The Nutter Securities Enforcement Update is a periodic update of noteworthy recent securities enforcement activity, settlements, decisions, and charges. We provide brief summaries that highlight recent enforcement action filings and developments to help identify enforcement trends, changes in the law, new theories, and new areas of enforcement focus. For more information on these cases or about how they may impact you, contact your Nutter attorney.

SEC Speaks 2024: Beyond the Headlines

The annual SEC Speaks conference generates headlines on topics of mainstream interest. Beyond the headlines, comments by SEC staffers can give securities industry practitioners insight into how to avoid Enforcement Division scrutiny and how to navigate an investigation when the Enforcement Division comes calling. This NSEU Client Alert notes key takeaways from the Staff’s remarks.

Off-Channel Communications Settlements – Factors for Assessing Penalties

The SEC has collected about $1.7 billion in penalties in settlements of off-channel communications cases and has not publicly disclosed how it calculates a penalty in each case. To determine the penalty in a case, the Staff stated that it conducts an individualized assessment weighing the five factors:

(1) the size of the registrant and the amount of penalty that would be large enough to serve as a deterrent, considering revenues, number of registered professionals, number of people who had off-channel communications, and number of off-channel communications;

(2) the registrant’s efforts to comply with the record-keeping rules, including timely adoption of available technology solutions;

(3) comparison to penalties in other off-channel cases;

(4) self-reporting, which the Staff described as “the most significant factor,” and

(5) cooperation with the Staff aside from self-reporting.

Adviser Marketing Rule Settlements – Factors for Assessing Penalties

In September 2023, the SEC announced charges against nine RIAs for violating the new Advisers Act Marketing Rule, Rule 206(4)-1 with penalties ranging from $50,000 to $175,000. At SEC Speaks, the Staff stated that to determine the penalty in a particular case, it conducts an individualized assessment weighing four factors:

(1) the RIA’s regulatory assets under management;

(2) the RIA’s disciplinary history;

(3) timeliness of remediating the violative marketing materials;

(4) self-reporting and cooperation.

Cooperation with Investigations – How to Get Credit

The Staff’s views have evolved on what an investigation target can do to maximize its chances of getting credit for cooperating with the Staff. The Seaboard 21(a) Report remains the law-of-the-land and the Staff continues to reference its four pillars of “cooperation”­: self-reporting, self-policing, remediation, and cooperation. In practice, the Staff identified five practical steps that it considers to constitute cooperation worthy of meaningful credit:

(1) providing documents to the Staff that it cannot compel;

(2) conducting an internal investigation and sharing both periodic updates and conclusions with the Staff;

(3) waiving the attorney-client privilege;

(4) translating foreign language documents for the Staff; and

(5) providing financial analyses and summaries of documents and information to the Staff.

The Staff identified six cases in which no penalty was assessed because of the company’s cooperation:

In the Matter of Cloopen Group Holding, Limited, Rel. 34-99483, AAER 4487 (Feb. 6, 2024) – No penalty was assessed in a matter involving conduct outside the United States when the company: (i) self-reported accounting violations; (ii) provided the Staff with summaries of interviews of witnesses located in China; (iii) translated key documents originally written in Chinese; and (iv) implemented prompt remedial measures, including firing the wrongdoers and restructuring.

In the Matter of GTT Communications, Inc., Rel. 33-11241, 34-98491, AAER-4459 (Sept. 25, 2023) – No penalty was assessed in an accounting misstatement case when the company: (i) self-reported the violation; (ii) provided multiple presentations of findings from its internal investigation, including before it had reached final conclusions; (iii) identified key documents and witnesses; (iv) promptly made documents and witnesses available; (v) facilitated testimony from former employees; and (vi) voluntarily undertook remedial measures, including replacing personnel, replacing its auditor, and overhauling its relevant accounting policies and procedures.

