10 Common Misconceptions About the Settlement Between the SEC and Ensign Peak/LDS Church

Here, we consider ten of the most common misconceptions about the 2023 settlement between the U.S. Securities and Exchange Commission (“SEC”) and Ensign Peak/LDS Church for charges related to violations of federal securities law from 1997 through 2019.

To better understand this analysis, please review the following documents:

  • SEC press release announcing the charges and settlement.
  • SEC Order, findings of the SEC’s ~4 year investigation, charges and settlement terms, cease and desist order. (9 pages)
  • LDS Church statement on the SEC settlement.
  • Our analysis of the timeline, shell structure & holdings, relevant securities law, and a detailed examination of the false statements made on Ensign Peak’s quarterly SEC Forms 13F.

1. Findings in the SEC Order represent just “one side of the story”

This is inaccurate. The 9-page SEC Order was mutually crafted and agreed upon by Ensign Peak, the Church and the SEC, with full benefit of counsel, after settlement offers were proposed by Ensign Peak and the Church (paragraph II). The Order represents a “negotiated agreement,” based on the best efforts by all sides to accurately (SEC) and favorably (Ensign Peak & the Church) convey the facts of the matter.

Careful word choice reveals the extent of negotiation over language in the Order, such as terms used for the LLCs: “shell” vs “clone.”

  • The SEC Order uses the term “shell” 0 times and “clone” 36 times
  • The SEC’s press release uses the term “shell” 5 times and “clone” 0 times. Unlike the Order, the SEC’s press release was not influenced by the Church or its attorneys.

SEC settlements are entered on a “neither admit nor deny” basis. Accordingly, while the Church and Ensign Peak are not required to admit wrongdoing, neither can they deny the allegations or fact patterns of wrongdoing set forth in the Order.

“Indeed, the SEC goes one step further and not only prohibits defendants from denying wrongdoing in a settlement, but has demanded a retraction or correction on those occasions when a defendant’s post-settlement statements are tantamount to a denial” (source).

2. The illegal practices were merely a result of “bad legal counsel” or “lawyers being lawyers”

The Church’s press release on the matter states, “The Church’s senior leadership received and relied upon legal counsel when it approved of the use of the external companies to make the filings.”

Creation and use of shell companies is legal. The use of shell companies to make federal filings is also legal, so long as the information in those filings is truthful. Thus, the statement above is benign as regarding the legal creation and use of shell LLCs to hold assets and make federal filings, but is far from complete in covering the relevant issues.

Indeed, the Church’s statement is silent about the decision to knowingly make false statements on the federal securities filings (Forms 13F), which Ensign Peak filed on a quarterly basis from 2003-2019 via shell LLCs (paragraphs 9-35). The Church’s statement is also silent about the decision not to comply whatsoever with Ensign Peak’s 13F filing obligations prior to 2003 (paragraphs 3-10). The SEC investigation found that the Church’s First Presidency caused these violations to occur (paragraph 37) and was ordered to cease and desist from causing those violations (paragraph IV-B).

“Advice of counsel” is a legal defense when intent is a key factor, as it is with the SEC in both criminal and, under some circumstances, civil matters. In this case, the settlement penalty was a civil penalty. However, the acts committed appear to have involved both civil and criminal violations: civil, by failing to file Forms 13F prior to 2003, and criminal, by knowingly falsifying key information on Forms 13F during periods between 2003-2019. See the SEC’s sample Form 13F, which includes the following warning above the signature line and the related attestation of truthfulness: “ATTENTION—Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).”

If the Church’s First Presidency had relied upon bad legal advice when it approved of Ensign Peak making statements, which Ensign Peak’s leadership surely knew to be false, on federal securities filings, that defense may have partially or completely absolved the Church from charges of “causing” Ensign Peak’s violations. Any leniency afforded, or denied, on that basis would have been noted in the Order.

Given the desirability of avoiding negative publicity associated with federal charges and consequential public litigation, the absence of any “advice of counsel” commentary in the SEC Order is meaningful. It appears the Church did not advance such a defense during the investigation or settlement negotiations.

The Order mentions flags raised by the Church Auditing Department (in 2014 and 2017, see paragraph 32), but says nothing about the Church having sought expert legal counsel to resolve those concerns. From all available facts and findings, it appears the decision to systematically misstate key information on the federal securities disclosure filings (Forms 13F) was made solely by the First Presidency and Ensign Peak’s senior leadership.

