The Salutary Effects of International Cooperation on SEC Enforcement
Dec. 3, 2018
Remarks at the IOSCO/PIFS-Harvard Law School Global Certificate Program for Regulators of Securities Markets
Good morning. Before I begin, let me give the required disclaimer that the views I express here today are my own and do not necessarily represent the views of the Commission or its Staff.
It is a real pleasure to be here today and I want to thank Professor Hal Scott and Harvard Law School’s Program on International Financial Systems (PIFS) for inviting me to speak with you all here today. Programs like this one provide important forums for sophisticated dialogue and education on issues impacting the global financial system. I am honored to join your list of distinguished speakers.
As Co-Director of the SEC’s Division of Enforcement, I have the privilege of leading a group of nearly 1,400 attorneys, accountants and other professionals, who together are responsible for investigating and prosecuting civil violations of the U.S. federal securities laws. The women and men of the Enforcement Division consist almost entirely of career public servants who are dedicated to the SEC’s tri-partite mission of protecting investors, promoting fair markets, and facilitating capital formation.
In the Enforcement Division, the scope of our responsibility is extremely broad. The SEC oversees approximately $90 trillion in annual securities trading, the disclosures of approximately 4,300 exchange-listed public companies valued at some $32 trillion, and the activities of over 27,000 registered entities such as investment advisers, broker-dealers, and self-regulatory organizations. The SEC’s Enforcement Division has the daunting task of ferreting out misconduct and, where appropriate, recommending civil enforcement actions that variously seek injunctions or cease-and-desist orders, penalties, disgorgement of ill-gotten gains, suspensions and bars of bad actors, and the temporary suspension or delisting of securities. We do so with a limited budget. Some of the larger firms that the SEC oversees spend each year on technology multiples of the SEC’s entire budget. And our already complex task is made even more difficult in light of the increasingly transnational nature of what we investigate and pursue.
So today I would like to talk to you about how international cooperation assists the SEC’s Division of Enforcement in its investor and market integrity protection missions. I start with what I think is an obvious proposition: Collaboration with international regulators and law enforcement is critical to the SEC’s civil law enforcement success. In today’s global, interconnected marketplace, fraudulent schemes and other misconduct often have cross-border elements, and the need for cooperation between the SEC’s Division of Enforcement and international law enforcement and regulatory counterparts has never been greater. Our investigations often involve witnesses and evidence in different countries, transactions that cross international boundaries, and the resulting application of multiple different legal systems.
For many years, the SEC Enforcement Division has cooperated extensively with international partners, and these relationships and cooperative arrangements have given us the ability to leverage the information and resources of our counterparts to accomplish our enforcement goals. Some statistics help to drive this point home. In this past fiscal year alone, almost a third of the SEC’s 817 enforcement actions involved an international component. The SEC’s Office of International Affairs (OIA), which assists us in obtaining international assistance, handled more than 1,200 requests for administrative assistance made to foreign regulators, many of which were made under the International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding. These statistics are not an anomaly, but rather represent a consistent upward trend over the past several fiscal years.
I will focus my remarks on a few areas within the SEC’s civil law enforcement jurisdiction where we see the most transnational activity and, accordingly, the need for international cooperation. I’m going to start my remarks today with cryptoassets and initial coin offerings, also known as ICOs. Next, I’ll turn to the SEC’s enforcement of the U.S. Foreign Corrupt Practices Act (FCPA). Finally, I will touch on microcap manipulation schemes, which have largely moved overseas. I will close my remarks by noting the other types of misconduct that international coordination has proved beneficial in unearthing and share some thoughts on the future of international cooperation in SEC enforcement.
Cryptoassets and ICOs
With that introduction, let me start with ICOs. There has been a lot of public attention on our recent Enforcement activities in this space. As many of you know, in just a few years, ICO markets have exploded from a mere concept to a phenomenon. In 2016, just two years ago, ICOs raised less than $100 million. So far in this year alone, that figure has grown to more than $22 billion – an increase of some 22,000 percent. The offerings are happening in dozens of market segments, from finance, trading, and e-commerce to gaming, advertising, transport, and social networking. And, the money is being raised from a broad base of investors both inside and outside the U.S.
The novelty of ICOs, coupled with excitement about the potential utility of the underlying blockchain or distributed ledger technology, makes these offerings particularly enticing for some investors. But the growth in the ICO market can obscure the fact that these offerings are often high-risk investments. The issuers may lack established track records. They may not have viable products, business models, or the capacity for safeguarding digital currencies from theft by hackers. And some of the offerings can be simply outright frauds.
