SEC Spotlight: Enforcement and Regulatory Developments in the Fourth Quarter of 2022
The US Securities and Exchange Commission (SEC or Commission) had an active fourth quarter, rounding out a record-breaking calendar year that saw several significant enforcement actions and regulatory developments. The SEC Division of Enforcement’s (Enforcement) vigor with respect to cryptocurrency enforcement continued in full force with high-profile enforcement actions against crypto companies and employees, while also diligently pursuing more traditional enforcement actions for insider trading and Foreign Corrupt Practices Act (FCPA) violations. On the regulatory side, the Commission proposed a number of rules and amendments aimed at, among other things, strengthening investor protection in connection with insider trading, standardizing best execution practices for broker-dealers, and promoting transparent and accessible information-sharing with investors.
This Advisory continues our series of quarterly SEC enforcement and regulatory highlights, with links to additional Arnold & Porter advisories when available. Our analysis is informed by our experience as former leaders and attorneys in the Enforcement Division at the SEC: Dan Hawke as the former Chief of the Market Abuse Unit and Director of the Philadelphia Regional Office, Jane Norberg as the former Chief of the Office of the Whistleblower and a Senior Officer in the Division of Enforcement, and Christian Schultz as former Assistant Chief Litigation Counsel.
FY 2022 Results. On November 15, 2022, Enforcement released its enforcement results for fiscal year 2022. Enforcement brought 760 total enforcement actions, including 462 new or “stand-alone” enforcement actions that ran the gamut from “first-of-their-kind” actions to cases charging traditional securities law violations. Actions against investment advisers and investment companies accounted for 26 percent of enforcement actions, with actions involving securities offerings a close second at 23 percent, actions involving issuer reporting or audit and accounting at 16 percent, and broker-dealers at 10 percent, rounding out the bulk of Enforcement’s work. The SEC obtained record-breaking monetary awards (in the form of money ordered, disgorgement, and pre-judgment interest) in excess of $6.4 billion, up from almost $3.9 billion the previous year. For FY 2022, the money ordered in these SEC actions included the highest-ever civil penalties of almost $4.2 billion, as well as disgorgement of more than $2.2 billion. The SEC’s whistleblower awards for the year were the second highest on record in terms of both the number of individuals awarded and the total dollar amounts awarded.
Crypto. In the fourth quarter of 2022, the SEC continued to focus on registration and disclosure requirements for cryptocurrencies and other crypto assets, reflecting Chair Gary Gensler’s stated view that many crypto platforms and crypto tokens may fall under the SEC’s jurisdiction. Among the most legally significant developments in the fourth quarter of 2022 were multiple cases testing the limits of the agency’s jurisdiction. Most notable was the mid-December 2022 charges brought against Samuel Bankman-Fried (Bankman-Fried), former CEO and co-founder of crypto trading platform FTX Trading Ltd. (FTX), for defrauding equity investors in the failed crypto exchange. Charges were also brought against Bankman-Fried by the US Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission (CFTC). The SEC has also charged Zixiao (Gary) Wang, former Chief Technology Officer of FTX, and Caroline Ellison, former CEO of Alameda Research LLC, for their roles in connection with the alleged scheme to defraud equity investors in FTX. The US Attorney’s Office for the Southern District of New York is also pursuing charges against these individuals.
In the SEC’s case against Ripple Labs, Inc. (Ripple) currently pending in the US District Court for the Southern District of New York, in December 2022, the parties wrapped up summary judgment briefing over whether Ripple’s XRP token is a security that required registration. This briefing followed shortly after the SEC obtained a summary judgment victory against blockchain publisher LBRY Inc. over whether its LBC token is a security despite not being distributed in an initial coin offering. For more background about the Ripple litigation, please see previous Enforcement Edge blog posts (available here, here, and here).
In November 2022, Enforcement also brought charges against the creator and three US promoters for their roles in Trade Coin Club, an alleged Ponzi scheme that from 2016 to 2018 raised more than 82,000 bitcoin, valued at $295 million at the time, from over 100,000 investors. Individuals involved in the scheme allegedly touted to investors that they would receive minimum returns of .35 percent daily. The complaint alleges that the creator of the scheme, Douver Torres Braga, siphoned off investor funds for his own benefit and received at least 8,396 bitcoin of the amounts invested, totaling approximately $55 million at the time. The SEC’s complaints against these four individuals were filed in the US District Court for the Western District of Washington.
