The “737 MAX is as safe as any airplane that has ever flown the skies”— Boeing settles antifraud charges with SEC
In a kind of sad coda to the litany of claims, charges, investigations and litigation surrounding the tragic crashes in 2018 and 2019 of two Boeing 737 MAX airplanes and the heartbreaking deaths of 346 passengers, the SEC announced last week, as discussed in this Order, that the Boeing Company had agreed to pay $200 million to settle charges that it made materially misleading statements following the crashes, including statements assuring the public that the 737 MAX airplane was “as safe as any airplane that has ever flown the skies.” (As discussed in this order, the CEO will pay $1 million to settle charges.) Of course, that settlement pales against the $2.5 billion settlement agreed on last year with Department of Justice to resolve a criminal charge related to a conspiracy to defraud the FAA in connection with the FAA’s evaluation of the Boeing’s 737 MAX airplane. Also last year, as reported by the NYT, Boeing’s directors reached a $237.5 million settlement of Caremark claims filed in Delaware, which asserted that, as a result of the directors’ “complete failure to establish a reporting system for airplane safety,” and “their turning a blind eye to a red flag representing airplane safety problems,” the board consciously breached its fiduciary duty and violated corporate responsibilities and, as a result, should bear some responsibility for Boeing’s losses. (For a discussion of that case, see this PubCo post.) According to SEC Chair Gary Gensler, “[t]here are no words to describe the tragic loss of life brought about by these two airplane crashes….In times of crisis and tragedy, it is especially important that public companies and executives provide full, fair, and truthful disclosures to the markets. The Boeing Company and its former CEO, Dennis Muilenburg, failed in this most basic obligation. They misled investors by providing assurances about the safety of the 737 MAX, despite knowing about serious safety concerns. The SEC remains committed to rooting out misconduct when public companies and their executives fail to fulfill their fundamental obligations to the investing public.” How do these things happen? The facts of the Boeing case may be instructive.
That’s the headline on a sidebar on the SEC’s newest Form 144 EDGAR page, providing psychological support and comfort to ease the trauma—I mean the transition—for new filers of electronic Forms 144. You might recall that, in June, the SEC adopted rule amendments that require electronic submission of Forms 144 related to the sale of securities of Exchange Act reporting companies. According to SEC Chair Gary Gensler, in “fiscal year 2021, more than half of all filed Form 144 forms—30,000 in total—were filed on paper. In a digital age, it’s important for investors to have easy, online access to material information, rather than needing to visit SEC facilities to access that information. This is particularly important during Covid-19, which has made in-person visits to access these filings even more challenging. Even when access to physical copies isn’t restricted, there are other costs associated with paper filings. It costs investors money and time to travel to the SEC’s reading room. It costs the SEC money and time to process paper filings. These amendments will reduce costs and drive more efficiencies for investors, filers, and the SEC.” (See this PubCo post.) The SEC has now posted the updated EDGAR Filer Manual instructions for electronic filing of Forms 144, commencing the transition; electronic filing will become mandatory in about six months. To facilitate the transition, the SEC has put together FAQs, step-by-instructions and a “wealth” of other resources to assist new electronic filers. There’s even a communications toolkit with the message “Don’t panic!”
It may look like just another run-of-the-mill insider trading case, but there’s one difference in this settled SEC Enforcement action: according to the SEC, it involved sales under a purported 10b5-1 trading plan while in possession of material nonpublic information. As you probably know, to be effective in insulating an insider from potential insider trading liability, the 10b5-1 plan must be established when the insider is acting in good faith and not aware of MNPI. Creating the plan when the insider has just learned of MNPI, as alleged in this Order, well, kinda defeats the whole purpose of the rule. That’s not how it’s supposed to work, and the two executives involved here—the CEO and President/CTO of Cheetah Mobile—found that out the hard way, with civil penalties of $556,580 and $200,254. The company’s CEO was also charged with playing a role in the company’s misleading statements and disclosure failures surrounding a material negative revenue trend. According to the Chief of the SEC Enforcement Division’s Market Abuse Unit in this press release, “[w]hile trading pursuant to 10b5-1 plans can shield employees from insider trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it.”
On Wednesday, the SEC’s Investor Advisory Committee held a jam-packed meeting to discuss, among other matters, human capital disclosure and the SEC’s proposal on Schedule 13D beneficial ownership. Wait, didn’t this Committee just have a meeting in June about human capital disclosure, part of the program about non-traditional financial information? (See this PubCo post.) Yes, but, as the moderator suggested, Wednesday’s program was really a “Part II” of that prior meeting, expanding the discussion from accounting standards for human capital disclosure to now consider other labor-related performance data metrics that may be appropriate for disclosure. The Committee also considered whether to make recommendations in support of the SEC’s proposals regarding cybersecurity disclosure and climate disclosure.
