The SEC Sees a Significant Uptick in Tips, Complaints, and Referrals


Posted on June 3, 2020, by James G. Lundy, Michael MacPhail and Nicholas S. Feltham in Enforcement. Comments Off on The SEC Sees a Significant Uptick in Tips, Complaints, and Referrals

From mid-March to mid-May, the SEC received more than 4,000 tips, complaints, and referrals. This, according to one of the SEC Co-Directors of the Division of Enforcement, represented a 35% increase over the same period last year. Additionally, as recently confirmed by the Director of the SEC’s New York regional office, the SEC is actively monitoring these tips, complaints, and referrals because it knows that doing so sends an important deterrence message to market participants. While the SEC has many sophisticated market monitoring and other fraud detection tools, tips and complaints provide the Enforcement Staff with valuable leads, which often develop into investigations and enforcement actions in matters that would otherwise may have remained hidden. Undoubtedly, many of these tips and complaints are either directly related to the COVID-19 pandemic or are indirectly related to the resulting economic turbulence. It is foreseeable that this significant uptick in tips and complaints will lead to a significant increase in the number of investigations and enforcement actions.

As we previously discussed, over the past several months the SEC has been using trading suspensions to prevent fraud and investor harm related to the COVID-19 pandemic. More recently, the SEC pressed forward with cases charging securities fraud for COVID-19-related misrepresentations. On May 14, the SEC charged Applied BioSciences Corp. with securities fraud based on the company’s public statements about offering products to combat COVID-19. The SEC had previously suspended trading of Applied BioSciences Corp.’s stock. Similarly, Praxsyn Corporation, whose stock the SEC had also halted trading of, was charged with fraud for falsely stating the company’s ability to secure large quantities of masks used to protect against COVID-19.

As the SEC continues to shift resources and priorities, a rise in investigations and enforcement actions should continue for the foreseeable future. Although the SEC’s focus to date has been on low-hanging fruit in the microcap space, it eventually may ensnare larger reporting companies that may have failed to adequately update their “MD&A”, risk factors, and other disclosures. In addition to pandemic-related tips and complaints, another reason to expect an increase in SEC COVID-related enforcement actions are the incentives provided by the agency’s Whistleblower Program, which provides monetary awards for successful whistleblowers. For example, the SEC recently announced more than $54 million in whistleblower awards, including more than $27 million to one whistleblower and $18 million to another.

For all of these reasons, we anticipate the SEC’s Division of Enforcement to continue to focus its resources on attempting to address these increasing tips and complaints.





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