Thoughts About SEC Enforcement

Elon Musk recently settled a U.S. Securities Exchange Commission (“SEC”) enforcement action that costs him $20 Million and his position as chairman of Tesla Motor Corporation for his infamous tweet about taking Tesla private[1]. The SEC is the federal agency charged with protecting the investing public and regulating broker dealers, securities exchanges, investment advisers, and overseeing our capital markets. One of the tools that the SEC uses to carry out its mandate includes the ability to bring enforcement actions in court or in an administrative action. Before the SEC decides to start an action, the SEC investigates the facts either informally or formally. How a person who is contacted by the SEC during the investigative process is critical to minimize, if possible, any adverse consequences. Unlike the U.S. Attorney, the SEC does not classify people being investigated as “targets”; however, counsel may be able ascertain the degree of exposure by the nature of the investigation and conversations with enforcement staff.

The “broken windows” enforcement approach by the former SEC Chairman Mary Jo White is not the philosophy by the Commission today that seems to be using a more measured approach. An enforcement philosophy that pursues minor violations with the same vigor as it does major violations is an unwise use of the SEC’s limited resources and may be counterproductive by creating a fear to self-report violations.

A SEC inquiry must be taken seriously given the potential ramifications of an enforcement action. The SEC can seek non-monetary relief in the form of equitable relief such as barring a person from employment in the securities industry or working for a public company. The Commission can seek undertakings which require a person to take affirmative actions, and conduct base injunctions that prohibit a person from engaging in activity posing as a risk of harm to public investors. In the Elizabeth Holmes enforcement proceeding the SEC settlement with Holmes required undertakings that (1) she relinquish her voting control over Theranos, Inc., a private company, converting her supermajority shares to common shares, (2) guaranteeing 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, and (3) barred her from serving as an officer of a public company for 10 years[2].

In addition, the SEC can seek to seek officer and director bars, associational bars and suspensions. The SEC does not view these remedies as punishment but rather as preserving the integrity of the markets and protecting investors. The SEC will also seek civil penalties and disgorgement. Civil penalties are one of the primary enforcement tools available to the Commission. When appropriate, the Commission will consider the Seaboard factors: remedial action taken by the company, policies of self-reporting and policing, and cooperation with the Commission.[3] Disgorgement is the other primary form of money relief sought by the SEC. Ill-gotten gains will be offset by cooperation with the Commission.


William Despo has over 40 years representing companies, persons, and regulated entities before the SEC. As the former chair of the Financial Institutions Group of a national firm and enforcement attorney at the American Stock Exchange, and current chair of the New Jersey State Bar Association Securities Law Committee, he can draw on his experience to represent person under investigation and a subject of an enforcement action.


[1]   See SEC Press Release 2018-226, Elon Musk Charged with Securities Fraud for Misleading Tweets (Sept. 27, 2018), available at https://ww.wc.gov/news/press-release/2018-226

[2] See SEC Press Release 2018-41, Theranos, CEO Holmes, and Forer President Balwani Charged with Massive Fraud (March 14, 2018), available at https://www.sec.gov/news/press-release/2018-41

[3]  See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Securities Exchange Act Release No. 44969 (Oct. 23, 2001) (available at: https://www.sec.gov/litigation /investreport/34-44969/htm).

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