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Will Pandemic Lessons Learned Accelerate SEC Investigations?

June 11, 2021
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Accelerated enforcement actions and new rapid response techniques at the SEC are likely to be with us for the long-haul.

By Paul Vorndran

Despite mandatory telework and asset reallocations, 2020 was a record year for whistleblowers and financial remedy orders at the Securities and Exchange Commission, according to the Division of Enforcement 2020 Annual Report (report) issued in November 2020. It was also the year the SEC learned a few things about how to fast-track investigations using remote testimony and investigative techniques that leverage technology.

The lessons learned in the use of accelerated enforcement actions and new rapid response techniques are likely to be with us for the long-haul.

Quicker investigative work

Two circumstances have hastened the SEC’s increased reliance on technology tools, devices and techniques. By mid-March 2020, the SEC Division of Enforcement had transitioned to mandatory telework and conducting business remotely. Staff were forced to figure  how to modify their approaches to “normal investigative steps” in remote settings, as noted in the report.

At the same time, market volatility led to a record year for whistleblowers. During the pandemic, the SEC saw a spike in tips, complaints and referrals of potential fraud from short-sellers, shareholders and other market participants. In March 2020, the SEC formed a Coronavirus Steering Committee to oversee fraud prevention efforts by coordinating investigations relating to potential misconduct in the areas of microcap, insider trading, and financial fraud and issuer disclosure.

From mid-March 2020 through fiscal year end, the SEC Division of Enforcement reported triaging approximately 16,000 tips, complaints, and referrals—a roughly 71% increase over the same time period last year—and opened over 150 COVID-related inquiries and investigations, referring several on to the commission. Notable actions in 2020 were brought against Wells Fargo & Co., Telegram Group Inc., BMW AG, Novartis AG, and J.P. Morgan Securities LLC.

Shortening investigation cycles and the time it takes to bring financial fraud and issuer disclosure cases became a focal point for the agency in 2020. While under mandatory telework orders, the Division conducted numerous remote interviews and examinations through internet-based video platforms, allowing staff to share documents with the witness while asking questions.

Courts even  began conducting remote hearings and bench trials by video, allowing litigation to proceed. The SEC conducted (and won) one virtual trial.

Enforcement and technology

These newly developed remote capabilities and more efficient ways to conduct investigations are here to stay. On May 6, 2021, Gary Gensler, newly appointed Chairman of the SEC, dedicated his first address as Chairman before the House Committee on Financial Services to highlighting some prescient perspectives for 2021.

In his remarks, Gensler referred to the early 2020 events of market volatility occurring at the “intersection of finance and technology,” prompting his central question: “When new technologies come along and change the face of finance, how do we continue to achieve our core public policy goals and ensure that markets work for everyday investors?”

The SEC’s apparent answer is increased use of enforcement mechanisms that leverage technology tools and techniques. Under trying circumstances in 2020, the SEC staff achieved some early success in condensing the average time to complete investigations from 37 months to 34 months.

It is a trend that will likely accelerate as the SEC moves toward faster, shorter enforcement cycles using the technology lessons learned from the pandemic. As the pace quickens, the number of cases the SEC can handle in any given year with existing resources will also increase, and more issuers, registrants and other market participants will be receiving requests for information in the prologue to SEC enforcement actions. Recipients of these requests should review their options with a qualified securities attorney before responding.

Paul Vorndran is a securities litigation and enforcement defense attorney with Jones & Keller in Denver.

This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above.