Category: Litigation
SEC charges director with proxy violation for failing to disclose personal relationship bearing on independence
Last week, the SEC announced settled charges against James R. Craigie, a former CEO, Chair and board member of Church & Dwight Co. Inc., an NYSE-listed “manufacturer of consumer-packaged goods,” for “violating proxy disclosure rules by standing for election as an independent director” without advising the board that maybe he really wasn’t quite so independent after all. This omission, the SEC alleged, caused the company’s proxy statements “to contain materially misleading statements.” Maybe you guessed that we’re not talking here about any of the NYSE-enumerated relationships that vitiate independence? No, we’re talking about something closer to the concept of “social independence”—something more amorphous than conventional, stock-exchange-defined independence—that some suggest can be even more compromising at times than the conventional variety. Craigie was alleged to have a “close personal friendship with a high-ranking Church & Dwight executive,” including paying more than $100,000 for the executive and his spouse to join Craigie and his spouse on “six trips that spanned eight countries on five continents.” Because Craigie never disclosed the relationship to the board and encouraged the executive to do the same, the SEC charged, the board was not aware of the relationship and the company’s proxy statements characterized Craigie incorrectly as an independent director. According to the Associate Director of the SEC’s Division of Enforcement, “[s]hareholders expect independent directors to exercise autonomous judgment in their decision making, free from undisclosed conflicts….By concealing his relationship with a company executive, Mr. Craigie undermined the board’s director independence process and compromised the company’s disclosures.” Craigie agreed to a five-year officer-and-director bar and to pay a civil penalty of $175,000. The case raises the thorny question of where to draw the line on personal relationships. Is an occasional dinner acceptable? If so, what about a weekend trip? A vacation trip? How many trips is too many? Just how thick do the personal connections have to be to taint independence? Caution seems to be the prescription here.
Last term SCOTUS gave the administrative state quite a thumping. Does it still have the urge to curb?
If you thought that SCOTUS’ decision in Loper Bright last term tolling the bell for the 70-year old Chevron doctrine was the end of SCOTUS’ drubbing of the administrative state, look again—you may well be sorely mistaken. (See this PubCo post.) You might remember that, at a recent Ninth Circuit judicial conference, Justice Elena Kagan, expanding on her dissent in Loper Bright in response to a question, suggested that one reason the Court abandoned stare decisis in the case was plain hubris: in her view, the Court just believed that there was too much agency regulation and thought that the courts needed to step in. (See the Sidebar in this PubCo post.) And perhaps that conclusion didn’t require a giant leap. As far back as 2013 in his dissent in City of Arlington v. FCC (2013), Chief Justice Roberts worried that “the danger posed by the growing power of the administrative state cannot be dismissed.” Is there any reason to think that the urge to curb the administrative state has suddenly abated? Or will we perhaps see a temporary pause while agencies and court watchers catch their breath? As it turns out, there certainly could be opportunities for SCOTUS to continue the onslaught this term. The nondelegation doctrine—which SCOTUS studiously avoided addressing in Jarkesy v. SEC, its looming presence in the lower court decision notwithstanding—has once again reared its head, this time in Consumers’ Research v. FCC out of the Fifth Circuit. A petition for cert has just been filed in that case. And the concept of agency independence as established in a 1935 case, Humphrey’s Executor v. United States, may also be on the chopping block, as SCOTUS considers whether to take up the petition for cert in a Fifth Circuit decision, Consumers’ Research v. Consumer Product Safety Commission, in which the panel practically begged SCOTUS to review the case.
SEC brings securities fraud charges against Cassava Sciences
The SEC announced last week that it had filed a complaint against Cassava Sciences, Inc., a “pharmaceutical company with one primary drug candidate, PTI-125, a potential therapeutic for the treatment of Alzheimer’s disease,” for misleading statements about the results of a Phase 2 clinical trial for the potential therapeutic. Also charged in the complaint were the company’s founder and former CEO and its former Senior Vice President of Neuroscience. The complaint highlights and analyzes a number of misleading statements and omissions—an analysis that could be instructive for companies reporting on clinical trial results. In a related Order, the SEC also charged an associate medical professor at the CUNY, who was a consultant and the co-developer of the therapeutic, with manipulating the reported clinical trial results. The company agreed to pay a civil penalty of $40 million. The former CEO and former Senior VP agreed to pay civil penalties of $175,000 and $85,000, respectively, and to officer-and-director bars of three and five years. The consultant agreed to pay a civil penalty of $50,000. They were all charged with violating the antifraud provisions of the federal securities laws; the company was also charged with violating the reporting provisions. It’s been widely reported that, after the announcement of the settlement, the stock price fell by almost 11%. PTI-125 is now reported to be in Phase 3 clinical trials.
