICOs.
Critics, however, contend that the SEC’s “Main Street” Remains a Focus
approach to the digital assets space amounts to Prioritizing retail or “Main Street” investors has
over-regulation and stifles needed financial innova- been a central tenet of the Enforcement program
tion. Commissioner Peirce has been a particularly under former Chairman Clayton, and the DivisionVOL. 28, NO. 1 • JANUARY 2021 5
continued to pursue this objective on several fronts. In terms of enforcement priorities, the Division
Beyond enforcement actions, the Commission con- redirected resources to the pursuit of COVID-
tinued its outreach efforts to educate retail inves- related fraud. Shortly after onset of the crisis, the
tors about the financial markets and the variants Commission formed the Coronavirus Steering
of fraudulent schemes, including, for example, the Committee, charged with, among other things,
Retail Strategy Task Force’s efforts to educate the overseeing investigations into pandemic-related
hearing-impaired on spotting fraudulent invest- misconduct and coordinating efforts across the
ment offerings.29 In February 2020, the SEC Office entire Division.33 By the end of its fiscal year,
of Investor Education and Advocacy issued an alert Enforcement obtained trading suspensions against
warning investors about COVID-related scams,30 35 issuers based on what it viewed as the question-
which were a repeated target of enforcement activity able accuracy or adequacy of COVID-related infor-
in the subsequent months. mation in the public domain about those issuers.34
The retail investor theme was a shift in emphasis The Division also has brought five enforcement
from that of Clayton’s predecessor, Mary Jo White, actions against issuers and individuals based on
who adopted a “broken windows” approach, tar- allegedly fraudulent claims about access to personal
geting small-scale violations in order to deter more protective and testing equipment. It also reported
serious misconduct, as well as systemically signifi- that it has initiated more than 150 COVID-related
cant harm to institutional investors following the inquiries and investigations in total,35 making it
2008 financial crisis. With the forthcoming change likely that more COVID-related cases will follow
in presidential administration, however, it is likely in fiscal 2021.
that Enforcement’s priorities will once again change Enforcement also made clear its view that the
to reflect the priorities and preferences of Clayton’s effects of the economic downturn in the wake of the
successor. While we expect retail investor harm to pandemic pose an increased risk of insider trading
remain an enforcement concern under the new chair, and misleading issuer disclosure. In a March 2020
it is likely that the Division’s focus will more closely statement, then Co-Directors Stephanie Avakian
resemble that under former Chair White. and Steven Peikin warned that the volatility of the
markets created more opportunity for insiders to
COVID-19 and Enforcement learn valuable market-moving information, and may
Like the country as a whole, the COVID-19 be more tempted than in normal times to trade on
pandemic has had a profound impact on the SEC that information before it is disclosed publicly.36 The
both operationally and programmatically. The gov- Co-Directors noted that Enforcement is therefore
ernment-imposed lockdowns and new work-from- keeping a close watch on potential insider trading
home reality directly affected the Commission’s during the crisis.
investigations and enforcement actions, forcing the In a May speech, Peikin noted that in addition
entire Enforcement Staff to transition to remote to insider trading, pandemic-related economic pres-
working by the middle of March, and preventing the sures may tempt issuers to downplay the impact
Division from using its core investigative tools of live of the crisis on their operations and financial per-
testimony and in-person interviews.31 Over the fol- formance, and may expose pre-existing accounting
lowing months, the Staff continued to push matters or disclosure violations. The Coronavirus Steering
forward by relying instead upon remote testimony, Committee has therefore developed a process for
interviews, and Wells meetings via WebEx, and on reviewing SEC filings of issuers in highly-impacted
the cooperation of entities and individuals involved industries, with a close eye on disclosures that are out
in its investigations.32 of step with those of others in the same industry.37
Copyright © 2021 by CCH Incorporated. All Rights Reserved.6 THE INVESTMENT LAWYER
A Record Year for the Whistleblower interpretive guidance on, the rules governing the
Program Whistleblower Program.46 Most controversially, the
SEC adopted the position that it has discretion to
Significant Numbers in Fiscal 2020 reduce the largest whistleblower awards based on
The Commission established its Whistleblower their size. The amendments, first proposed in 2018,
Program in 2011 under the Dodd-Frank Wall Street have generated substantial opposition from the
Reform and Consumer Protection Act of 2010 in plaintiffs’ bar and within the Commission, and the
order to incentivize employees and other individuals SEC twice postponed the commissioners’ vote while
to report wrongdoing.38 Based on the SEC’s reported they attempted to reach agreement.47
metrics, the Whistleblower Program has succeeded Under the statutory framework, the SEC must
in this objective. As of the end of fiscal 2020, the pay awards to whistleblowers who voluntarily pro-
agency, since the Whistleblower Program’s incep- vide “original information” to the agency that results
tion, has awarded 106 individuals approximately in a successful enforcement action by the SEC or a
$562 million,39 and the program has led to enforce- “related action” by another law enforcement or regu-
ment actions resulting in more than $2.5 billion in latory agency (typically the US Department of Justice
ordered monetary relief, of which $1.4 billion con- (DOJ)) or self-regulatory organization. As prescribed
sisted of disgorgement and $750 million returned to by Section 21F(b)(1) of the Securities Exchange Act,
harmed investors.40 the award amount can range from 10 to 30 percent
In fiscal 2020, the Commission awarded whis- of the total monetary sanctions obtained in the suc-
tleblowers approximately $175 million in total cessful action, as determined by the SEC.48 The new
awards to 39 different individuals, both of which amendments and guidance affect this scheme in sev-
were program highs.41 The 39 awardees represent 37 eral significant ways, for example:
percent of the total individuals who have received
awards during the program, and a more than 200 ■ In the most controversial of the measures
percent increase over the program’s previous record.42 announced in October, the SEC clarified that
Moreover, the $175 million awarded consists of it has discretion under the rules to calculate the
approximately one-third of all awards during the life size of awards in dollar terms rather than the
of the program. In total, whistleblower tips last year percentage basis set forth in the statute, in effect
generated $765 million in financial remedies.43 allowing it to reduce the amount of the largest
In October 2020, the Commission awarded the awards based on their size.
