by Anat Carmy-Wiechman, Giovanni Patti, and Peter Robau
In a new report (PDF: 1.02 MB), the NYU Pollack Center for Law & Business, in collaboration with Cornerstone Research, investigated recent trends in enforcement via the Securities Enforcement Empirical Database (SEED). Below, we highlight some of the key findings.
The SEC Filed 61 Enforcement Actions Against Public Companies and Subsidiaries in FY 2020
SEED currently provides data for SEC actions initiated against public companies traded on major U.S. exchanges and their subsidiaries from October 1, 2009 through the present.[1] SEED found that the SEC brought 61 new actions against public companies and subsidiaries (out of a total of 405 independent actions) in FY 2020, representing the lowest number since FY 2014 and a 36% decrease from the record high number of 95 actions in FY 2019 that included 26 actions related to the Share Class Initiative. Notably, 18 of the 61 actions were filed in the last two weeks of the SEC’s fiscal year.
The above figure illustrates the number of SEC actions against public companies and subsidiaries in each fiscal year 2010 to 2020.
“Issuer Reporting and Disclosure” Reemerged As the Most Common Allegation Type
SEED found that Issuer Reporting and Disclosure represented the most common allegation type in FY 2020 for a total of 30 actions, accounting for nearly half (49%) of the total actions against public companies and subsidiaries. As noted in the SEED report, the 30 Issuer Reporting and Disclosure actions represented the highest number of any fiscal year in SEED. SEED also found that 2 of the 30 Issuer Reporting and Disclosure actions stemmed from the Earnings Per Share (EPS) initiative which, as explained by the SEC, “utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.” As reflected in the below chart, the second most common allegation in FY 2020 involved Investment Adviser/Investment Company allegations (accounting for 23% of the actions), which in combination with Issuer Reporting and Disclosure allegations accounted for more than 70% of actions in FY 2020. SEED also found that the SEC filed only 7 Foreign Corrupt Practices Act actions in FY 2020, representing the lowest level since FY 2014 (7 actions). Finally, SEED found that the SEC filed only 6 Broker Dealer actions, representing the lowest level since FY 2014 (0 actions).
The above figure contains a heat map of the percentages of SEC actions against public companies and subsidiaries for each allegation type from fiscal year 2010 to fiscal year 2020.
The SEC Brought 89% of Actions Against Public Companies and Subsidiaries As Administrative Proceedings
SEED found that the SEC brought 11% of actions against public companies and subsidiaries as civil actions in FY 2020, consistent with the average of 10% over the last five fiscal years. SEED also found that Issuer Reporting and Disclosure actions were more frequently brought as civil actions than the overall average. Finally, SEED found that prior to FY 2019 all 70 actions with Investment Adviser/Investment Company allegations were brought as administrative proceedings, while, during fiscal years 2019-2020, there was 1 action (of 49) that was brought as civil action.
The above figure illustrates the percentages of civil actions and administrative proceedings against public companies and subsidiaries for each fiscal year 2010 to 2020.
The Finance, Insurance, and Real Estate Industry Remains the Most Targeted Industry Division
SEED classifies public companies and parent companies of subsidiaries according to the Standard Industrial Classification (SIC) code. This methodology enables us to look at the number of actions that the SEC brings in different industry divisions. SEED found that, in FY 2020, 46% of all actions targeted the Finance, Insurance, and Real Estate industry, similar to the average over the prior 10 fiscal years. Notably, Commercial Banks were targeted in only 11 actions in FY 2020, the lowest number since FY 2014. SEED also found that the combined share of FY 2020 actions targeting defendants in either the Manufacturing or Services industries reached 41%, the highest combined share for these two industries since FY 2017. Moreover, Issuer Reporting and Disclosure allegations against defendants in both the Manufacturing and Services industries increased.
The above figure contains a heat map of the percentages of SEC actions against public companies and subsidiaries for each SIC industry division from fiscal year 2010 to fiscal year 2020.
SEC Settlements: 62% of Defendants Noted Cooperation with the SEC
Since 2001, the SEC has acknowledged cooperation by defendants. The Commission considers four broad factors when negotiating a settlement with a cooperating defendant: “self-policing, self-reporting, remediation, and cooperation.” SEED measures the latter three factors – as an indication of cooperation by a public company or subsidiary defendant with the SEC – based on whether the SEC acknowledges voluntary reporting or explicitly mentions “remediation” or “cooperation” by the defendant in the settlement announcement.
Using this methodology, SEED found that, in FY 2020, 62% of public company and subsidiary defendants noted cooperation in settlements with the SEC. This percentage represents a decrease from the record high of 77% in FY 2019, which included the Share Class Initiative (in which all defendants cooperated and self-reported). However, SEED found that cooperation in FY 2020 remained above the average of 54% from FY 2020 to FY 2019. In addition, SEED found that, in FY 2020, 92% of settlements involved monetary penalties, consistent with the average over the past six fiscal years of 94%.
The above figure illustrates, for each fiscal year from 2010 to 2020, the percentages of SEC actions against public companies and subsidiaries that noted: cooperation and monetary settlement; cooperation and no monetary settlement; no cooperation and monetary settlement; no cooperation and no monetary settlement.
SEC Settlements: Monetary Settlements Totaled $1.6 Billion in FY 2020
SEED tracks all monetary settlements imposed by the SEC on all type of defendants (including individuals and other entities) in actions against public companies and subsidiaries. SEED found that the total amount of monetary settlements in actions against public companies and subsidiaries was $1.6 billion in FY 2020. This amount is consistent with total monetary settlements of $1.5 billion in FY 2019 and average total monetary settlements of $1.5 billion for the previous fiscal years tracked by SEED (FY 2010 – FY 2019). SEED also found that the largest monetary settlement imposed in a public company or subsidiary action in FY 2020 was $540 million, the third-highest maximum in a fiscal year in SEED.
The above figure illustrates the average monetary settlement and the median monetary settlement in each fiscal year 2010 to 2020.
SEC Settlements: Disgorgement and Prejudgment Interest in Monetary Settlements Totaled $878 Million
SEED found that disgorgement and prejudgment interest imposed in actions against public companies and subsidiaries totaled $878 million in FY 2020, which is 54% of the total monetary settlement amount of $1.6 billion imposed on public companies and subsidiaries. This was slightly higher than the average of 52% from the previous fiscal years tracked by SEED (FY 2010 – FY 2019).
SEED also found that the disgorgement and prejudgment interest for civil actions totaled $565 million in FY 2020 (representing 35% of total monetary settlements, and 64% of total disgorgement and prejudgment interest). As Professor Stephen Choi noted in the report: “Disgorgement was a major component of monetary settlements in FY 2020. The SEC imposed $565 million in disgorgement and prejudgment interest for civil actions, the highest amount in a fiscal year since the start of the SEED database in 2010.”
The above figure illustrates the percentages of civil penalties and other monetary settlements vs. disgorgement and prejudgment interest against public companies and subsidiaries for each fiscal year 2010 to 2020.
Footnotes
[1] We define public companies as those that traded on a major U.S. exchange as identified by the Center for Research in Security Prices (CRSP) at the time the enforcement action was initiated, or otherwise within the five-year period preceding the initiation.
Anat Carmy-Wiechman is the Associate Director and a past Wagner Fellow at the NYU Pollack Center for Law & Business. Giovanni Patti is the Head of Research for the Securities Enforcement Empirical Database (SEED) at the NYU Pollack Center for Law & Business. Peter Robau is the Wagner Fellow at the NYU Pollack Center for Law & Business.
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