The SEC’s Enforcement Division had another active enforcement year in fiscal 2019, which ended September 30, 2019, that resulted in substantial recoveries. According to the Division’s latest annual report, the agency pursued more enforcement actions in fiscal 2019, including more standalone actions, than in the past several years. The agency’s enforcement action monetary recoveries, including both penalties and disgorgement, also were at the highest level in years. As the report points out, the agency maintained this level of activity and recoveries despite a number of factors – what the report describes as “significant headwinds” — that constrained the agency’s efforts and recoveries. The Enforcement Division’s November 6, 2019 annual report can be found here. The agency’s November 6, 2019 press release about the report can be found here.


The Number of Enforcement Actions

According to its report, the Enforcement Division filed 862 enforcement actions in fiscal 2019, of which 526 were standalone actions, 210 were “follow on” proceedings, and 126 were proceedings to de-register public companies that were delinquent in their periodic reporting to the agency.


The total of 862 enforcement actions in fiscal 2019 represents about a 5% increase in the overall number of enforcement actions in fiscal 2018. It also represents the highest annual number of enforcement actions since fiscal 2016.


The 526 standalone enforcement actions in fiscal 2019 represents about a 7.3% increase over the 490 standalone enforcement actions in fiscal 2018, which also represents the highest number of standalone enforcement actions since fiscal 2016.


The information that the number of enforcement actions increased in fiscal 2019 is interesting, because up to this point the number of enforcement actions had trended lower during the Trump administration. However, the report does note that the elevated number of standalone actions during fiscal 2019 was due in part to the number of actions arising from the Share Class Initiative (intended to protect retail investors from mutual funds’ failures to disclose conflicts of interest associated with fee-paying mutual fund share classes when no-cost or low-cost alternatives were available).


In terms of the kinds of actions that the 526 standalone actions during the 2019 fiscal year represent, investment advisory firms and investment company issues represented 36%; securities offerings represented 21%; and issuer reporting/accounting and auditing represented 17%. The remainder of the actions represented a wide variety of other kinds of issues. For example, FCPA cases represented 3% of the standalone actions.


Another interesting detail with respect to the number of enforcement action is the extent to which the agency’s initiative sought to hold individuals accountable. During fiscal 2019, 69% of the agency’s standalone enforcement actions (excluding actions brought as part of the Share Class Initiative, which applied only to entities) involved charges against one or more individuals. If the Share Class Initiative is taken into account, the percentage of actions involving one or more individuals is 57%.


The report notes that the agency was able to maintain these increase activity levels the cessation of activity the agency sustained during the fiscal year due to 35-day day lapse in Congressional appropriations.


The Agency’s Monetary Recoveries

The agency’s overall monetary recoveries were at the highest level in at least the last five years. During fiscal 2019, the agency recovered a total of $4.349 billion, of which $1.101 billion represented penalties and $3.248 billion represented disgorgements. The total amount of recoveries in fiscal 2019 represented about a 10.2% increase over the $3.945 billion in recoveries during fiscal 2018.


As has been the case in the past, a significant portion of the agency’s monetary recoveries during fiscal 2019 were the result of the largest cases. The 5% of cases that involved the largest financial remedies accounted for 70% of the recoveries (compared to 77% in fiscal 2018), while the remaining 95% of cases accounted for 30% of the recoveries (compared to 23% in fiscal 2018).


The Impact of the Kokesh Decision

The report notes that it obtained the elevated levels in disgorgement recoveries during 2019 despite the continued adverse impact to the agency from the U.S. Supreme Court’s June 2017 decision in Kokesh v. SEC. As discussed here, in the Kokesh case the Supreme Court held that SEC disgorgement claims are subject to a five-year statute of limitations. The report states that the Kokesh decision has “had a significant impact, as many securities frauds are complex, well-concealed, and not discovered until investors have been victimized over many years.” The report states further that the Kokesh ruling has caused the agency to forego over $1.1 billion in disgorgements in filed cases. The impact of the Kokesh decision is ever greater than that as the agency has shifted resources to investigation that are the most likely to result in the return of funds to investors. “It is likely,” the report says, “that Kokesh will continue to impact our ability to recover funds for harmed investors in long-running frauds.”


In fact, the agency could face even further challenges in disgorgement cases in the future, beyond those posed by the Kokesh case alone. As discussed here, earlier this month, the U.S. Supreme Court agreed to take up a case in which the Court will consider whether the agency even has the authority to seek and obtain disgorgements. This latest case, Liu v. SEC, will be heard by the Court this term and decided by the end of June 2020. Depending on the outcome, the Liu case could have a significant impact on the SEC’s future ability to obtain disgorgements in enforcement actions.


The Enforcement Division’s report contains a lot of information and is subject to a variety of interpretations. Broc Romanek poses an interesting question on his blog, which is — why does the agency release this report? Romanek says the agency does it for purposes of PR with Congress: “I would argue that some of the motivation is driven by the fact that Congress requires some proof that its money is going to good use. The SEC is not self-funded – and the Senate & House Committees that oversee the SEC need something to hang their hat on. Of course, the stats can’t improve every year – at some point, they have to fall to earth. That’s when the SEC argues that quality is better than quantity – such an argument was made just last year.”


If Romanek is right, the report is not aimed at mere mortals like you and me. It is aimed at Congress and its staff, as a way to justify the agency’s continued (and, the agency might hope) increased future funding.


Romanek might well be right. However, even if he is right, the Enforcement Division’s report is interesting and worth reading in its own right, beyond whatever value it may have as a PR effort by the agency.