Fiscal Year 2024 in Review: Key Takeaways and Predictions from SEC Enforcement Actions Against US Public Companies

Alert

26 December 2024

12 min read

Maia Gez |

On November 22, 2024, the US Securities and Exchange Commission (SEC) released its enforcement results for fiscal year ("FY") 2024 (October 1, 2023 through September 30, 2024).¹ While the next administration's approach to enforcement may differ from the current administration, there are important lessons for US public companies from these results.

Enforcement Actions Against US Public Companies

As we discussed in a recent client alert, the SEC announced that it filed 583 total enforcement actions in FY 2024 and obtained orders for $8.2 billion in financial remedies, the highest amount in SEC history.² According to an analysis by Cornerstone Research, 80 of these enforcement actions were brought against US public companies and subsidiaries.³ Disclosure and reporting related actions constituted the largest category of enforcement actions against public companies, consisting of 41 percent of all such actions.⁴ The SEC also remained focused on revenue recognition and restatement-related enforcement actions, as reflected by its settlement with Cloopen Group Holding Limited described in more detail below.

Although this enforcement activity marks a 12 percent decline in enforcement actions against public companies from FY 2023, this number remains nearly 5 percent above the prior nine-year average, revealing the SEC's continued focus on public companies.⁵ Nonetheless, as we discuss below, the dismissal of many of the SEC's claims against software development company, SolarWinds, and its chief information security officer, reflects judicial pushback on some of the SEC's most aggressive enforcement efforts. Of note, the SEC utilized market-wide "sweeps" to investigate similar conduct by multiple public companies, bringing 38 enforcement actions against public companies and subsidiaries as part of five sweeps.⁶ Enforcement actions brought under such "sweeps" thus accounted for 48 percent of all enforcement activity against public companies and subsidiaries.⁷ Two of the five sweeps related to public company issues: i) violations of the whistleblower protection rule; and ii) failure to timely file beneficial ownership and insider transaction reports.⁸ We discuss both of these issues in more detail below.

Per Cornerstone Research's analysis, FY 2024 also saw an increase in the average settlement amount for public company and subsidiary defendants to $19.8 million from $15 million in FY 2023.⁹ Many of these actions were brought against registered entities for off channel communications violations. Accordingly, it is difficult to say that this average reflects the average that would be imposed in an action for violations relating to US public company activities.

While we continue to expect the next administration to continue to enforce the securities laws relating to public companies, we anticipate some changes. It remains to be seen whether there are budget and staff cuts at the SEC as a result of the Department of Government Efficiency ("DOGE") process that reduces enforcement personnel with knock on effects for enforcement actions and whether the prior Trump administration's aversion to sweeps continues in the new administration.

We may also see reduced civil money penalties for public companies due to the concern that they harm shareholders. Regulators may instead recognize that reputational harm to public companies resulting from an announced enforcement action can have as much of an impact on future conduct. Finally, the next administration may pull back from an enforcement focus on disclosures that are not financial in nature or that do not have a direct financial impact on a company (e.g., ESG).

Key Lessons from FY2024

We highlight below some of the key lessons for US public companies from the FY 2024 enforcement actions and thoughts on any anticipated differences from the new administration:

