In a recent keynote speech, Co-Director of the US Securities and Exchange Commission’s Division of Enforcement Steven Peikin made it clear that the Division has made coronavirus (COVID-19) related enforcement matters a top priority and is dedicating significant time and resources to respond to such issues.
Co-Director Peikin, speaking on May 12 at the virtual Securities Enforcement Forum West 2020 Conference, also discussed the challenges of investigations being undertaken remotely, and noted the Division has seen an increase in whistleblower complaints and investigations.
Establishment of Coronavirus Steering Committee
In order to ensure a “well-coordinated response” to COVID-19-related matters, Peikin and Co-Director Stephanie Avakian formed a Coronavirus Steering Committee in late March. The committee, composed of two dozen leaders from across the Division, is “focused on identifying key areas of potential market and investor risk” and proactively monitoring “areas of potential misconduct” in light of the current climate. Importantly, the committee is also charged with allocating resources, avoiding duplication of efforts, ensuring consistency, and coordinating the Division’s responses to COVID-19-related matters with other state and federal agencies.
Key COVID-19 Focus Areas
Peikin described several key risk areas related to COVID-19, which we believe the Division will continue to focus on in the near term:
With respect to what the Division has achieved thus far, Peikin focused on two primary benchmarks: trading suspensions and enforcement actions. He also emphasized that the US Securities and Exchange Commission (SEC) has made “significant efforts to communicate” and be transparent with investors regarding these issues and the Division’s actions in light of COVID-19. We expect that this will continue as the Division perceives increased communication to be a quick and effective way to be influential in this crisis.
Trading Suspensions: A Critical Element of the Division’s COVID-19 Response
Referencing the co-directors’ March 23, 2020 statement regarding market integrity, Peikin described recent trading suspensions as the “most visible manifestation” of the Division’s commitment to “ensuring that our Main Street investors are not victims of fraud or illegal practices in these unprecedented market and economic conditions.” He noted that the Division is conducting investigations “on an accelerated basis” into whether a trading suspension is warranted—i.e., whether public information about the issuer is accurate, adequate, or reliable—and where Division staff believe a suspension is warranted, they are requesting “expedited consideration” from the SEC.
Peikin noted that, since February 7, 2020, the SEC has suspended trading for more than 30 issuers due to “questions about the adequacy and accuracy of coronavirus-related information.” It has also suspended trading in at least three microcap issuers “whose names or ticker symbols closely resemble those of unrelated companies whose products are actually relevant to COVID-19 . . . due to concerns about investor confusion.”
In addition to trading suspensions, the Division is actively investigating whether suspended issuers (and others) have engaged in potential fraud or other misconduct. As an example, Peikin cited to the SEC’s recent charges against Praxsyn Corporation and its CEO, following a temporary trading suspension, for allegedly issuing false and misleading press releases “about having, and being able to obtain, large quantities of N95 masks.” This case was filed only 61 days after Praxsyn made its first allegedly fraudulent statement. According to Peikin, we can expect to see many other “investigations of COVID-19-related potential misconduct” proceed with similar swiftness.
Given the inherent challenges of investigating matters in a remote environment (such as video testimony in lieu of live testimony), Peikin said the Division staff will offer “reasonable accommodations.” Peikin made clear that despite the Division’s prioritization of COVID-19-related matters, its other “priorities also remain in place, and [its] many hundreds of investigations and litigations remain ongoing.” His pointed statement that the Division cannot “permit the crisis to be used as a cover for gamesmanship” when it comes to accommodating scheduling requests by counsel suggests that the Division may pursue subpoena enforcement, if necessary.
Peikin also emphasized that the Division is “keenly focused” on expiring statutes of limitations periods and is dedicated to “protect[ing] the Commission’s claims and remedies in the face of this crisis.” As a result, if a tolling agreement cannot be reached, Peikin remarked that the Commission may authorize an action, knowing that additional evidence will need to be secured later through civil discovery.
As discussed in our prior LawFlash, Peikin revealed that the Division staff triaged 4,000 tips, complaints, and referrals since mid-March 2020 (a 35% increase over the same period last year). The Division also “opened hundreds of new investigations, many COVID-19 related, but many in other traditional areas” since mid-March.
Peikin then reiterated a point that he made earlier in his remarks: “If history is a guide, this recent market decline and continuing economic stress may well reveal past misconduct, or result in new misconduct.” We believe that, in the current business environment, including employee downsizing, there could be an increase in whistleblower claims submitted to companies and/or the SEC.
In light of Co-Director Peikin’s insight into the Division’s priorities and focus during these unprecedented times, companies should consider doing the following:
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. Find resources on how to cope with the post-pandemic reality on our NOW. NORMAL. NEXT. page and our COVID-19 page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts, and download our biweekly COVID-19 Legal Issue Compendium.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Michael M. Philipp
John F. Hartigan