SEC Enforcement: 1Q22 (Part III)

This is the concluding segment to a three-part series analyzing the enforcement actions filed during the first quarter of this year. The first segment reviewed and discussed the statistics for the quarter and identified the largest categories of cases. The second segment provided examples of the cases in the four largest categories of cases. It also detailed examples of significant cases that were not part of the four largest groups.

At the end of the fourth quarter of last year, the concluding segment of a series analyzing the enforcement cases filed in that period noted that the Commission’s enforcement program continued to struggle with the pandemic. That continues to be true today, although there are signs that perhaps the pandemic in this country may be easing.

Nevertheless, in-person testimony is still not the norm as it was prior to the pandemic. The staff still has not returned to the office, although there are discussions on how and when that may occur. Similarly many law firms and other businesses have not yet returned to the office. Just when normal or a “new normal”, whatever that might be, will emerge is unclear.

Equally clear is the fact that the “back to the future” enforcement approach forecast for the future at the close of the series on 4Q21 has continued. That approach centers on the traditional areas of focus for the Enforcement Division. Those have long been, for example, microcap fraud, investment advisers, offering fraud, insider trading and at times corporate and financial. Indeed, it was this approach that the Enforcement Director discussed in his October 2021 remarks. It is this approach that is reflected in the categories of cases discussed in Parts I & II of this series.

Using a “Back to the Future” approach does not mean that the Division of Enforcement is being complacent or failing to consider emerging areas and trends. The additional cases cited at the end of Part II, which focus on a manipulation case keyed to scalping using Twitter and a sham transaction, are good examples of cases which reflect the reach of the approach today. While the array of significant cases filed outside of those in the largest categories is not nearly as broad as in 1Q21, the actions are significant.

Equally important is the fact that the content of the major categories identified has changed. The best illustration of this fact is the “offering fraud” category. Traditionally, those cases are microcap fraud “pump-and-dump” actions. While a number of those cases were brought during the period, a significant number of “offering fraud” cases were filed based on crypto asserts. Given the popularity of all things digital and crypto, plus the volatility of those assets, there is a significant potential for Main Street investors to jump in and quickly lose all.

Fortunately, the back to the future approach is working – the “new offering fraud cases” based on crypto are being brought. This trend, coupled with the others identified in this series, and the fact that approximately the same number of cases were filed in 1Q22 and in 1Q 21 (depending on how the filing cases discussed earlier are treated) more than demonstrates that back to the future enforcement is having a positive impact in the marketplace.