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SEC’s Penalties Are Working to Deter Fraud, Agency Looks to Continue Enforcement Trends in 2024

In late 2023, Director of the Securities and Exchange Commission’s Enforcement Division Gurbir Grewal said the agency’s tougher penalties imposed in recent years are working to deter securities fraud. In an interview with The Wall Street Journal’s Mengqi Sun, Grewal said the SEC’s higher fines are effective, noting, “That was a conscious effort over the last two years to make sure the penalties we were seeking were having that deterrent effect,” and that the penalties were more than the cost of doing business.   

Record-Breaking SEC Penalties and Actions in 2023

The agency has brought a record number of actions under Grewal as director. In the year ended Sept. 30, 2023, the SEC imposed financial penalties of about $5 billion through 784 enforcement actions. That is second only to the record set the year before at $6.44 billion in monetary penalties through 760 enforcement actions.  

Grewal promised when he took the job that tougher fines for wrongdoing were coming, saying, “We can’t arrest them. We can get them out of the industry.” 

Grewel also added that in the future, the SEC will be recalibrating penalties to identify and reward efforts at cooperation and remediation by offenders.  

The interview also delved into recent trends in areas of SEC enforcement, such as the agency’s efforts to enforce certain companies’ responsibilities to maintain and preserve electronic communications, and fraud perpetrated by cryptocurrency companies.  

Revamping Electronic Communication Compliance

Broker-dealers, exchanges, and certain other types of entities are subject to record-keeping requirements to maintain electronic communications in specific formats. Since December 2021, the SEC has imposed a total of more than $1.5 billion in fines against 40 firms for failing to do so and in many instances communicating by “off-channel” means such as WhatsApp, Signal, and other personal chat applications.  Grewal said, These cases started because we weren’t able to effectively investigate misconduct in the market….It was a cultural problem that the tone at the top was such that you had senior folks directing subordinates to deliberately move communications off-channel.” 

“That’s all changed,” said Grewal.  He maintains that the SEC’s enforcement efforts have served as a warning to companies to preserve electronic communications. “I’d call that impacting positive behavior in the markets” he stated, and added, “That’s a real improvement as to where we were over two years ago. I haven’t seen an initiative like this that has positively impacted the behaviors of so many registrants.”  

Looking forward, Grewal said, “[M]y hope is that there’s increased compliance and more self-reporting and that we’ll see this [enforcement effort] slow down. And in those cases where we do ultimately bring [enforcement actions], I think you can expect to see higher penalties if people haven’t cleaned up.”   

Prioritizing Cryptocurrency Enforcement in the SEC’s Agenda

The SEC looks to continue to make enforcement of the cryptocurrency industry a priority in 2024. Last year, the SEC filed civil lawsuits against some of the largest players in the cryptocurrency space, including Coinbase, Genesis, Celsius, and Binance, and reached settlements with cryptocurrency exchanges Kraken and Bittrex.  For example, in February 2023 Kraken agreed to cease offering or selling securities through crypto asset staking services or staking programs and pay a civil penalty of $30 million. In November 2023, the SEC charged Kraken for operating as an unregistered securities exchange, broker, dealer, and clearing agency.   

“Crypto intermediaries—to the extent they continue to commingle these functions under one roof—remain a priority for the commission, and you could expect to see us continuing to be active in that space. And we’ll keep pace with changing risks,” Grewal told The Wall Street Journal.   

[SEC Chair Gary Gensler] made it clear over the last year—and probably even before—about the tremendous amount of noncompliance in this [cryptocurrency] space, that if folks don’t come into compliance, that we’ll use all the tools that we have to make sure that they’re held accountable. That’s what you’ve seen over the past fiscal year. The commission brought a number of really impactful matters in the crypto space against crypto intermediaries,” said Grewal.   

“And we’ll keep pace with changing risks. We started years ago focusing on [initial coin offerings]. We’ve moved on to actions against [nonfungible tokens] and now you see us focused on the crypto asset platforms that are unlawfully commingling these different intermediary functions. A lot of people have lost money as a result of these bankruptcies and…there has been a lot of fraud in this space. So we’ll continue to be active against that noncompliance,” Grewal added. 

Reporting Violations

Phillips & Cohen’s experienced attorneys specialize in whistleblower cases brought before the SEC and CFTC, with the first Chief of the SEC Whistleblower Office, Sean McKessy, serving for the past seven years as a partner at the firm and recently added as a new partner the most recent Director of the CFTC’s Whistleblower office (who also served at the SEC as a Division of Enforcement Assistant Director), Christopher Ehrman. If you have information about securities fraud and are considering blowing the whistle, get in touch for a free, confidential consultation.

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