largest award in the program’s history—$114 mil- ■ Where the statutory maximum amount of an
lion to a single whistleblower.44 The Whistleblower award is $5 million or less (approximately 75
Program’s other top largest awards consisted of $50 percent of awards to date), the SEC will apply
million to two separate individuals, $39 million, a presumption that the whistleblower is entitled
and $37 million.45 Given the size of and public- to the maximum 30 percent.
ity surrounding these awards, we expect that the ■ The amendments provide that whistleblower
Whistleblower Program will continue to be a major tips leading to a deferred prosecution agreement
source of the SEC’s investigations and enforcement or non-prosecution agreement entered into by
actions in the foreseeable future. the DOJ, or a settlement by the SEC in a non-
judicial or administrative setting, qualify as an
Rule Amendments Bring Controversy eligible “action,” and any money paid under
In a 3-2 vote, the Commission in September such agreements will be taken into account in
approved several significant amendments to, and calculating a whistleblower award.VOL. 28, NO. 1 • JANUARY 2021 7
■ The amendments clarify that if the SEC deter- challenged the lower court’s imposition of a $26.7
mines that another agency’s whistleblower pro- million disgorgement award, arguing that the
gram more appropriately applies, an action by Commission does not have the authority to seek a
that agency will not qualify as a “related action.” disgorgement award in the federal courts because
■ In response to the US Supreme Court’s 2018 disgorgement is not an equitable remedy.53
decision in Digital Realty Trust v. Somers,49 in Justice Sotomayor delivered the majority’s opin-
which the Court held that an individual must ion holding that “a disgorgement award that does
provide information to the SEC directly to qual- not exceed a wrongdoer’s net profits and is awarded
ify for Dodd-Frank’s anti-retaliation protections, for victims is equitable relief ” permissible under the
the amendments adopt a uniform definition of Securities Exchange Act.54 Based on a survey of the
“whistleblower,” which requires individuals to Court’s equity jurisprudence, Justice Sotomayor
provide information to the SEC in writing and found that “equity practice long authorized courts to
before experiencing any retaliation. strip wrongdoers of their ill-gotten gains,” but noted
■ The amendments clarify that the SEC can bar that “to avoid transforming an equitable remedy
individuals from submitting whistleblower into a punitive sanction, courts restricted the rem-
applications when they are found to have sub- edy to an individual wrongdoer’s net profits to be
mitted false information or frivolous applica- awarded for victims.”55 Accordingly, disgorgement
tions, and make it easier for the Commission awards may not include a wrongdoer’s “legitimate
to reject applications on common grounds such expenses.”