Thus, the phrase, “received and relied upon legal counsel,” does not explain or justify the First Presidency causing (a) Ensign Peak to not comply – in any way – with 13F filing requirements prior to 2003, or (b) Ensign Peak to systematically misstate key information on 13F filings from 2003-2019. The statement about legal counsel appears to have been made only for public relations value (i.e., misdirection or saving face).

In addition to the Ensign Peak 13F matter, we have identified numerous other violations of U.S. securities disclosure laws by Ensign Peak, the LDS Church, and other Church-owned corporate entities. Together, these violations indicate a long-term policy of selective legal compliance, a choice to prioritize institutional secrecy above compliance with the law. The pattern of violations contradicts any suggestion that the 13F matter was influenced by “bad legal advice” or “lawyers being lawyers.” Below is a list of the LDS Church’s known & verifiable violations of U.S. securities law:

3. The whole thing was just a “paperwork issue,” or, “some forms were filled out incorrectly”

This dismissive misconception is equivalent to, “if they hadn’t deliberately violated the law (i.e., committed perjury on federal securities filings), then they wouldn’t have broken the law.” The idea that these violations merely constitute a harmless set of inadvertent errors in paperwork is not only misconceived, but also betrays ignorance of the crucial protective purpose of the relevant securities law and regulations.

Ensign Peak submitted some 268 federal securities disclosure filings (Forms 13F) from 2003-2019, containing a total of 650,000+ instances of intentionally-misstated key information (see our analysis report). Each filing was signed with the following attestation: “The institutional investment manager filing this report and the person by whom it is signed hereby represent … that all information contained herein is true, correct and complete…” (see SEC Order paragraphs 25-32, and 13F filings for Ensign Peak’s shell LLCs Whitney, Argyll, Ashmore, Cortland, Green Valley, Riverhead, Tiverton, Elkfork, Flinton, Glen Harbor, Meadow Creek, Neuburgh, Tyers)

Although it is true that the violations were committed through misstatements on federal document filings (or, “paperwork”), Ensign Peak’s intentional misstatements constituted federal criminal violations inasmuch as they satisfied all of the criteria for perjury. See the SEC’s sample Form 13F, which includes the following warning above the signature line and the related attestation of truthfulness: “ATTENTION— Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).“

For roughly 20 years, the LDS Church enacted a complex scheme to knowingly submit untrue information on simple federal securities disclosures, while minimizing the risk of discovery by federal authorities. The scheme involved setting up shell companies, each with a designated “business manager” and an “investment management agreement” (“IMA”). The IMA contracts claimed to transfer investment authority to the business managers. Yet, the business managers were, in fact, mere puppets who possessed no investment influence, trading authority or shareholder voting authority whatsoever (see paragraphs 17-34). These efforts created layers of legal smokescreen, which may have succeeded in foiling certain coincidental SEC investigations. But, when peeled back, these layers clearly demonstrate the LDS Church’s intent to violate the letter and spirit of the law, while paying it a degree of lip service. It is also possible that these layers of smokescreen were constructed to ease the consciences of lower-level employees who were asked to participate, actively or passively, in the Church’s scheme.

A variation of the “paperwork” misconception is: “if the LLCs had controlled the investments, there would have been no issue.” This is a counterfactual argument with no ethical basis or value. The shell LLCs did not have control (i.e., investment authority and/or voting authority) over any of their investments at any time, yet Ensign Peak explicitly & falsely attested that the LLCs did independently control all of their listed stockholdings. This is another way saying, “if they hadn’t deliberately violated the law, then they wouldn’t have broken the law.”

4. The relevant laws are “confusing,” with a lot of “gray area”

Section 13(f) violations are not common because the law is easy to understand and follow. The forms are not difficult, confusing or complicated either. Besides Ensign Peak, we were able to identify only 3 other instances of SEC action for violations of Section 13(f) between 1995-2023. Prior to Ensign Peak, the most recent SEC action was in 2007 (see our analysis report p.17 for details).

Section 13(f) of the Securities Exchange Act was adopted by Congress as part of Exchange Act amendments in 1975. Section 13(f) requires institutional shareholders to make quarterly disclosures of all stocks held if the market value of those securities is over $100 million and the firm has discretion (authority) over buying and selling. Section 13(f) addressed concerns regarding the impact of large institutional funds on market stability, fairness to the investing public, and the interests of companies who issue stocks and bonds.