Last week, the SEC brought a settled action against VMware, a provider of cloud-storage software and services, alleging that it misled shareholders by failing to disclose material information about its “managed pipeline” of orders in quarterly and annual Exchange Act reports, on earnings calls and in earnings releases during its 2019 and 2020 fiscal years. According to the press release, the company used its “backlog management practices” to “push revenue into future quarters by delaying product deliveries to customers, concealing the company’s slowing performance relative to its projections.” Interestingly, the charges in the SEC’s Order were not about funny accounting or even that favorite Enforcement standby, failure to maintain and comply with adequate disclosure controls and procedures. As VMware noted in a statement, the “SEC’s findings do not include any findings that the Company failed to comply with generally accepted accounting principles.” Rather, the charges were about the disclosures about the accounting. “Although VMware publicly disclosed that its backlog was ‘managed based upon multiple considerations,’” the SEC said, “it did not reveal to investors that it used the backlog to manage the timing of the company’s revenue recognition.” VMware was ordered to cease and desist and pay a civil penalty of $8 million. According to an Associate Director in the Division of Enforcement, “by making misleading statements about order management practices, VMware deprived investors of important information about its financial performance….Such conduct is incompatible with an issuer’s disclosure obligations under the federal securities laws.”
Last week, SEC Chair Gary Gensler gave testimony before the Senate Banking, Housing and Urban Affairs Committee. While his prepared testimony largely revisited familiar themes, the Committee’s questioning offered a bit more insight. Committee Chair Senator Sherrod Brown cautioned at the outset that Republicans have “bellyached”—and he assumed would today—about Gensler’s “ambitious agenda,” but added that, “if Wall Street and its allies are complaining,” that means Gensler is doing his job. And right on cue, Ranking Member Senator Pat Toomey cast doubt on recent SEC actions that, he said, raised questions about how well the SEC was handling its responsibility to facilitate capital formation. Where was the SEC, he asked, when some crypto lending platforms “blew up,” resulting in billions in losses? And while the SEC has failed to provide regulatory clarity for the crypto market, he contended, it has instead been busy proposing many controversial and burdensome rules that are outside the SEC’s mission and authority. After West Virginia v. EPA (see this PubCo post), he warned, the SEC should consider itself to be on notice from the courts. In particular, some on the Committee—on both sides of the aisle—took aim at the SEC’s climate disclosure proposal—particularly Scope 3 disclosure—and Gensler’s responses made clear that he heard the criticisms, both from the Committee and from commenters, and that there would be some changes to the proposal as the SEC tries to “find a balance.” But far would those changes go?
Reg FD cases rarely get to court, but here’s one that, barring a settlement, appears to be headed to trial. In a 129-page opinion in SEC v. AT&T, 9/08/22, the federal district court for the SDNY denied summary judgment for both sides in a case the SEC brought in March of 2021 against AT&T and three members of its Investor Relations Department for violations of Reg FD. (See this PubCo post.) The SEC alleged that, in March 2016, AT&T learned that, as a result of a “steeper-than-expected decline in smartphone sales,” AT&T’s first quarter revenues would fall short of analysts’ estimates by over a $1 billion. Given that AT&T had missed consensus revenue estimates in two of the three preceding quarters, AT&T, it was alleged, embarked on a “campaign” to beat consensus revenue estimates for Q1: the three defendant IR employees were asked by the CFO and IR Director to contact the analysts whose estimates were too high to “walk” them down. As part of that campaign, the SEC alleged, they selectively disclosed the company’s “projected or actual total revenue, and internal metrics bearing on total revenue, including wireless equipment revenue and wireless equipment upgrade rates.” The campaign worked. But—and it’s a big but—it also led the SEC to bring claims against AT&T for violating Reg FD, and against the three IR employees for aiding and abetting that violation. As to AT&T and the other defendants, the Court was not persuaded by their arguments that there was insufficient evidence to support the SEC’s claims of a Reg FD violation, nor did the Court agree that Reg FD was “invalid” under the First Amendment. And, as to the SEC, while the Court viewed as “formidable” the evidence showing that the information at issue was material, nonpublic and selectively disclosed, the question of scienter was a closer one, and a reasonable jury could find for the defendants on that point.
At last week’s PLI program, SEC Speaks, Corp Fin Director Renee Jones and crew discussed a number of topics, among them disclosure of emerging risks, recent rulemakings, staff focus on Part III disclosures, shareholder proposals and MD&A disclosures. But there’s no denying that the most entertaining moments came from the caustic side commentary provided by former SEC Commissioner Paul Atkins, whose perspective on current trends is, hmmm, distinctly at odds with the zeitgeist currently prevailing at the SEC.
Today, the SEC adopted a number of inflation-related adjustments under the JOBS Act, including an adjustment to the revenue cap in the definition of “emerging growth company,” as well as adjustments to certain thresholds and limitations in the crowdfunding exemption under Reg Crowdfunding. Inflation has been very real in the last couple of years, so the adjustments are more substantial than for the prior period. The new inflation-adjusted amounts will become effective upon publication in the Federal Register.
Countries outside the U.S. have sometimes been trendsetters when it comes to board diversity. For example, according to the California’s board gender diversity bill, SB 826, signed into law in 2018, “in 2003, Norway was the first country to legislate a mandatory 40 percent quota for female representation on corporate boards.” Under Nasdaq’s board diversity rules (see this PubCo post), board diversity encompasses more than gender diversity—it also includes persons who self-identify as underrepresented minorities or LGBTQ+. Nasdaq’s new diversity rules also apply to foreign private issuers. What does “board diversity” mean for foreign private issuers and non-US companies considering US IPOs? Does it focus solely on women or does it have a broader scope? Who are “underrepresented individuals in home country jurisdiction”? These questions and more are addressed in this fascinating piece, Board Diversity for Foreign Private Issuers: Does Board Diversity Mean the Same Thing Worldwide?, from Cooley’s Singapore office, posted on the Cooley CapitalXchange blog.