SEC Enforcement: A Review of 1Q21 — Part III, Conclusion

This is the final segment of a three part series reviewing and analyzing the actions brought by SEC enforcement during the first quarter of 2021. Part 1, which analyzed the overall number and types of cases brought during the quarter and provided examples of the cases in the largest groups of actions was published on Wednesday (here). Part II, published yesterday, reviewed select cases brought during the quarter that were not in the largest four categories of cases (here). This concluding segment analyzes the quarter, the cases brought, select related issues and suggests the future direction of the program.

The cases discussed above illustrate the primary areas of focus during the first quarter of 2021. More importantly, they depict a broad range of issues that range from the FCPA and internal controls to Regulation FD. Thus, while the number of cases filed is low compared to 2020, the diverse range of actions initiated in 1Q21 suggests that the new senior staff was moving forward and building the program. This is particularly true in view of the significant increase in actions filed in March compared to the earlier two months of the period.

Three other points regarding the Enforcement program should be considered when evaluating its direction for the remainder of the year.

First, in Blaszczak v. U.S., No. 20-5649 (January 11, 2021) the Supreme Court remanded an insider trading case to the Second Circuit for reconsideration. In that case the convictions for insider trading were based on the Sarbanes Oxley Act, Section 1343 and Section 666(a)(1)(A) of Title 18, not Exchange Act Section 10(b). Many believed the Second Circuit decision might suggest an alternative to the court crafted elements of a Section 10(b) insider trading claim.

No so. The High Court remanded the decision on a writ of certiorari to the Second Circuit for reconsider in view of its decision in Kelly v. United States . . .” 590 U.S. — (May 7, 2020). The remand essentially rejects the notion that federal statutes other than Exchange Act Section 10(b) may be used to prosecute insider trading. See Blaszczak v. U.S., 947 F. 3^rd 19 (2^nd Cir. 2019).

Second, the statute of limitations for SEC actions was extended to ten years by Congress at the close of 2020. The adverse rulings the Commission suffered in the Supreme Court’s Kokesh and Liu decisions were legislatively overruled in part by a provision tucked into the National Defense Authorization Act. Section 6501 of the Investigations and Prosecution of Offenses for Violations of the Securities Laws, incorporated in the National Defense Authorization Act, modified Exchange Act Section 21(d), adding language authorizing the agency to obtain disgorgement and reach back 10 years rather than five years. See e.g., Section 6501(a)(7)(Commission can obtain disgorgement); (a)(8)(extends statute of limitations to 10 years); (a)(8)(B)(can seek equitable remedies including an junction, bar, cease and desist order for up to 10 years). Interestingly, while the statute affirms the right of the agency to recover disgorgement without defining the term it says nothing about prejudgment interest, a question that may be litigated in the future.

Finally, just prior to the close of the quarter Gary Gensler was sworn in as the new Chairman of the agency. While Mr. Gensler got off to a bit of a rocky start with his new Enforcement Director resigning after just two weeks, he has a track record for being an aggressive enforcer. That more than suggests that the enforcement program can be expected to build quickly on the broad based approach represented by 1Q21 and continue to increase the number of actions brought in the future.