SEC Forms Cross-Border Fraud Task Force: Key Considerations for International Companies

The US Securities and Exchange Commission has announced the formation of a cross-border task force to combat fraud. While the Commission’s press release specifically referenced market manipulation and “pump-and-dump” schemes as an initial focus, the task force’s mandate is much broader, with significant implications for international companies that do business in the United States or access the US markets. 

According to the SEC’s press release, the task force will focus on investigating potential US federal securities law violations related to foreign-based companies. The announcement further indicated that gatekeepers, particularly auditors and underwriters, will be under the SEC’s microscope. The press release also pointed specifically to potential securities law violations related to companies from foreign jurisdictions where governmental control and other factors pose unique risks.

Chairman Paul Atkins charged the task force with consolidating SEC investigative efforts and using “every available tool to combat transnational fraud.” Newly appointed Division of Enforcement Director Margaret Ryan stated that the task force “will leverage the Division of Enforcement’s resources and expertise to combat international market manipulation and fraud.”

PRACTICAL IMPLICATIONS

With the benefit of past as prologue,[1] we anticipate that multiple investigative avenues will fall under the task force’s purview, including financial fraud, insider trading, sophisticated market manipulation, and cybersecurity. A range of industries—from life sciences to retail to technology to audit firms—may find themselves under review given their global presence. 

The SEC’s Global Reach

First, it is important to keep in mind that the SEC’s global reach is significant. In 2010, the Supreme Court limited antifraud jurisdiction under the main antifraud securities statute to transactions in the United States.[2]

Very shortly thereafter, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, providing federal district courts with jurisdiction over cases filed by the SEC alleging a violation of the antifraud provisions involving (1) conduct within the United States that constitutes significant steps in furtherance of the violation (even if the securities transaction occurs outside the United States and involves only foreign investors) or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.[3]

Exactly whether and how these extraterritoriality provisions may apply in a given set of facts and circumstances is often the subject of strenuous litigation. But companies with a global presence should keep in mind that the SEC has at times taken an expansive view of its ability to charge fraud violations across international borders. 

Financial Fraud

Under the first Trump administration, the SEC brought a number of enforcement actions alleging financial fraud by international public companies. The companies’ presence in the United States varied widely, including foreign companies with US headquarters or subsidiaries and international companies whose securities were listed on US exchanges.

In some cases the SEC cited the use of American Depository Receipts (ADRs) and American Depositary Shares (ADSs): ADRs allow US investors to invest in non-US companies through ownership interests in ADSs, which in turn represent an interest in the shares of a non-US company that have been deposited with a US bank.

For instance, the SEC in 2020 announced settled fraud charges against Luckin Coffee, Inc., a US-listed retail coffee provider based and operating in the People’s Republic of China, for allegedly fabricating more than approximately $311 million in retail sales transactions in an effort to appear to achieve rapid growth and increased profitability and to meet the company’s earnings estimates.

The SEC’s complaint pointed to the trading on the NASDAQ Global Select Market of Luckin Coffee’s ADS, and the SEC alleged that venue was proper in the Southern District of New York based on that trading as well as the location in New York of the headquarters of Luckin Coffee’s depository bank for its ADS.

The SEC anticipates a renewed focus on China-based companies as part of the task force’s work. We also would not be surprised to see the SEC’s attention on companies from other countries with a risk of state-sponsored activity. In addition to geographic focus, the types of securities law violations emphasized by this administration, particularly fraud, may result in a net cast over several growing global industries, such as life sciences and biopharmaceuticals, technology, and financial institutions.

Insider Trading

We have already seen the current administration bring insider trading cases with a global reach. For example, the SEC earlier this year charged German and Singapore citizens with an international trading scheme in which they traded in advance of 10 corporate transactions and earnings announcements, generating more than $17.5 million over a seven-year period.[4] Not only were the traders international and not only did the scheme involve global travel, but some of the securities at issue were ADRs, allowing the defendants to trade over-the-counter in the United States in securities of non-US companies.

This action mirrors prior actions in which the SEC has charged international insider trading schemes. For example, in 2019 the SEC charged an investment banker and trader relating to trading in the stock of at least two public companies in advance of news that they had been targeted for acquisition.[5] The investment banker began the scheme working in London before transferring to New York; the trader was a Greek citizen with residences in New York and Greece; and the trading was a mix of common stock, ADSs, and other securities.

Staff in the SEC’s Market Abuse Unit, which uses sophisticated data analysis to detect suspicious trading patterns, investigated both cases. We anticipate continued use of the SEC’s data tools to originate and help investigate insider trading cases, including those with international traders and/or companies, as these matters fit squarely within the SEC’s “back to basics” approach to investigating fraud violations.

Market Manipulation

As mentioned in the SEC’s press release, the Commission is renewing its focus on market manipulation. The press release specifically called out “pump-and-dump” style violations, but we anticipate the SEC will look at more sophisticated manipulative behavior as well. For example, the SEC recently filed settled charges against an individual trader for a manipulative options scheme in which he placed spoofed orders on one side of a thinly traded market to manipulate the prices and then profited by executing orders on the other side of the market.[6]

While this matter did not have an international component, it demonstrates the SEC’s continued ability to unearth sophisticated trading schemes such as those encompassing spoofing or layering, which often have involved international traders and trading firms.[7]

The task force may consider other forms of abusive trading, such as those involving naked short selling,[8] as well as violations of Rule 105 of Regulation M, which do not involve fraud but prohibit firms from participating in public stock offerings after selling short those same stocks.[9] We anticipate the SEC may search for examples involving international actors or misconduct that affects US investors in non-US companies.

Cybersecurity

Cybersecurity is undoubtedly an area with global reach: the SEC has previously charged international cyber threat actors with federal securities violations for their role in accessing material, nonpublic information and either trading on it or providing it to others who did so.[10]

Under the current administration, we expect the SEC to continue pursuing such threat actors as well as those who may engage in insider trading upon discovery that their company has been hacked.[11] Because the task force is focused on pursuing fraud, its focus could also extend to public companies’ fraudulent disclosures relating to cybersecurity (also part of the mandate of the SEC’s Cyber and Emerging Technologies Unit).[12]

Audit Firms

When the SEC announced the formation of the task force, it noted a focus on gatekeepers, such as audit firms, that help foreign-based companies access US capital markets. Under the prior Trump administration, the SEC focused on audit firms with operations in emerging markets, particularly China, and on issues related to audit quality and regulatory access to audit information.[13] Historically, the SEC has brought actions against audit firms for failure to produce documents in SEC investigations and may be signaling with the new task force that it will be looking closely at these issues going forward.

TAKEAWAYS

Public companies with a global presence should take note of the SEC’s announcement regarding the formation of the cross-border task force. An international company with US headquarters, US subsidiaries that roll up in the financial statements of the international parent, or public reporting of any sort to the SEC may be sufficient to raise SEC interest. Even if a company does not check any of these boxes, it may still trigger SEC attention through securities that trade in the United States, including ADRs.

It would be prudent for companies to take a fresh look at policies and procedures around financial reporting, insider trading, and cybersecurity and review for current risks, business operations, and implications for US investors. 

If companies receive whistleblower complaints that touch on these subjects or that otherwise may relate to disclosures to US investors, they should consider carefully reviewing these submissions with an eye toward federal securities laws.

Companies may also want to review their training programs for both employees in the United States and those located outside of the United States to assess whether any updates or enhancements may be prudent depending on employees’ roles relating to financial reporting, handling of sensitive information, and/or investor relations.