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SEC Enforcement Chief Speaks on Penalties, Investigations, and Compliance

Throughout my first year as Director, I have spoken[1] often about the public’s declining trust in our institutions and financial markets.[2] I have observed that, while there is no single cause for this decline of trust, it is in part due to the perception that we—the regulators—are failing to hold bad actors accountable, and that there are two sets of rules: one for the big and powerful and another for everyone else.

In those speeches, I also outlined steps that we in the SEC’s Division of Enforcement would take, and have taken, to address the decline in public trust. During my speech last May at SEF West, for example, I spoke about the need to push the pace of investigations so that, when the public reads a news story about corporate misconduct, the public knows that we will move quickly and efficiently to investigate what happened and hold wrongdoers accountable, even in the most complex cases.[3]

This is especially true right now given the volatility and uncertainty we are experiencing across the financial markets and in the crypto market.

So today, I would like to talk about how we are working with that sense of urgency to restore public trust by doing three things:

  • obtaining penalties and remedies that deter misconduct and meaningfully hold bad actors accountable, protect investors and, where possible, help harmed investors recover their losses;
  • proactively investigating and charging cases across a spectrum of market participants and harm; and
  • Continuing to incentivize proactive compliance and meaningful cooperation.

The work is obviously not done; but I think we made some real progress over the course of this past fiscal year, which closed on September 30th.

Seeking Penalties and Remedies that Deter Misconduct and Protect Investors

With respect to penalties and remedies, simply put, they must be adequate to both punish and deter wrongdoing. If market participants think that getting fined by the SEC is just another expense to be priced into the cost of doing business, then penalties are neither effective punishment, nor deterrence. Market participants must realize that complying with securities laws is cheaper than violating those laws.

This must be true not only in cases involving fraud, but also in cases based on negligence. After all, investors are harmed equally whether someone violate securities laws with bad intent or through negligence.

So this past fiscal year we sought to re-calibrate penalties to more effectively promote deterrence and get away from the idea that penalties are just another business expense.

To that end, last year we recommended, and the Commission issued, orders imposing nearly $4.2 billion in penalties.[4] This is the highest amount of penalties ever ordered in a year. And it is more than the prior three years combined. We don’t expect to break this record and set a new one every year because we expect behaviors to change. We expect compliance.

Look at our off-channel communications sweep. When 17 major Wall Street firms are fined in excess of a 1.2 billion dollars, required to admit their failures, engage consultants and implement safeguards to prevent future violations, not only do those firms improve their culture and practices, but other financial services firms take note and do so as well, the media takes notice, and important to trust-building, the investing public sees accountability.[5]

Similarly, when three senior Allianz portfolio managers allegedly orchestrate a multi-billion dollar fraud scheme that resulted in billions in investor losses, the penalties must be meaningful enough to deter both Allianz and others and demonstrate accountability. That’s why Allianz was required to admit that its conduct violated the federal securities laws and pay a $675 million civil penalty, one of the largest in an SEC fraud case since the days of Enron and WorldCom, to settle fraud charges.[6]

And when gatekeepers at the gatekeeper engage in a massive cheating scheme for the second time in 10 years, on of all things the ethics portion of the CPA exam, and then that gatekeeper withholds evidence of the misconduct from us, then we need to not only increase the penalty from the last violation, but also incorporate additional remedies. Because that’s what’s required for accountability and deterrence and that’s why the Commission required EY to pay a record $100 million penalty, admit its misconduct, and implement extensive remedial measures to address the firm’s ethical issues.[7]

I want to pause here for a moment because I don’t want an important aspect of the nineteen resolutions I just discussed to get overshadowed by the dollar figures at play. Each of them also involved admissions of wrongdoing. Admissions are an incredibly powerful accountability measure and you should expect us to continue seeking admissions in similar cases. And as I’ve said before, when we put them on the table it’s not to gain an advantage in negotiations. We’ll litigate those matters.

While the examples I’ve discussed involved penalties against companies and firms, holding individuals accountable is also critical to our efforts.

As in prior years, more than two-thirds of the SEC’s stand-alone enforcement actions over the past fiscal year involved at least one individual defendant or respondent.[8] And these individuals included senior public company executives like the former CEO of Boeing, who was charged with making misleading statements about the safety of Boeing’s airplanes following crashes in 2018 and 2019, and ordered to pay $1 million in penalties.[9]

SOX 304 Clawbacks

But more is required to ensure accountability from senior executives at public companies and incentivize them to prevent misconduct at their firms. That’s why the Commission employed another tool in fiscal year 2022 and used Sarbanes-Oxley 304 to require several executives to return bonuses and compensation following misconduct at their firms, even though the executives were not personally charged with the underlying misconduct.

