Category: Litigation
Was it SPAC week? SEC charges SPAC with misleading statements
Perfectly calibrated to slap an exclamation point on last Wednesday’s 581-page SPAC release (see this PubCo post), this new SEC Order, posted the following day, reflects settled charges against Northern Star Investment Corp. II, a SPAC, for misleading statements in its SEC filings in connection with its SPAC IPO and failed de-SPAC transaction. In the SPAC release, the SEC noted concerns from commentators regarding the adequacy of the disclosures provided to investors in SPAC IPOs and de-SPAC transactions. In this case, the SEC charged that Northern Star stated in its SEC filings that, prior to filing its S-1 for its IPO, it had had no substantive discussions with any potential target; in reality, however, Northern Star had had several discussions with the ultimate target regarding a potential SPAC business combination. According to the Director of the SEC’s Philadelphia Regional Office, “Northern Star’s failure to disclose discussions with its merger target kept investors in the dark about its future plans, information that would have been important in deciding whether to invest in this SPAC….Given that the purpose of a SPAC is to identify and acquire an operating business, SPACs should be transparent about any pre-IPO discussions with potential acquisition targets.” Northern Star was ordered to pay a civil money penalty of $1.5 million for violation of the antifraud provisions of the Securities Act.
Exxon employs “direct-to-court” strategy for shareholder proposal. Will others do the same?
Back in 2014, a few companies, facing shareholder proposals from the prolific shareholder-proposal activist, John Chevedden, and his associates, adopted a “direct-to-court” strategy, bypassing the standard SEC no-action process for exclusion of shareholder proposals. In each of these cases, the court handed a victory of sorts to Mr. Chevedden, refusing to issue declaratory judgments that the companies could exclude his proposals. (At the end of the day, one proposal was defeated, one succeeded and one was ultimately permitted to be excluded by the SEC. See this PubCo post, and these News Briefs of 3/18/14, 3/13/14 and 3/3/14.) Now, ten years later, ExxonMobil has picked up the baton, having just filed a complaint against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. In summary, the proposal asks Exxon to accelerate the reduction of GHG emissions in the medium term and to disclose new plans, targets and timetables for these reductions. Will Exxon meet the same fate as the companies in 2014? Perhaps more significantly, Exxon took this action in part because it viewed the SEC’s shareholder proposal process as a “flawed” system “that does not serve investors’ interests and has become ripe for abuse by activists with minimal shares and no interest in growing long-term shareholder value.” If Exxon is successful in its litigation, will more companies, likewise faced with environmental or social proposals and perhaps perceiving themselves beset by the same flawed process, follow suit (so to speak) and sidestep the SEC?
House hearing raises specter of serious legal hurdles for climate proposal—will the SEC backtrack?
Last week, a House Financial Services subcommittee held a hearing with the ominous title “Oversight of the SEC’s Proposed Climate Disclosure Rule: A Future of Legal Hurdles.” Billed as oversight, the hearing certainly highlighted the gauntlet that the SEC would have to run if the rules were adopted as is. Not that SEC Chair Gary Gensler wasn’t already well aware that the climate proposal is facing a number of legal challenges. Will this gentle “reminder” by the subcommittee, together with recent court decisions, perhaps lead the SEC to moderate some of the most controversial aspects of the proposal, such as the Scope 3 and accounting requirements? The witnesses were a VP of the National Association of Manufacturers, counsel from BigLaw, a farmer and an academic.
Atlantic herring get their day in court—does it spell the end of Chevron deference?
