Category: Litigation

Treasures to remember RBG

For all who admired her greatly—I think that’s just about everyone—and miss seeing her on the Court, especially now with SCOTUS so prominent in our lives, you might want to take a long look through Bonham’s online auction of The Library of Justice Ruth Bader Ginsburg.  It’s wonderful and moving just to look through the catalogue, which has lots of photos and text with personal stories accompanying some of the lot descriptions.  

SEC’s “shadow trading” case survives motion to dismiss

In August last year, the SEC announced that it had filed a complaint in the U.S. District Court charging Matthew Panuwat, a former employee of Medivation Inc., an oncology-focused biopharma, with insider trading in advance of Medivation’s announcement that it would be acquired by a big pharma company.  But this isn’t your run-of-the-mill insider trading case. Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction.  No, according to the SEC, he engaged in what has been referred to as “shadow trading”; he used the information about his employer’s acquisition to purchase call options on a separate biopharma company, Incyte Corporation, which the SEC claimed was comparable to Medivation.  According to the SEC, Panuwat made that purchase based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte. Incyte’s stock price increased after the sale of Medivation was announced.  The SEC charged that Panuwat committed fraud against Medivation in connection with the purchase or sale of securities, with scienter, in violation of Rule 10b-5; he had, the SEC charged, breached his “duty to refrain from using Medivation’s proprietary information for his own personal gain” and traded ahead of the announcement. The SEC sought an injunction and civil penalties. (See this PubCo post.) In November, Panuwat filed a motion to dismiss the complaint under Rule 12(b)(6), calling it “an unprecedented expansion” of the Exchange Act. Last week, the Court denied the motion.

SEC charges company for alleged misstatements regarding director independence and disclosure control failures

As we head into a new proxy season, this SEC order involving settled charges against Leaf Group Ltd. might be a good case to keep in mind.  In this case, the SEC charged that Leaf did not adequately identify and analyze—and did not maintain effective disclosure controls and procedures to identify and analyze— whether some of its directors were “independent” and whether there were “interlocking relationships between its directors and executive officers,” which led to “material misstatements and omissions in certain of its public filings,” including its proxy statement. As part of the settlement, Leaf was ordered to pay a civil penalty of $325,000. The company’s alleged failings as outlined in the order might serve to augment your seasonal checklist for examining issues of director independence.

Fiduciary duty claims against SPAC sponsor survive dismissal in Delaware under entire fairness standard

Is everything securities fraud, as Bloomberg’s Matt Levine frequently maintains? (See this PubCo post.) Or perhaps, in the SPAC environment, will all claims of fraudulent misrepresentation and omission now become claims of breach of fiduciary duty under Delaware law—and reviewed under the entire fairness standard? Is that a possible takeaway from the Delaware Chancery Court’s refusal last week to dismiss the complaint in In Re Multiplan Corp. Stockholders Litigation? In that case, the plaintiffs, purchasers of securities in a SPAC IPO, claimed that the defendant SPAC sponsor and SPAC board members disloyally impaired the plaintiffs’ rights to redeem their SPAC shares prior to consummation of the de-SPAC transaction by breaching their fiduciary duty to disclose to the plaintiffs material information about the de-SPAC target company. According to the Court, the “Delaware courts have not previously had an opportunity to consider the application of our law in the SPAC context. In this decision, well-worn fiduciary principles are applied to the plaintiffs’ claims despite the novel issues presented. Doing so leads to several conclusions.” In particular, one of those conclusions was that, due to inherent conflicts between the SPAC’s fiduciaries and the public stockholders, the entire fairness standard of review applied, establishing a very high bar for dismissal of the complaint. 

SEC imposes $125 million civil penalty on Nikola for alleged material misstatements

Happy New Year!

In July of last year, as discussed in this PubCo post, the SEC and DOJ charged Trevor Milton, the founder, former CEO and executive chair of Nikola Corporation, with securities fraud for disseminating, primarily through social media, false and misleading information about Nikola’s technological achievements. In addition to civil SEC charges, Milton faced two counts of criminal securities fraud and one count of wire fraud, with maximum 20- and 25-year prison terms if convicted. He pleaded not guilty. But, interestingly, there was no word about the company. Was the company completely off the hook for the CEO’s alleged misrepresentations? Now we know that the answer is—far from it. In December, the SEC announced that Nikola had “agreed to pay $125 million to settle charges that it defrauded investors by misleading them about its products, technical advancements, and commercial prospects.” According to Gurbir Grewal, the SEC’s Director of Enforcement, “Nikola Corporation is responsible both for Milton’s allegedly misleading statements and for other alleged deceptions, all of which falsely portrayed the true state of the company’s business and technology.” And in this case, Milton’s alleged misstatements were attributed to the company even though many of the statements were communicated through Milton’s personal account, not the company’s corporate account. Although, according to the SEC, there were plenty of material misrepresentations in Nikola’s registration statements and other standard communications (i.e., not only alleged misstatements through Milton), the case reinforces the point that fraudulent or misleading statements don’t have to be in a prospectus or 10-K to be actionable—social media will do just fine. The case also highlights the need for companies to take social media into consideration in the context of disclosure controls and procedures, potentially including communications, to the extent that they relate to the company, that are made through personal accounts.

