The SEC Speaks 2020: Enforcement Panel Signals Full Speed Ahead Regardless of the Pandemic

Senior officials from the U.S. Securities and Exchange Commission Division of Enforcement convened at a panel as part of the first entirely virtual The SEC Speaks conference to discuss the SEC’s fiscal year 2020 enforcement results and report on enforcement priorities.[1] To no one’s surprise, the impact of the ongoing COVID-19 pandemic on the Enforcement Division’s efforts was a significant part of the discussion.

The message from the Enforcement Division was clear: COVID-19 has not slowed investigations and the Enforcement Staff (Staff) continues moving ahead full throttle with enforcement. In addition to explaining how the Enforcement Division has adapted to the challenges of the pandemic, the panel reported on the Enforcement Division’s focus on issuer reporting and insider trading and its use of innovative in-house technologies to detect potential violations in these areas; a blockbuster year for the SEC’s whistleblower program (including important rulemaking impacting the program); the impact the recent Supreme Court decision in SEC v. Liu is having on investigations and litigation; and notable instances of entities receiving cooperation credit, thus providing a guidepost on what constitutes credit-worthy cooperation.

COVID-19-Related Procedural Changes — Designing the New Normal

By all accounts, the Enforcement Division had a strong year despite the significant challenges presented by the pandemic, which required the vast majority of the Staff to transition to telework from remote locations. SEC Chairman Jay Clayton, in his opening remarks to the virtual conference, reported that in fiscal year 2020, the SEC instituted more than 700 enforcement actions and obtained more than $4 billion in financial remedies (the SEC’s fiscal year ended Sept. 30, 2020).[2] Enforcement Deputy Director Marc Berger reported that since the onset of the pandemic in mid-March, the SEC has brought more than 490 actions; opened 640 new matters (150 of which relate to COVID-19); processed more than 15,000 tips, complaints and referrals (TCRs); and continued to move forward with its open investigations. According to Deputy Director Berger, the 640 matters opened by the SEC between mid-March and the end of September reflect a 7 percent increase from investigations opened during the same period in fiscal year 2019.[3] Consistent with these statistics, a common theme of the panelists was that the Enforcement Division is operating effectively working remotely. Given this success, the Enforcement Division also is using the pandemic-related challenges to examine its procedures and look for ways to increase efficiency.

Quick Reaction: Early Identification of COVID-19-Related Areas of Concern

Enforcement Director Stephanie Avakian and Deputy Director Berger discussed the Enforcement Division’s prompt organization of a “Coronavirus Steering Committee” to assist the Staff in identifying areas of high risk for potential fraud and investor harm arising from the pandemic and to coordinate investigative and enforcement efforts within the Enforcement Division and across the SEC. These “pandemic-related areas of concern” include:

(i) insider trader and market manipulation (due to pandemic-related market volatility and market-moving announcements by corporate issuers);

(ii) monitoring for failure by investment advisers or investment companies to honor redemption requests; and

(iii) the impact of the pandemic on the performance of complex structured products and improper marketing and sale of those products to retail investors.

In addition to proactively identifying high-risk areas, the Enforcement Division’s efforts have focused on identifying potential pandemic-related issuer reporting violations. In this regard, Deputy Director Berger emphasized that the Enforcement Division was closely monitoring issuers’ financial reporting to identify whether issuers might be using the pandemic to mask pre-existing weaknesses or weaknesses that emerged as a result of the pandemic, particularly in areas of judgment such as impairment, debt modifications and going concern opinions. According to Chairman Clayton, the Enforcement Division’s actions related to the pandemic to date include three dozen trading suspensions and six COVID-19-related fraud actions.[4]

With respect to insider trading, Deputy Director Berger emphasized a March 23, 2020, Statement Regarding Market Integrity issued by then-Co-Directors Avakian and Steven Peikin. As McGuireWoods previously reported, through this Statement, the Enforcement Division: (i) reminded market participants — corporate issuers, broker-dealers, investment advisers and other registrants — of the importance of controlling for the potential receipt and misuse of material nonpublic information (MNPI) in light of the unprecedented market and economic conditions caused by COVID-19; and (ii) cautioned that trading in a company’s securities on the basis of MNPI (insider trading), or the improper dissemination of MNPI, may violate the anti-fraud provisions of the federal securities laws.

