Published on Oct 16th, 2014 | Posted in Articles

The Securities and Exchange Commission today announced that in fiscal year 2014, new investigative approaches and the innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry.  

In the fiscal year that ended in September, the SEC filed a record 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures.  In FY 2013, the Commission filed 686 enforcement actions and obtained orders totaling $3.4 billion in disgorgement and penalties.  In FY 2012, the Commission filed 734 enforcement actions and obtained orders totaling $3.1 billion in disgorgement and penalties.

The agency’s enforcement actions also included a number of first-ever cases, including actions  involving the market access rule, the “pay-to-play” rule for investment advisers, an emergency action to halt a municipal bond offering, and an action for whistleblower retaliation.

 “Aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets,” said SEC Chair Mary Jo White.  “The innovative use of technology – enhanced use of data and quantitative analysis – was instrumental in detecting misconduct and contributed to the Enforcement Division’s success in bringing quality actions that resulted in stiff monetary sanctions.”

“Time and again this past year, the Division’s staff applied its tremendous energy and talent, uncovered misconduct, and held accountable those who were responsible for wrongdoing,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement actions.”

In addition to the first-ever cases, Chair White noted that the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative was an important effort that began in the last fiscal year.  The SEC reached a settlement with a California school district for charges of misleading bond investors, making it the first settlement under the initiative targeting municipal disclosure. 

Director Ceresney added that, going forward, the Enforcement Division will continue to bring its resources to bear across the entire spectrum of the financial industry, from complex accounting fraud and market structure cases, to investment adviser and municipal securities cases, microcap fraud, insider trading, and cases against gatekeepers.

SEC Enforcement in Fiscal Year 2014

Combatting Financial Fraud and Enhancing Issuer Disclosure

Ensuring Exchanges, Traders and Other Market Participants Operate Fairly

Uncovering Misconduct by Investment Advisers and Investment Companies

  • Brought first-ever action under investment adviser “pay-to-play” rule, charging private equity firm TL Ventures Inc. with providing certain services within two years after an associate made contributions to two political candidates.  Also charged this firm and an affiliated adviser with improperly acting as unregistered investment advisers.
  • Filed first action arising from a focus on fees and expenses charged by private equity firms.  The Commission instituted an action against private equity firm Clean Energy Capital LLC and its president, alleging fraud in the allocation of expenses to the firm’s funds.
  • Charged three investment advisory firms with failures to maintain adequate controls on the custody of customer accounts.  The misconduct at Further Lane Asset Management, GW & Wade, and Knelman Asset Management Group involved failures to maintain client assets with a qualified custodian or to engage an independent public accountant to conduct surprise exams as required by the custody rule.  Also charged the CEO of Further Lane and the CEO and chief compliance officer of Knelman for custody rule and other violations.
  • Pursued other types of wrongdoing by asset managers, and leveraged proactive risk identification initiatives such as the Aberrational Performance Inquiry that uses proprietary analytics to identify hedge funds with suspicious returns.

Increasing Activity in Whistleblower Program

  • The program awarded nine whistleblowers with total awards of approximately $35 million in FY 2014.
  • Brought the first charges ever under new authority to bring anti-retaliation enforcement actions.  The SEC charged hedge fund advisory firm Paradigm Capital Management with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the Commission, and charged the firm’s owner in connection with the principal transactions.
  • Awarded more than $30 million to a whistleblower who provided key original information that led to a successful enforcement action, making it the largest-ever whistleblower award.

Holding Gatekeepers Accountable

  • Held attorneys, accountants and compliance professionals accountable for the important roles they play in the securities industry. 
  • Cases include an action against Ernst & Young LLP relating to auditor independence rules, and against audit firm Sherb & Co. LLP and four of its auditors for their roles in the failed audits of three China-based companies.
  • The Commission charged two Florida-based attorneys for their roles in an offering fraud conducted by a transfer agent, and charged transfer agent Registrar and Transfer Company and its CEO for violations involving improper distributions of billions of shares of unregistered stock.
  • In its fraud case against animal feed company AgFeed Industries Inc., the Commission charged the company’s audit committee chair, who learned of the misconduct in question and failed to take meaningful action to investigate it or disclose it to investors after learning of it.

Rooting Out Insider Trading 

Upholding Disclosure Standards in Municipal Securities

  • Focused on upholding appropriate standards of disclosure in securities issuances by local and state governments.  Cases this year included an emergency court order against a Chicago suburb and its comptroller, featuring the Commission’s first emergency action to halt a municipal bond offering; charges against the state of Kansas; and the first penalty imposed against a municipal issuer.
  • Announced the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, which encourages and rewards self-reporting of certain violations by municipal issuers and underwriters.  Under the MCDC Initiative, these parties may self-report inaccurate statements in bond offerings about their prior compliance with certain continuing disclosure obligations.  In exchange, they may receive settlement terms that reflect credit for their self-reporting.  In the first action to arise from this Initiative, the Commission reached a settlement with a California school district for charges of misleading bond investors.

Cracking Down on Misconduct Involving Complex Financial Instruments

Combatting Foreign Corrupt Practices and Obtaining Highest-Ever Penalties Against Individuals

Demanding Admissions in Important Cases Enhancing Public Accountability

Successful Litigation

  • Obtained a jury verdict against Samuel Wyly and the estate of the late Charles Wyly in a matter alleging a longstanding fraudulent scheme to use offshore trusts to conceal their ownership of tens of millions of shares of public companies.  This was the first litigation in which a defendant testified at trial against his co-defendants after agreeing to settle on terms requiring a written acknowledgement of wrongdoing.  The court issued a preliminary decision under which defendants are required to pay disgorgement of approximately $187 million and substantial prejudgment interest.
  • Obtained a jury verdict against a Minneapolis attorney and entities he controls for fraud in connection with unregistered offerings in a real estate fund.  The court ordered almost $20 million of monetary relief.
  • Obtained a jury verdict finding a Connecticut hedge fund manager liable for fraud after he funneled money to a Ponzi scheme.  The court ordered more than $80 million of monetary relief.
  • Obtained a jury verdict against Massachusetts advisory firm Sage Advisory Group, LLC and its principal in a case charging a scheme to induce the principal’s former brokerage customers to transfer their assets to his new advisory firm.  The court will later determine whether and what relief to impose against the defendants.

Additional data on the SEC’s FY 2014 enforcement results will be available as part of the SEC’s upcoming Agency Financial Report.