Keynote Address: Securities Enforcement Forum West 2020, Steven Peikin, Co-Director, SEC Division Of Enforcement, May 12, 2020

I. Introduction

Thank you for that kind introduction, and thank you for inviting me to speak to you this afternoon. Before I begin, I am required to give a standard disclaimer that the views I express here today are my own, and do not necessarily represent the views of the Commission or its staff.[1]

We are all too familiar with the many ways in which the COVID-19 pandemic has transformed our personal and professional lives over these last several months. We are confronting new and serious personal challenges, all the while endeavoring to continue our respective professional responsibilities. Like most of you, the SEC Staff have been teleworking since March. The disruption and changed work environment has had – and will continue to have – a substantial impact on the activities of the Division of Enforcement. But I am gratified to report that we have continued to execute on our important mission to protect investors, promote capital formation, and maintain fair and orderly markets.

So this afternoon, I’d like to share with you how the Division of Enforcement is responding during this ongoing crisis. I’ll describe some of the work we are doing to detect and address COVID-19-related misconduct. Then I will turn to our regular docket of investigations and litigations. All of our regular enforcement responsibilities remain in place, and we are endeavoring to execute on them, though in many respects we have had to find new ways to do so. I’ll close with a brief discussion of where I see the Division going from here.

II. COVID-19 Enforcement Matters

Like our colleagues across the Commission, we in the Division of Enforcement have focused significant time and resources on responding to COVID-related matters. In organizing our response, we have looked to the experiences had, and the lessons learned, by our predecessors in other periods of emergency and serious market disruption, including the September 11 attacks and the 2007-08 global financial crisis.

A. Coronavirus Steering Committee

One of those essential lessons is the importance of a well-coordinated response. To that end, in late March my co-Director, Stephanie Avakian, and I formed a Coronavirus Steering Committee to coordinate the Division of Enforcement’s response to coronavirus-related enforcement issues. The Steering Committee comprises approximately two dozen leaders from across the Division, including representatives from our various specialized units, from our Home Office and various regional offices, and from our Office of Market Intelligence. The Steering Committee’s mandate is to proactively identify and monitor areas of potential misconduct, ensure appropriate allocation of our resources, avoid duplication of efforts, coordinate responses as appropriate with other state and federal agencies, and ensure consistency in the manner in which the women and men of the Division address coronavirus-related matters.

The Steering Committee is focused on identifying key areas of potential market and investor risk. One such area that we immediately identified is microcap fraud. Other public health crises and national emergencies such as Hurricane Katrina in 2005 and the Ebola crisis of 2014 were followed by efforts by microcap fraudsters to make specious claims of treatments, disaster-response capabilities, and the like. Sadly, but not surprisingly, we have seen an explosion of similar activity over the last few months. To combat these potential frauds, the Steering Committee is coordinating with the Division’s Microcap Fraud Task Force and Office of Market Intelligence to rapidly gather and analyze market intelligence in the microcap space, and to quickly triage matters for potential trading suspensions or enforcement actions. I will discuss these in more detail in a moment.

The COVID-19 crisis has resulted in dynamic and volatile markets not seen in decades. These market conditions, along with a regular stream of potentially market-moving announcements by issuers, provide increased opportunities for insider trading and market manipulation. To detect such misconduct, the Steering Committee is working with the Division’s Market Abuse Unit to monitor trading activity around announcements made by issuers in industries particularly impacted by COVID-19 and to identify other suspicious market movements for possible manipulation.

Previous economic downturns proved that stresses on the financial conditions of issuers may raise the risk to investors from financial statement and issuer disclosure frauds in two ways: exposing pre-existing accounting or disclosure improprieties, or leading issuers to engage in improper conduct. As a result, structural risks such as excessive debt, extreme leverage, and possible liquidity disruptions, could be indications of potential issues. Recognizing that the economic impacts of any downturn may vary across different industries and sectors, the Steering Committee has developed a systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry. We are also looking for disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.

