Traditionally, the Securities and Exchange Commission (SEC) enforced the nation’s securities laws against public companies and related entities who committed insider trading or securities fraud, violated the Foreign Corrupt Practices Act, or transgressed other provisions designed to protect American investors.
A new wave of cases riding the cryptocurrency tide have become a significant subset of SEC actions, both those pursuant to the Dodd-Frank Act of 2010, which permits the agency to bring actions and impose penalties administratively, as well as those brought in federal court. Of particular note is the SEC’s crackdown on cryptocurrency platforms for selling digital currencies without first registering them as securities with the agency.
The SEC’s theory, that digital currencies are indeed securities subject to regulation, is being put to the test in its bellwether case against Ripple Labs and several current and former executives. The SEC alleges that the defendants made illegal unregistered offerings of digital assets, including Ripple’s XRP token, since 2013. The outcome of the Southern District of New York proceeding will impact the SEC’s ongoing efforts to police this arena, though the timing of a final decision is hard to predict.
Otherwise, the SEC has maintained a steady flow of federal court enforcement actions in the last four years. Docket Alarm and SEC data show increasing monetary penalties, the most popular forums for SEC civil actions, and which law firms have dominated company and individual representation.
Data from Docket Alarm analytics shows consistent SEC enforcement for cases filed under PACER nature of suit code 850, “Securities/Commodities/Exchange.” Actions filed under this code include charges of market manipulation, insider trading, reporting or auditing/accounting violations, and securities offering-related offenses, among others.
A review of the last four years reveals that the SEC has brought an average, very evenly, of 250 cases per year. Notably, the SEC reported its Trial Unit, comprised of attorneys across the nation, won favorable verdicts in 12 of the 15 trials in 2022, reportedly the most conducted in a single year within the past decade.
The SEC has jurisdiction over a broad range of misconduct governed by both federal laws and agency regulations. According to SEC data, in 2022, the agency’s most prominent civil cause of action was securities offering violations. This was followed, not closely, by insider trading cases and those brought against investment advisors/investment companies.
As alluded to earlier, a possible explanation for the relatively high number of securities offerings cases may lie within the burgeoning crypto sector. In addition to the Ripple case, the SEC has, in recent years, brought a number of actions against crypto platforms for anti-fraud provision violations.
Germane to the trend is the SEC’s May 2022 announcement of 20 additional positions to its Crypto Assets and Cyber Unit, nearly doubling that unit’s staffing and resulting in “significant enforcement actions” in the crypto arena for last financial year. Among those brought in federal court were charges against 11 individuals for their alleged roles creating and promoting Forsage, a fraudulent crypto pyramid and Ponzi scheme.
More Money at Stake
SEC data from the last six years shows an increase of almost 40% between financial year 2021 and 2022 in total money ordered. Though 2021 may have been an anomalously low year, there overall appears to be an upwards trend in monetary relief. Note that this data, unlike Docket Alarm data, includes SEC administrative proceedings.
SEC federal court enforcement actions take place around the country, but the overwhelming majority in the last four years have been in the Southern District of New York, long the country’s de facto financial capitol. Behind New York City is the Central District of California, home to Los Angeles and many investment advisors and capital management firms. The district containing Miami, Fl., also a favored location of investment firms, ranks third while the Northern District of California, home to Silicon Valley, comes in fourth.
While the SEC tends to sue in the jurisdiction where the defendant is headquartered, the agency maintains offices in the major cities in each of the foregoing districts too.
Leading Law Firms
According to Docket Alarm analytics, the top firms representing clients facing SEC scrutiny in Code 850 actions from the past four years are Greenberg Traurig, Gibson, Dunn & Crutcher, Armstrong Teasdale, Hunter Taubman Fischer & Li, Vedder Price, and Sallah Astarita & Cox. A number of other firms are ranked closely behind these top five as depicted below.
With an uptick in crypto interest and enforcement, we may expect to see even greater crypto-related enforcement next year. In addition, the outcome of the pending cross-motions for summary judgment in the Ripple securities case, a future trial, or appeals could foretell the future of securities registration-related actions in the digital currency realm.