Yesterday, the SEC announced a sweep enforcement action against several insiders and companies for failing to file Forms 4 (Section 16(a) short-swing trading reports) and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis. Using data analytics, the SEC staff identified the insiders charged as “repeatedly filing these reports late,” some delayed “by weeks, months, or even years.” In some cases, the companies failed to make filings on behalf of insiders after having volunteered to do so, and then failed to report the delinquencies in their own filings, as required by Reg S-K Item 405. Those charged were assessed penalties ranging from $66,000 to $200,000. In commenting on these cases, SEC Director of Enforcement Gurbir Grewal said that “[t]imely disclosure of insider transactions is critically important to both investors and the fair, orderly and efficient operation of our securities markets. According to today’s orders, the insiders and companies charged in these matters in the aggregate deprived investors of timely information about over $90 million in transactions….These enforcement actions also make clear that we will not hesitate to charge companies for causing their insiders’ disclosure violations where the companies took on the responsibility for making relevant filings for their insiders, and then acted negligently.” According to the Deputy Enforcement Director, “[s]everal years ago, we undertook a similar initiative to root out repeated late filers….Today’s enforcement action should serve to remind SEC filers that reporting obligations under the securities laws are not optional, and there are consequences for failing to file required forms in a timely manner.” Apparently, the SEC wants to send a message that late filings are not ok…and really late filing are really not ok. It’s also clear that the SEC views companies that do volunteer to make filings on behalf of their insiders—a common practice—as potentially contributing to their filing failures and will hold the companies responsible if the insiders fail to timely file. Message sent, message received?
According to the press release, the charges “stem from an SEC enforcement initiative focused on Form 4 and Schedules 13D and 13G reports.” As you know, under Section 16(a) and Rule 16a-3, insiders are required to file initial statements of holdings on Form 3 and update the information by reporting transactions on Forms 4 and 5. Under Section 13(d) of the Exchange Act, a person (or group) who has acquired beneficial ownership of more than 5% of a registered class of equity securities must file a Schedule 13D within 10 days after the acquisition and promptly amend the filing as needed to report material changes. Depending on the nature of ownership and circumstances of acquisition, some beneficial owners (often referred to as “passive investors”) are permitted to use Schedule 13G, but must file a Schedule 13D within 10 days after beneficial ownership first equals or exceeds 20% percent of the class. As described by the SEC, these reports “give investors and other market participants the opportunity to evaluate whether the holdings and transactions of company insiders could be indicative of the company’s future prospects.” (In light of advances in technology and developments in the financial markets, the SEC has proposed to “modernize” the reporting system by, among other things, revising the various filing deadlines. See this PubCo post.) The SEC noted that there is “no state of mind requirement for violations of Section 16(a) and 13(d) and the rules thereunder. The failure to timely file a required report, even if inadvertent, constitutes a violation.”
Here, the SEC’s enforcement sweep involved five companies and six individuals. In one of the cases brought by the SEC, the individual was a director of SolarEdge Technologies, Inc. The Order alleged that the insider made 18 late Form 4 filings—some two days late and one over four years late—related to open market sales with a total of approximately $26 million in market value, along with restricted stock grants. The SEC alleged that about half of the insider’s “transactions between 2018 and 2021 were reported one or more days late.” He also failed to timely file a Form 5. In the Order, the SEC observed that, although it “has encouraged the practice of many issuers to ‘help their [officers and directors] or submit the  filings on their behalf . . . [in order] to facilitate accurate and timely filing,’ Section 16 places the responsibility to report changes in securities ownership on insiders.” In this case, however, the insider tried to place the blame on the company and the broker: he
“represented that certain of his delinquent filings resulted from the failure of SolarEdge to make timely filings on his behalf and the failure of his broker to timely notify SolarEdge of certain transactions. Respondent’s reliance on SolarEdge and his broker does not excuse his violations because an insider retains legal responsibility for compliance with the filing requirements, including the obligation to assure that the filing is timely and accurately made. In addition, here, SolarEdge made disclosures in its annual proxy statements filed in 2018 through 2022 relating to Section 16(a) compliance by its insiders during fiscal years 2017 through 2021 that named Respondent and other insiders as having late-filed reports and cited that they were ‘due to administrative errors and due to the fact that the Company’s headquarters in Israel work Sundays through Thursdays’ as causes of Respondent’s late reports. Respondent took inadequate and ineffective steps to monitor whether his broker was providing timely notice to SolarEdge and whether timely and accurate filings were made on his behalf by SolarEdge.”
The insider was found to have violated Section 16(a) of the Exchange Act and Rule 16a-3 thereunder, and ordered to pay a civil penalty of $66,000.