The Steering Committee is also focusing on the ways in which COVID-19 may affect regulated entities and individuals. For example, in conjunction with the Division’s Asset Management Unit, the Committee is monitoring the investment adviser and investment company space for failures to honor redemption requests at both private funds and registered investment companies, which could indicate an underlying issue. The Steering Committee is working with our Complex Financial Instruments Unit to monitor the impact of the crisis on the performance of complex structured products and to identify possible improper marketing and sale of such products to retail investors.

The Steering Committee is also communicating with state securities regulators, other federal agencies, exchanges, and SROs to coordinate our parallel efforts to protect investors. Those lines of communication have allowed us to exchange information efficiently, move quickly where the facts and circumstances have warranted, and avoid unnecessary duplication of efforts.

This is far from an exhaustive list of the steps the Committee is taking to proactively detect and investigate possible COVID-19 related misconduct, but it should give you a sense of our overall framework and approach.

B. Communications and Transparency

Throughout the current crisis, the Commission has made significant efforts to communicate with investors and market participants regarding the market impact of coronavirus and the various steps the Commission and the staff have taken in response.[2] Consistent with this approach, the Division has worked to provide visibility and transparency regarding enforcement initiatives to educate market participants and deter potential wrongdoers.

One example is the statement that Stephanie and I issued on March 23.[3] In that statement, noting the increased number of corporate insiders with access to material nonpublic information, and the potential increased value of such information given dynamic market conditions, we urged companies to follow their disclosure controls and procedures to protect against the improper dissemination and use of such information.

The Division is also committed to educating investors on the unique risks they may be facing during this pandemic. The Division’s Retail Strategy Task Force, in collaboration with the SEC’s Office of Investor Education and Advocacy, has issued an Investor Alert warning of potential COVID-19-related scams targeting Main Street Investors.[4] The alert, which was updated last week, cautions that “[f]raudsters often seek to use national crises and periods of uncertainty to lure investors into scams,” and urges investors to be vigilant when considering investment opportunities. The alert also highlights the types of frauds investors should be wary of in these tumultuous times, and provides specific steps that retail investors can take to protect themselves.

C. Results

Now let me turn to some of the results we have achieved so far on behalf of investors.

1. Trading Suspensions

In our March 23 statement, Stephanie and I emphasizedthat the Division was “committing substantial resources to ensuring that our Main Street investors are not victims of fraud or illegal practices in these unprecedented market and economic conditions.”[5] The most visible manifestation of this commitment is the significant number of trading suspensions the Commission has ordered in the last several months. Trading suspensions are, by design, prophylactic. The SEC has the authority to suspend trading in a stock “if in its opinion the public interest and the protection of investors so require.”[6] In many instances, the Commission suspends trading when there are questions about whether public information about the issuer is accurate, adequate, or reliable.[7] Because of the importance to and potentially significant impact on investors of questions about whether public information about the issuer is accurate, adequate, or reliable, we are conducting these investigations on an accelerated basis.

The path that leads to a recommendation that the Commission order a trading suspension often starts with referrals from FINRA, tips from investors, or from the Commission staff’s own market surveillance. Because time is often of the essence, Enforcement staff engage in accelerated fact gathering and analysis, analyzing public statements by and about the issuer and reviewing trading data. In some cases, the staff may contact brokers, promoters, or others for documents or information. Where claims have been made about contracts or new products, staff may contact counterparties or others to gather facts about whether those claims are accurate. If the staff believes that a trading suspension is warranted, it makes a recommendation to the Commission for expedited consideration.