For example, three former senior executives of infrastructure company Granite Construction were ordered to return nearly $2 million in bonuses and compensation after their company restated its financials following misconduct by another former official.[10]

Disgorgement

Of course, a penalty is only one of several tools available to us when we seek to impose remedies against bad actors. We also seek disgorgement from market participants to ensure that they do not profit from their violations of securities laws. Where appropriate, we will aggressively seek disgorgement of all ill-gotten gains, regardless of whether the violations are scienter-based. Last year, in total, the Commission ordered market participants to disgorge about $2.2 billion in ill-gotten gains.[11]

For example, as part of global resolutions in the case against Allianz that I mentioned previously, Allianz and its parent company agreed to pay nearly $350 million in disgorgement and prejudgment interest.[12] That’s in addition to the $675 million civil penalty.

Here, I think it is helpful to talk a bit about the interplay between penalties and disgorgement. For the five fiscal years prior to this last one, the Commission ordered more than twice as much in disgorgement as it did in penalties. In other words, for each dollar in penalties that was ordered, the violators had received more than $2 in ill-gotten gains. To me, that ratio is backwards because it means, on a macro level, that the potential reward for getting away with violating the securities laws was much greater than the potential downside of being caught. If you get $2 for violating the law, but are only fined $1 if you get caught, and required to return your ill-gotten gains, some people may see that as an acceptable calculated risk.

As demonstrated by the Allianz matter, that ratio has flipped this year. The $4.2 billion in penalties that the Commission ordered is nearly double the $2.2 billion in disgorgement that the Commission ordered, meaning that the potential consequences of violating the law are significantly greater than the potential rewards.

So while disgorgement was slightly down from the prior year, about 6%, it is the first time that the amount ordered to be paid in penalties has been double the amount ordered to be paid in disgorgement. There are of course also legal developments that have affected the Commission’s ability to order disgorgement. But whatever the reason, the increased penalty to disgorgement ratio nonetheless demonstrates that the risk-reward calculation is not what it was even a few years ago.

Proactive Enforcement Through the Use of Sweeps and Initiatives

Another way that we work to address the declining trust in the financial markets is by conducting proactive enforcement sweeps and initiatives that specifically target recurring issues.

Filing multiple, coordinated actions simultaneously not only demonstrates accountability, but also has a more pronounced deterrent effect than if the Commission filed separate standalone cases at different times.

For example, we’ve already discussed the sweep that led to the charges against 17 Wall Street firms for widespread recordkeeping failures. I suspect that it has generated conversation at this conference and will do so at others, as well as among compliance officers and in board rooms.

Another recent sweep conducted by our Asset Management Unit underscored the importance of meeting custody obligations to secure client assets and to protect investors—an important risk area for us. That initiative led to charges against nine registered private fund advisers for failing to comply with the Custody Rule and/or update their Forms ADV to accurately reflect the status of their private fund clients’ financial statements.[13]

You can expect to see us employ these strategies more frequently moving forward.

Rebuilding Public Trust Requires Proactive Compliance and Cooperation

But robust penalties and innovative enforcement actions alone cannot restore trust in our financial markets. Rather, we need market participants to help by self-policing and, when things go wrong, to meaningfully cooperate with our investigations.

So even as we seek robust penalties to deter misconduct, we must continue to have a robust cooperation program which can bring significant benefits to cooperators, including reduced penalties.

While meaningful cooperation starts with self-policing and self-reporting, it does not end there. It also means proactively cooperating with our investigations and remediating violations.

Since I spent the bulk of my speech at SEF West talking about ways in which the defense bar and their clients could do more, I think it’s only fitting to end this one by detailing several cases from the last fiscal year where firms meaningfully cooperated with our investigations and the Commission credited that cooperation through reduced penalties, or even no penalties at all.

In February, the Commission charged Baxter International with engaging in improper foreignexchange transactions and misstating the company’s income.[14] The Commission agreed to substantially limit the penalty imposed for the wrongful conduct due to Baxter’s self-reporting, its cooperation with the investigation, and remedial measures it took. As the charging document stated, Baxter provided substantial cooperation to the investigation,

including by providing detailed explanations of how the FX Transactions worked, summarizing witness interviews, and providing other relevant information to the staff, both on their own initiative and at the staff’s request.[15]

As I mentioned, in appropriate situation, meaningful cooperation can mean no penalties at all. For example, the Commission charged ProPetro Holding with failing to properly disclose executive perks and stock pledges that its CEO received.[16] The Commission agreed to not impose a civil penalty on ProPetro for its wrongful conduct thanks to ProPetro’s cooperation with the staff’s investigation and its extensive remediation.

