We’ve all heard the expression “hard cases make bad law.”  But sometimes bad law is the result of bad cases – i.e., cases that should never have been brought in the first place.  That’s the case with the SEC’s prosecution of Ray Dirks, who died on December 9 at age 89.  I suspect that many

Image by WikiImages from Pixabay

Hating lawyers may not have started with Shakespeare, but he didn’t help things when he wrote “The first thing we do, let’s kill all the lawyers” in Henry VI.  Any lawyer who’s been practicing law for more than a couple of weeks knows that part of the price of bar admission is having to endure lawyer jokes (most of which aren’t very good) and experiences like having a client say to you at the outset of your first meeting, “just so you know, I don’t like lawyers” or words to that effect.

It’s particularly painful, however, when an attack on our profession comes from one of our own, who also happens to be a member of the Securities and Exchange Commission.  I refer to a March 4 speech by Commissioner Allison Herren Lee in which she notes her “deep regard for the ideals of public service that our profession represents” and that her “belief in the ideals of the profession – ideals I know you all share – has only grown stronger with time” but then goes on to castigate corporate lawyers for failing to fulfill our “role…as gatekeepers in the capital markets.”  She distinguishes corporate lawyers from litigators – a dubious distinction that suggests we should be less zealous in representing our clients than our litigation colleagues – and says that in passing Section 307 of the Sarbanes-Oxley Act (more on that below) “Congress was concerned…that counsel often acted in the interests of the executives who hired them rather than the company and its shareholders to whom their duty and responsibility is [sic] owed.”
Continue Reading Who needs Shakespeare when you’ve got the SEC?

I suppose I should be getting tired of writing about enforcement actions involving nondisclosure of perquisites (for example, see here), and that you’re getting tired of reading about them.  However, the topic is hard to resist, whether due to schadenfreude (look it up) or other factors.

The most recent such enforcement action, announced in late November, told a story similar to those told before – a CEO who used corporate aircraft for personal travel, used corporate credit cards for personal expenses, and so on, resulting in a failure to disclose more than $425,000 in “perks” over a two-year period.  The CEO also pledged all of his company stock in violation of a shareholders agreement that required the prior written consent of the company, but that’s another story.  Suffice it to say that the company and the CEO were hit with a variety of charges, including a failure to maintain accurate books and records.

If this elicits yawns or eye-rolling that we’ve seen this movie before, so be it.  However, there is a twist.  Specifically, the SEC’s report noted that the CEO did not disclose the relevant information in his questionnaires – and in some cases had not completed a questionnaire at all.  I don’t recall the SEC focusing on the lowly D&O questionnaire in the past.  Anyone who has pulled his or her hair out trying to get a director or officer to complete a questionnaire is now smiling and saying “Ha!  It serves him right!”  (The same goes for all those directors and officers who complete every questionnaire by saying “please fill it out for me” or “no change from last year” regardless of whether there are changes.)
Continue Reading Another perquisites enforcement action…with a twist or three

Image by haengematteORG from Pixabay

Lest you think that the summer is a quiet time for those of us in the wacky world of securities and corporate governance, think again.  Here’s some of what’s going on:

Legislation

On July 30, the House Financial Services Committee passed 11 bills and sent them to the full House. One of the bills would authorize the SEC to revise the reporting period for 13F disclosures from quarterly to monthly, change the time period to submit such reports, and expand the list of items to be disclosed to include certain derivatives.  The issuer and investment communities support these moves, and House passage seems likely, but the Senate is another matter altogether.

Another bill would impact family offices in a number of ways, including limiting the use of the family office exemption from registration as an investment adviser with the SEC to offices with $750 million or less in assets under management; requiring family offices with more than $750 million of assets under management to register with the SEC as “exempt reporting advisers”; and preventing persons who are barred or subject to final orders for conduct constituting fraud, manipulation, or deceit from being associated with a family office.
Continue Reading Summer Doldrums? Not So Much!

Image by mohamed Hassan from Pixabay

In the last several days, the SEC has engaged in a skirmish, and possibly an opening battle, against SPACs.  A recap follows.

The first shot was fired on March 31, when the Staff of the SEC’s Division of Corporation Finance and the Office of Chief Accountant issued separate public statements about a number of risks and challenges associated with taking private companies public via “deSPAC” transactions.

The CorpFin statement covered a lot of territory, pointing out the following pitfalls, among others, facing companies that go public via a deSPAC.  These pitfalls reflect that such companies are subject to rules governing shell companies that do not apply to companies going public through conventional IPOs.

  • Financial statements for the target must be filed with an 8-K report within four business days of the completion of the business combination.  The usual 71-day extension for such financial statements is not available.
  • The combined company will not be eligible to incorporate Exchange Act reports or proxy or information statements until three years after the completion of the business combination.
  • The combined company will not be eligible to use Form S-8 for the registration of securities issuable under compensation and benefit plans until at least 60 calendar days after the combined company has filed current Form 10 information. (This information is customarily included in a “Super 8-K” filed within four business days after closing of the deSPAC transaction.)
  • For three years following the completion of the deSPAC transaction, the company will be unable to use some streamlined procedures for offerings and other filings, such as using a free-writing prospectus.

The statement also reminds companies that public issuers are required to maintain accurate books and records as well as internal control on financial reporting – both areas that have been the basis for enforcement actions by the SEC.
Continue Reading Caveat Everybody — The SEC Takes Aim at SPACs

Image by Gerd Altmann from Pixabay

Apparently, I wasn’t the only one who thought it was odd to enforce what was essentially an insider trading matter as an internal accounting controls matter.  Commissioners Peirce and Roisman agreed in a November 13, 2020  “statement” that can be found here.

