The number of enforcement actions, fines and penalties levied by the Securities and Exchange Commission provide a “rough measure” of the agency’s overall activity in policing wrongdoing, but they “do not provide a full and meaningful picture of the quality, nature and effectiveness” of the securities regulator’s efforts, according to Steven Peikin, co-director of the SEC’s enforcement division.
Indeed, the “undertakings” the agency took against Theranos and Tesla founder Elon Musk “provide unique benefits to investors in the long term,” Peikin stated during a recent speech at the Practising Law Institute’s White Collar Crime 2018 conference.
Peikin said that non-monetary relief such as undertakings and conduct-based injunctions as well as industry bars, suspensions and disgorgement are other important sanctions the agency uses to crack down on wrongdoing.
Peikin noted that in civil injunctive actions, the federal securities laws “permit the commission to seek — and federal courts to grant — any equitable relief that may be appropriate or necessary for the benefit of investors.”
Two of the “most effective forms” of equitable relief in commission enforcement actions are undertakings, Peikin explained, “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.”
The commission also has authority to impose similar obligations in administrative and cease-and-desist proceedings, he continued.
Undertakings “are a forward-looking remedy; they are specifically designed with an eye toward what happens after the settlement,” Piekin said.
“When they are well-crafted, they unquestionably provide unique benefits to investors in the long term.”
Piekin gave two examples of recent undertaking actions by the division — fraud charges against Silicon Valley-based private company Theranos Inc., now defunct, and its founder and former CEO, Elizabeth Holmes, and charges against Tesla founder Elon Musk.
In March, the commission charged Theranos and Holmes with raising more than $700 million from investors in an elaborate, years-long scheme involving exaggerated claims about the company’s technology, business and financial performance.
“One of the most important elements of the commission’s settlement with Holmes were undertakings that required her to relinquish her voting control over Theranos by converting her supermajority shares to common shares, and 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,” Peikin said.
With Theranos, the commission “confronted a situation where, because of the capital structure of the company, Holmes had nearly complete control of the company,” Peikin said. “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.”
The agency also charged Musk, chairman and CEO of Tesla, with fraud for tweeting a series of false and misleading statements about his plan to take Tesla private.
Tesla was also charged with failing to maintain disclosure controls and procedures with respect to Musk’s communications.
To settle the SEC actions, “Musk and Tesla agreed not only to pay significant penalties, but also to a set of comprehensive undertakings,” Peikin said.
If approved by the court, Piekin continued, the undertakings will require, among other things;
- Musk to resign as chairman and be replaced by an independent chairman;
- Tesla to add two independent directors to its board;
- Tesla to establish a committee of independent directors and adopt mandatory controls and procedures to oversee and Musk’s public communications about the company; and
- Tesla to employ within its legal department an experienced securities counsel.
The undertakings, Piekin said, “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.”
Added Peikin: “I believe these carefully tailored undertakings serve the commission’s investor protection mission by specifically addressing the misconduct at issue.”