We generally see two separate types of securities law violations in the ICO space. First, we see ICOs that meet the definition of a security, but are being sold, brokered, or traded to U.S. investors without complying with the registration requirements of the federal securities laws. Second, we see ICOs that appear to be simply outright frauds – where the issuers are using excitement around the cryptoasset space to simply rip off money from investors. The sponsors of ICOs are, in many instances, located outside the United States, and international cooperation is critical to our ability to investigate and, where appropriate, recommend that the Commission bring enforcement action.
For example, almost a year ago, the SEC obtained an emergency asset freeze to halt a fast-moving ICO fraud that raised up to $15 million from thousands of investors in the U.S. and elsewhere by allegedly falsely promising a 13-fold profit in less than a month. We learned of this ICO from our counterparts at the AMF in Quebec, who provided us with important evidence in support of our complaint and motion for emergency relief. What’s more, we also recently obtained a court ruling that personal jurisdiction existed over the two Canadian residents we charged. Again, international assistance was a significant asset to us. For instance, staff at the AMF provided declarations in our proceeding, which the court relied on in ruling against the defendants.
We continue to work with other international authorities to develop pending ICO investigations. We are gratified that our partners around the world have been dedicating significant resources and concern to this area. In this space, the international assistance we’ve received, and continue to receive, has been essential.
Foreign Corrupt Practices Act
Now, let me say a few words about the FCPA and the importance of international collaboration to our efforts to enforce the statute. The FCPA is subject to a dual enforcement regime – the Department of Justice (DOJ) pursues criminal enforcement of the statute, and the SEC has civil enforcement authority.
In the three decades since Congress enacted the FCPA, the extent of corporate bribery has become more clear and its ramifications in a transnational economy more stark. While bribery of government officials may offer the prospect of short term gains for some companies, I believe it is pernicious and bad for business. It is anti-competitive, leading to distorted prices and disadvantaging honest businesses that do not pay bribes. Bribery has destructive effects within a business as well, undermining employee confidence in a company’s management and fostering a permissive atmosphere for other kinds of corporate misconduct, such as employee self-dealing, embezzlement, financial fraud, and anti-competitive behavior. Companies that pay bribes to win business ultimately undermine their own long-term interests and the best interests of their investors. For these and other reasons, the U.S. enacted the FCPA in 1977, making it illegal, both civilly and criminally, for U.S. companies and individuals acting on their behalf to pay bribes to foreign officials.
Vigorous enforcement of the FCPA remains a high priority for the SEC. As Jay Clayton, Chairman of the SEC, noted during his confirmation hearing before the U.S. Senate, bribery and corruption have no place in society. They often go hand-in-hand with many other societal ills, including instability, inequality, and poverty, and have anti-competitive effects, including putting honest businesses at a disadvantage. Combatting corruption therefore remains an important government mission.
But, as I’ve previously expressed, in my view, in an increasingly international enforcement environment, the U.S. authorities cannot – and should not – go it alone in fighting corruption. As global markets become more interconnected and complex, no one country or agency can effectively fight bribery and corruption by itself. Anti-corruption enforcement is a team effort. The Enforcement Division’s fight against corruption is much more effective when our international colleagues join us in a shared commitment to eradicating corruption and bribery.
Fortunately, I have observed that the level of cooperation and coordination among regulators and law enforcement worldwide is on a sharply upward trajectory, particularly in matters involving corruption. In the past two fiscal years alone, the SEC has publicly acknowledged assistance from more than 25 different jurisdictions in FCPA matters. And, one need look no further than several substantial cases we resolved globally, including the settlements that (i) we, the DOJ, and Dutch regulators entered into with VimpelCom, a telecommunications provider based in the Netherlands, (ii) the SEC, DOJ and Brazilian authorities entered into with aircraft manufacturer Embraer and oil-and-gas company Petrobras, (iii) the SEC, DOJ, and Brazilian and Swiss authorities entered into with petrochemical manufacturer Braskem, and (iv) the collaboration between the SEC, DOJ, and Dutch and Swedish law enforcement authorities with regard to telecommunications provider Teliasonera.
These resolutions – as well as others in the FCPA space – would not have been possible but for the invaluable assistance from foreign authorities and regulators, such as helping us to obtain witness statements and on-the-record testimony, compelling document production, providing bank records, and other sharing of information. We rely on our international partners to help us develop our cases, and with coordinated resolutions we are each able to magnify the deterrent effect of the cases the Commission brings while also offsetting the financial sanctions as appropriate. These sorts of global resolutions send strong messages of deterrence to companies and individuals, as they know they will face potential sanctions from the U.S., as well as other places they do significant business. Global settlements also allow us to resolve cases efficiently and provide closure to companies and individuals on all exposures they face. I fully expect the trend of the Enforcement Division working closely with foreign law enforcement and regulators in anti-bribery actions to continue its upward trajectory in the coming years.