Section 13(f) is a federal law (see §78m(f) in the link). It applies to ALL institutional shareholders, including non-profits and charities, such as the Church, its integrated auxiliaries and subsidiary companies.

Form 13F enables compliance with Section 13(f). The form is simple. It contains information about the institution, securities held, other firms involved with investment decisions, and specific declarations for each stock in the portfolio regarding the firm’s investment discretion (trading authority) and authority to vote as a shareholder.

5. There was “reasonable disagreement” on the legality of Ensign Peak’s 13F practices

This is not supported by the facts.

Ensign Peak leadership notified the Church of its quarterly 13F filing obligations by at least 1998 (paragraphs 6-7). However, in plain non-compliance, no 13F was filed until 2003, or 5 years later. The filing obligation was not in question and there was no disagreement about the law or how to comply with the law. The only debates, as per findings established in the SEC Order, related to a tactical objective of paying lip service to the law without fully complying, all while minimizing the risk of discovery.

From Ensign Peak’s founding in 1997, its head was concurrently Chairman of another large investment firm, which filed all of its Forms 13F properly, including truthful disclosure of shared investment discretion with other firms (see p.14 of our analysis report). Ensign Peak’s leadership team consisted of seasoned investment professionals who were not confused about the legal requirement of compliance with 13F obligations.

The Church Auditing Department (“CAD”), which consists of accounting and finance professionals, raised flags about Ensign Peak’s shell LLC filing practices in 2014 and 2017 (paragraph 32), but did not recommend specific changes. The SEC Order states that the CAD “highlighted the risk that the SEC might disagree with the approach.” Such language from an auditor’s report on a potential question of legal violation indicates a severe lack of domain expertise with investment compliance. More importantly, the CAD’s failure to follow through and obtain affirmative answers to its voiced concerns demonstrates a structural conflict of interest: the CAD reports to the Church’s First Presidency and is mandated only with assuring that Church funds are used in accordance with approved First Presidency policies. It is noteworthy that the CAD provides no effective or independent oversight regarding legal compliance of the LDS Church’s investment entities. For additional background on CAD processes and assurances, see our analysis of the Church Auditing Department.

Two of Ensign Peak’s shell LLC “business managers” resigned their roles in the scheme in 2018, voicing concerns about what they had been asked to do (i.e., commit perjury on quarterly federal securities filings, see paragraphs 33-34). Rather than address their concerns by simply complying with the law, the Church found two new “business managers” (paragraph 34).

6. Use of shell companies is a “common practice” for large investment funds

There are numerous circumstances in which it is sensible and advantageous for investment managers to use shell companies. Hiding the true ownership of assets from authorities in highly regulated industries, such as the stock market, is not a legitimate, legal or ethical rationale for doing so.

7. What Ensign Peak and the Church did was a “victimless crime”

This is a terrible rationalization for violating the law. It is also an unsupportable assertion.

If every institutional investor with 13F filing requirements chose not to comply in order to hide their true identities from the public, then the behavior of large stockholders would be opaque to the market and to securities regulators. Very serious harm could and would be done. Indeed, this was the impetus for enacting the law in 1975. Under such opacity, damaging market manipulation would be rampant, uncontrollable and undetectable, causing harm to ordinary investors and to issuers (companies) of publicly-traded stock. With that in mind, starting from zero, at what number of violators could anyone make a determination that non-compliance is no longer a “victimless” act? And, in that hypothetical scenario, who causes the most harm: the last fund to violate, or the precedent-setting first violator?

In business ethics, a relatable analogy is the Tragedy of the Commons. As with many laws, the public good is served when participants choose to comply. Even when the consequences for violating the law may not be immediately apparent, compliance demonstrates respect for the rule of law and a commitment to ethical behavior.

Separate from what might be measurable harm in the markets, how can anyone make a determination that Ensign Peak’s illegal actions were “victimless,” given the variety of vested stakeholders? A few examples for consideration:

  • The impact of active or passive participation in illegal activity on the consciences of Ensign Peak employees
  • The impact of the discovery of willful non-compliance with the law on personal relationships between Ensign Peak employees and their families, friends and professional networks
  • The long-term impact on LDS tithe-payers who are disappointed to learn of systematic, intentional non-compliance with the law
  • The long-term spiritual opportunity cost of the public example of selective legal compliance set by Ensign Peak and the LDS Church’s First Presidency

8. The $5 million civil penalty was like a “speeding ticket” or a “parking ticket”

This analogy reflects the relative size of the civil penalty: a $5 million fine vs tens of billions of dollars in covered 13F securities held during the period of noncompliance.

However, the analogy creates a false equivalency: on the one hand, the rather banal common social denominator of receiving a speeding ticket or a parking ticket, and on the other hand, a calculated, decades-long institutional effort to deceive securities regulators and the investing public with layers of smokescreen designed to reduce the risk of discovery.

Moreover, the $5 million fine was not the whole penalty, unlike with aforementioned tickets, which can generally be paid and forgotten. The reputational impact of non-refutable findings laid out in the SEC Order is, arguably, a far greater penalty against the Church and is the SEC’s primary post-settlement deterrent. The Order implicates both Ensign Peak and the Church’s First Presidency in an intricate scheme to put institutional interests above compliance with the law.

The $5 million combined civil penalty ($4 million from Ensign Peak, $1 million from the LDS Church), is also 50x larger than any previous 13F-related fine (see p.17 of our analysis report). It is unclear whether assets under management impacts the size of 13F fines.

It appears the maximum civil penalty for making “false and misleading” statements on federal securities filings is $5 million for an individual and $25 million for a company. Based on language in the Order, appears that the Church, recognized in the SEC Order as a “corporation sole,” may have successfully argued that the maximum fine for an individual, or $5 million in total, should apply.

Roughly 98% of SEC cases end with settlement. SEC settlement policy aims to achieve the most efficient outcomes for government resources, namely (a) settlement amounts similar to what would reasonably be expected through litigation, and (b) determination that deterrence goals have been met. For more on SEC settlement policy see here, here and here.

9. Ensign Peak immediately began to comply with the law once the SEC raised objections

The Church’s press release on the matter states, “In June 2019, the SEC first expressed concern about Ensign Peak’s reporting approach. Ensign Peak adjusted its approach and began filing a single aggregated report. Since that time, 13 quarterly reports have been filed in full accordance with SEC requirements.“

This statement implies Ensign Peak immediately began to comply with the law by filing a consolidated 13F report in its own name after June 2019. That is incorrect. Ensign Peak continued to use its shell LLCs to submit misstated 13F filings for 2 additional quarters thereafter — for quarters ended Jun. 30 (filed Aug. 13) and Sept. 30 (filed Nov. 14). The first consolidated 13F was filed on Feb. 14, 2020, roughly 9 months after the SEC put Ensign Peak on notice. Prior to Feb. 14, 2020, Ensign Peak had been in violation of Section 13(f) since its founding in 1997.

Ensign Peak’s practice of filing Forms 13F under the names of purportedly unrelated shell LLCs relied on misstatement of key information, including investment discretion (trading authority) and shareholder voting authority, for every stock held in each LLC. Truthful information, if submitted, would have negated the usefulness of the shell LLCs; their only purpose was to file misstated Forms 13F (see SEC Order). Therefore, once the Church decided that Ensign Peak should comply “in full accordance with SEC requirements,” there was no longer any use for the shell LLC structure. Therefore, the filing of a “single aggregated report” on Feb. 14, 2020, signifies the decision to cease violating the law.

In response to widespread media coverage, the LDS Church’s First Presidency issued a statement on Dec. 17, 2019, stating that, “The Church complies with all applicable law governing our donations, investments, taxes, and reserves.” This statement is not supported by facts now known to have been true at the time. As of that date, two Church entities — Ensign Peak and DMBA — were knowingly violating applicable law governing securities markets, specifically 15 U.S.C. § 78m(f).

  • As of Dec. 17, 2019, Ensign Peak, under First Presidency direction, had not yet filed a single accurate & truthful SEC Form 13F to report public stockholdings in its own name, as required under U.S. securities law. Since 2003, it had filed Forms 13F under the names of purportedly unrelated shell LLCs. All of those filings were intentionally misstated with false and misleading information. Ensign Peak filed its first consolidated (i.e., truthful and compliant with the law) 13F on Feb. 14, 2020.
  • As of Dec. 17, 2019, DMBA, a Church-owned administrator of employee benefits and retirement services, had not yet filed a single SEC Form 13F to report its public stockholdings, as required under U.S. securities law. DMBA’s 13F filing obligations had existed since at least 2009. DMBA filed its first 13F on Feb. 14, 2020, the same day Ensign Peak filed its first consolidated 13F.