The SEC may suspend trading in any stock for up to 10 business days, after which trading may resume. For stocks that trade on an exchange, quoting may resume as soon as a suspension ends. For stocks quoted over-the-counter (OTC), however, quoting does not automatically resume after the suspension ends. Instead, a broker-dealer generally may not solicit investors to buy or sell the previously-suspended stock until certain requirements are met. Because a trading suspension that results in a break in two-way quotations for more than four business days removes the so-called “piggyback exception” that enables many OTC tickers to be quoted by market-makers, a broker-dealer may resume quoting an OTC stock only if it has a reasonable basis under the circumstances for believing that a company’s financial statements are reasonably current and accurate, and complies with the requirements of Rule 15c2-11.[8]

The SEC has a process in place that allows anyone adversely affected by a trading suspension to file a petition seeking to terminate the suspension order.[9] The SEC may provide appropriate relief where the suspension expires while the petition is pending. These petitions should be filed with the Office of the Secretary and are directed to the Commission in the first instance, and Commission decisions may be appealed to a federal circuit court. The Commission has noted that it also has the authority to provide relief from possible consequences arising from the trading suspension, such as the loss of piggy-back eligibility.[10]

Trading suspensions have been a critical element of the Commission’s response to COVID-19. Since February 7, the Commission has suspended trading in the securities of more than 30 issuers as a result of questions about the adequacy and accuracy of coronavirus-related information. These suspensions followed a broad range of claims by issuers, including those relating to access to testing materials, developments of treatments or vaccines, and access to personal protective equipment. The Commission has also suspended trading in the stock of at least three microcap issuers whose names or ticker symbols closely resembled those of unrelated companies whose products are actually relevant to COVID-19, such as testing, N-95 masks, and videoconferencing technology, due to concerns about investor confusion, among other things.[11]

2. Enforcement Actions

A trading suspension is not a finding of fraud or misconduct.[12] In many instances, the Division of Enforcement will continue to investigate whether an issuer whose stock has been suspended from trading was engaged in potential fraud or other misconduct and, if appropriate, will recommend charges to the Commission. Because of the potential severity of the impact of this sort of misconduct on investors we are conducting these investigations on an extremely accelerated basis.

One such example is Praxsyn Corporation, whose stock was suspended from trading on March 25. As stated in the Commission’s Order, the suspension was due to questions regarding the accuracy and adequacy of claims Praxsyn made in a pair of press releases “about having, and being able to obtain, large quantities of N95 masks used to protect wearers from COVID-19.”[13] After the suspension was ordered, the staff continued its investigation, and on April 28, the Commission filed suit against Praxsyn and its CEO in federal court in Florida.[14] This was the Commission’s first action alleging fraud charges relating to an issuer’s COVID-19-related claims. The case was filed 61 days after Praxsyn made its first allegedly fraudulent statement.

Civil actions that result in sanctions serve significant enforcement goals that suspensions are not designed to achieve, such as deterrence, punishment, and in some cases compensation of harmed investors. There are numerous active investigations of COVID-19-related potential misconduct, many of which are also proceeding at an accelerated pace.

III. Ongoing Non-COVID-19 work

Stephanie and I have spoken publicly on a number of occasions about the importance of resource allocation to our Enforcement program; the current crisis is testing us on that front. While COVID-19-related matters are a top priority for the Division and the Commission, our other priorities also remain in place, and our many hundreds of investigations and litigations remain ongoing.

To continue this work, we have had to adapt in the face of new challenges. Some of them are mundane, such as determining which videoconferencing platforms are sufficiently secure for us to use, or how to print and serve subpoenas when we are working from home. Others are more substantive, such as under what circumstances should we seek emergency relief when courthouses are shut, what to do when witnesses decline to sit for testimony or interviews, or how to respond to expiring limitations periods.

In the face of these challenges, I am proud of the way the Division has responded. Since the onset of the crisis, Division staff have been engaged in virtually every facet of our work, from opening new cases, to taking remote testimony, to having Wells meetings, to filing litigated and settled actions, and even conducting jury trials.