And in a separate action, SolarEdge was also charged as “a cause of many of the Section 16(a) violations by its officers and directors as a result of [SolarEdge’s] negligence in performing certain tasks it voluntarily agreed to undertake in connection with the preparation and filing of Section 16(a) reports on their behalf. “ As the Order explained, issuers that “voluntarily accept certain responsibilities and then act negligently in the performance of those tasks may be liable as a cause of Section 16(a) violations by insiders.” The Order alleged that, between January 2018 and October 2022, SolarEdge’s “officers and directors in the aggregate filed untimely Forms 4 for reportable transactions that occurred on more than 60 dates. These transactions primarily related to stock awards and open-market stock sales. For virtually all of these late-reported transactions, [SolarEdge] had received timely notification of or otherwise possessed the necessary information for such filings but failed to prepare and file the reports within the required time frame.” Accordingly, the SEC concluded that the SolarEdge’s procedures and practices “were insufficient to the extent that those practices resulted in the recurrent failure to meet the two-business-day filing deadline.” As a result, the SEC determined that SolarEdge was a cause of violations of Section 16(a) of the Exchange Act and Rule 16a-3 and imposed a civil penalty of $125,000.
Similarly, in the SEC’s Order regarding AgEagle Aerial Systems, Inc., the SEC charged that the company was a “cause” of many of its insiders’ Section 16(a) violations—between March 2018 and June 2022, there were more than 125 untimely insiders’ Forms 4—as a result of its negligence in failing to prepare and file Section 16(a) reports, a task that it had voluntarily agreed to undertake. In addition, the SEC charged that, for multiple years, the company “failed to comply with its disclosure obligations to report these delinquencies” by its insiders as required under Reg S-K Item 405. For example, the SEC alleged that, in 2018, the company stated in its Form 10-K that it believed that all Section 16(a) filing requirements applicable to its insiders were “timely met.” However,
“multiple AgEagle insiders filed untimely required Section 16(a) reports, which [AgEagle] was required to disclose pursuant to Item 405. [AgEagle] was required to review the forms filed and identify by name each insider who failed to file on a timely basis and set forth the number of late reports and the number of transactions that were not reported on a timely basis, which [AgEagle] failed to do. In addition, [AgEagle] did not possess any written representations from its officers and directors that no Form 5 was required, and [AgEagle] did not have a basis to know that no Form 5 was required for at least certain insiders with respect to its fiscal year 2018. In fact, several officers and directors had reportable transactions during 2018 involving, among other things, options award grants and exercises that should have been reported on Form 4 within two business days, but were not, and such reports were not filed until May 2019.”
In other years, the SEC alleged, the company provided some Item 405 disclosure, but omitted material information for each late-filing insider about the number of late reports and the number of transactions that were not reported on a timely basis, and was inaccurate in other respects. The SEC charged that the company was a cause of violations by its insiders of Section 16(a) and Rule 16a-3, and also failed to comply with its disclosure obligation under Item 405, violating Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. AgEagle was required to pay a civil penalty of $190,000.
Likewise, Lattice Semiconductor Corporation made material omissions in its Item 405 disclosure and was also deemed to have caused over 75 late filings by insiders. According to the Order, Lattice filed late Forms 4 on behalf of certain insiders to report open-market purchases or sales for which it had received “timely notification of all necessary information for such filings.” Although Lattice “had agreed to perform all tasks in connection with preparing and filing such reports, the reports were not timely filed due to [Lattice’s] negligent procedures and practices, including with respect to its oversight of an outside stock administrator that [Lattice] engaged in May 2019 to assist with its Form 4 filings.” Lattice was ordered to pay a civil penalty of $185,000. For similar failures under Item 405 and Section 16—more than 150 untimely Forms 4— Cumberland Pharmaceuticals was required to pay a civil penalty of $200,000.
In another instance, an insider—but not his company—was charged with failing to file on a timely basis 19 Forms 4, as well as a Form 5, to report derivative options transactions in his employer’s securities. According to the Order, although the employer had a limited POA to file on his behalf and filed Forms 4 on a timely basis reporting a number of transactions, the individual did not provide timely notice of the transactions to his employer. Shortly after providing notice to his employer, the missing transactions were reported on a Form 4, but, in some cases, were over a year late. The SEC charged that he violated Section 16(a) and Rule 16a-3 and imposed a civil penalty of $143,000.
Some of the Orders also charged failures in connection with filings of Schedule 13D. For example, one individual, a beneficial owner of more than 10% of the shares of one company and an acquirer of beneficial ownership of more than 5% of various other companies, was alleged to have made late filings under both Section 16 and Section 13(d). For one company, he was alleged to have filed a late Form 3 and about 65 late Forms 4 and 5, as well as a late Schedule 13G. Then, the SEC charged, he failed to promptly file amendments to the Schedule 13G reporting the increases in his ownership. After becoming ineligible to file a Schedule 13G because his ownership exceeded 20%, the individual was about nine months late in filing the required Schedule 13D. He was also late in filing of Schedules 13G and 13D for a number of other companies. The SEC charged that the individual violated Section 16(a) and Rule 16a-3, as well as Section 13(d) and Rules 13d-1 and 13d-2 thereunder, and ordered him to pay a civil penalty of $150,000.