Fine-Tuning Enforcement

The panelists emphasized that the Enforcement Division continues to prioritize increasing efficiency. Director Avakian noted that, even before COVID-19, the Enforcement Division was working to (i) increase staffing on appropriate matters; (ii) triage new matters to decide whether the merits are worth pursuing and/or to narrow issues at the outset of the investigation; (iii) make more targeted information requests; (iv) leverage cooperation, specifically related to internal investigations companies already may be undertaking; and (v) enforce tighter deadlines during the post-investigation stage (both as to defense counsel and internally).

Building on these efforts, one of the Enforcement Division’s priorities in the COVID-19 era is to continue to find ways to conduct more streamlined, targeted and accelerated investigations while also working collaboratively with entities, individuals and their counsel to accommodate reasonable pandemic-related concerns. Associate Director Anita Bandy mentioned that the Enforcement Division is employing a targeted approach to its factual development process, including: (i) taking the relatively rare step of issuing interrogatory-like requests to parties under investigation; (ii) seeking documents and other information from third parties such as auditors; and (iii) receiving attorney proffers at earlier points in the investigation to allow the Enforcement Division to narrow follow-up requests. And, despite COVID-19 disrupting in-person contact, the Enforcement Division has effectively pivoted to conducting witness interviews, taking testimony and depositions, and holding Wells meetings, by videoconference.

One particularly challenging investigative process has been the taking of witness testimony. Here, Associate Director Bandy stated that the Staff has been flexible with scheduling meetings and testimony, has prepared external guidance on using videoconference platforms, and encourages parties to schedule test sessions with the Staff in advance of meetings or testimony to familiarize themselves with the technology before those meetings or testimony. Associate Director Bandy reported that most witnesses have agreed to sit for remote testimony. As for the outliers, she noted that an individual’s refusal to sit for remote testimony will not delay the Staff’s investigation. Rather, the Enforcement Division might advance its investigation without the individual’s testimony and might even proceed with a Wells notice (where the totality of the record warrants it) and then take the individual’s deposition in civil litigation, where federal courts are routinely authorizing video depositions.

With regard to Wells meetings, multiple panelists assured market participants that the Enforcement Division continues to take the longstanding Wells process extremely seriously and is undertaking to ensure that Wells meetings can continue electronically. Director Avakian noted that conducting virtual Wells meetings has actually served to promote investigative efficiencies by allowing the Enforcement Division to: (i) set meetings sooner, given that they do not have to accommodate travel schedules; (ii) schedule related meetings (i.e., for the at-issue company and the related individuals) closer in time; and (iii) often hold multiple Wells meetings in a single day.

Litigation, Including Trials, Is Proceeding

Like investigations, Chief Litigation Counsel Bridget Fitzpatrick reported that litigation is also moving forward with only minor delays through remote depositions and virtual bench trials, highlighting that, despite a lull in trials between March and June 2020 as a result of the pandemic, in July 2020, the SEC conducted its first bench trial post-COVID-19 outbreak.[5] In the Staff’s view, the technological logistics for the trial worked, and the Enforcement Division expects to see more trials in the near future.

Chief Counsel Fitzpatrick also cited a Sept. 16, 2020, order out of the U.S. District Court for the District of Massachusetts, which provides guidance on the logistics for remote depositions.[6] In addition to reflecting standard best practices for videoconferences (for example, mute the microphone when not speaking), the protocols address:

(i) concerns about recording capabilities (only the official court reporter and videographer are permitted to create an audio or visual recording);

(ii) the identification and use of exhibits (copies provided two days in advance and questioning counsel to display all portions reasonably requested);

(iii) rules regarding who may be physically present with the deponent (no party or counsel for any party other than counsel for the deponent);

(iv) what happens if any lead counsel becomes disconnected (immediate suspension of deposition which will not affect the seven-hour limit); and

(v) concerns about deponents’ access to information (prohibits deponent from viewing documents or data not first identified on the record and prohibiting use of “chat” features or other communications with the deponent during the taking of the deposition).