Self-Reporting and Cooperation. Of the 103 public company and subsidiary defendants charged in FY 2024, 77 of them had their cooperation noted by the SEC, the highest percentage (75 percent) since FY 2019 and significantly above the FY 2015 – FY 2023 64 percent average.¹⁰ As we noted in our February 22, 2024 alert on the SEC's settlement of accounting fraud charges against Cloopen Group Holding Limited ("Cloopen" or the "Company"), such cooperation can bring significant benefits for public companies.¹¹ There, the SEC did not impose civil money penalties against Cloopen because the Company self-reported its accounting issues, cooperated extensively with the SEC, and undertook prompt remedial measures, which included terminating employees involved in the misconduct, strengthening its internal accounting controls, and clawing back compensation from senior officers.¹² As the SEC Enforcement Director emphasized at the time of settlement, public companies' self-reporting, assistance during SEC investigations, and undertaking remedial efforts can yield "real benefits to companies."¹³ We anticipate that the next administration will continue to reward self-disclosures and cooperation.
Shadow Insider Trading. FY 24 also saw the SEC win a jury verdict in its first "shadow trading" insider trading action. There, as we discussed in our April 16, 2024 alert and December 12, 2024 alert, the SEC brought an enforcement action against biopharmaceutical executive, Matthew Panuwat, for "shadow trading": the practice of a corporate insider trading shares of an "economically linked" company while in possession of material nonpublic information ("MNPI") about the insider's own company.¹⁴ Companies are "economically linked" when the MNPI about the insider's company could influence the market price of shares of the other company. The SEC's success puts public companies and traders on notice that the SEC can successfully pursue novel theories of insider trading. Companies should consider their insider trading policies – see our alert Insider Trading Policies: A Survey of Recent Filings | White & Case LLP and consider such policies, including provisions that relate to trading in other company securities, special blackout periods, and 10b5-1 plans.
Whistleblower Provisions. The SEC brought 7 actions against public companies and subsidiaries for violations of the whistleblower protection rule in FY 2024, an increase from three in FY 2023.¹⁵ More specifically, the SEC charged each company with violating whistleblower protection Rule 21F-17(a) under the Securities Exchange Act of 1934, which prohibits impeding an individual from communicating with SEC staff about possible securities law violations. As explained in our September 25, 2024 alert, these actions underscore the SEC's continued focus on impediments to whistleblowers' ability to report possible securities law violations. Consequently, public companies should review employee-related documents to confirm that there is no language that could impede reporting to the SEC. Such documents could include employee compliance manuals, codes of ethics, employment agreements, consulting agreements, and separation agreements.
Beneficial Ownership and Insider Transaction Reports. In FY 2024, the SEC brought six actions against public companies and subsidiaries under sweeps for failing to timely file beneficial ownership and insider transaction reports, as well as one action for failing to file a Form 13F.¹⁶ As discussed in more detail in our October 24, 2024 client alert, public companies should closely monitor their compliance with these reporting requirements.
Cybersecurity. As analyzed in our July 29, 2024 alert detailing one of the most high-profile losses for the SEC in FY 2024, a New York federal judge dismissed most of the SEC's claims against SolarWinds Corp. ("SolarWinds" or the "Company") and its Chief Information Security Officer in connection with the Company's cybersecurity practice.¹⁷ The ruling dismissed all allegations related to SolarWinds' pre-SUNBURST cyberattack risk factor disclosure and post-SUNBURST Form 8-K disclosure, as well as claims concerning SolarWinds' internal accounting and disclosure controls. The Court, however, allowed the SEC to move forward with its claim that SolarWinds committed securities fraud due to misrepresentations on the Company's website regarding cybersecurity vulnerabilities. As detailed in our November 8, 2024 alert, shortly after the end of FY 2024, the SEC brought charges against four public companies who were customers of SolarWinds for making materially misleading disclosures regarding cybersecurity. The two Republican SEC Commissioners issued a joint dissenting statement against these actions, taking the position that the SEC is regulating by enforcement and citing immaterial, undisclosed details to support the charges, details that they do not believe would have altered the "total mix" of information. It is also notable that the SEC did not charge these companies with violating the internal accounting controls provision, Section 13(b)(2)(B), in these cybersecurity actions, which was one of the claims that a federal court dismissed in the SolarWinds case and an SEC approach in 2024 that Commissioners Mark Uyeda and Hester Pierce strongly critiqued in their joint statement on the R.R. Donnelley action.¹⁸ The new administration is likely to pursue a more restrained interpretation of the scope of internal controls provisions in enforcement efforts. Further, we expect that once these Commissioners are in the majority, the SEC will not be bringing actions for cybersecurity related misstatements unless those statements are clearly material to investors.
ESG Disclosures. As discussed in our October 10, 2024 alert, the SEC charged Keurig Dr. Pepper Inc. (the "Company" or "Keurig") with making inaccurate statements regarding the recyclability of its K-Cup single use beverage pods.¹⁹ This enforcement action demonstrates why public companies should continue to exercise care when preparing ESG-related disclosures. Specifically, this action highlights the importance of ensuring that companies' public disclosures, including on sustainability-related topics, are complete and not misleading due to the omission of information. One of the Republican Commissioners dissented because the SEC's order did not demonstrate that the statements at issue were material to investors; instead it only indicated that recyclability was a factor considered by customers in 2016. Due to this, we anticipate that similar ESG related statements will be scrutinized by the next administration to ensure they are material.
Artificial Intelligence. In a December 20, 2023 alert, we discussed the SEC issuing several warnings in FY 2024 to public companies to ensure accurate disclosure of the role and risks of artificial intelligence ("AI") in their businesses. In March 2024, the SEC then brought charges against two investment advisers for "AI washing:" making false and misleading statements about their use of artificial intelligence.²⁰ Although this enforcement action was not against a public company, it nonetheless highlights the SEC's increasing focus on AI washing and the importance of public companies complying with their disclosure obligations when communicating their AI capabilities or use.
Regulation FD Violations for Social Media Posts. In a November 8, 2024 alert, we discussed an SEC enforcement action against DraftKings Inc., for violations of Reg FD in connection with the posting of material nonpublic information ("MNPI") to certain social media accounts associated with the company's CEO.²¹ According to the SEC, the company's external public relations firm posted MNPI on the CEO's personal X and LinkedIn accounts, including statements about the company's second quarter earnings prior to the company's disclosure of this information to the public. Neither of these accounts was a Reg FD-compliant distribution channel. This enforcement action emphasizes the importance of public companies ensuring that executives' social media accounts are not disclosing any material nonpublic information, as well as ensuring that external Investor Relations providers are complying with the Company's policies and receiving appropriate oversight from Company management to confirm compliance with Reg FD.
Enforcement Actions Against Short Sellers. In July 2024, the SEC and Department of Justice (DOJ) announced parallel actions against activist short seller, Andrew Left, and his company, Citron Capital, charging them with multiple counts of securities fraud.²² In a September 5, 2024 alert, we explained how this enforcement action shone a light on short-and-distort campaigns and the challenges they pose for public companies. Specifically, we explained that public companies should consider how they would respond to short-and-distort attacks and appropriate disclosure following such attacks.