Arnold & Porter recently discussed cryptocurrency litigation, bankruptcy, cyber, compliance, and securities law developments in an Advisory, available here. Another recent Arnold & Porter Advisory, available here, provides valuable insight to companies with respect to how, in response to the current crypto environment, the SEC’s Division of Corporation Finance urged public companies to assess how recent crypto developments have impacted their business and to disclose those effects to investors.
Fraud Against Investors. Aside from crypto cases, the Commission’s fourth quarter saw a number of significant securities fraud enforcement actions, some of which settled for substantial sums. In mid-December 2022, the Commission charged Lawrence Billimek, an employee of a major asset management firm, and Alan Williams, an individual who previously worked at several financial industry firms, for carrying out a multi-year front-running scheme that generated at least $47 million in illegal trading profits. Also in mid-December 2022, the SEC charged Denmark-based multinational financial services corporation Danske Bank with fraud for allegedly misleading investors regarding its anti-money laundering compliance program in its Estonian branch and for failing to disclose the risks posed by the program’s significant deficiencies. Danske Bank agreed to pay $413 million to settle the SEC’s charges.
In November 2022, the SEC charged Jebara Igbara (a.k.a. Jay Mazini), the founder of Halal Capital LLC, with securities fraud for operating an $8 million scheme that allegedly targeted investors from the New York metropolitan area’s Muslim community, including promises to invest their funds in Quran-compliant investments. He allegedly offered investors promissory notes purporting to offer guaranteed, significant returns on investments, made Ponzi-like payments to investors, and used funds to purchase luxury items and pay off gambling debts. Criminal charges were also brought against him by the US Attorney’s Office for the Eastern District of New York.
Finally, early in the fourth quarter, the SEC charged New Jersey-based National Realty Investment Advisors LLC (NRIA) and several of its former executives with fraud for running a years-long, Ponzi-like scheme that raised over $600 million from about 2,000 investors. NRIA and its executives allegedly promised that investments would be used to buy and develop real estate properties in Philadelphia and New Jersey. Instead, investor money was used to pay distributions to other investors. Executives also allegedly used investor funds for personal and luxury purchases and to pay reputation management firms to undermine investors’ due diligence of the executives. The SEC’s complaint was filed in the US District Court for the District of New Jersey.
FCPA and Bribery. In December 2022, the SEC brought and settled charges for alleged violations of the FCPA arising out of bribery schemes in both Brazil and Algeria, which, with a parallel criminal case brought by the US Department of Justice (DOJ), resulted in the company paying roughly $80 million.
Insider Trading. The Commission continued its vigilant enforcement of insider trading laws in the fourth quarter. In December 2022, the SEC charged Nader Pourhassan, the former CEO of CytoDyn Inc. (CytoDyn), with fraud and insider trading for providing misleading information to shareholders about the progress of clinical research treatment for COVID-19 and HIV. The SEC alleges that Pourhassan issued several press releases exaggerating CytoDyn’s medical innovations, causing the company’s stock to rise, while selling approximately $15.8 million worth of company stock based on the false information. In a separate action, the DOJ brought parallel criminal charges against Pourhassan and an associate.
In November 2022, the SEC brought insider trading charges against Ramkumar Rayapureddy (Rayapureddy), Chief Information Officer of pharmaceutical company Viatris Inc. (f.k.a. Mylan N.V.) (Mylan), for insider trading for allegedly providing a tip to his friend and former colleague with material nonpublic information about Mylan’s business, including unannounced drug approval by the US Food & Drug Administration, financial results, and an impending merger with a division of another pharmaceutical company. The complaint alleges that the tippee’s gains totaled approximately $8 million, a portion of which was shared with Rayapureddy through cash payments in India. The DOJ also brought criminal charges against Rayapureddy.
Social Media Influencers’ Stock Manipulation. In December 2022, the SEC charged eight social media influencers in a $100 million alleged stock manipulation scheme. The influencers allegedly used social media platforms Twitter and Discord to promote themselves as successful traders, garnering significant social media followings that relied on their expertise. The defendants allegedly purchased certain stocks and subsequently encouraged their followers to follow suit, only to sell the stock without disclosing their plans to dispose of the securities. The SEC charged one defendant with aiding and abetting the scheme by, among other things, hosting a podcast on which he promoted the influencers’ trading knowledge. The SEC’s complaint was filed against all eight influencers in the US District Court for the Southern District of Texas.