Let’s assume that you are an executive of a company; that you have material non-public information about the company that will, when announced, cause the company’s stock to increase in value; that the company has a policy that prohibits trading when in possession of MNPI; and that you make an open market purchase of the company’s stock before the information is made publicly available.  What are the odds that you will be charged with fraud or insider trading?

Let’s assume a similar but slightly different set of facts:  The company has material, non-public information that will, when announced, cause the company’s stock to increase in value; the company has a policy that prohibits trading when in possession of MNPI; before this information is made publicly available, the company enters into a so-called Rule 10b5-1 plan to facilitate a stock buyback program; and the company then proceeds to buy shares of its stock under the Rule 10b5-1 plan.  What are the odds that the company will be charged with fraud or insider trading?

If you answered both questions the same way, you may be wrong.  In a recent enforcement action involving the second fact pattern above, the SEC opted not to charge the company or its executives with fraud or insider trading.  Rather, the problem, according to the SEC, was that the company had “insufficient” internal accounting controls.  Without going into too many details, the SEC’s theory goes something like this:
Continue Reading Alternate routes (updated)

I’ve often said that lawyers representing corporations should never underestimate the creativity of the plaintiffs’ bar.  However, it seems that the white collar criminal defense bar may not be slouches in the creativity department either.

I’m referring to a recent report in The Wall Street Journal that the legal team representing Elizabeth Holmes, the “disgraced Theranos founder,” is considering using her mental health (presumably, the lack thereof) as a defense in her upcoming federal trial for engaging in a variety of frauds.

I’m prepared to admit that I am totally if morbidly fascinated by the Theranos case: I’ve read the phenomenal book, Bad Blood, by John Carreyrou – twice, in fact – and will surely be among the first to see the movie (which reportedly will star Jennifer Lawrence as Holmes in what strikes me as the best casting choice ever); I’ve attended programs featuring Tyler Shultz, the whistleblower who blew the top off the fraud (and whose grandfather, former Secretary of State George Shultz, was on the Theranos board at the time in a family saga worthy of Aeschylus); I’ve listened to the podcast; I’ve watched the HBO documentary; and much more.  Still, it seems just surreal.
Continue Reading Legal surrealism

Image by JayJayV from Pixabay

As noted in a prior post, every now and then the SEC Enforcement Division likes to remind companies of the requirement to disclose personal benefits, or perquisites.  I’d even hazard a guess – completely unsubstantiated by research – that enforcement actions regarding perquisite non-disclosure make up a significant percentage of enforcement actions concerning proxy statements.

And yet, companies seem to keep forgetting about perks disclosure.  In some cases, the companies’ disclosure controls may not capture perquisites, but my hunch – again, unsupported by research, but this time supported by experience – is that companies and, in particular, their executives, manage to persuade themselves that the benefits in question have a legitimate business purpose and thus are not personal benefits at all.  Over the course of my career, I’ve heard hundreds if not thousands of reasons why a seemingly personal benefit should be treated as a business expense.  Here are just a few:
Continue Reading When it comes to perquisites, caveat discloser

The SEC is re-examining one of the most important disclosures companies provide – Management’s Discussion and Analysis, or MD&A.  I’ve read lots of MD&As in my time, and to be completely candid, many of them – or at least too many of them – are poor.

There are lots of ways in which MD&As are poor, but my principal complaints are as follows:

  1. They don’t provide the “A” in MD&A – the analysis. Sales are up?  Great!  Why were they up?  Well, that’s anyone’s guess.  “Increased market acceptance of our product.”  Also great, but does “greater acceptance” mean that more units sold?  That customers were willing to pay more for each unit, so the company raised the price?  That the company expanded the markets in which the product is sold?  Beats me.
  2. Instead of discussing the “why’s,” companies do a cut and paste of key line items in their financial statements, sometimes with a “Percentage Change” column, indicating how much each line in, say, the P&L changed from period to period. In other words, they’re doing what any reader can do, which is precisely what prior SEC glosses on MD&A disclosure have said not to do.  And then they copy and paste sections of the notes to financial statements about how revenue is determined.  Again, no “why.”

I could rattle off a list of other weaknesses of many MD&As, but let’s move on.Continue Reading Analyze This!

Image by engin akyurt from Pixabay

In case you think that SEC Regulation FD is old news, think again.  A recent enforcement action makes it clear that Reg FD is alive and well.  (And, I might add, living in Boca Raton, Florida.)

Specifically, in an August 20 announcement, the  SEC announced that it had charged a Boca Raton-based pharmaceutical company with FD violations “based on its sharing of material, nonpublic information with sell-side research analysts without disclosing the same information to the public.”  The more detailed allegations include the following:

  • In June 2017, the company privately advised analysts of a “very positive and productive” meeting with the FDA about approval of a new drug. The next day – before any public announcement – the company’s stock closed up nearly 20% on heavy volume.
  • One month later, the company issued an early morning press release that it had submitted additional information to the FDA but “did not yet have a clear path” regarding its new drug application. The stock declined 16% in pre-market trading following the issuance of the release.  However, after issuing the press release but before the opening of the market, the company provided analysts with previously undisclosed information about the June FDA meeting.   The analysts published research notes with these details, and the stock rebounded, to close “only” 6.6% down for the day.

Continue Reading FD Lives!