SEC offers another packed agenda for Fall 2021

The SEC’s new Fall reg-flex agenda is posted and, no surprise, it’s packed.  Here is the short-term agenda and here is the long-term version.  And just as with the spring agenda, Commissioners Hester Peirce and Elad Roisman have lambasted it in a dissenting statement.  The agenda is laden with major proposals that were on the Spring agenda, but didn’t quite make it out the door, such as plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, Rule 14a-8 amendments and SPACs, as well as a new, already controversial, proposal to amend the definition of “holders of record.”  Some of the agenda items have recently been proposed, for example, new rules regarding mandated electronic filings (see this PubCo post) and amendments to the proxy rules governing proxy voting advice (see this PubCo post). Similarly, three items identified as at the “final rule stage” have already been adopted: universal proxy (see this PubCo post), filing fee disclosure (see this PubCo post) and amendments under the Holding Foreign Companies Accountable Act (see this PubCo post). The agenda also identifies a couple of topics that are still just at the pre-rule stage, such as exempt offerings (updating the financial thresholds in the accredited investor definition, amendments to Rule 701 and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda (see this PubCo post), nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.

SEC charges company and finance executives with raiding the cookie jar

Just in time for the holidays—cookie jars full of…revenue adjustments! In this complaint, the SEC charged American Renal Associates Holdings, Inc., a national provider of dialysis services, and three of its finance executives with securities fraud and other misconduct. According to the SEC, the alleged fraudulent scheme involved a “series of revenue adjustments to make it appear that ARA had beat, met, or come close to meeting various predetermined financial metrics, when in fact its financial performance was materially worse.” After receiving an inquiry from the SEC, ARA conducted an internal investigation that led the company to restate its financials, which, according to the SEC, showed that the company had overstated its net income by over 30% for 2017 and by more than 200% for the first three quarters of 2018.  The revenue adjustments in the cookie jar, the SEC charged, were one of the key ingredients used in this alleged effort to cook the company’s books.

Enforcement again brings charges for failure to disclose perks

Failure to disclose executive perks continues to be a flashing target for SEC Enforcement. Just last year, there were two actions against companies for disclosure failures regarding perks—Hilton Worldwide Holdings Inc. (see this PubCo post) and Argo Group International Holdings, Ltd. (see this PubCo post).  And earlier this year, Enforcement brought settled charges against Gulfport Energy Corporation and its former CEO, Michael G. Moore, for failure to disclose some of the perks provided to Moore (see this PubCo post). Now, the SEC has once again filed settled charges against a company,  ProPetro Holding Corp., and its co-founder and former CEO, Dale Redman, for failure to properly disclose executive perks—including, once again, personal use of aircraft at the company’s expense—as well as two stock pledges. While the topic is not new, the different types of blunders and slip-ups—which seem to be unique to each case—can be instructive.  In this case, the focus was—in addition to absence of a policy regarding personal travel reimbursement, inadequate internal controls around perks and failure to disclose paid personal travel expenses—an inadequate process for completion and review of D&O questionnaires.

Another complaint filed against California board diversity statutes

Yesterday, yet another complaint was filed in federal district court charging that California’s board diversity statutes, SB 826 and AB 979, are unconstitutional under the equal protection provisions of the 14th Amendment.  This complaint was filed by The National Center for Public Policy Research, which, you may recall, has also filed a petition challenging the Nasdaq board diversity rule (see this PubCo post and this PubCo post).  The NCPPR describes itself as “a non-profit 501(c)(3) organization that supports free market solutions to social problems and opposes corporate and shareholder social activism that detracts from the goal of maximizing shareholder returns.” The case is National Center for Public Policy Research v. Weber, and the initial scheduling conference for this case isn’t set to occur until March of next year.

Number of whistleblower complaints explodes

Since the onset of the COVID-19 pandemic, the number of whistleblower complaints received by regulators has exploded on both sides of the Atlantic. That’s the subject of this new Cooley Alert, Whistleblower Complaints and Rewards Explode Worldwide, from our White Collar Defense and Investigations group.