as untimeliness or failure to follow the SEC’s The holding, however, left unanswered several
requirements regarding forms and procedures.50 significant questions.56 Justice Sotomayor noted
the Commission’s tendency to deposit disgorge-
ment proceeds into the US Treasury rather than
Scope of the SEC’s Authority return funds directly to harmed investors, and left
Remains Unsettled it to the lower courts to determine whether this
practice is consistent with the equitable require-
SEC v. Liu: US Supreme Court Preserves, ment that disgorgement be for the benefit of vic-
but Limits, the Agency’s Disgorgement tims. The Court’s opinion also concluded that
Power
joint-and-several liability for disgorgement of mul-
In SEC v. Liu, the Supreme Court last tiple wrongdoers was consistent with the Court’s
June rejected a closely-watched challenge to the precedent, but again, left it to the lower courts to
Commission’s authority to obtain disgorgement, a determine precisely when joint-and-several liability
question left open by Kokesh.51 The Court’s ruling should attach in this context. Finally, the Court did
upheld the SEC’s disgorgement power, subject to not define the scope of “legitimate expenses” that
limitations that it largely left to the lower courts to must be netted out of a disgorgement calculation,
clarify. A contrary ruling would have deprived the again leaving it to future litigation to shed light on
SEC—at least in federal court actions—of its most this question.57
significant source of monetary relief. In response to Liu, the SEC announced that
The case involved enforcement proceedings it would be reevaluating the balance between the
against petitioners Charles Liu and Xin Wang for penalties and disgorgement it recommends to the
their misappropriation of funds received from Commission to comply with Liu.58 Signaling, in
Chinese investors seeking to participate in the effect, that where Liu requires it to reduce a dis-
US Immigrant Investor Program.52 Liu and Wang gorgement amount, it will increase the penalty by a
Copyright © 2021 by CCH Incorporated. All Rights Reserved.8 THE INVESTMENT LAWYER
corresponding amount where it has statutory discre- and concluded that Cochran must fully exhaust her
tion to do so. administrative remedies before challenging the con-
stitutionality of the ALJ appointment.64 In October,
Continuing Challenges to Lucia’s the court granted Cochran’s petition to rehear the
Unanswered Questions case en banc.65
The Supreme Court’s 2018 decision in Lucia v. In the Eleventh Circuit case, former investment
SEC caused major logistical challenges for the agency adviser Christopher Gibson filed a petition for certio-
by holding that the Commission’s administrative law rari in the US Supreme Court, arguing that the Court
judges (ALJs) were “Officers of the United States” of Appeals erred when it likewise concluded that
under the US Constitution’s Appointments Clause, Gibson must exhaust all of his administrative remedies
requiring that they be appointed by an agency before bringing a Lucia challenege.66 A ruling against
head.59 The Commission responded by staying all the SEC in these appeals would provide defendants
of its pending administrative proceedings, reassign- with a significant weapon with which to complicate
ing approximately 200 of them to new ALJs, and the agency’s pursuit of administrative proceedings.
re-appointing all of its existing ALJs.60 The Lucia
decision still looms large over the Commission’s Investment Advisers Remain
administrative proceedings due to the questions it left Enforcement Targets
unanswered: (1) whether the Commission’s ALJs are Actions involving investment advisers and
“principal” or “inferior” officers—if the former, only investment companies remained prominent in
the US President may appoint them; and (2) whether 2020, constituting the second largest category last
the Commission’s current procedure for removing year (as compared to the largest in fiscal 2019), but
ALJs, which requires “good cause,” unconstitution- the number of actions filed against advisers and
ally insulates them from presidential removal.61 investment companies fell dramatically from 191 in
The separate question of whether respondents 2019 to 87 in 2020.67 It is as yet unclear whether this
must litigate SEC administrative proceedings to decline reflects a diminished interest in these cases
completion before challenging them in federal court on Enforcement’s part, the effects of the pandemic,
under Lucia is currently at issue before the US Courts or some combination of both.
of Appeals for the Fifth and Eleventh Circuits. The Actions against advisers, which are brought pri-
Fifth Circuit case was brought by Rachel Cochran, marily by Enforcement’s Asset Management Unit
whom an ALJ barred from practicing before the (AMU), continued to target violations involving dis-
SEC as an accountant and ordered to pay a $22,500 closure of conflicts of interest, disclosures concerning
fine before Lucia was decided.62 After re-assigning risk management practices, misallocation of fees and
her case to a new ALJ in light of the decision, the expenses, and valuation issues. Also consistent with
Commission re-commenced proceedings against prior years, the charges that the SEC brought against
her in 2019. Cochran appealed, arguing that she is advisers in these areas tended to result in negligence-
not required to exhaust her administrative remedies based disclosure and compliance charges under the
before the SEC prior to suing in federal court, claim- Investment Advisors Act of 1940 (Advisers Act),
ing that her case falls within an exception to the rather than scienter-based (intentional) fraud.
exhaustion requirement for challenges that are col-
lateral to the subject matter of the enforcement pro- Retail Advisory Clients Still Front and
ceedings and are necessary to avoid losing the chance Center
for “meaningful” judicial review.63 In August, the The persistence of the retail investor focus was
Fifth Circuit agreed with the Commission’s position exemplified last year by the SEC’s settled actionVOL. 28, NO. 1 • JANUARY 2021 9
against Wells Fargo Clearing Services and Wells that representation was inconsistent with the firm’s
Fargo Advisors Financial Network, which agreed routine practice of directing trades to third-party
in February 2020 to pay a $35 million penalty in brokers, and led to additional fees that were not
connection with their advisers’ and brokers’ alleged apparent to clients. MSSB agreed to a $5 million
recommendations of high-risk single-inverse penalty.