Financial Fraud and Technology — Continued Use of In-House Data Analytics to Detect and Combat Fraud

Associate Director Bandy reported on the Enforcement Division’s continued efforts to use data analytic tools to detect fraud in enforcement priority areas of insider trading and financial reporting and disclosures. The SEC has long used data analytics to detect insider trading by identifying improbably successful trading patterns, and Associate Director Bandy stated that the Staff has continued to use these techniques to identify increasingly complex insider trading schemes that often have an international dimension.[7] Similarly, the Enforcement Division (together with SEC Staff Accountants) has long used data analytics to identify fraud by analyzing issuers’ SEC reporting data and comparing them to their peers.

Associate Director Bandy pointed to the Enforcement Division’s EPS Initiative, specifically referencing recent enforcement actions resulting from this initiative as examples of how the division is using risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, improper earnings management practices.

Associate Director Bandy also stated that the Staff is using data analytics in executive compensation and proxy disclosure cases, where the analytics identified anomalous disclosures and trends in an issuer’s financial statements. She identified a recent settlement with a company for failing to disclose more than $1 million in perquisites and personal benefits paid to its executives as an example of another case where the Staff identified the violation using data analytics tools.

The SEC is also focused on the use of non-GAAP metrics and misstatements of key performance metrics. Examples of these cases include the SEC’s recent settlements against: (1) Valeant Pharmaceuticals and three of its former executives alleging improper revenue recognition when announcing certain GAAP and non-GAAP measures; and (2) HP for allegedly failing to disclose material information regarding its print supplies channel inventory management and sales practices. Associate Director Bandy also noted the SEC’s recent filing of a complaint against Revolution Lighting alleging that it improperly recognized revenues for sales.

Record Year for the Whistleblower Program

Fiscal year 2020 was the SEC whistleblower program’s most successful year ever, with 39 individual awards of approximately $175 million. This is more than in any prior fiscal year and a 200 percent increase over last year. To put the success of this program in perspective, the fiscal year 2020 awards represent one-third of both the number of individual awards and amount awarded since the program’s inception in 2011. Further, in fiscal year 2020, the Enforcement Division obtained relief totaling more than $765 million in enforcement actions arising from whistleblower tips.

In September 2020, the SEC finalized rule amendments that allow whistleblowers to receive the statutory maximum percentage award where the award is $5 million or less and also to improve claim processing efficiency to ensure whistleblowers receive awards on a more timely basis. See 17 C.F.R. §§ 240, 249, RIN 3235-AM11 (Sept. 23, 2020). While the amendments ensure whistleblowers benefit from the maximum percentage used for an award under $5 million, for larger awards the amendments give the SEC discretion to consider the dollar amount, rather than the statutory maximum percentage, which has the potential to depress higher-dollar awards.

According to Director Avakian, the key takeaway for companies is that they must take whistleblowers seriously — indeed, 85 percent of awards in fiscal year 2020 were in cases that originated with an internal report. Director Avakian further cautioned companies against identifying whistleblowers and emphasized that companies must not retaliate against them.

Downstream of Liu — Navigating Disgorgement

Enforcement Division Chief Counsel Joseph Brenner and Chief Litigation Counsel Fitzpatrick discussed the U.S. Supreme Court’s recent decision in Liu v. SEC and how the division will approach disgorgement going forward. As McGuireWoods previously reported, the Supreme Court held in Liu that Section 21(d)(5) of the Securities Exchange Act of 1934 authorized the SEC to seek disgorgement in federal court litigation so long as the disgorgement sought was “properly tailored” to be within the bounds of equitable relief, as traditionally understood. The Supreme Court ruled that disgorgement must be limited to “net profits” that accrued to the defendants responsible for perpetrating the unlawful conduct and must be awarded for the benefit of the victims of the unlawful conduct. However, the ruling left open three critical issues for further determination by the lower courts: (1) how to determine what constitutes the “net profits” of a fraudulent scheme and, in particular, what legitimate expenses, if any, should be deducted from the net profits; (2) whether disgorged funds should be returned to victims in every instance or whether they could be deposited with the Treasury; and (3) under what circumstances a defendant could be ordered to disgorge another’s ill-gotten gains.

