Securities and Exchange Commission Co-Director of Enforcement Steven Peikin Gives Speech on Remedies and Relief

On October 3, Steven Peikin, Co-Director of the Enforcement Division at the Securities and Exchange Commission (SEC), delivered a speech at the PLI White Collar Crime 2018 Conference that focused on “how particular remedies and relief that the Division of Enforcement recommends to the Commission advance our goals.”  Because this speech appears to have received comparatively little legal- and trade-media coverage, this post will summarize the main points of the Co-Director’s speech.

  • Non-Monetary Relief: Peikin began by noting that “in most of our actions, non-monetary relief can be highly important to achieving the Commission’s overall goals.”  Stressing that “a case-specific approach to remedies and relief is important,” he discussed “a few forms of non-monetary relief that are of particular significance – undertakings and conduct-based injunctions, and bars and suspensions”:
    • Undertakings and Conduct-Based Injunctions: Peikin cited undertakings – “which require a defendant to take affirmative steps – either in conjunction with entry of the order or in the future – in order to come into and remain in compliance with the specific terms of the court’s order” — and conduct-based injunctions, “which prohibit a defendant from engaging in conduct that, while otherwise legal, poses risk of harm to investors in the future” – as “two of the most effective forms of equitable relief in Commission enforcement actions.” Some undertakings may be directed at constraining a defendant’s conduct, as in SEC v. McFarland and SEC v. Holmes and Theranos, Inc.  In the latter case, Peikin explained,
      • one of the most important elements of the Commission’s settlement with Holmes were undertakings that (1) required her to relinquish her voting control over Theranos by converting her supermajority shares to common shares, and (2) guaranteed that in a liquidation event, Holmes would not profit from her ownership stake in the company until $750 million had been returned to other Theranos investors. In Theranos, the Commission confronted a situation where, because of the capital structure of the company, Holmes had nearly complete control of the company.  And given what we alleged had occurred, it was appropriate to seek relief that protected investors from potential misuse of that controlling position going forward.  The undertakings were designed to do exactly that.”
    • Peikin also discussed the Commission’s litigation with Elon Musk, which led to undertakings that would require (1) Musk’s resignation as Chairman of Tesla and replacement by an independent Chairman, (2) the addition of two independent directors to Tesla’s board, (3) Tesla’s establishment of a committee of independent directors and adoption of mandatory controls and procedures to oversee Musk’s public communications about the company, and (4) Tesla’s employment of “an experienced securities counsel” within its legal department.  He stated that these undertakings “specifically target and attempt to address specific risks – in this case, the potential harm to investors caused by Musk’s communication practices and a lack of sufficient oversight and control of those communications.  The undertakings were specifically targeted to put in place stronger corporate governance by increasing the independence of the Tesla board and imposing closer oversight and control of Musk’s communications.
    • Peikin commented that many undertakings “require the settling party to retain a compliance consultant or monitor to make recommendations to the issuer and report to the Commission on terms specifically defined in the settlement papers. Such undertakings make it possible for an SEC action to seed change in a corporation’s processes in a way that serves the long-term interests of investors.”
    • Bars and Suspensions: Peikin discussed “other forms of forward-looking or remedial relief, such as officer and director bars and associational bars and suspensions.” He noted that like undertakings, “bars and suspensions are not a punishment,” but “serve a critical prophylactic function – preserving the integrity of our markets and protecting investors by limiting the activity of known bad actors by removing them from the industry or preventing them from serving as officers or directors at public companies.”  He acknowledged that “bars can be a resource-intensive remedy for the agency,” but emphasized that because bars and suspensions “can have direct, far-reaching, and positive effects for investors . . . obtaining bars and suspensions, when warranted by the facts and circumstances, are a high priority for the Division.”
  • Monetary Relief: Peikin also took time to discuss the roles and significance of monetary relief such as civil penalties and disgorgement.
    • Civil Penalties: After summarizing a number of cases in which the Enforcement Division recommended, and the SEC obtained, substantial civil penalties, he noted that “not every case warrants a penalty.” As one example, he cited the SEC’s case against biopharmaceutical company Provectus, in which the company’s extensive remedial efforts persuaded the Division not to recommend a corporate penalty.
    • Disgorgement: Peikin also stated that in contrast to civil penalties, which involve ”a careful weighing of factors,” disgorgement “is handled quite differently. Even where a defendant or respondent cooperates and agrees to meaningful undertakings, it should not be entitled to keep its ill-gotten gains, which we are often in a position to restore to harmed investors.”  He concluded his remarks with observations about the effect of the Supreme Court’s 2017 decision in Kokesh v. SEC, which held that because SEC disgorgement operates as a penalty,  any disgorgement claim in an SEC enforcement action must be commenced within five years of the date that the claim accrued.  Peikin stated that the effect of Kokesh across the Division’s enforcement program has been and will continue to be “very significant.”  He said that Kokesh has led the Division to forego seeking more than $800 million in potential disgorgement in filed and settled cases.

Note: Peikin’s remarks contain a number of points of which securities practitioners and compliance officers should be mindful.  At a minimum, in-house professionals can use the information in Peikin’s speech to help company executives understand the full range of monetary and non-monetary penalties that the SEC can bring to bear on publicly traded companies.  In addition, for any company that finds itself under SEC investigation, board members and C-level executives need to understand that monetary penalties are far from the only risk on which they should focus in negotiations with Enforcement Division staff.  As Peikin’s remarks make clear, other factors such as the degree of vigor that the board and senior management show in undertaking remediation can be influential in warding off a civil penalty.  Finally, given the general unpopularity of monitorships, companies need to be prepared, in negotiations with Enforcement Division staff, to explain in detail why no external overseer of remedial efforts, or at most a compliance consultant, is sufficient to ensure that the company will complete and sustain its remedial efforts.

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