exchange-traded fund (ETF) investments to retail
investors. The SEC charged Wells Fargo with fail- Conflict Disclosures Remain under
ing to put in place adequate policies and procedures Scrutiny
to prevent and detect unsuitable recommendations The adequacy of disclosures of conflicts of inter-
of that product, and with failure to supervise its est remained a central Enforcement priority last
employees’ recommendations or provide adequate year. In a November 2019 speech, then Co-Director
training on single-inverse ETFs. Avakian affirmed that Enforcement “will continue
In July of last year, the SEC brought two actions to allocate [its] resources” to identifying undisclosed
against VALIC Financial Advisors (VFA) for disclo- conflicts, signaling that advisers should continue to
sure violations affecting teachers,68 who, along with anticipate investigations and enforcement actions in
current and former military personnel, have been the this area in the coming year.71
focus of recent SEC initiatives targeting retail inves- In recent years, the AMU was largely focused
tor fraud.69 VFA allegedly failed to disclose that its on conflicts arising from the “12b-1 fees” that
parent company made payments to an entity owned mutual funds pay from fund assets for marketing
by Florida teachers’ unions for 13 years in exchange and distribution to broker-dealers and their regis-
for the entity’s exclusive endorsement of VFA, and tered representatives. The SEC takes the view that
provided the entity with three “member benefit 12b-1 fees incentivize advisers with broker-dealer
coordinators” who held themselves out as employ- affiliates to steer clients towards mutual fund share
ees of the entity, but were in fact VFA employees. classes that charge 12b-1 fees over classes that do not
The SEC also found that VFA failed to disclose the charge fees. In fiscal 2020, Enforcement concluded
conflicts that arose from: (1) its alleged avoidance its Share Class Disclosure Initiative (SCDI), which
of transaction fees on client trades that it otherwise allowed advisers who self-reported their failure to
would have borne under “wrap fee” arrangements disclose 12b-1 fees to settle with the SEC without
(an asset-based fee that covers investment advice and paying a penalty. The agency ultimately ordered
brokerage services, including trade execution) by nearly 100 self-reporting firms to return more than
recommending more expensive mutual fund shares $139 million to investors under the SCDI.72 In her
through its clearing broker’s no-transaction fee November 2019 speech, Avakain made explicit that
(NTF) program; and (2) its alleged receipt of 12b-1 Enforcement’s interest has broadened to include
(mutual fund marketing and distribution) fees and additional conflicts, including those arising from
revenue sharing from the broker. VFA agreed to pay revenue-sharing arrangements, cash sweep pro-
a penalty of approximately $40 million to settle the grams, and unit investment trusts (UITs).
two actions. In the revenue-sharing scenario, clearing bro-
Wrap fee structure was again at issue in the kers agree to share with introducing brokers (which
SEC’s settled action against Morgan Stanley Smith may be dually-registered or affiliated with advisers)
Barney (MSSB), based on allegations that the firm a portion of the fees they charge to mutual funds for
gave advisory clients the misleading impression that access to the clearing brokers’ platforms. The SEC
wrap fee clients were not likely to incur additional views these fees as posing a conflict when the adviser
execution costs.70 According to the SEC’s order, recommends share classes for which the adviser or its
Copyright © 2021 by CCH Incorporated. All Rights Reserved.10 THE INVESTMENT LAWYER
affiliate receives more revenue over those paying less or advisers to private funds also have been the subject
no revenue. This conflict (along with alleged conflicts of significant Enforcement interest in recent years.
arising from 12b-1 fees and undisclosed markups) is In particular, Enforcement has focused on con-
at issue, for example, in the federal court action the flict disclosure, misallocation of fees and expenses
SEC brought against Cetera Advisors and its broker- to investors, disclosure of risk management prac-
dealer affiliate at the beginning of fiscal 2020.73 tices, and asset valuation. Last June, the Office of
In cash sweep arrangements, cash in advisory Compliance Inspections and Examination (OCIE)
accounts is automatically swept into a money mar- issued a Risk Alert flagging what it found to be a
ket mutual fund or bank deposit sweep program. In pattern of inadequate compliance by private fund
the SEC’s view, where the clearing broker agrees to advisers with respect to conflict disclosure and fees
share a portion of the revenue from those funds or and expenses.76 Since OCIE Risk Alerts are often a
deposits with the adviser or its broker-dealer affiliate, harbinger of enforcement action to come, further
the revenue-share incentivizes the adviser to favor cases in these areas seem likely.
such programs over other vehicles. In August 2020, From the perspective of investor exposure,
it brought a settled action against California-based the SEC’s interest in private fund advisers can be
SCF Investment Advisors, which agreed to disgorge viewed as consistent with its retail-oriented focus,
approximately $545,000 and pay a $200,000 penalty even though “Main Street” investors are not typi-
arising from its alleged failure to disclose the conflict cally associated with hedge funds and private equity.