On Wednesday, SCOTUS heard oral argument—for over three and a half hours—in two very important cases, Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Dept of Commerce, about whether the National Marine Fisheries Service (NMFS) has the authority to require Atlantic herring fishing vessels to pay some of the costs for onboard federal observers who are required to monitor regulatory compliance. And they’re important because… why? Because one of the questions presented to SCOTUS was whether the Court should continue the decades-long deference of courts, under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, to the reasonable interpretations of statutes by agencies. The doctrine of Chevron deference mandates that, if a statute does not directly address the “precise question at issue” or if there is ambiguity in how to interpret the statute, courts must accept an agency’s permissible interpretation of a law unless it is arbitrary or manifestly contrary to the statute. Of course, the conservative members of the Court have long signaled their desire to rein in the dreaded “administrative state,” especially when agencies are advancing regulations that conservative judges perceive as too “nanny state.” And overruling Chevron is one way to do just that. (See, for example, the dissent of Chief Justice John Roberts in City of Arlington v. FCC back in 2013, where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed,” not to mention the concurring opinion of Justice Neil Gorsuch in the 2016 case, Gutierrez-Brizuela v. Lynch, where he referred to Chevron as an “elephant in the room” that permits “executive bureaucracies to swallow huge amounts of core judicial and legislative power.” And then there’s Justice Brett Kavanaugh’s 2016 article, Fixing Statutory Interpretation, in which he argues that Chevron is a “judicially orchestrated shift of power from Congress to the Executive Branch.” See the SideBars below.) But, in recent past cases, SCOTUS has resolved issues without addressing Chevron, looking instead to theories such as the “major questions” doctrine. (See this PubCo post.) The two cases now before the Court, however, may well present that long-sought opportunity. Depending on the outcome, their impact could be felt far beyond the Marine Fisheries Service at many other agencies, including the SEC and the FDA. Will we soon be seeing a dramatically different sort of administrative state? To me, it seemed pretty clear from the oral argument that SCOTUS is likely to jettison or significantly erode Chevron. Among the most conservative justices at least, there didn’t seem to be a lot of interest in half-measures—been there, done that. (The concept of the Court’s limiting its decision to whether statutory silence should be treated as ambiguity, as some had hoped, did not even come up for serious discussion.) But what approach the Court might take—overrule Chevron with no alternative framework suggested, adopt a version of “weak deference” as outlined in a 1944 case, Skidmore v. Swift & Co., or possibly even “Kisorize” (as they termed it) Chevron by imposing some serious limitations, as in Kisor v. Wilkie—that remains to be seen.
Future of SEC’s ALJs looks bleak—but the administrative state? Not so much
Last week, SCOTUS heard oral argument in Jarkesy v. SEC (BTW, pronounced Járk?z?, according to his counsel). As you may have heard, that case is about the constitutionality of the SEC’s administrative law judges. There were three questions presented, and Jarkesy had been successful in the appellate court on all three:
“1. Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.
2. Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.
3. Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.”
While, on its face, the case may not have much allure, it has the potential to be enormously important in limiting the power of the SEC and other federal agencies. That’s especially true if SCOTUS broadly decides that the statute granting authority to the SEC to elect to use ALJs violates the nondelegation doctrine. This case, together with the two cases to be heard in January addressing the continued viability of Chevron deference (see this PubCo post), could go far to upend the “administrative state.” And, for those justices with a well-known antipathy to the administrative state, that might be their ultimate goal. (See, for example, the dissent of Chief Justice Roberts in City of Arlington v. FCC (2013), where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) During the over two-hour oral argument, however, the discussion was focused almost entirely on the question of whether the SEC’s use of an ALJ deprived Jarkesy of his Seventh Amendment right to a jury trial—certainly an important issue with possibly far-reaching implications across federal agencies. But what was most conspicuous—and perhaps most consequential—was what was not discussed: the nondelegation doctrine. In case I missed it, I searched the 170-page transcript and found the word “nondelegation” only once and that from the lips of SEC counsel. While, at the end of the day, the Court’s opinion could certainly go in a different direction, the oral argument did not leave the impression that the end of the administrative state is nigh—not as result of this case, at least.
District Court views “shadow trading” to be within the “misappropriation” standard of §10(b)
In August 2021, the SEC 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, Pfizer. As you know by now, this case has often been viewed as highly unusual: Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction. No, the SEC’s novel theory of the case was that Panuwat engaged in “shadow trading”; he allegedly used the information about the acquisition of his employer to purchase call options on Incyte Corporation, another biopharma that the SEC claimed was comparable to Medivation, based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte. Panuwat made over $100,000 in profit. The SEC charged that he violated Rule 10b-5 and sought an injunction and civil penalties. (See this PubCo post.) After losing a motion to dismiss, this past September, Panuwat moved for summary judgment, claiming that this was the wrong case to test out the novel shadow-trading theory: “Incyte and Medivation were fundamentally different companies with no economic or business connection, Medivation’s policies did not prohibit Mr. