TheCorporateCounsel.net

Earlier this week, I jokingly referenced the Commission’s “customary year-end enforcement spree” – a reliable addition to the government’s bottom line. On the final business day this year, the SEC raked in $218 million in fines!

New research in the Journal of Accounting & Economics looks at 20 years of data to figure out whether the “September Spike” is really a thing – and if so, whether it can be explained away by market or other factors. Here’s an excerpt about the case volume at the SEC’s FYE:

We find that the average number of cases (of any category) filed in September is almost double the average in other months, and that the median percentage of total annual cases filed in September is 16%. We refer to higher case volume in September relative to other months as the “September spike” and document variation in the size of this spike across time.

Our results are consistent with trends described in the financial press and examined by legal scholars. The Wall Street Journal, for example, reported an uptick in case volume in September 2013 (Eaglesham, 2013b), and subsequent legal research has shown similar upticks over longer sample periods (Velikonja, 2017; Choi, 2020). We extend the descriptive and graphical evidence in these articles by showing that the September spike is robust to controlling for various factors that may influence case volume, such as trailing securities class actions, SEC investigations, and other market factors.

The researchers found that the spike is larger when case totals are lagging the prior year, and smaller when the Chair is in their first year in office. It’s also larger when the SEC’s spending exceeds its budget authority and when the Enforcement Division has more resources. Does it matter? The authors suggest that in “high-spike” years, the resolutions of complex and possibly egregious cases are getting kicked down the road:

Regarding case selection, we create measures of case complexity and find that SEC staff prioritize less complex cases at fiscal year-end. Specifically, the standalone cases filed in September are significantly more likely to reference defendant cooperation and to only name companies as defendants, and are less likely to include a fraud allegation and to reference parallel criminal proceedings. For instance, September cases are approximately 11% less likely to include fraud allegations than cases filed in other months.

The annual year-end pressure might also give companies more leverage for settlements:

We find that defendants receive lower financial sanctions—both disgorgement and civil penalties—when they settle in September. On average, our results suggest the SEC discounts financial sanctions for cases filed as settled charges in September by approximately $132,000—an economically meaningful discount, given that the average financial sanction is $270,000. We also find an 11% lower likelihood of a large financial sanction in September.

As far as whether companies need to be on their best behavior in September, a graph on pg. 45 shows that the number of investigations remains steady year-round. Fiscal year end is just a good time to negotiate a settlement.

– Liz Dunshee