from its receipt of 12b-1 fees and recommendation As the SEC recognized several years ago, retail
of cash sweep mutual fund share classes that resulted investors are in fact exposed to the sector through
in revenue-sharing payments from its clearing bro- retirement funds, insurers, endowments, and foun-
ker.74 The following month, the agency brought a dations.77 Hence, as a former director of the SEC’s
settled action against New Orleans-based Hancock Office of Compliance Inspections and Examinations
Whitney Investment Services for alleged failure to observed, “[t]o the extent private equity advisers are
disclose similar conflicts, resulting in disgorgement engaged in improper conduct, it adversely affects the
of over $1.65 million and a $400,000 penalty.75 retirement savings of teachers, firemen, police offi-
UITs are investment companies commonly cers, and other workers across the US.”78 That said,
offered in a single public offering and holding a fixed Enforcement’s scrutiny of private fund advisers pre-
portfolio of securities for a specific length of time, dates Chairman Clayton’s arrival, and we expect it to
after which the UIT terminates and the proceeds are continue under his successor.
distributed to investors. A UIT may be sold with
multiple fee structures, for example, varying struc- Misallocation of Fees and Expenses
tures for broker-dealer and advisory clients, with the In April, the SEC brought a settled action against
former including sales charges paid to the broker- New York-based Monomoy Capital Management,
dealer that are not charged to purchasers under the L.P. for allegedly failing to disclose that it was charg-
fee-based advisory structure. Avakian’s comments ing portfolio companies for the costs of opera-
last year suggest that enforcement actions based on tional services provided by its Operations Group.79
this conflict may be forthcoming as well. According to the SEC’s order, Monomoy used the
Group to help its portfolio companies make business
Private Funds Remain in improvements, and highlighted the Group’s role and
Enforcement’s Sights value in the private placement memorandum for the
Notwithstanding the SEC’s focus on retail relevant fund. Rather than covering the costs of run-
advisory clients under former Chairman Clayton, ning the Group from its management fee, the SECVOL. 28, NO. 1 • JANUARY 2021 11
found that for over four and a half years, Monomoy mutual fund that invested primarily in options on
charged the portfolio companies an hourly rate to S&P 500 index futures contracts.81 According to
recoup those costs, recovering an amount that was the SEC’s order, Catalyst told investors that it had
more than 13 percent of Monomoy’s overall revenue implemented stop loss measures and triggers to
from the fund. Per the order, neither the reimburse- limit losses to 8 percent, but failed to follow those
ment nor the associated conflicts were disclosed in parameters for a majority of trading days between
the governing limited partnership agreement (LPA) December 2016 and February 2017, causing the
or elsewhere. The firm agreed to disgorge over $1.5 fund to lose approximately 20 percent of its value.
million and pay a $200,000 penalty. The SEC brought negligence-based charges against
In August 2020, Enforcement brought a set- Catalyst and the CEO, who the SEC alleged caused
tled action against Miami-based Rialto Capital Catalyst’s violations and failed to supervise the senior
Management, LLC, for allegedly charging more than portfolio manager. The Commission charged the
$3 million to two real estate private equity funds for senior portfolio manager with both scienter-based
tasks by third parties, including asset-level due dili- and negligence-based violations of the Advisers Act.
gence, accounting, and valuation, which should have Catalyst agreed to disgorgement of over $8.8 million
been charged to co-investment vehicles to the funds, and a $1.3 million penalty, while the CEO agreed to
for whom those tasks were actually performed.80 a $300,000 penalty.
(According to the order, Rialto later reimbursed the In April, the SEC brought a settled action against
funds for those costs.) The SEC also alleged that Florida-based Everest Capital and its sole manag-
Rialto represented to the limited partner advisory ing member, who also served as its chief investment
committee (LPAC) for one of the funds that its costs officer (CIO), for failing to follow its stated risk
for third-party tasks were at or below market rates, management procedures with respect to currency
when it had performed no analysis or other backup positions in its Capital Global Fund.82 According
for that representation, and failed to disclose to the to the SEC’s order, the offering documents for
LPAC that its cost allocation methodology resulted the Fund represented that Everest’s “disciplined
in an increased charge for overhead. Rialto agreed to investment management style” was “driven by risk
pay a $350,000 penalty. management,” and that Everest would not take con-
centrated positions in any single geographic region.
Risk Management Disclosures In 2014 and 2015, however, Everest and the CIO
Enforcement also pursued private fund advis- allegedly made highly concentrated investments in
ers for allegedly misleading disclosures about their the Euro to Swiss Franc exchange rate, increasing the
risk management practices. Notably, this area has Fund’s gross exposure to that position from 400 per-
attracted the interest of the Complex Financial cent to over 900 percent, and failed to apply the risk
Instruments (CFI) Unit, which has expertise in management described in the offering materials. The
asset-backed securities, derivatives, and other finan- SEC charged Everest and the CIO with negligence-
cial products, along with the AMU. based violations of the Advisers Act. Everest agreed
In January 2020, the AMU and the CFI Unit to disgorgement of approximately $2.5 million and
brought a settled administrative proceeding against to a joint and several penalty of $750,000 with the
New York-based Catalyst Capital Advisors LLC and CIO.
