SEC Enforcement Recovers A Record $6.5B with a Focus on the “Rapidly Evolving Crypto Asset Securities Space”

The US Securities and Exchange Commission (SEC) released a report on Tuesday, sharing that in the fiscal year 2022, it filed a total of 760 enforcement actions – 9% more than the prior year.  These included 462 new, or “stand-alone,” enforcement actions that involved everything from “first-of-their-kind” actions to cases charging traditional securities law violations.

In addition, 129 actions were against issuers who were allegedly delinquent in making required filings with the SEC, and 169 “follow-on” administrative proceedings seeking to bar individuals from certain functions in the securities markets based on civil injunctions, criminal convictions, or other orders.

In 2022, the SEC recovered a record $6.439 billion in penalties and disgorgement on behalf of the investing public, up from $3.852 billion in the previous year.

A Focus on Crypto

SEC’s enforcement action remained particularly focused on the rapidly evolving crypto-asset securities space, with the regulator noting that earlier this year, they decided to nearly double its crypto unit’s staffing. For instance, in May 2022, the SEC announced adding 20 new positions to the renamed Crypto Assets and Cyber Unit (previously the Cyber Unit).

The agency meanwhile continued to investigate potential misconduct in this area, leading to significant enforcement actions, including charges against crypto lender BlockFi for failing to register the offers and sales of its crypto lending product to retail. This was a first-of-its-kind action from the SEC against cryptocurrency lending platforms for violating the registration requirements of the Investment Company Act of 1940.

According to a report from the Wall Street Journal, BlockFi is currently exploring a bankruptcy filing and is preparing to lay off some of its workforce.  This comes after BlockFi announced that it “can no longer operate business as usual” following FTX’s collapse. As centralized exchange (CEX) FTX filed for bankruptcy, the crypto lender paused many platform activities, including withdrawals, and asked customers not to submit any deposits.  BlockFi had “significant exposure” to the CEX in the form of obligations owed to the lender by FTX’s sister company Alameda, assets on the FTX platform, and an undrawn credit line from FTX.

In addition to BlockFi, the SEC also reported charges against 11 individuals for their alleged roles in creating and promoting Forsage, a fraudulent crypto pyramid, and a Ponzi scheme.

The SEC also brought insider trading charges against Ishan Wahi and his associates, alleging that Wahi obtained material non-public information in his former role as a product manager at Coinbase.  The executive then tipped his associates ahead of announcements regarding multiple crypto asset securities that would be made available for trading on the platform, in advance of which his associates traded.

Among the cases listed was NVIDIA Corporation, which was also charged for inadequate disclosures concerning the impact of crypto mining on the company’s gaming business.

Wall Street Giants Leading the Charge

The SEC is responsible for enforcing federal securities laws designed to protect investors and promote fair and orderly markets. The agency regularly releases enforcement results, which provide information on the actions the regulator has taken against violators of securities laws.

The SEC’s enforcement results can be found on its website and are also published in the SEC’s Annual Report. The results provide information on the SEC’s actions, including the type of violation, the number of cases brought, and the amount of money recovered.

The agency aims to show that it is committed to protecting investors and maintaining fair and orderly markets through its enforcement results. However, crypto wasn’t the only focus of the SEC. In fact, the record amount of civil penalties was partly driven by the fines against several large Wall Street firms.

A whopping $1.2 billion in penalties were reported against JP Morgan Securities and 16 other firms for “widespread and long-standing failures” to preserve text message communications on personal devices.

The banking giant JP Morgan agreed to settle charges that included many prominent names in financial services, including Barclays Capital, Bank of America Securities, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS.

The commission also brought actions against Allianz Global Investors, which is paying $1 billion to settle charges for allegedly concealing the downside risks of a complex options trading strategy from investors.

Among the actions the SEC cited included a $1.5 million penalty against BNY Mellon for misrepresenting the ESG scrutiny of several managed mutual funds. TradeZero America co-founder also settled charges earlier this year for briefly barring trading during the “meme stock” frenzy of early 2021, despite public claims to the contrary. There was also a $200 million settlement with Boeing Co to cover charges that it misled investors about its 737 MAX.

Whistleblowers and Accountability

The fiscal year 2022 also marked the second-highest year in whistleblower awards, with the SEC issuing $229 million in 103 total awards and receiving an all-time high number of tips alleging wrongdoing of more than 12,300.

SEC Chairman Gary Gensler said he continued to be impressed with the commission’s Enforcement Division. Meanwhile, Enforcement Division Director Gurbir S. Grewal said they tried to use “every tool in our toolkit.” Grewal further said they do not expect to break the records and set new ones each year because they “expect compliance.”

These results show that the SEC’s Enforcement Division “is working with a sense of urgency to protect investors, hold wrongdoers accountable and deter future misconduct in our financial markets,” Grewal added.

Regulatory Unclarity in Crypto Landscape

The SEC’s report comes after the US Commodity Futures Trading Commission (CFTC) announced that 22% of the 82 enforcement actions brought by it in the fiscal year 2022 were filed against crypto-related entities.

According to the federal regulator’s annual enforcement report in late October, the CFTC filed charges against the USDT stablecoin issuer Tether and its sister company, the crypto exchange Bitfinex, which settled for a combined $42.5 million last October.

The CFTC highlighted other high-profile actions as well, many of which have not yet been resolved, including charges against the decentralized exchange (DEX) Digitex. The DEX has been accused of operating an illegal futures market. Another action was against anonymous members of Ooki DAO for allegedly offering illegal, off-exchange tokenized margin trading and lending services.

At the time, CFTC Chairman Rostin Behnam said that “in the face of unprecedented financial market conditions directly impacting American consumers, emerging technological disruption, and growing retail investor participation, the CFTC continues its unwavering commitment to a robust enforcement program ensuring the markets we oversee are open, transparent, fair and competitive.”

Interestingly, many in the crypto industry see the SEC as the “bad cop” of crypto regulation and the CFTC as the “good cop.”  However, SEC Commissioner Hester Peirce, who has been attributed “Crypto Mom,” recently said in an interview that the SEC and CFTC should “work jointly and get input from the border public.”  According to her, “having one regulator devoted to crypto could be problematic.” Because crypto and the underlying blockchain technology could be “integrated into the back end of the financial system,” which means the crypto industry requires the jurisdiction of the SEC.

“The SEC would be a good regulator for spot crypto markets if we got our act together,” she said last week.  Peirce’s comments came as Bahamas-based FTX announced files for Chapter 11 bankruptcy protection in the US, which she believes could be the “catalyst” government agencies needed to “sit down” and create clear regulations.

“That doesn’t mean just bringing enforcement actions,” Peirce said, “but we also need to know, thinking about this as a society, how we want to regulate this thing.”

SEC Chair Gary Gensler has actually declared most cryptocurrencies as securities, but the agency’s position on cryptocurrencies has been met with harsh criticism from the crypto industry, with some arguing that the agency is overreacting and that cryptocurrencies should not be subject to the same rules as traditional securities.

The regulatory environment surrounding cryptocurrencies is still relatively unclear, creating uncertainty for businesses operating in the space. While some countries have taken a more hands-off approach, others have been more proactive in regulating the industry. This has led to a patchwork of different rules and regulations that can be difficult to navigate.

This lack of clarity has made it difficult for financial institutions to get involved in crypto. Due to the regulatory risk, many banks and other traditional players have been hesitant to get involved. This has limited the industry’s growth and stopped it from reaching its full potential.

Hopefully, as the industry matures, we will see more clarity from regulators worldwide. This will allow businesses to operate more freely and help the crypto space reach its full potential.