Chief Counsel Brenner offered some guidelines for counsel seeking to take advantage of Liu’s holding that legitimate expenses should be deducted from the amount of potential disgorgement sought in an enforcement action. Chief Counsel Brenner noted that the Enforcement Division would be on the lookout for “expenses” that in its view were just wrongful gains under another name, such as expenses that furthered the scheme, or deductions for the defendant’s personal services to the fraudulent enterprise. If defense counsel believe there are legitimate expenses that should be deducted from a potential disgorgement amount, Chief Counsel Brenner recommended counsel to consider the following questions:

  1. What makes the expense legitimate within Liu’s framework — in particular, did the expense provide actual value to investors, was the expense consistent with how investors understood their money would be used, or is the expense really just disguised profits?

  2. If the expenses are legitimate, how closely were those expenses tied to the unlawful profits? Thus, the Enforcement Division may not view all “legitimate” expenses as deductible if they were in furtherance of the violation.

  3. What is the right amount of the offset?

With respect to the third point, Chief Counsel Brenner stated that, in the Enforcement Division’s view, counsel must come prepared to demonstrate both the entitlement to a deduction for a legitimate expense and its amount. Based on practical experience gained since Liu, the Staff stated that counsel can make a more persuasive case for a reduction from the full amount of disgorgement by doing the work up front to support both the basis for the deductible legitimate expense and, critically, its amount. In the Staff’s view, it is not sufficient for counsel to claim it is too difficult or resource-intensive to quantify the expense, or to claim that the analysis supporting a request was work product that the Staff could not review.

Because the issues are fact-intensive, Chief Counsel Fitzgerald stated that the Staff intends to make a complete record during the investigation or in civil discovery on the three issues in Liu to support a request for disgorgement. In particular, the Enforcement Division will look to develop a record on the availability and proper amount of disgorgement, including whether a distribution to investors is feasible (thus perhaps paving the way for a distribution to the Treasury) before the remedy phase of proceedings.

While Liu may limit the amount of disgorgement the SEC can obtain in the future, Director Avakian suggested that the Enforcement Division might adjust the mix of penalties and disgorgement so defendants would end up paying the same amount of money. Director Avakian expected that the SEC might seek higher penalties (within the bounds of the statute) where its ability to seek disgorgement might be curtailed compared to a pre-Liu regime.

Staff Emphasizes (Again) the Role of Cooperation

The panelists stated that the Enforcement Division continues to credit cooperation that substantially enhances the quality and efficiency of the Staff’s investigation. The Staff continues to consider the traditional Seaboard factors[8] when evaluating whether a firm’s cooperation and efforts to be transparent in an investigation are credit-worthy. Associate Director Bandy highlighted a recent settlement with BMW, where the SEC charged that the company made false and misleading disclosures regarding its U.S. sales, as an example of cooperation that the Staff found meaningful. The SEC brought the action against BMW within 10 months of starting the investigation, which was possible because BMW quickly produced documents and witnesses (some of which were located in Germany) in the midst of a global pandemic. As a result, BMW was charged with a negligence-based fraud violation and received a reduced penalty. Associate Director Bandy also noted the SEC’s recent settlement with Transamerica, which self-reported its conduct and adopted remedial measures, leading the SEC to impose no monetary penalty against the company.

Looking Forward: What to Expect in Enforcement

Market participants and their counsel can expect that the innovative and efficient investigative techniques the Enforcement Division has adopted in response to COVID-19 will become standard operating procedure. The Staff’s “full throttle” approach will require counsel to be more nimble and proactive in responding to the Enforcement Division’s requests, which in turn will create a premium on meaningful cooperation.

