SEC Director of the Division of Enforcement (the "Division") Stephanie Avakian highlighted efforts "to combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets."
In a speech before the Institute for Law and Economics at the University of Pennsylvania Law School, Ms. Avakian delineated two fundamental goals of the Division: to (i) bring impactful cases in important areas for the protection of investors, and (ii) strategically adapt to capital market developments in order to operate successfully and efficiently. Ms. Avakian described "substantial, unexpected challenges" that the Division faced during her tenure - in particular, the COVID-19 pandemic and a string of Supreme Court cases affecting the Division's enforcement powers and capacity (see previous coverage regarding Lucia v. SEC, Kokesh v. SEC, and Liu v. SEC).
Ms. Avakian noted the wide variety of cases brought by the Division covering not only traditional issue areas such as Ponzi schemes and financial fraud, incomplete or misleading financial reporting, market participant misconduct (e.g., sales of unsuitable products by broker-dealers), and insider trading, but also novel problems relating to initial coin offerings. Ms. Avakian stressed the SEC's continued, substantial focus on large public companies and financial institutions. In addition, she reported that the Division brought over 2,500 enforcement actions, received $14 billion in financial remedies, returned over $3.3 billion to harmed retail investors, and distributed more than $350 million in whistleblower awards during the tenure of Chair Clayton.
Ms. Avakian also described Division efforts to enhance the efficiency and effectiveness of the enforcement program. She described "new approaches" including: (i) streamlining investigations through targeted requests, (ii) constructing better messaging around the benefits of cooperation, (iii) more practical management of enforcement issues, (iv) the development of new initiatives (e.g., the Share Class Selection Disclosure Initiative, the Teachers' Initiative, the Whistleblower Program, etc.), and (v) inventive remedies. Ms. Avakian also noted changes that have brought "rigor and discipline" to case selection, in part through the establishment of a division of labor between the enforcement program and the SEC's Office of Compliance, Inspections and Examinations.
Commentary
Like Chair Clayton, whose remarks on the SEC's enforcement program immediately preceded hers, Ms. Avakian gave a retrospective of the Division's achievements over the past three years, rather than announce new programs or a shift in priorities.
One notable exception to what otherwise was a well-deserved victory lap was her comment addressing the SEC's approach to civil money penalties in the aftermath of the Supreme Court's decision in Liu v. SEC (covered here). Ms. Avakian confirmed that the SEC will seek higher penalties in cases where it is permitted to do so, in order to make up for the limitations on disgorgement set out in Liu. This is consistent with recent SEC insider trading settlements where, instead of demanding that the defendant pay disgorgement and a "one-time penalty" that equals the disgorgement amount, the SEC has settled cases without any disgorgement but has demanded the defendants pay a "two-time penalty" equal to twice the profits earned by the trading. The net result is that the defendants pay the same amount in financial remedies despite paying nothing in disgorgement. While companies and individuals facing SEC enforcement actions should aggressively argue for limits to any potential disgorgement consistent with Liu, they should be prepared for the SEC to push back and demand higher penalties in response.
Primary Sources
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