its CEO, as well as an injunctive action in federal
court against one of its senior portfolio managers, for Valuation
alleged misrepresentations to investors that Catalyst Fund valuation practices have been a primary
followed specific risk parameters in managing a AMU concern in recent years. This includes the
Copyright © 2021 by CCH Incorporated. All Rights Reserved.12 THE INVESTMENT LAWYER
SEC’s notable 2019 action against Deer Park Capital ADRs without the deposit of foreign shares, as long
Management and its chief investment officer last as the broker receiving them has a “pre-release agree-
year for alleged compliance failures that allowed its ment” with the bank. Those agreements typically
traders to mark up the price of residential mortgage- require the broker to own, or take reasonable steps to
backed securities (RMBS) gradually rather than determine that the customer owns, the same num-
mark those assets to market.83 ber of shares represented by the ADR. Since 2017,
In April 2020, the SEC brought a settled the SEC has brought 19 actions against banks, bro-
action against New York-based mutual fund adviser kers and individuals based on their failure to follow
Semper Capital Management, L.P. for allegedly mis- these requirements. In fiscal 2020, these included
pricing non-agency mortgage-backed securities (NA settled cases against Jefferies LLC and ABN AMRO
MBS) purchased in odd lots (less than $1 million Clearing Chicago LLC involving alleged negligence-
in size).84 According to the SEC’s order, Semper based anti-fraud violations under the Securities Act
used pricing data from third party pricing vendors of 1933 and failure to supervise charges for allegedly
that were appropriate for round lots, even though borrowing pre-released ADRs from other brokers
it had no reasonable basis to believe that the pric- despite knowing that those brokers did not own the
ing vendor marks accurately reflected the price the foreign shares needed to support the ADRs.86
fund would receive for its NA MBS positions in a Broker order routing practices were another
current sale. As a result, Semper allegedly overstated market integrity issue for Enforcement last year. In
its net asset value and made misleading disclosures May 2020, the SEC charged Bloomberg Tradebook
to investors about the reasons for the fund’s reported LLC for allegedly misleading customers by repre-
performance, resulting in negligence-based compli- senting in marketing materials that orders would
ance and disclosure charges, for which it agreed to be routed by its own “advanced” technology, when
disgorgement and prejudgment interest of approxi- in fact the firm allowed unaffiliated broker-dealers
mately $128,000 and a $375,000 penalty. to make order routing decisions.87 In August, it
brought a settled case against Millington Securities,
Broker-Dealers and Market Integrity Inc. for alleged misrepresentations about payment-
As is typical, Enforcement’s broker-dealer cases for-order-flow it received for routing orders to cer-
encompassed a broad range of misconduct, such as tain executing brokers.88
violation of Regulation SHO (governing short sell- The obligation to file Suspicious Activity
ing practices), failure to comply with prospectus Reports (SARs) was at issue in the SEC’s settled
delivery requirements, and unsuitable recommen- action against Interactive Brokers LLC, which
dations to clients. Several noteworthy broker-dealer agreed to pay a total of $38 million in penalties to
cases in fiscal 2020 were focused on the integrity of the Commission and to the Commodity Futures
the securities markets, a longstanding Enforcement Trading Commission (CFTC) and Financial
theme that Director Avakian reaffirmed in the Industry Regulatory Authority (FINRA) in parallel
Division’s Annual Report.85 actions.89 Under the Exchange Act, broker-dealers
The “pre-release” of American Depository are required to file a SAR with the Financial Crimes
Receipts (ADRs) has been a leading market structure Enforcement Network (FinCEN), a division of the
concern for the SEC in recent years. ADRs are secu- US Treasury Department, when they know, suspect,
rities traded in the United States that represent shares or have reason to suspect that a transaction involves
of a foreign company and generally require that a illegal activity or lacks a legitimate business purpose.