Environmental, Social, and Governance-Related (ESG) Enforcement. In November 2022, the SEC charged Goldman Sachs Asset Management (GSAM) with failing to follow its own policies and procedures with respect to two mutual funds and one separately managed account strategy marketed as ESG investments. The SEC’s order detailed multiple deficiencies in GSAM’s management of the investments, including failure to maintain written policies and procedures for ESG research for products and failure to follow such policies and procedures consistently. GSAM agreed to pay a $4 million penalty to settle the charges. Arnold & Porter discussed the enforcement action against GSAM in a recent Advisory, available here.
Whistleblower Enforcement. Rule 21F-17 of the Securities Exchange Act of 1934 (Exchange Act) prohibits anyone from taking steps “to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” In November 2022, the SEC filed an amended securities fraud complaint against Adam Rogas, former Chief Executive Officer of NS8, Inc. (NS8), pursuant to Rule 21F-17, alleging that he engaged in whistleblower impeding and retaliation against the NS8 employee who reported his fraudulent conduct. This case follows a whistleblower impeding action against the co-founder and Chief Information Officer of NS8, In re David Hansen, which was one of 16 total actions the SEC has taken against companies and individuals for violating Rule 21F-17. Arnold & Porter recently discussed the Rogas case and its implications for companies in an Advisory, available here.
Whistleblower Awards. The SEC awarded several substantial whistleblower awards in the fourth quarter, totaling more than $87 million. The awards granted include:
- One award of more than $10 million to a whistleblower who provided important documents and met twice with Enforcement staff, which provided information and assistance to an underlying investigation and significantly contributed to a successful SEC enforcement action.
- Two awards of $20 million each, one to a whistleblower who provided new and critical information and continued assistance that led to a successful SEC enforcement action and one to a whistleblower who provided new information and met with Enforcement staff multiple times, also leading to a successful SEC enforcement action.
- One award of more than $37 million to a whistleblower who was the initial source of a company’s internal investigation, as well as the source for investigations by the SEC and another agency. The whistleblower received credit for the investigations even though the company also reported the alleged conduct to the SEC and another agency because the whistleblower provided the same information to the SEC within 120 days of reporting it internally.
Whistleblower Program FY 2022 Results. In November 2022, the SEC Office of the Whistleblower issued its annual report for FY 2022. As a whole, FY 2022 was an exceptionally active year for whistleblower tips, enforcement, and awards. The SEC’s report revealed that the Commission received the largest number of tips in the history of the whistleblower program, which was established in 2011 following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The report also highlighted several substantial whistleblower awards, indicating that whistleblowers remain an important source for SEC investigations and enforcement actions. Finally, the report indicated an uptick in Rule 21F-17 cases, reinforcing the need for companies and their counsel to take seriously their policies, procedures, and practices surrounding whistleblower protection. Arnold & Porter’s top five takeaways from the SEC’s annual whistleblower report are available here.
Regulation Best Execution. In December 2022, the SEC proposed Regulation Best Execution, which would establish a best execution regulatory framework for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers (collectively broker-dealers). If adopted by the Commission, the proposed rule would be the first SEC-established rule concerning the best execution standard. “[A] best execution standard,” noted Chairman Gensler, “is too important, too central to the SEC’s mandate to protect investors, not to have on the books as Commission rule text.” As a whole, the proposed rule would require broker-dealers to “establish, maintain, and enforce written policies and procedures reasonably designed to comply with the proposed best execution standard” and contains exemptions for that standard in certain instances. With respect to conflicted transactions with retail customers, Regulation Best Execution would require broker-dealers to document their compliance with the best execution standard, including all efforts to enforce their best execution policies and procedures for conflicted transactions and the basis and information relied on for their determination that such transactions would comply with the best execution standard. Broker-dealers would also be required to document any arrangement concerning payment for order flow. Importantly, this proposed regulation would also require broker-dealers to review their best execution policies and procedures at least annually, document such reviews, and present written reports of such reviews to their boards or directors, or other governing bodies. The public comment period for Regulation Best Execution will remain open until March 31, 2023.