The last area where international cooperation has proved invaluable is in our efforts to address fraud in microcap securities. The fraudulent pattern of a “pump and dump” is all too familiar: fraudsters inflate – pump – the volume and price of a stock artificially by using misleading promotions to induce investors to purchase shares, then sell – dump – their own shares at the artificially inflated price. Once the fraudsters have reaped the benefits of their manipulation, the stock price plummets, and the victims are left with virtually worthless shares. This is the identical same scheme that I confronted nearly 20 years ago when I worked as a federal prosecutor in Manhattan. And as then, large numbers of particularly vulnerable retail or unsophisticated investors are harmed.
Increasingly, the internet and social media are being used to carry out these fraudulent microcap schemes, which give the fraudsters the means of reaching and defrauding even more of our less sophisticated, retail investors. These frauds are global. We need to – and do – help each other in policing microcap fraud in the global markets.
International cooperation has been vital to pursuing these cases, and a recent example demonstrates how important international cooperation is in policing the microcap space. In October, the SEC filed an emergency action and obtained an asset freeze against two individuals and their companies in an alleged scheme that generated more than $165 million of illegal sales of stock in at least 50 microcap companies. We unraveled the multi-year scheme with the assistance of more than a dozen international regulators and sophisticated analysis of nearly 400 bank and brokerage accounts.
As I hope you all can see from my discussion so far, one cannot overstate the value of international cooperation to the SEC’s enforcement program. Indeed, aside from cases involving ICOs, the FCPA, and microcap schemes, we receive invaluable assistance from our international partners in virtually every kind of case we bring – financial reporting and accounting fraud, cases involving unregistered entities, insider trading cases, and the list goes on.
But, as we all recognize, international cooperation is not a one-way street. In fiscal year 2018, the SEC staff responded to more than 650 requests for assistance from our international partners. We are committed to being a strong partner to all of our fellow regulators in their enforcement matters. Securities fraud is global and our efforts to be effective must be global as well.
The Future of International Cooperation
As we look forward to what the future of international cooperation may bring, no discussion would be complete if I did not reference some of the challenges we face. Despite the upward trajectory in international cooperation on enforcement matters, information reasonably necessary for our shared goals of investor protection and the protection of market integrity does not always flow freely to the U.S. regulators from foreign jurisdictions.
Barriers to information may come in various forms, including data protection, privacy, confidentiality, bank secrecy, state secrecy, or national security laws. These laws, many of which have rational objectives unrelated to our capital markets, can restrict access to critical information that enables us to be effective in our enforcement mission. The implications for SEC enforcement are stark. As I mentioned earlier, over a third of the cases brought by the SEC last fiscal year involved an international component. Those cases were able to be brought in large part due to international assistance we received. Had the assistance we received been limited in some material respect, we might not have been able to prosecute those cases and, hence, bad actors in our respective securities markets might have been able to continue their wrongdoing.
Among other things, we need to address the impact of the European Union’s new General Data Protection Regulation (GDPR) on international cooperation. The implementation of the GDPR in Europe has the potential to curtail certain aspects of the cooperative regime that exists between the SEC and European securities regulators and law enforcement on securities-related matters. We are working with our European counterparts and IOSCO to overcome these challenges and develop frameworks that allow us to continue to receive valuable overseas evidence while respecting the EU data protection regime. We must come up with solutions while recognizing that we do not operate in a one-size-fits-all world and that there are, for good reason, significant differences across various markets, as well as regulatory regimes.
Another challenge that we and our international counterparts face simply boils down to human ingenuity and its application to wrongdoing. Simply put, the increasing sophistication of bad actors never seems to lag. One area where we’ve seen this is in schemes to obtain material, nonpublic information by hacking into computer networks and then trading based on the stolen information. In one such case, the SEC charged dozens of defendants – located in the U.S. and abroad – including two Ukrainian men who allegedly hacked into U.S. newswire services and sold material nonpublic information to traders in Russia, Ukraine, Malta, Cyprus, France, and the U.S.