corresponding number of foreign shares be held at Here, the SEC found that Interactive Brokers failed
a depositary bank. Pre-release allows the issuance of to meet this requirement in more than 150 instancesVOL. 28, NO. 1 • JANUARY 2021 13
involving potential microcap fraud in customer approximately $1.4 million based on the man-
accounts. ager’s tip. All three consented to final judgments
ordering them to pay total disgorgement of
Insider Trading Still in Focus, but approximately $1.4 million and penalties north
Filed Cases Remain at a Low Ebb of $1.1 million.94
Insider trading has been a perennial focus for ■ The Commission charged five friends who alleg-
Enforcement since the SEC’s seminal 1961 decision edly traded repeatedly on earnings information
in Matter of Cady, Roberts & Co. that Rule 10b-5 of a Silicon Valley cloud-computing company in
prohibits insiders from trading on the basis of mate- an ongoing federal court action. According to
rial, non-public information unless they disclose that the SEC’s complaint, a former IT administrator
information before trading.90 The Division’s enthu- of the company used his credentials to obtain
siasm for these cases, however, has waxed and waned confidential information, which he then trans-
over the years, and under the Trump Administration, mitted to his friends in exchange for kickbacks
its insider trading actions have fallen to their low- from the trading profits.95
est level since the mid-1990s.91 Last year, the SEC ■ The Commission brought charges in an ongo-
brought 33 standalone cases, up slightly from 30 in ing federal court action against a senior index
fiscal 2019. 92 It is probable that the arrival of the manager who allegedly purchased call or put
Biden Administration next year will bring about options of publicly traded companies before
an increased interest in insider trading more in line those companies were added or removed to/
with the higher numbers of filed cases under previ- from stock market indices. The SEC alleged
ous Democratic administrations. that the manager learned of the information
The Commission nevertheless brought some through his employer, and used an acquain-
notable insider trading actions last year, primarily tance who managed a sushi restaurant to place
though Enforcement’s Market Abuse Unit (MAU), the options in an attempt to mask the scheme,
including “classic” insider trading cases involving which netted them more than $900,000 in ill-
corporate insiders as well as “misappropriation” cases gotten profits.96
involving the misuse of material non-public infor-
mation by “outsiders” who owe a duty to the source In addition to pursuing individuals for insider
of that information. In building these cases, the trading, Enforcement is closely focused on poten-
MAU has continued to utilize extensively the SEC’s tial compliance failures by companies, investment
data analytic capabilities, which allow the Staff to advisers, and broker-dealers. (Advisers are subject
analyze massive amounts of trading data in order to to Section 204A of the Investment Advisers Act,97
spot suspicious trades.93 which requires them to have in place written poli-
Among its other significant insider trading cases cies and procedures reasonably designed to prevent
in fiscal 2020: the misuse of material non-public information.) For
example, the Commission brought a settled Section
■ In September 2020, the Commission brought 204A action in February 2020 against Wyoming-
a settled action against a former senior tax based Cannell Capital, LLC for allegedly failing to
manager at Amazon for allegedly tipping her maintain a list of securities that could not be traded
husband and father-in-law with details about after the firm came into possession of material non-
Amazon’s financial performance in advance public information, and for failing to provide writ-
of earnings announcements. According to the ten guidance on business-specific risks or when
SEC’s order, the tips resulted in trading profits of trading should be restricted.98
Copyright © 2021 by CCH Incorporated. All Rights Reserved.14 THE INVESTMENT LAWYER
In March, the then Co-Directors of Enforcement 2009 and 2014, Blaszczak used his contacts within
issued a public statement noting the heightened CMS to discover proposed CMS initiatives with
incentives to engage in insider trading during the negative implications for healthcare companies,
COVID-19 pandemic, and admonishing employ- which he then disclosed to healthcare-focused hedge
ers to ensure “maximum protection” against insider fund Deerfield Management and its principals.102
trading through their disclosure controls and proce- Deerfield then used that information to trade in the
dures, insider trading prohibitions, codes of ethics, securities of several companies.103 Blaszczak and sev-
and Regulation FD and selective disclosure prohibi- eral others were charged with insider trading under
tions.99 Given this express warning, charges against Section 10(b) and Rule 10b-5 (which are codified at
entities for inadequate insider trading policies and Title 15 of the United States Code) and under the
procedures may be on the horizon for 2021. criminal securities fraud statute, 18 U.S.C. § 1348,
along with federal wire fraud. At trial, Blaszczak was
United States v. Blaszczak: Expansion of acquitted of the Title 15 charges, but convicted of
Insider Trading Liability the Title 18 counts.104
The courts have spent significant time and Blaszczak and the other appellants challenged
energy in recent years addressing thorny questions their convictions under Title 18 because the district
surrounding the scope of liability under Section court had not instructed the jury that Blaszczak
10(b) of the Securities Exchange Act and Rule 10b-5 must have provided the information in exchange for
of “tippees”—individuals who trade on material a “personal benefit.” The Second Circuit explained
non-public information provided by a “tipper.” In that the personal benefit requirement does not come
particular, the Second Circuit has held that for liabil- from the text of Title 15, but from “judge-made
ity to attach under those provisions, the tipper must doctrine premised on the Exchange Act’s statutory
have provided inside information in exchange for a purpose … to protect the free flow of information
“personal benefit,” and the tippee must have known into the securities markets[.]”105 Concluding that
that.100 In some cases, this has proven a difficult evi- neither Title 18 nor the other statutes under which
dentiary hurdle for the SEC and DOJ to clear. the appellants were convicted involve the same stat-
In late 2019, however, the US Court of Appeals utory purposes as the insider trading prohibitions
for the Second Circuit ruled in United States v. under Title 15, the Second Circuit declined to read
Blaszczak that the government has an alternative in a personal benefit requirement to those statutes.106
and less burdensome path under the federal criminal The Second Circuit denied Blaszczak’s motion for
insider trading, conversion, and wire fraud statutes, rehearing en banc last April.107
which do not impose a “personal benefit” require-
ment.101 Although these statutes are not available to Insider Trading Prohibition Act Still
the SEC, the decision is nevertheless significant from Awaiting Action by Congress
an SEC Enforcement perspective because the SEC The proposed Insider Trading Prohibition Act
and DOJ routinely work together in insider trading (ITPA), which would dramatically simplify the
investigations, and the SEC’s investigative record prosecution of insider trading cases, failed to move
often serves as a basis for the DOJ’s charges. forward in Congress in 2020. The ITPA would
David Blaszczak was a former employee of the eliminate the requirement under the Exchange Act
Centers for Medicare & Medicaid Services (CMS) that the tippee be aware of the personal benefit to
and maintained contacts within CMS when he tran- the tipper, and would expand the prohibition on
sitioned into his short-lived career as a “political insider trading to include deceptive or wrongful
intelligence” consultant for hedge funds. Between taking of material, non-public information, evenVOL. 28, NO. 1 • JANUARY 2021 15
absent a breach of fiduciary duty.108 The House of likewise targeted the practice in the securities mar-
Representatives passed the ITPA in December of kets under Section 17(a) of the Securities Act and
2019 by a 410-13 vote, and the bill was referred to Sections 9(a)(2) and 10(b) of the Exchange Act.