SEC Enforcement sweep picks up multiple companies and insiders with late filings under Section 16 and 13(d), (g) and (f) [RESEND]
[We are resending this post from Friday because, for reasons well beyond my technical capacity, it was apparently not distributed to all subscribers. Hopefully, everyone that is supposed to receive it will receive it this time.]
Can we call it a year-end tradition yet? It’s almost the end of the SEC’s fiscal year, and, as it did last year around this time, the SEC has just announced a big Enforcement sweep of multiple companies and some individuals—23 in total—for failing to timely file Section 16(a) short-swing trading reports (Forms 3, 4 and 5) and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis. Two public companies were charged with failing to make filings on behalf of insiders after having volunteered to do so, and then failing to report the delinquencies in their own filings, as required by Reg S-K Item 405. Surprisingly, the sweep also captured a public company that was charged with failure to timely file Forms 13F—reports that institutional investment managers are required to file regarding certain large securities holdings. The SEC used data analytics to identify those charged in the sweep. The penalties aggregated over $3.8 million and ranged from $10,000 to $750,000. According to the Associate Regional Director of the SEC’s Division of Enforcement, “[t]o make informed investment decisions, shareholders rely on, among other things, timely reports about insider holdings and transactions and changes in potential controlling interests….Today’s actions are a reminder to large investors that they must commit necessary resources to ensure these reports are filed on time.” It appears that the SEC is continuing to send messages that late filings are not ok…and lots of late filings 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—and that don’t follow through to be potentially contributing to their insiders’ filing failures; the SEC will hold the companies responsible if the insiders’ filings are not timely.
SEC Enforcement sweep picks up multiple companies and insiders with late filings under Section 16 and 13(d), (g) and (f)
Can we call it a year-end tradition yet? It’s almost the end of the SEC’s fiscal year, and, as it did last year around this time, the SEC has just announced a big Enforcement sweep of multiple companies and some individuals—23 in total—for failing to timely file Section 16(a) short-swing trading reports (Forms 3, 4 and 5) and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis. Two public companies were charged with failing to make filings on behalf of insiders after having volunteered to do so, and then failing to report the delinquencies in their own filings, as required by Reg S-K Item 405. Surprisingly, the sweep also captured a public company that was charged with failure to timely file Forms 13F—reports that institutional investment managers are required to file regarding certain large securities holdings. The SEC used data analytics to identify those charged in the sweep. The penalties aggregated over $3.8 million and ranged from $10,000 to $750,000. According to the Associate Regional Director of the SEC’s Division of Enforcement, “[t]o make informed investment decisions, shareholders rely on, among other things, timely reports about insider holdings and transactions and changes in potential controlling interests….Today’s actions are a reminder to large investors that they must commit necessary resources to ensure these reports are filed on time.” It appears that the SEC is continuing to send messages that late filings are not ok…and lots of late filings 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—and that don’t follow through to be potentially contributing to their insiders’ filing failures; the SEC will hold the companies responsible if the insiders’ filings are not timely.
SEC’s Investor Advisory Committee discusses tracing in §11 litigation and shareholder proposals—will they recommend SEC action?
Last week, at the SEC’s Investor Advisory Committee meeting, the Committee discussed two topics described as “pain points” for investors: tracing in §11 litigation and shareholder proposals. In the discussion of §11 and tracing issues, the presenting panel made a strong pitch for SEC intervention to facilitate tracing and restore §11 liability following Slack Technologies v. Pirani. The panel advocated that the Committee make recommendations to the SEC to solve this problem. With regard to shareholder proposals, the Committee considered whether the current regulatory framework appropriately protected investors’ ability to submit shareholder proposals or did it result in an overload of shareholder proposals? Was Exxon v. Arjuna a reflection of exasperation experienced by many companies? No clear consensus view emerged other than the desire for a balanced approach and a stable set of rules. Recommendations from SEC advisory committees often hold some sway with the staff and the commissioners, so it’s worth paying attention to the outcome here.