In another case, the SEC charged three Chinese traders with fraudulently trading on hacked nonpublic market-moving information stolen from two prominent New York-based law firms. International cooperation was essential to our efforts in cracking both schemes. Through the assistance of international partners, we were able to freeze millions of dollars of illegal trading proceeds. But these cases also illustrate how sophisticated these hacking-to-trade schemes can be. These schemes threaten the integrity of worldwide markets. Investigating and prosecuting them must be a shared priority among the SEC and its international partners.
Let me conclude my remarks here. I appreciate the opportunity to speak to all of you about the salutary effects of transnational cooperation on the SEC’s enforcement program. Our international counterparts and we have made tremendous progress in our efforts to fight fraud and other kinds of misconduct, and I am confident that the trend will continue. Thank you for inviting me to spend time with you today, and I hope you enjoy the rest of the program.
 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues on the staff of the Commission.
 U.S. Sec. & Exch. Comm’n, Div. of Enforcement, Annual Report 2018 at 6 (Nov. 2, 2018), available at https://www.sec.gov/files/enforcement-annual-report-2018.pdf.
 See Chairman Jay Clayton, U.S. Sec. & Exch. Comm’n, Testimony on Examining the SEC’s Agenda, Operation, and Budget: Hearing Before the H. Comm. On Fin. Serv. (Oct. 4, 2017) (“For example, in 2016 one large financial institution alone spent more than $9.5 billion on technology firm-wide, with $3 billion of that dedicated to new initiatives. Another large financial institution spent $6.6 billion in 2016 on technology initiatives.”), available at https://www.sec.gov/news/testimony/testimony-examining-secs-agenda-operation-and-budget.
 SEC v. PlexCorps, No. 17-cv-7007, 2018 WL 4299983 (E.D.N.Y. Aug. 9, 2018).
 See U.S. Dep’t of Justice, Criminal Div. & U.S. Sec. & Exch. Comm’n, Div. of Enforcement, FCPA: A Resource Guide to the U.S. Foreign Corrupt Practices Act at 2-4, (Nov. 2012),available athttps://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf.
 Nomination of Jay Clayton: Hearing Before the S. Comm. On Banking, Housing and Urban Affairs, 115th Cong. 99 (2017) (Responses to Written Questions of Sen. Tester from Jay Clayton).
 Steven R. Peikin, Co-Director, Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Reflections on the Past, Present, and Future of the SEC’s Enforcement of the Foreign Corrupt Practices Act (Nov. 9, 2017), available at https://www.sec.gov/news/speech/speech-peikin-2017-11-09.
 Press Release 2018-215, Petrobras Reaches Settlement With SEC for Misleading Investors (Sept. 27, 2018), available at https://www.sec.gov/news/press-release/2018-215; Press Release 2017-171, Telecommunications Company Paying $965 Million For FCPA Violations (Sept. 21, 2017), available at https://www.sec.gov/news/press-release/2017-171; Press Release 2016-271, Petrochemical Manufacturer Braskem S.A. to Pay $957 Million to Settle FCPA Charges (Dec. 21, 2016), available at https://www.sec.gov/news/pressrelease/2016-271.html; Press Release 2016-224, Embraer Paying $205 Million to Settle FCPA Charges (Oct. 24, 2016), available at https://www.sec.gov/news/pressrelease/2016-224.html; Press Release 2016-34,VimpelCom to Pay $795 Million in Global Settlement for FCPA Violations (Feb. 18, 2016),available athttps://www.sec.gov/news/pressrelease/2016-34.html.
 Press Release 2017-60, SEC Charges Mexico-Based Homebuilder in $3.3 Billion Accounting Fraud; SEC Uses Satellite Imagery to Crack Case (Mar. 3, 2017), available at https://www.sec.gov/news/pressrelease/2017-60.html.
 Litigation Release No. 24136, SEC Charges Thailand-Based Trader with Insider Trading Ahead of Smithfield Foods Acquisition Announcement (May 7, 2018), available at https://www.sec.gov/litigation/litreleases/2018/lr24136.htm.
 Press Release 2015-191,SEC Obtains $30 Million From Traders Who Profited on Hacked News Releases(Sep. 14, 2015), available athttps://www.sec.gov/news/pressrelease/2015-191.html; Press Release 2015-163,SEC Charges 32 Defendants in Scheme to Trade on Hacked News Releases(Aug. 11, 2015), available athttps://www.sec.gov/news/pressrelease/2015-163.html.
 Press Release 2016-280, Chinese Traders Charged With Trading on Hacked Nonpublic Information Stolen From Two Law Firms; Marks First Time SEC Charges Hacking Into Law Firm Computer Networks (Dec. 27, 2016), available at https://www.sec.gov/news/pressrelease/2016-280.html.