10. Ensign Peak’s shell LLCs enabled no unfair financial advantages or illegal tax evasion.

The claim that Ensign Peak achieved no improper financial or tax advantage through the use of its shell LLCs has been reiterated by an outspoken BYU ethics professor (see here and here). These assertions appear to have been based on trust, rather than objective analysis or investigation.

We recently analyzed Ensign Peak’s publicly traded partnership (“PTP”) investments as disclosed in two distinct types of federal statutory filings:

  • SEC Forms 13F. This is where institutional investors are required to report public securities investments if the combined value of those holdings exceeds $100 million. Our study included 13F filings by all known shell LLCs utilized by Ensign Peak in the past and recent consolidated filings in the firm’s own name.
  • IRS Forms 990-T. This is where tax-exempt entities report unrelated business taxable income (“UBTI”), or money earned through business activities not related to their exempt purposes. Our study included all known 990-T filings, original and amended. EPA’s past 990-T filings can be found here and here.

PTPs are public securities that trade like stocks but create taxable income for tax-exempt owners, such as Ensign Peak. Our analysis examined Ensign Peak’s PTP holdings over time (via SEC 13F filings), applied the basic mechanisms by which PTPs create taxable income (“UBTI”), and compared those results with taxable income that was reported by Ensign Peak in its IRS 990-T filings. Our study uncovered compelling evidence that Ensign Peak routinely understated UBTI earned from PTPs in its tax filings to the IRS. This practice appears to have continued until the firm received critical public attention in 2018 & 2019.

We estimate Ensign Peak failed to report $200-450 million in cumulative taxable income from PTPs between 2003 and 2017, representing a federal income tax obligation of $40-90M. (For details on the $200-450 million estimate, see Appendix 4 of our report. For further study, see also pages 16, 38 & 40 and Appendix 3. Detailed 13F data, with PTP breakout sheets, can be found in our downloadable workbook.)

Ensign Peak appears to have indulged in these unique, tax-sensitive securities. By 2010, Ensign Peak had amassed one of the largest PTP portfolios in the market, becoming a top-25 holder in many of the leading issuers and a top-10 ranked holder in several. By that time, ~5% of the firm’s entire public equity fund was allocated to PTPs. Ensign Peak’s prominence as a mysterious and unknown top holder in key PTP issuers likely fueled concern over receiving “unwanted attention” (see paragraph 13 of the SEC Order), especially given that overall fund assets were roughly the same (~$15 billion) as they were in Q4 2006 when EPA first began using Argyll Research as its sole holding shell. See our report, pages 21-25.

PTPs were accorded special handling in Ensign Peak’s shell LLCs in apparent attempts to avoid attention while effectively securing large sums of unreported taxable income. The most unusual PTP trades occurred while the firm planned new shell LLC launches. By contrast, common stocks were sold and moved in a straightforward manner from old LLCs into new ones as the firm expanded its multi-shell holding & 13F reporting strategy in 2012 and again in 2016 (see paragraphs 13-16 of the SEC Order and our analysis). In short, highly unusual trading in very large PTP positions among EPA’s shell LLCs, together with essentially zero UBTI reported in connection with those PTPs, indicates calculated intent and, we believe, is consistent with tax evasion. See our report, pages 29-36.

Our study acknowledges the possibility that Ensign Peak may have made undisclosed payments to the IRS while intentionally misstating UBTI on its 990-T filings. There is no evidence to support this scenario, but we acknowledge it is an untestable possibility. While itself an illegal act (information supplied on Form 990-T is attested under penalty of perjury), Ensign Peak might have done so to further its efforts to conceal assets, as reporting large amounts of UBTI would have indicated a large base of investment assets. It is already well-documented that the firm intentionally misstated other key information on IRS Forms 990-T (see here) and on SEC Forms 13F (see here and here). Complicating matters, Ensign Peak’s tax forms were prepared by Deloitte, a leading global services firm that provides audit and tax preparation services to the LDS Church and its auxiliaries. Extensive and systematic understatement of taxable income on IRS tax forms would have been a clear violation of Deloitte’s ethical code.

To the extent 990-T filings accurately represent taxes paid by Ensign Peak, comparable evidence from 13F filings strongly indicates that most or all of Ensign Peak’s 990-T filings prior to 2018 substantially understate UBTI and tax obligations from PTP investments, and should be restated.

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