Category: Litigation
SEC files complaint against Elon Musk alleging violation of Section 13(d)
On Tuesday, the SEC filed a complaint in the D.C. federal district court alleging that Elon Musk ignored the Section 13(d) beneficial ownership reporting deadline when, in March 2022, he acquired more than 5% of outstanding Twitter shares. Because Musk failed to timely file the report with the SEC, the SEC alleged, he was able to continue to make purchases of Twitter common stock at artificially low prices, allowing him to underpay for the shares by at least $150 million Hmmm. Think this case will be pursued after the SEC comes under new management?
McMahon takes a bump
On Friday, the SEC announced settled charges against Vince McMahon, founder, controlling shareholder and former Executive Chair and CEO of World Wrestling Entertainment, for “knowingly circumventing WWE’s internal accounting controls,” making false or misleading statements to WWE’s auditor, and causing “WWE’s violations of the reporting and books and records provisions of the Exchange Act.” The SEC alleged that McMahon signed two settlement agreements relating to claims of sexual misconduct (as the WSJ framed it), one in 2019 and one in 2022, on behalf of himself and WWE but failed to disclose the existence of the agreements to “WWE’s Board of Directors, legal department, accountants, financial reporting personnel, or auditor.” Oops. The SEC charged that this omission “circumvented WWE’s system of internal accounting controls and caused material misstatements in WWE’s 2018 and 2021 financial statements,” leading WWE ultimately to issue financial restatements. McMahon agreed to pay a $400,000 civil penalty and to reimburse WWE just over $1.3 million pursuant to SOX 304(a), the SOX clawback provision. According to the Associate Regional Director in the SEC’s New York Regional Office, “[c]ompany executives cannot enter into material agreements on behalf of the company they serve and withhold that information from the company’s control functions and auditor.” (Even if—or maybe especially if—it involves hush money.)
SEC charges Entergy with violation of internal accounting controls requirements
At the end of last year, the SEC announced settled charges against Entergy Corporation, a Louisiana-based utility company with shares traded on the NYSE, for failure to maintain internal accounting controls adequate to ensure that its surplus materials and supplies were accurately recorded on its books and financial statements in accordance with GAAP. The case represents yet another example where the charged misconduct related only to ineffective controls, without any associated charges of fraud. According to Sanjay Wadhwa, Acting SEC Enforcement Director, “internal accounting controls serve as a front-line defense in ensuring the accuracy and reliability of financial statements….Investors rely on public companies, such as Entergy, to ensure that adequate internal accounting controls are in place. We allege that Entergy failed to fulfill its obligation in this regard.” Entergy agreed to pay a civil penalty of $12 million. Rumor has it that we’re likely not going to see a lot more of these “controls-only” types of Enforcement actions once the SEC comes under new management.
SEC charges Becton Dickinson with misleading investors about regulatory risks and product sales
The SEC has announced settled charges against Becton, Dickinson and Company, a medical device manufacturer known as BD listed on the NYSE, for “repeatedly misleading investors about risks associated with its continued sales of its Alaris infusion pump and for overstating its income by failing to record the costs of fixing multiple software flaws with the pump.” In essence, the company failed to disclose that it needed, but did not have, FDA clearance for certain changes to the software for its Alaris product, sales of which contributed about 10% of BD’s profits. Without those changes, the product was potentially harmful to patients. “Rather than inform investors that these issues heightened the risk that the FDA would limit BD’s ability to continue selling Alaris,” the SEC charged, “BD made misleading statements in its periodic reports about its regulatory risks.” BD agreed to pay a $175 million civil penalty. Companies in the life sciences should take note that this is yet another recent Enforcement action aimed at a life science company’s alleged misleading statements, including hypothetical or generic risks, regarding regulatory (FDA) status; in charges announced earlier this month against Kiromic BioPharma, the SEC alleged that Kiromic had failed to disclose that the FDA had placed both of its INDs on clinical hold. (See this PubCo post.) According to Sanjay Wadhwa, Acting Director of SEC Enforcement, “BD repeatedly painted a misleading picture of its Alaris infusion pump for investors and then doubled down by keeping them in the dark when the device’s issues came to a head with the FDA in late 2019….Public companies have a fundamental duty to accurately disclose material business risks and should expect to be held accountable when they fall short in that regard.”
Happy Holidays!
SEC Enforcement charges Express for failure to disclose CEO perks
The SEC has announced settled charges against Express, Inc., a multi-brand American fashion retailer formerly listed on the NYSE, for failing to disclose over a three-year period almost $1 million in perks provided to its now former CEO. What were those perks? About a half of that amount was attributable to the perk that seems to trip up so many companies (and flashing favorite target of SEC Enforcement): use of company-owned or -leased aircraft and other travel expenses for personal purposes. The SEC also charged that the company “did not have adequate controls, policies, or procedures in place to effectively identify and analyze potential compensation for disclosure.” However, the SEC did not impose civil penalties on the company, which filed for bankruptcy, in light of its cooperation. According to Sanjay Wadhwa, the Acting Director of Enforcement, “[p]ublic companies have a duty to comply with their disclosure obligations regarding executive compensation, including perks and personal benefits, so that investors can make educated investment decisions….Here, although Express fell short in carrying out its obligation, the Commission declined to impose a civil penalty based, in part, on the company’s self-report, cooperation with the staff’s investigation, and remedial efforts.”