Headspin, Inc. is another example of a case where, because of the company’s significant cooperation, the Commission did not impose a penalty on the company for its wrongful conduct.[17]

These last few examples are important because they illustrate that even as we have sought and obtained record penalties, the Commission continues to reward meaningful cooperation. And given the record penalties, there should likewise be a heightened incentive to cooperate. I hope that is a message that those of you in private practice will take back to your clients and companies.

ENDNOTES

[1] This speech is provided in the author’s official capacity as the Commission’s Director of the Division of Enforcement but does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.

[2] See., e.g., Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Remarks at SEC Speaks 2021 (Oct. 13, 2021), available at https://www.sec.gov/news/speech/grewal-sec-speaks-101321.

[3] See Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Remarks at Enforcement Forum West 2022 (May 12, 2022), available at https://www.sec.gov/news/speech/grewal-remarks-securities-enforcement-forum-west-051222.

[4] See Press Release 2022-206, SEC Announces Enforcement Results for FY22 (Nov. 15, 2022), available at https://www.sec.gov/news/press-release/2022-206.

[5] See Press Release 2022-174, SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures (Sept. 17, 2022) available at https://www.sec.gov/news/press-release/2022-174; Press Release 2021-262, JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges (Dec. 17, 2021), available at https://www.sec.gov/news/press-release/2021-262.

[6] See Press Release 2022-84, SEC Charges Allianz Global Investors and Three Former Senior Portfolio Managers with Multibillion Dollar Securities Fraud (May 17, 2022), available at https://www.sec.gov/news/press-release/2022-84.

[7] See Press Release 2022-114, Ernst & Young to Pay $100 Million Penalty for Employees Cheating on CPA Ethics Exams and Misleading Investigation (June 28, 2022), available at https://www.sec.gov/news/press-release/2022-114.

[8] See Press Release 2022-206, SEC Announces Enforcement Results for FY22 (Nov. 15, 2022), available at https://www.sec.gov/news/press-release/2022-206.

[9] See Press Release 2022-170, Boeing to Pay $200 Million to Settle SEC Charges that it Misled Investors about the 737 MAX (Sept. 22, 2022), available at https://www.sec.gov/news/press-release/2022-170.

[10] See Press Release 2022-150, SEC Charges Infrastructure Company Granite Construction and Former Executive with Financial Reporting Fraud (Aug. 25, 2022), available at https://www.sec.gov/news/press-release/2022-150.

[11] See Press Release 2022-206, SEC Announces Enforcement Results for FY22 (Nov. 15, 2022), available at https://www.sec.gov/news/press-release/2022-206.

[12] See Press Release 2022-84, SEC Charges Allianz Global Investors and Three Former Senior Portfolio Managers with Multibillion Dollar Securities Fraud (May 17, 2022), available at https://www.sec.gov/news/press-release/2022-84.

[13] See Press Release 2022-156, SEC Charges Two Advisory Firms for Custody Rule Violations, One for Form ADV Violations, and Six for Both (Sept. 9, 2022), available at https://www.sec.gov/news/press-release/2022-156.

[14] See Press Release 2022-31, SEC Charges Health Care Co. and Two Former Employees for Accounting Improprieties (Feb. 22, 2022), available at https://www.sec.gov/news/press-release/2022-31.

[15] See In the Matter of Baxter International Inc., File No. 3-20781 (Feb. 22, 2022), available at https://www.sec.gov/litigation/admin/2022/33-11032.pdf.

[16] See Press Release 2021-244, SEC Charges Oilfield Services Company and Former CEO With Failing to Disclose Executive Perks and Stock Pledges (Nov. 22, 2021), available athttps://www.sec.gov/news/press-release/2021-244.

[17] See Litigation Release No. 25320, SEC’s Fraud Case Against Silicon Valley-Based Headspin, Inc.’s Former CEO Is Ongoing (Jan. 28, 2022), available athttps://www.sec.gov/litigation/litreleases/2022/lr25320.htm.

These remarks were delivered on November 15, 2022, by Gurbir Grewal, director of the Division of Enforcement of the U.S Securities and Exchange Commission, at the Securities Enforcement Forum in Washington, D.C.

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