The total number of SEC enforcement actions of all types fell 26 percent in FY 2024, but the financial remedies ordered in those cases rose to an all-time high. Similarly, the Commission brought 80 enforcement actions against public companies and subsidiaries in 2024, a 12 percent decrease from FY 2023. However, total monetary settlements in public company cases grew to $1.5 billion (up from $1.3 billion in 2023), although the median settlement amount declined.
These are the headline findings of two annual reports on SEC enforcement activity – the SEC Division of Enforcement’s summary of its 2024 cases and the Cornerstone Research/NYU Pollack Center analysis of 2024 SEC enforcement actions against public companies and their subsidiaries. The prior editions of these two reports were discussed in SEC Enforcement Targets Individuals but Rewards Company Cooperation, November-December 2023 Update.
SEC Division of Enforcement Press Release
On November 22, the SEC’s Division of Enforcement issued its annual press release describing the results of its enforcement program. See SEC Announces Enforcement Results for Fiscal Year 2024. An addendum to the press release contains detailed statistics.
The SEC’s 2024 enforcement activities are the mirror image of its 2023 results. In 2023, the number of actions filed increased sharply over 2022, but the total amount of monetary relief fell. In contrast, during FY 2024 (which ended on September 30), the SEC filed 583 enforcement actions, a 26 percent decrease from the 784 actions brought in FY 2023. But monetary payments ordered in SEC actions (i.e., civil penalties, disgorgement, and pre-judgment interest) totaled $8.2 billion, the highest amount ever awarded in a single year and roughly two-thirds more than the $4.9 billion in 2023.
The $8.2 billion in financial remedies consisted of $6.1 billion in disgorgement and prejudgment interest (also an all-time high) and $2.1 billion in civil penalties. However, 56 percent of the $8.2 billion is attributable to the monetary judgment in a single case – the Commission’s cryptocurrency fraud action against Terraform Labs and its founder Do Kwon. Following a jury verdict in favor of the SEC, the defendants agreed to pay $4.5 billion in disgorgement, prejudgment interest, and civil penalties. (The $8.2 billion in financial remedies represents the aggregate amount that defendants and respondents in Commission actions were ordered to pay, not necessarily the amount the Commission collected. For example, the Terraform Labs judgment is subject to offsets for payments to defrauded investors, and it is unclear how much the SEC will collect.)
The SEC’s announcement makes several points related to cases involving public company disclosure and actions against public company officers and auditors:
Crediting Market Participants Who Practice Proactive Compliance. The Division states that “market participants including public companies * * * self-reported or remediated securities law violations or otherwise cooperated meaningfully with the Division’s investigations, answering the Division’s call to practice a culture of proactive compliance.” This cooperation resulted in reduced penalties or no penalties, “including in cases involving very large firms.”
Cybersecurity. The SEC brought several actions relating to cybersecurity incidents, including a case against R.R. Donnelley & Sons for disclosure and internal control failures relating to cybersecurity incidents. See Shoot the Wounded! SEC Charges that Inadequate Cybersecurity is an Internal Accounting Control Violation, July 2024 Update.
Gatekeepers. In fiscal year 2024, the Division investigated a wide range of “gatekeeper” violations. The two examples cited in the press release are charges against audit firm BF Borgers for failure to comply with PCAOB standards in audits and reviews involving several hundred public company clients and charges against audit firm Prager Metis for failing to comply with generally accepted auditing standards in its audit of crypto trading platform FTX and for auditor independence violations in connection with numerous public company clients.
Public Company Misstatements. The press release states that it is “foundational to the proper operation of the securities markets that public companies provide materially accurate information to investors” and that “the Division investigated misstatements by public companies leading to a number of enforcement actions” during 2024. Examples cited include cases against Cassava Sciences (misleading statements about the results of a Phase 2 clinical trial for an Alzheimer’s disease treatment); Ideanomics (misleading statements about financial performance); and former executives of Kubient (involvement in a scheme to overstate and misrepresent revenue in connection with public stock offerings – see SEC Charges Audit Committee Chair with Fraud, September-October 2024 Update).
