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On November 2, 2020, the U.S. Securities and Exchange Commission’s (“SEC”) Division of Enforcement (the “Division”) published its 2020 Annual Report (the “Report”), highlighting that the SEC collected more money in 2020 through enforcement actions than in any prior year. This came even though the total number of enforcement actions was at its lowest point in six years.
In FY20, the SEC collected a total of just under $4.7B through enforcement actions, the largest amount on record and approximately 8% higher than in FY19, comprising $1.09B in penalties and $3.59B in disgorgement, an equitable remedy that generally requires wrongdoers to return ill-gotten profits to victims. By comparison, FY19 saw an almost record number of enforcement actions, but the SEC collected less money ($4.35B).
Disgorgement is the key to understanding SEC enforcement in 2020. The $3.59B in disgorgement set a new record. The $1.09B in penalties, on the other hand, was the second lowest in the previous five years, making it clear that disgorgement is what drove the SEC to its high-water mark for collections. In that context, it is notable that one-third of the total disgorgement collected was attributable to the SEC’s highly watched settlement with Telegram Group Inc., which included $1.2B in disgorgement plus $18.5M in civil penalties. Indeed, the SEC’s record-setting year was achieved primarily through such “mega settlements,” with $3.8B of the $4.7B total collected attributable to the largest 5% of cases.
Although the total number of enforcement actions was down considerably (FY20: 715; FY19: 862), Stephanie Avakian, Director of the Division, indicated that the coronavirus pandemic led to the overall decrease in enforcement actions, as the Division grappled with how to operate within the realities imposed by COVID-19. Indeed, the Report characterizes the 700-plus cases brought in FY20 as a triumph “against the backdrop of COVID-19” considering the tremendous obstacles presented to enforcement by such an environment.
The SEC’s record-setting disgorgement in FY20 is especially noteworthy considering the U.S. Supreme Court’s June 2020 decision in Liu v. SEC, 140 S. Ct. 1936 (2020), which upheld the ability of the SEC to seek disgorgement as a remedy in enforcement actions. In doing so, the Liu decision resolved a lingering uncertainty from the Supreme Court’s 2017 opinion in Kokesh v. SEC, 137 S. Ct. 1635 (2017), where, in a footnote, the Court indicated that nothing in its decision “should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.”
Although this raised the possibility that the SEC could be foreclosed in the future from seeking disgorgement, the Court affirmatively held in Liu that the SEC is authorized to seek disgorgement so long as the award does not exceed a wrongdoer’s net profits and is awarded for victims. To satisfy this principle, the Court noted that "legitimate expenses" must ordinarily be deducted from any disgorgement award, potentially limiting the amount the SEC can recover. The SEC stated in the Report that “[t]he Division continues to evaluate the impact of this decision and how the questions that the Court left open will affect us going forward.” The Division also indicated that it may consider recommending higher penalties in the future where possible, consistent with Liu, in order to seek the relief necessary to protect investors.
With the ongoing COVID-19 pandemic and potential changes in enforcement priorities that may come with a new administration, it is difficult to predict what the Report portends for the next year of enforcement activity at the SEC. However, regardless of its priorities or even the number of cases it brings, the SEC will likely continue to seek disgorgement awards wherever possible and test the limits of the Supreme Court’s Liu decision.
A copy of the SEC’s Report is available here.