Amendments to Rule 10b5-1. In December 2022, the SEC adopted amendments to Rule 10b5-1 under the Exchange Act to modernize the rule and increase investor protections against insider trading. Specifically, the amendments update the conditions that must be met for the 10b5-1 affirmative defense to insider trading liability, which allows corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith, before becoming aware of material nonpublic information. The updates are intended to address concerns articulated by courts, commentators, and members of Congress that “insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis on material nonpublic information.” The updates include cooling-off periods for insiders prior to trading and require all persons entering into a Rule 10b5-1 plan to act in good faith with respect to the plan. The updates also require directors and officers entering into a Rule 10b5-1 plan to include representations in their trading plans certifying that they are not aware of any material nonpublic information, and that they are adopting the trading plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5. The amendments also include requirements providing for more comprehensive disclosures regarding issuers’ policies and procedures on insider trading, including quarterly disclosure regarding issuers’ use of Rule 10b5-1 plans. The final rules become effective on February 27, 2023.
Enhancements to Open-End Fund Liquidity Framework. In November 2022, the SEC voted to propose amendments to its rules for registered open-end funds. The amendments would “enhance how funds manage their liquidity risks, require mutual funds to implement liquidity management tools, and provide for more timely and detailed reporting of fund information.” One proposed amendment would require open-end funds to use “swing pricing,” an investor protection technique used to allocate costs stemming from inflows or outflows to the investors engaged in that activity, rather than diluting other shareholders. Chairman Gensler explained that the amendments were formulated and proposed in response to systematic liquidity issues seen during the COVID-19 pandemic. The public comment period will remain open until February 14, 2023.
Enhancements to Proxy Voting Disclosure. In November 2022, the SEC adopted amendments to Form N-PX, aimed at enhancing and improving the information that mutual funds, exchange-traded funds, and other certain registered funds report about their proxy votes. The purpose of the amendments is to improve investors’ ability to monitor how their funds vote and compare different funds’ voting records. The amendments will require funds and managers to categorize each matter by type, to organize their reports and require them to use a structured data language to make filings easier to analyze, and to disclose the number of shares that were voted or instructed to be voted to provide shareholders with context to understand how securities lending activities could affect a fund’s or manager’s proxy voting practices. The new rules and form amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024.
Compensation Recovery Listing Standards. In October 2022, the SEC voted to adopt rules requiring securities exchanges to adopt listing standards that require issuers to implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers. Under the new rules, listed issuers must develop and implement a written policy for recovery of erroneously awarded incentive-based compensation, file the policy as an exhibit to their annual report, and disclose any actions they have taken pursuant to the policy when a recovery is triggered. The new rules implement a mandate in the Dodd-Frank Act aimed at “prevent[ing] executives from keeping compensation received based on misstated financials.” The final rules become effective on January 27, 2023.
Modernizing Fund Shareholder Reports. Also in October 2022, the SEC voted to adopt rule and form amendments requiring mutual funds and exchange-traded funds to transmit concise and visually engaging shareholder reports, with the aim of promoting transparent and balanced presentations of fees and expenses in investment company advertisements. The rule will require funds to provide succinct, tailored shareholder reports that highlight key information using graphics and other visual aids. Noting that “[s]hareholder reports are amongst the most important documents that fund investors receive,” Chairman Gensler explained that the typically lengthy and dense reports often require retail investors to sift through extensive financial information. The rule amendments require funds to highlight information in a structured data format and make certain, more in-depth information available online and available for delivery free of charge to investors on request. These amendments become effective on January 24, 2023.
A full list of all the Commission’s proposed rules during the fourth quarter can be found here.
The SEC’s enforcement and regulatory actions in the fourth quarter of 2022 capped off an active, and in some respects record-breaking, calendar year for the Commission. The fourth quarter showcased the Commission’s aggressive approach to monitoring, developing, and enforcing securities laws under the leadership of Chairman Gensler and Enforcement Director Gurbir S. Grewal. Companies, individuals, and other market participants should take notice of the continued emphasis on active and aggressive monitoring and enforcement, and take proactive steps to ensure compliance with the federal securities laws. The SEC’s fourth quarter flurry tees up what is sure to be an active 2023, likely focusing on continued crackdown on crypto, strong enforcement of insider trading laws, ongoing efforts to monitor and enforce ESG disclosure-related violations, and regulatory developments aimed at increasing corporate transparency for investors. We anticipate whistleblowers will continue to be a key source of information that further strengthens the SEC’s enforcement efforts.
We will continue to monitor and report on the key enforcement and regulatory developments at the SEC. In the meantime, please reach out to any author of this Advisory or your regular Arnold & Porter contact with any questions about the issues discussed herein or the state of play at the Commission.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.