In this issue of our monthly Securities Enforcement Roundup, we highlight top securities enforcement developments and cases from December 2024.
In December 2024:
Paul Atkins, CEO of consulting firm Patomak Global Partners and a former Republican-appointed SEC Commissioner from 2002 to 2008, has been nominated by President-elect Donald Trump to replace outgoing SEC Chair Gary Gensler. While his confirmation hearing is still a couple months away, there is much anticipation surrounding what Chair-elect Atkins will prioritize as the new head of the SEC, particularly as it relates to the digital asset space, ESG-related matters, cybersecurity, and the types of enforcement actions and related penalties the Commission will pursue.
During his prior SEC tenure, Chair-elect Atkins was a critic of excessive civil penalties imposed on firms for potential violations of securities laws, regulations that imposed “disclosure overload,” and, more recently, the concept of “regulation by enforcement.” If Chair-elect Atkins is confirmed, it is anticipated that he will exercise a reserved approach to the creation of new regulations and the enforcement of existing regulations, as well as staunch opposition to excessive penalties imposed on companies as part of enforcement settlements.
On December 3, 2024, a biotherapeutics company, its former CEO, and its former CFO settled charges by the SEC for allegedly failing to disclose material information concerning the company’s $40 million public offering intended to fund clinical trials for two cancer drugs.[1] According to the SEC, two weeks before the offering, the Food and Drug Administration (FDA) notified the company that it had placed the drug candidates on “clinical hold,” meaning that the proposed clinical trials would be delayed. The SEC alleged that the company, its then-CEO, and its then-CFO did not disclose the clinical holds in SEC filings, on investor roadshow calls, during due diligence calls leading up to the offering, or in SEC filings after the offering, despite knowing that the holds were material and warranted disclosure.
Without admitting or denying the SEC’s findings, the CEO and CFO agreed to pay civil penalties of $125,000 and $20,000, respectively, to settle the SEC’s charges. The company, however, was not required to pay any civil penalty in light of its voluntary self-report, prompt remedial actions, and cooperation with the Commission staff.
The SEC’s order credited the company for, upon receiving complaints of potential inaccuracies in its disclosures, (1) engaging outside counsel to “conduct an internal investigation into the anonymous complaints,” (2) adopting “several remedial measures to improve the effectiveness of the company’s disclosure controls and procedures,” (3) filing a “Form 8-K in which it acknowledged that it had failed to timely disclose the FDA communications,” (4) terminating the CEO for cause, (5) voluntarily self-reporting the issue to the SEC’s enforcement division, and (6) cooperating with the division’s investigation, including by “facilitating the submissions of sworn declarations and testimony of foreign-based witnesses.”[2]
This settlement is representative of other recent settlements in which the SEC has not imposed any civil penalty where the respondent company or firm has self-reported and/or cooperated with the Staff’s investigation.[3]
In December 2024, the SEC charged a hedge fund with failing to establish, implement, and enforce written policies and procedures designed to prevent the misuse of material non-public information (MNPI) relating to the firm’s participation on creditors’ committees. According to the SEC, one of the hedge fund’s core strategies was to invest in distressed companies. The SEC alleges in its complaint that the hedge fund failed to enforce policies that were reasonably designed to address the risks associated with its representatives’ participation in creditor’s committees while also in possession of MNPI.
Acting Director of the SEC’s Division of Enforcement Sanjay Wadhwa stated that by “[a]llowing individuals who possess MNPI to have unfettered access to those making trading decisions presents an enhanced risk of misuse of MNPI, and the resulting risks to market integrity and investors are cofounded when investment advisers failed to enforce their compliance policies and procedures to prevent the misuse of MNPI.” This case is currently being litigated in federal district court and is in its nascent stages.
On December 20, 2024, the SEC announced the settlement of charges against a registered investment adviser and two private companies (all unrelated) for failure to timely file SEC Forms D in connection with unregistered securities offerings.[4] With respect to the investment adviser, the SEC alleged that it solicited investments of over $1 million from 34 investors in two funds managed by the investment adviser. The private companies, respectively, allegedly raised tens or hundreds of millions of dollars in investment in the companies. In each case, the SEC alleged that the respondents engaged in the general solicitation of the various unregistered securities offerings, making the offerings ineligible for exemption from registration under Section 4(a)(2) of the Securities Act of 1933.
Each of the respondents relied on exemptions from registration provided by Regulation D, Rules 504 (limited offerings not exceeding $10 million) or Rule 506(c) (offerings to accredited investors). To rely on Rules 504 or 506(c) of Regulation D, however, an issuer is required by Rule 503 to file with the SEC a notice of sales on Form D no later than 15 calendar days after the first sale of securities in the offering. The SEC alleged that the respondents failed to timely file Forms D for any of the referenced offerings. The settlements involved civil penalties ranging between $60,000 and $195,000 per respondent.
Two broker-dealers settled charges for submitting electronic blue sheets that contained inaccurate or incomplete trade information. Federal securities laws and FINRA rules require broker-dealers to submit trade data in an automated format when requested by FINRA or the SEC to assist regulators with their investigations into potential trading violations. These trade data submissions are known as “electronic blue sheets” (EBS). Each broker-dealer settled with FINRA for alleged violations of FINRA Rules 8211, 8213, and 2010, and separately with the SEC for violations of Section 17(a)(1) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder.
The settlements outline multiyear periods during which the firms submitted thousands of EBS containing inaccurate or incomplete information about hundreds of thousands or, in some of the matters, millions of transactions. The firms were fined $900,000 separately by the SEC and FINRA, totaling $1.8 million. According to the regulators, the inaccuracies and omissions were largely caused by coding errors within the firms’ and/or its vendors’ EBS reporting software, and the SEC noted that neither firm had reasonable procedures in place to detect the errors.
Both firms’ SEC and FINRA matters originated from self-reports. For one firm, FINRA included a Sanctions Considerations section in the settlement that highlighted the firm’s remedial efforts, noting that the firm quickly remediated and resubmitted all impacted EBS, devoted substantial resources to enhancing its EBS procedures and controls, hired an outside consultant on its own initiative to conduct a comprehensive review of the firms’ EBS procedures, and was designing and implementing additional pre- and post-submission controls and reviews. The SEC similarly noted that the firm’s penalty amount “reflects that it self-reported its misconduct.”
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
[1] Press Release, Securities and Exchange Commission, SEC Charges Kiromic BioPharma and Two Former C-Suite Executives with Misleading Investors about Status of FDA Reviews (Dec. 3, 2024).
[2] Id.
[3] See, e.g., Press Release, Securities and Exchange Commission, SEC Charges Express, Inc. with Failing to Disclose Nearly $1 Million in Perks Provided to Former CEO (Dec. 17, 2024).
[4] Press Release, Securities and Exchange Commission, SEC Files Settled Charges Against Multiple Entities for Failing to Timely File Forms D in Connection With Securities Offerings (Dec. 20, 2024).