Cornerstone Research/NYU Pollack Center Report
On November 21, Cornerstone Research and the New York University Pollack Center for Law & Business released SEC Enforcement Activity: Public Companies and Subsidiaries—Fiscal Year 2024 Update, their annual report on SEC enforcement actions against public companies and their subsidiaries. Cornerstone and the Pollack Center also issued a press release summarizing the report. Cornerstone uses the Securities Enforcement Empirical Database (SEED), which it created in conjunction with the Pollack Center, to analyze trends in SEC enforcement.
The Cornerstone/Pollack Center report finds that the SEC filed 80 actions against public companies and their subsidiaries in fiscal 2024 – a 12 percent decrease from the 91 actions in 2023. However, despite the drop in cases, monetary settlements in public company and subsidiary actions grew to $1.5 billion, up from $1.3 billion in 2023. (The 2023 total was the lowest in the last nine fiscal years.) The average monetary settlement in these cases in FY 2024 was $19.8 million—significantly higher than the $15 million average in FY 2023. The increase is, however, somewhat misleading since the median monetary settlement decreased to $3.2 million in FY 2024, down from $4.0 million in FY 2023. The report attributes the lower median to “more cases with monetary settlements under $100,000 and the top 10 actions making up a higher percentage of total monetary settlements than in FY 2023.”
The average penalty level was also influenced by the tendency for public companies to cooperate with SEC investigations. The defendant or respondent cooperated in 75 percent of settled actions involving public company and subsidiary defendants, including five percent of defendants who cooperated and were not required to make any monetary payment. NYU Law School Professor Stephen Choi, a coauthor of the report, observed that the SEC focused “on cooperation and non-monetary settlements, as the agency prioritized efficiency and cooperation in its enforcement approach.”
“Issuer Reporting and Disclosure” was the most common type of allegation against public companies in FY 2024; 45 percent of the 80 actions filed involved reporting/disclosure violations. Broker-dealer allegations were the second most common type of charge (29 percent). These cases apparently involved securities broker-dealer subsidiaries of public holding companies. The Commission charged Foreign Corrupt Practices Act violations in only three percent of cases against public companies, down from 12 percent in 2023, and the lowest annual FCPA case percentage in SEED, which begins in 2015.
Typically, the defendant neither admits nor denies guilt in settling an SEC enforcement action. However, according to the report, the current SEC administration “has taken a strong stance on admissions of guilt as a key accountability measure.” In FY 2024, 34 public company and subsidiary defendants admitted guilt in settlement agreements, up from 16 such admissions in 2022 and 2023 and none in 2021.
Audit Committee Takeaways
SEC Chair Gensler has announced that he will depart on January 20, and President-Elect Trump has indicated they he will nominate former SEC Commissioner Paul Atkins as SEC Chair. As a result, the SEC’s enforcement priorities and settlement philosophy will likely change in 2025. Companies involved in SEC investigations and their audit committees may face a different approach to enforcement decision-making under the new SEC administration.
Nonetheless, companies embroiled in an SEC investigation should consider the Commission’s record of rewarding cooperation in deciding how to respond. The 2024 enforcement results indicate that more companies are choosing to cooperate and that cooperation can have tangible benefits in terms of the monetary penalties to which the company must agree to settle a matter. On the other hand, the benefits of cooperation are uncertain at the beginning of an investigation, the costs in terms of the exposure of company executives to sanctions can be high, and what the staff will view as reward-worthy is not always clear. Also, admitting guilt as part of a settlement, while pleasing to the SEC, may open the door to liability in private civil litigation based on the same matters as addressed in the SEC investigation. But, despite these factors, cooperation is likely to be cheaper in the long run than resisting the SEC’s inquiries.
Comments