Expect to see the continued use of big data in enforcement actions, particularly in key programmatic areas of insider trading and financial reporting, and in the near term, a keen focus on issuer disclosures related to the impact of the pandemic on business operations and financial performance. Market participants can expect that the Staff itself will deploy its analytical tools rather than having the companies undertake those processing and data-harvesting efforts and provide the results to the Staff. Expect also to see the SEC renew its focus on companies’ interactions with whistleblowers, and to aggressively pursue any matters involving retaliation against whistleblowers or any other efforts to impede individuals from communicating directly with the Staff about possible securities law violations.

Finally, as predicted, the Supreme Court’s shakeup of disgorgement in Liu will significantly impact investigations and litigation. Here, the Staff, companies and their counsel will need to be sure to build a sufficient record during investigations on the issue of “net profits.” Companies and counsel can expect more document and information requests from the Staff, having to produce additional witnesses for testimony, and perhaps even engaging expert testimony on business and operational issues to arrive at “properly tailored” disgorgement as required by the Supreme Court.


1. The panelists for the Enforcement Division were:

  • Stephanie Avakian, Director;
  • Marc P. Berger, Deputy Director;
  • Joseph K. Brenner, Chief Counsel;
  • Bridget Fitzpatrick, Chief Litigation Counsel;
  • Eric Bustillo, Miami Regional Director; and
  • Anita Bandy, Associate Director, Home Office.

2. The fiscal year 2020 enforcement results represent a downtick in the number of enforcement actions from fiscal year 2019; however the level of financial relief obtained by the SEC remained about the same. See (reporting 862 enforcement actions and financial relief totaling more than $4.3 billion).

3. Also according to Deputy Director Berger, the 15,000 TCRs represent a substantial increase during the same period year over year.

4. The SEC has brought COVID-19-related fraud charges against: (i) Praxsyn Corp. and its CEO for allegedly issuing false and misleading press releases claiming the company was able to acquire and supply large quantities of N95 or similar masks to protect wearers from the COVID-19 virus; (ii) Applied BioSciences Corp. for misrepresentations in a March 31 press release regarding the availability of at-home COVID-19 tests; (iii) Turbo Global Partners, Inc. for misrepresentations in a press release regarding a purported partnership “to sell thermal scanning equipment to detect individuals with fevers”; (iv) a penny stock trader for “conducting a fraudulent pump-and-dump scheme in the stock of a biotechnology company by making hundreds of misleading statements in an online investment forum, including a false assertion that the company had developed an ‘approved’ COVID-19 blood test”; (v) the President and CEO of ArrayIt Corporation “for making allegedly false and misleading statements concerning Array; its development of a COVID-19 blood test and its intention to resolve its delinquency in filing required periodic reports with the SEC”; and (vi) “individuals and six offshore entities for an alleged fraudulent scheme that generated more than $25 million from illegal sales of multiple microcap companies’ stock . . . [which] were often boosted by promotional campaigns that, in some instances, included false and misleading information designed to fraudulently capitalize on the COVID-19 pandemic.”

5. SEC v. Paulsen, No. 18-cv-6718 (S.D.N.Y.).

6. SEC v. Commonwealth Equity Services, LLC d/b/a Commonwealth Financial Network, No. 19-cv-11655 (D. Mass. Sept. 16, 2020) (Dkt. No. 46).

7. Associate Director Bandy highlighted insider trading cases the SEC brought in October 2019 against two London bankers, SEC v. Taylor et al., 19-cv-09744 (S.D.N.Y. Oct. 22, 2019) and in March 2020 against two Israeli citizens who were residing in Switzerland, see SEC v. Feingold, et al., 20-cv-01881 (S.D.N.Y. Mar. 3, 2020), as examples of the kinds of complex, international frauds the Enforcement Division detects. Both cases originated from the SEC’s Market Abuse Unit’s Analysis and Detection Center.

8. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Securities Exchange Act Release No. 44969 (Oct. 23, 2001) (the “Seaboard Report”), available at The Seaboard Report is incorporated into the SEC Enforcement Manual at Section 6.1.2. Securities and Exchange Commission Division of Enforcement, Enforcement Manual § 6.1.2, available at

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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