In a recent keynote speech, Co-Director of the US Securities and Exchange Commission’s Division of Enforcement Steven Peikin made it clear that the Division has made coronavirus (COVID-19) related enforcement matters a top priority and is dedicating significant time and resources to respond to such issues.
Co-Director Peikin, speaking on May 12 at the virtual Securities Enforcement Forum West 2020 Conference, also discussed the challenges of investigations being undertaken remotely, and noted the Division has seen an increase in whistleblower complaints and investigations.
COVID-19-RELATED ENFORCEMENT MATTERS
Establishment of Coronavirus Steering Committee
In order to ensure a “well-coordinated response” to COVID-19-related matters, Peikin and Co-Director Stephanie Avakian formed a Coronavirus Steering Committee in late March. The committee, composed of two dozen leaders from across the Division, is “focused on identifying key areas of potential market and investor risk” and proactively monitoring “areas of potential misconduct” in light of the current climate. Importantly, the committee is also charged with allocating resources, avoiding duplication of efforts, ensuring consistency, and coordinating the Division’s responses to COVID-19-related matters with other state and federal agencies.
Key COVID-19 Focus Areas
Peikin described several key risk areas related to COVID-19, which we believe the Division will continue to focus on in the near term:
- Microcap: The Division has seen an “explosion” of microcap fraud involving “specious claims” by issuers regarding treatments or vaccines, access to testing material, disaster response capabilities etc. In response, the Coronavirus Steering Committee has been coordinating with, among other groups, the Division’s Microcap Fraud Task Force to “quickly triage [these] matters for potential trading suspensions or enforcement actions.”
- Insider Trading: Given the volatile market conditions, Peikin believes that there are “increased opportunities for insider trading and market manipulation.” As a result, the Division has been monitoring “trading activity around announcements made by issuers in industries particularly impacted by COVID-19.”
- Accounting or Disclosure Fraud: Peikin made it clear that, in the Division’s view, the current climate is ripe for “exposing preexisting accounting or disclosure improprieties, or leading issuers to engage in improper conduct.” In a signal that the Division will continue to leverage technology to drive investigations, Peikin described a “systematic process to review public filings from issuers in highly impacted industries” to identify reporting trends and disclosures that are “out of step” with a company’s peers or its own past performance.
- Redemption Requests: Peikin advised that the Coronavirus Steering Committee continues to monitor investment advisers and investment companies for “failures to honor redemption requests at both private funds and registered investment companies, which could indicate an underlying issue.”
With respect to what the Division has achieved thus far, Peikin focused on two primary benchmarks: trading suspensions and enforcement actions. He also emphasized that the US Securities and Exchange Commission (SEC) has made “significant efforts to communicate” and be transparent with investors regarding these issues and the Division’s actions in light of COVID-19. We expect that this will continue as the Division perceives increased communication to be a quick and effective way to be influential in this crisis.
Trading Suspensions: A Critical Element of the Division’s COVID-19 Response
Referencing the co-directors’ March 23, 2020 statement regarding market integrity, Peikin described recent trading suspensions as the “most visible manifestation” of the Division’s commitment to “ensuring that our Main Street investors are not victims of fraud or illegal practices in these unprecedented market and economic conditions.” He noted that the Division is conducting investigations “on an accelerated basis” into whether a trading suspension is warranted—i.e., whether public information about the issuer is accurate, adequate, or reliable—and where Division staff believe a suspension is warranted, they are requesting “expedited consideration” from the SEC.
Peikin noted that, since February 7, 2020, the SEC has suspended trading for more than 30 issuers due to “questions about the adequacy and accuracy of coronavirus-related information.” It has also suspended trading in at least three microcap issuers “whose names or ticker symbols closely resemble those of unrelated companies whose products are actually relevant to COVID-19 . . . due to concerns about investor confusion.”
In addition to trading suspensions, the Division is actively investigating whether suspended issuers (and others) have engaged in potential fraud or other misconduct. As an example, Peikin cited to the SEC’s recent charges against Praxsyn Corporation and its CEO, following a temporary trading suspension, for allegedly issuing false and misleading press releases “about having, and being able to obtain, large quantities of N95 masks.” This case was filed only 61 days after Praxsyn made its first allegedly fraudulent statement. According to Peikin, we can expect to see many other “investigations of COVID-19-related potential misconduct” proceed with similar swiftness.
RECOGNIZING CHALLENGES OF A REMOTE ENVIRONMENT FOR ALL INVESTIGATIONS
Given the inherent challenges of investigating matters in a remote environment (such as video testimony in lieu of live testimony), Peikin said the Division staff will offer “reasonable accommodations.” Peikin made clear that despite the Division’s prioritization of COVID-19-related matters, its other “priorities also remain in place, and [its] many hundreds of investigations and litigations remain ongoing.” His pointed statement that the Division cannot “permit the crisis to be used as a cover for gamesmanship” when it comes to accommodating scheduling requests by counsel suggests that the Division may pursue subpoena enforcement, if necessary.
Peikin also emphasized that the Division is “keenly focused” on expiring statutes of limitations periods and is dedicated to “protect[ing] the Commission’s claims and remedies in the face of this crisis.” As a result, if a tolling agreement cannot be reached, Peikin remarked that the Commission may authorize an action, knowing that additional evidence will need to be secured later through civil discovery.
INCREASED WHISTLEBLOWER COMPLAINTS AND INVESTIGATIONS
As discussed in our prior LawFlash, Peikin revealed that the Division staff triaged 4,000 tips, complaints, and referrals since mid-March 2020 (a 35% increase over the same period last year). The Division also “opened hundreds of new investigations, many COVID-19 related, but many in other traditional areas” since mid-March.
Peikin then reiterated a point that he made earlier in his remarks: “If history is a guide, this recent market decline and continuing economic stress may well reveal past misconduct, or result in new misconduct.” We believe that, in the current business environment, including employee downsizing, there could be an increase in whistleblower claims submitted to companies and/or the SEC.
PRACTICAL IMPLICATIONS: WHAT COMPANIES AND REGULATED ENTITIES CAN DO NOW
In light of Co-Director Peikin’s insight into the Division’s priorities and focus during these unprecedented times, companies should consider doing the following:
- Ensure disclosures accurately describe the business effects of COVID-19.
- Establish and maintain disciplined financial reporting processes, including robust internal controls, particularly relating to highly judgmental accounting decisions such as goodwill impairments or write-downs.
- Revisit insider trading policies, including procedures surrounding trading windows.
- To the extent that employment or separation agreements contain confidentiality provisions, confirm that such provisions do not violate applicable whistleblower protections.
- If the SEC seeks information in a new or ongoing investigation, consider the following:
- Communicate early with the staff about logistical challenges to gathering documents and witness availability if accommodations are necessary.
- Carefully consider the necessity and extent of any requested tolling agreement.
- For registrants confronting redemption requests, implement a process to handle a higher volume of requests and to review the accuracy and completeness of information provided to investors.
Read Co-Director Peikin’s full keynote address >>