UPDATED—en banc Fifth Circuit puts the kibosh on the Nasdaq board diversity rules
(This post updates my post of December 12 to add further discussion of the decision.)
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post.) (Reuters points out that the same pair of challengers “led the successful U.S. Supreme Court challenge against race-conscious college admissions policies.” In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on that panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. In May, the en banc court heard oral argument, with a discussion dominated by rule skeptics. (See this PubCo post.) Last week, the Fifth Circuit, sitting en banc, issued its opinion in Alliance for Fair Board Recruitment v. SEC, vacating the SEC’s order approving Nasdaq’s board diversity proposal. No surprise there—the surprise was that the vote by the Fifth Circuit was nine to eight. The majority of the Court applied a strict interpretation—some might call it pinched—of the purposes of the Exchange Act to hold that the Nasdaq board diversity rules “cannot be squared with the Securities Exchange Act of 1934,” and, therefore, the SEC had no business approving them. Ironically, the dissent also contended that the SEC’s authority was limited—that its statutory authority to disapprove a rule proposed by Nasdaq, cast by the dissent as a “private entity” engaged in private ordering, was constrained by the Exchange Act. In effect, the dissent contended, the majority was advocating that the agency intrude more on this exercise in private ordering. According to Bloomberg Law, a “Nasdaq representative said the exchange disagreed with the court’s decision, but doesn’t plan to appeal the ruling. An SEC spokesperson said the agency is ‘reviewing the decision and will determine next steps as appropriate.’” But if Nasdaq doesn’t appeal, how likely is it that the new Administration would do so?
En banc Fifth Circuit puts the kibosh on the Nasdaq board diversity rules
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post) In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. In May, the en banc court heard oral argument, with a discussion was dominated by rule skeptics. (See this PubCo post.) Yesterday, the Court issued its opinion in Alliance for Fair Board Recruitment v. SEC. No surprise there—the majority of the Court held that the Nasdaq diversity rules “cannot be squared with the Securities Exchange Act of 1934.” The surprise was that the vote on the Fifth Circuit was nine to eight. According to Bloomberg Law, a “Nasdaq representative said the exchange disagreed with the court’s decision, but doesn’t plan to appeal the ruling. An SEC spokesperson said the agency is ‘reviewing the decision and will determine next steps as appropriate.’” But if Nasdaq doesn’t appeal, how likely is that the new Administration would do so?
Below is a very quick paragraph to alert you to the decision. I plan to write a much longer post on the case (including the dissent) in the next day or so. Stay tuned for the update.
Profs share predictions for securities regulation under next Administration—and their response
In this post on the CLS Blue Sky Blog, two leading authorities on securities law, Professors John C. Coffee, Jr. and Joel Seligman, take a crack at prognosticating about SEC regulation—and even the SEC itself—under the next Administration. They contend that, with a new Republican majority on the Commission, including the new Chair, together with Republican majorities in Congress, the SEC will be in a position to “revise a broad range of statutory, rule, and enforcement policies of the Commission.” What’s more, the new Department of Government Efficiency—which they suggest, may not be entirely, um, open-minded when it comes to the SEC—could certainly put a major crimp in the resources available for the SEC’s budget. (They note the irony “that the SEC makes a large profit for the U.S. government, and in fiscal 2024, it obtained a record-high level of fines and sanctions (approximately $8.2 billion). Shrink its budget and you likely shrink that recovery.”) In their view, the SEC is “probably the most successful and effective of the New Deal administrative agencies, one that has helped preserve the integrity of our capitalist system,” but they fear that it may be handicapped in continuing to do so under the next Administration. With that in mind, they pre-announce their intent to “encourage a more informed debate by forming a ‘Shadow SEC,’ composed of acknowledged experts in securities regulation.” Let’s look at some of the potential legislation and rulemaking changes that they speculate might be in store for the SEC and public company disclosure.
SEC charges biopharma with misleading investors about status of INDs
The SEC has announced that it filed settled charges against Kiromic BioPharma and two of its executives for alleged failure to disclose in its public statements and filings, including in its public offering prospectus, material information about its investigational new drug applications filed with the FDA for two of its drug candidates—the only two product candidates in the company’s pipeline. What was that omitted information? That the FDA had placed both of its INDs on clinical hold, meaning that the proposed clinical investigations could not proceed until the company first corrected the deficiencies cited by the FDA. Instead of disclosing in its prospectus that the INDs had actually been placed on clinical hold, the company included a risk factor describing the “hypothetical risk of a clinical hold and the potential negative consequences” on the company’s business. In light of the company’s voluntary self-reporting, remediation and other proactive cooperation, there was no civil penalty for the company, but two executives, the then-CEO and then-CFO, agreed to pay civil penalties of $125,000 and $20,000. According to the Director of the SEC’s Fort Worth Regional Office, the resolution of these cases strikes “the right balance between holding Kiromic’s then-two most senior officers responsible for Kiromic’s disclosure failures while also crediting Kiromic for its voluntary self-report, remediation, proactively instituting remedial measures, and providing meaningful cooperation to the staff.”
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