In the Matter of View, Inc., Rel. 33-11208, 34-97830 (July 3, 2023) – No penalty was assessed in an accounting misstatement case when the company: (i) provided the Staff with detailed explanations and summaries of the facts; (ii) provided detailed financial analyses from an outside consulting firm; (iii) identified key documents and witnesses the Staff had not yet identified; (iv) made witnesses available quickly, including from overseas; (v) promptly followed up Staff requests without requiring subpoenas, including obtaining information from various employees, providing additional documents, and explaining accounting and finance issues; and (vi) undertook prompt remedial measures, including implementing new controls, hiring new accounting personnel, and implementing enhanced training.

In the Matter of Stanley Black & Decker, Inc., Rel. 34-97761, AAER-4422 (June 20, 2023) – No penalty was assessed against the company in a case about undisclosed executive perks when the company: (i) self-reported; (ii) formed a special committee of independent directors that retained outside counsel to conduct an internal investigation; (iii) provided the Staff with facts developed through the internal investigation and compilations of relevant documents, information, and data; and (iii) implemented remedial measures to prevent future similar violations.

In the Matter of Stephen J. Easterbrook and McDonald’s Corporation, Rel. 33-11144, 34-96610 (Jan. 9, 2023) – No penalty was assessed against the company in a case about the company’s failure to disclose the full reasons for its CEO’s termination when the company: (i) voluntarily provided relevant documents and testimonial information that was otherwise not required to be produced in response to the Staff’s requests; (ii) briefed the Staff about critical facts and key documents; (iii) promptly made the company’s officers, directors, and other senior managers available to the Staff; and (iv) took affirmative remedial steps by suing the former CEO, seeking and ultimately recovering the compensation that had been paid under a separation agreement.

In the Matter of Cronos Group, Inc., Rel. 33-11123, 34-96137, AAER 4357 (Oct. 24, 2022) – No penalty was assessed in accounting misstatement case when the company: (i) had an effective whistleblower procedure that led to the discovery of the issue; (ii) self-reported prior to the completion of an internal investigation and then self-reported again when additional issues were discovered; (iii) provided timely updates to the Staff and voluntarily produced documents; (iv) facilitated interviews of current and former personnel residing outside of the United States; and (v) remediated, including implementing new controls and new training and hiring new accounting staff.

Whistleblower Retaliation

The SEC has aggressively enforced the prohibitions on deterring whistleblower activity. The Staff will be looking for confidentiality provisions that lack carve-outs for contact with regulators, attestations regarding prior regulatory contact, requirements that employees give notice to a company of any regulatory contact, and evidence that company management supports (or does not support) whistleblowers. Three recent cases illustrate the SEC’s approach:

In the Matter of J.P. Morgan Securities LLC, Rel. 34-99344, IA-6530 (Jan. 16, 2024) – In a settled matter, the SEC charged that, from March 2020 through July 2023, J.P. Morgan Securities LLC (“JPMS”) regularly asked retail clients to sign confidential release agreements if they had been issued a credit or settlement from the firm of more than $1,000. The agreements required the clients to agree to confidentiality about the settlement, all underlying facts relating to the settlement, and all information relating to the account at issue. In addition, even though the agreements permitted clients to respond to SEC inquiries, they did not permit clients to voluntarily contact the SEC. Charges under Exchange Act Rule 21F-17(a). Remedies included cease-and-desist, censure, and a civil monetary penalty of $18m.

In the Matter of D.E. Shaw & Co. L.P., Rel. 34-98641, IA-6452 (Sept. 29, 2023) – In a settled matter, an RIA was charged with violating whistleblower protection rules by requiring current employees and departing employees to agree to confidentiality provisions that did not include a carve-out for voluntary communications with regulators. Charges under Exchange Act Rule 21F-17(a). Remedies included a civil penalty of $10m.

In the Matter of Gaia, Inc., et al., Rel. 33-11196, 34-97548 (May 23, 2023) – In a settled matter, a public company and its chief financial officer were charged with retaliating against a whistleblower and with including language in employee severance agreements requiring waiver of their rights to monetary incentives intended to encourage direct communication with the SEC about possible securities law violations. Charges under Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a) and 21F(h) and Rules 13a-11, 12b-20, and 21F-17. Remedies included cease-and-desist and civil penalties of $2m (entity) and $50k (individual).

(NSEU 24-06)

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.