Given the range of actions against public companies identified above, it does not come as a surprise that, in its enforcement round-up for FY 2024, the SEC chose to emphasize: "It is foundational to the proper operation of the securities markets that public companies provide materially accurate information to investors."²³ The next administration will likely continue to follow this foundational principal of the federal securities laws.

_{1 Press Release, U.S. Sec. & Exch. Comm'n., SEC Announces Enforcement Results for Fiscal Year 2024 (Nov. 22, 2024),}_{https://www.sec.gov/newsroom/press-releases/2024-186?utm_medium=email&utm_source=govdelivery}_.
2_Id._{3 Cornerstone Research,}_{SEC Enforcement Activity: Public Companies and Subsidiaries}_{(Fiscal Year 2024 Update) at 3,}_{https://www.cornerstone.com/wp-content/uploads/2024/11/SEC-Enforcement-Public-Companies-Subsidiaries-FY2024.pdf}_.
4_Id._{at 6.
5}_Id.₆_Id_{. at 5.
7}_Id.₈_Id._{The other sweeps related to violations of the broker dealer and investment adviser provisions.
9}_Id._{at 8.
10}_Id._{at 7
11 White & Case LLP represented Cloopen's independent special committee of the Board of Directors in connection with its independent internal investigation. See Press Release, Cloopen Grp. Holding Ltd., Cloopen Announces the Substantial Completion of the Independent Internal Investigation (Sept. 6, 2022),}_{https://ir.yuntongxun.com/2022-09-06-Cloopen-Announces-the-Substantial-Completion-of-the-Independent-Internal-Investigation}_{.
12 In Re Cloopen Grp. Holding Ltd., Exchange Act Release No. 99483 (Feb. 5, 2024).
13 Press Release, U.S. Sec. & Exch. Comm'n., SEC Charges China-Based Tech Company Cloopen Group with Accounting Fraud (Feb. 6, 2024),}_{https://www.sec.gov/news/press-release/2024-15?utm_medium=email&utm_source=govdelivery}_{.
14 Statement, U.S. Sec. & Exch. Comm'n, Statement on Jury's Verdict in Trial of Matthew Panuwat (Apr. 5, 2024),}_{https://www.sec.gov/news/statement/grewal-statement-040524}_{.
15 Cornerstone Research,}_{SEC Enforcement Activity: Public Companies and Subsidiaries}_{(Fiscal Year 2024 Update) at 3,}_{https://www.cornerstone.com/wp-content/uploads/2024/11/SEC-Enforcement-Public-Companies-Subsidiaries-FY2024.pdf}_{.
16 Sections 13(d) and 13(g) of the Exchange Act require investors who beneficially own more than five percent of any US public company's SEC-registered voting stock to make Schedule 13D or 13G filings regarding their holdings. Section 16(a) requires "insiders" (i.e., officers, directors and beneficial owners of more than 10% of the registered voting stock of any US public company (other than a foreign private issuer)) to file Forms 3, 4 and 5 disclosing their beneficial ownership of and transactions in the company's equity securities. Section 13(f) requires that certain "institutional investment managers" file on Form 13F if they have investment discretion over $100 million or more of certain Section 13(f) securities (generally, U.S. listed securities), and Section 13(h) requires that certain "large traders" identify their status to the SEC and their broker-dealers via Form 13H.
17}_{SEC v. SolarWinds Corp.}_{, No. 1:23-cv-9518 (S.D.N.Y. July 18, 2024).
18 See}_{SEC.gov | Hey, look, there's a hoof cleaner! Statement on R.R. Donnelley & Sons, Co.}_{19 In the Matter of Keurig Dr Pepper Inc., Securities Act Release No. 100983, at 4 (Sept. 10, 2024).
20 Press Release, U.S. Sec. & Exch. Comm'n., SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of Artificial Intelligence (March 18, 2024),}_{https://www.sec.gov/newsroom/press-releases/2024-36}_{.
21 Press Release, Statement, U.S. Sec. & Exch. Comm'n, SEC Charges DraftKings with Selectively Disclosing Nonpublic Information Via CEO's Social Media Accounts (Sept. 26, 2024),}_{https://www.sec.gov/newsroom/press-releases/2024-149}_{.
22 Litigation Release, U.S. Sec. & Exch. Comm'n., SEC Charges Andrew Left and Citron Capital for $20 Million Fraud Scheme (July 26, 2024),}_{https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26056}_{.
23 Press Release, U.S. Sec. & Exch. Comm’n., SEC Announces Enforcement Results for Fiscal Year 2024 (Nov. 22, 2024),}_{https://www.sec.gov/newsroom/press-releases/2024-186?utm_medium=email&utm_source=govdelivery}_.

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}