ICYMI—Say goodbye to the SEC’s Climate and ESG Task Force
In case it escaped your notice a few months back—as it did mine—Bloomberg is now reporting that the SEC has “quietly disbanded” its Enforcement Division’s Climate and ESG Task Force. You remember the task force? Back in 2021, when Allison Herren Lee was Acting Chair of the SEC, she directed the staff of Corp Fin to “enhance its focus on climate-related disclosure in public company filings.” Shortly thereafter, the SEC announced that the new climate focus would not be limited to Corp Fin—the SEC had created a new Climate and ESG Task Force in the Division of Enforcement. While the initial focus of the Task Force was to identify any material gaps or misstatements in issuers’ disclosure of climate risks under then-existing rules, the remit of the Task Force went beyond climate to address other ESG issues. Lee said that the Task Force was designed to bolster the efforts of the SEC as a whole in addressing climate risk and sustainability, which were “critical issues for the investing public and our capital markets.” (See this PubCo post.) Now, an SEC spokesperson has advised Bloomberg that it has “shut down its Enforcement Division’s Climate and ESG Task Force within the past few months.”
SEC charges Zymergen for “unsupported hype” in its IPO
The SEC has announced settled charges against Zymergen, which, prior to its recent bankruptcy and ultimate liquidation, was a biotech “focused on the manufacture of novel materials, including optical films used in electronic screens.” The SEC charged that, in its $530 million IPO in 2021, Zymergen misled “IPO investors about its overall market potential, revenue prospects, and customer pipeline for its only commercially available product, an electronics film named Hyaline.” According to the Director of the SEC’s San Francisco Regional Office, “[p]re-revenue and early-stage companies that seek to tap the capital markets must do so with reasonable estimates of their market potential….Today’s order finds that Zymergen failed to satisfy this obligation when it misled investors with what amounted to unsupported hype.” The company agreed to pay a civil penalty of $30 million. In the meantime, Bloomberg reports that a federal district court has recently allowed claims by Zymergen investors to proceed against several VC funds (along with the company, the board, the underwriters, etc). The investors contended that, among other things, the levers provided in the company’s governing documents allowed the VC funds to “control[] the company in the lead-up to its initial public offering” and claimed that they were “responsible for misleading IPO papers before the biological manufacturing company imploded.”
Keurig settles SEC “greenwashing” charges
According to a 2023 survey discussed in Global Executives Say Greenwashing Remains Rife in the WSJ, executives think greenwashing is widespread: almost “three-quarters of executives said most organizations in their industry would be caught greenwashing if they were investigated thoroughly.” Moreover, almost “60% say their own organization is overstating its sustainability methods.” However, the article suggested, although some companies may be intentionally overstating their progress, for the most part, the greenwashing is more benign: companies set their sustainability goals but didn’t have a “concrete plan” to achieve them or reliable data to measure them. According to the survey, 85% of executives believe that “customers and clients are becoming more vocal about their preference for engaging with sustainable brands,” creating more impetus for sustainability initiatives. By the same token, these external influences also create more pressure for greenwashing. The article reports that the risks related to greenwashing are increasing, with the threat of potential “crackdowns.” (See this PubCo post.) Last week, the SEC charged Keurig Dr Pepper with making inaccurate statements in its Forms 10-K for fiscal 2019 and 2020 regarding the recyclability of its K-Cup beverage pods used to make coffee and other beverages in Keurig’s single-serve brewing systems. According to the Associate Director of the SEC’s Boston Regional Office, “Public companies must ensure that the reports they file with the SEC are complete and accurate….When a company speaks to an issue in its annual report, they are required to provide information necessary for investors to get the full picture on that issue so that investors can make educated investment decisions.” To settle the SEC’s charges, Keurig agreed to pay a $1.5 million civil penalty. Commissioner Hester Peirce had a few words to say in dissent.
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