the Senate Committee on Banking, Housing and In late 2019, the SEC won victories in federal
Urban Affairs, which to date has not acted upon it. court against the participants in an alleged scheme
It is possible that the ITPA was overshadowed by the involving a variant of spoofing known as “layering.”
presidential impeachment proceedings in early 2020 In that scheme, Ukraine-based trading firm Avalon
or that enthusiasm was dampened by the public out- FA Ltd. entered spoofed orders at multiple price lev-
cry over possible insider trading by members of the els, and engaged in “cross-market” manipulation by
Senate last year.109 For now, the legislation appears buying and selling stocks to artificially affect options
stalled, though it is possible that the ITPA will find prices, through New York-based broker dealer Lek
renewed impetus under the new presidential admin- Securities Corp.110 According to the SEC’s com-
istration and in a new session of Congress. plaint, the scheme generated more than $25 million
in profits. In October, the Commission settled with
Market Manipulation: Focus on Lek and its CEO, resulting in a three-year injunc-
Spoofing tion restricting the broker-dealer’s business with for-
Though one of the smaller categories of stand- eign customers and nearly $2 million in monetary
alone enforcement actions, constituting approxi- relief.111 The following month, Enforcement won a
mately 5 percent in fiscal 2020, market manipulation jury verdict against Avalon and its owners.
has been at the core of the SEC’s mission since the In September 2020, the SEC brought a set-
agency was established. In enacting the Securities tled action against the broker-dealer subsidiary
Exchange Act of 1934, Congress viewed manipula- of JPMorgan Chase & Co. for spoofing trades in
tive trading practices, such as “stock pools,” to be a US Treasury bonds, resulting in disgorgement of
primary cause of the stock market crash of 1929, and $10 million and a $25 million penalty against the
they have since been a regular target of Enforcement. entity.112 (The DOJ and CFTC announced parallel
The forms of manipulation have continually cases for manipulative trading in the precious met-
evolved over time, and Enforcement has sought to als and Treasuries markets, bringing the total paid
keep pace. Last year, the Division’s most noteworthy to resolve the three actions to more than $920 mil-
manipulation cases involved “spoofing,” in which lion.) Notably, the broker-dealer admitted the find-
a trader places a large buy or sell order without ings in the SEC’s order—a rare departure from
intending to execute the order, thereby creating a Enforcement’s usual practice of “no admit, no deny”
false impression of market demand. The trader (or settlements, in which settling parties do not admit,
spoofer) simultaneously places a smaller order for the but agree not to deny, the alleged violations. Under
same security on the other side of the market, which former Chair Mary Jo White, the SEC adopted a
the spoofer does intend to execute. (For example, a policy of seeking admissions in certain cases, but
spoofer may place an order to buy 100,000 shares Enforcement has disfavored the practice under for-
and a simultaneous order to sell 10,000 shares.) By mer Chairman Clayton. The inclusion of admissions
creating a fictitious appearance of trading interest in this settlement suggests that Enforcement views
that moves the market price, the trader is able to spoofing as a particularly egregious violation.
profit by executing on the other side of the market In another alleged international spoofing
(in the foregoing example, selling shares at a higher scheme, the SEC in October 2020 brought an emer-
price). Spoofing in the commodities markets has gency action and obtained an asset freeze against 18
long been a focus for the CFTC, and the SEC has China-based traders alleged to have placed spoofed
Copyright © 2021 by CCH Incorporated. All Rights Reserved.You can also read