Before I describe some of the most significant results, I want to say a word about how we have tried to interact with the people and entities who are on the other side of our investigations, whether as witnesses, custodians, or opposing counsel. We understand that we are all confronting many of the same difficulties, regardless of where we sit. But if we in the Division of Enforcement are to continue to fulfill our important responsibilities, we cannot effectively shut down our program by agreeing to a blanket hiatus in investigations or litigation. That being said, our staff has been directed to work with counsel and others to reach reasonable accommodations wherever possible. The flipside of this, which I hope goes without saying, is that we cannot permit the crisis to be used as a cover for gamesmanship.

One additional note on this: we are keenly focused on matters where we face expiring statutes of limitations that may result in the Commission losing claims or potential remedies, such as the ability to seek penalties or disgorgement. In those instances where we are unable to obtain tolling agreements to complete our investigation and we believe the existing record supports enforcement action, we will consider recommending that the Commission authorize an action, and will seek to supplement our evidence through civil discovery. In other words, we will do everything we can to protect the Commission’s claims and remedies in the face of this crisis.

There are a few examples of our work I’d like to highlight to illustrate the continued breadth of our activities over the last several months. Since mid-March, the Commission has reached settlements resolving matters in a number of important regulatory areas, including broker-dealers’ blue sheets submissions[15] and investment adviser disclosures.[16] The Commission obtained favorable jury verdicts in two trials that concluded in mid-March,[17] and it obtained a preliminary injunction against Telegram in connection with the Commission’s claim that Telegram violated Section 5 in its $1.7 billion offering of digital asset securities.[18]

In an ongoing case concerning an offering of a purported digital asset that the defendants allegedly told investors was risk-free and could provide returns of up to 224,923%, the Commission won emergency relief including an asset freeze, and then obtained a contempt order, with bench warrants issued for the arrest of two defendants, including a former Washington state senator, who had failed to appear in the proceedings.[19]

The Staff has also been busy on the investigative front. Since mid-March, the staff has triaged more than 4,000 Tips, Complaints, and Referrals – a 35% increase over the same period last year. In that same period, it has opened hundreds of new investigations, many COVID-19 related, but many in other traditional areas.

Finally, thanks to hard work from staff of the Office of the Whistleblower and colleagues across the Division, since March 23 the Commission has issued awards to nine whistleblowers, including an award of over $27 million.[20] While far from comprehensive, this list should give some sense of the work the Division has continued to do on behalf of investors.

IV. What’s Next

So, finally, what lies ahead?

Obviously, much is uncertain. We do not know how long this crisis will last or what its ultimate impact will be. But I do expect that the Division of Enforcement will continue to do its work, and its ability to function remotely and virtually will continue to improve. I expect there will be more trading suspensions related to COVID-19 and more fraud cases related to potential COVID-19 investment scams. If history is a guide, this recent market decline and continuing economic stress may well reveal past misconduct, or result in new misconduct. But it is too soon to know much more than that.

V. A Few Words About Division Staff

Before I close I would like to say a few words about our staff. All of the accomplishments I have discussed—the trading suspensions, the new actions, the settlements, the jury verdicts—are due to the incredible job that the staff of the Division of Enforcement have done under extremely difficult circumstances. Amid the logistical challenges posed by an all-telework environment, including in many cases the sudden need to be a full-time caregiver for children or others in addition to a full-time enforcement attorney, accountant, or other team member, our staff have functioned at a high level.

Many of our staff have shown great willingness to pitch in on various projects on top of their investigative work, and they have demonstrated resourcefulness and creativity in handling their cases. Most of all, they have shown a level of camaraderie, and a concern for their colleagues and their communities, that is inspiring.

In the spirit of finding a silver lining to a particularly dark cloud, I believe that they have learned lessons that will benefit the Division, the Commission, and the investing public, long after COVID-19 is hopefully a distant memory.

VI. Conclusion

With that, I want to thank our hosts at the Securities Enforcement Forum. I am glad that we were able to proceed with this program notwithstanding the unprecedented logistical obstacles. And thank you all for listening today, I am grateful that you were able to join me.

Thank you for your time, and please take good care of yourselves and your loved ones.