In November, when the SEC released its annual enforcement activity report, the report showed that during the fiscal year that ended on September 30, 2018 both the volume of the agency’s enforcement activity and the level of financial recoveries increased compared to the prior fiscal year. The agency’s report did not separate out its enforcement activity involving public companies. However, a new report from the NYU Pollack Center for Law & Business and Cornerstone Research breaks out the enforcement numbers for public companies. The new report show that SEC enforcement actions against public companies and subsidiaries “jumped substantially” in the second half of FY 2018, reversing a decline in filings that began in the second half of 2017 and continued through the first half of 2018.
The December 11, 2018 report, entitled “SEC Enforcement Activity: Public Companies and Subsidiaries—Fiscal Year 2018 Update,” can be found here. Cornerstone Research’s December 11, 2018 press release about the new report can be found here.
The report is based on analysis of the collaborating partners’ Securities Enforcement Empirical Database (SEED), which includes data on 535 SEC enforcement actions initiated against 471 public company defendants and their subsidiaries between October 1, 2009 and September 30, 2018.
The report shows that of the 490 independent enforcement actions the SEC initiated during the 2018 fiscal year, 71 involved new actions against public companies and subsidiaries, representing an increase of nine percent from FY2017. However, the FY2018 increase was largely a reflection of the activity during the second half of FY 2018, during which the agency filed 55 new actions against public companies and subsidiaries. By way of comparison, the two half-year periods preceding the 2H18 each had fewer than 20 public company enforcement actions. The 71 public company enforcement actions during FY2018 were well above the FY 2010- FY 2017 annual average of 58 (although below the average of 86 for the unusually active enforcement years of FY 2015 –FY 2016).
A “record” 45 public company enforcement actions were filed in the last quarter of FY 2018, including 16 in the last two weeks of September. In a separate comment, NYU Law Professor Stephen Choi noted that while it is common to see an uptick in activity toward the end of a fiscal year, “this year’s increase was particularly pronounced, with 23 actions in the last month of FY 2018.”
Of the FY 2018 public company enforcement actions, 23 percent included individuals named as defendants, roughly equal to the FY 2010-FY 2017 annual average of 24%. The majority (53%) of the individual public company defendants in FY 2018 were either CEOs or CFOs.
85% of the 2018 FY public company enforcement actions were filed as administrative proceedings, compared to an annual average of 66% during the period FY 2010–FY 2017. By way of comparison, 45% of enforcement actions without a public company or subsidiary defendant were filed as administrative proceedings.
Issuer Reporting and Disclosure continued to be the most common allegation type, representing in FY 2018 nearly half (45%) of public company enforcement actions during the 2018 fiscal year. FCPA allegations accounted for only 13 percent of public company enforcement actions in FY 2018, down from the FY 2010-FY 2017 annual average of 20%.
During FY 2018, about half (51%) of public company enforcement actions targeted the Finance, Insurance, and Real Estate industry, consistent with the annual average during the period FY 2010-FY 2017 of 48%. Within this industry category, public company enforcement actions against Commercial Banks accounted for more than 25% of actions in FY 2018.
The SEC imposed monetary settlements on 89 percent of the defendants that reach settlements in FY 2018, compared with a FY 2010-FY 2017 annual average 84%. Monetary settlements in public company enforcement actions totaled $2.4 billion, well above the FY 2010-FY2017 annual average of $1.4 billion.
However, of the $2.4 billion in public company enforcement actions settlements in FY 2018, $1.786 billion represented the amount from a single case, the Petrobras bribery enforcement action. The SEC actually recovered very little of the penalties and disgorgements in the Petrobras case, as the agency credited amounts the company paid in connection with a related securities class action lawsuit and penalties paid to Brazilian authorities. Of the penalties and disgorgements against Petrobras, only $85 million was not offset by credits.
The report itself contains no analysis or speculation on why the numbers of public company enforcement actions jumped so significantly in the second half of 2018. The increase in public company enforcement actions mirrors the overall increase in SEC enforcement activity during the year’s second half. The increased level of activity in FY 2018 presents quite a contrast with the reduced levels of enforcement activity during the 2017 fiscal year.
The reduction of the enforcement activity in the 2017 FY was widely viewed as consistent with the Trump administration’s overall hostility to regulation and governmental action. The expectation among at least some commentators was that the agency would again report a reduction in activity in the 2018 FY. However, contrary to these expectations, the activity jumped significantly, at least toward the second half of the year. The increase suggests that whatever the overall administrative view may be toward regulatory activity, the approach is not so comprehensive that it precludes an active enforcement approach from the SEC.
One interesting question is whether the heightened level of activity at the end of the 2018 fiscal year will continue during the current fiscal year. Without knowing for sure what caused the surge in the second half of 2018, it is hard to speculate about whether the increase level of activity will continue into the current year.
One thing I did note in connection with the SEC’s own November 2018 enforcement activity report was that as of the end of the 2018 FY, the agency had over 225 cyber-related investigations pending. Call it a hunch, but I suspect that we will be seeing a significant amount of cyber-related enforcement activity during FY 2019, which could drive the overall enforcement numbers for the fiscal year.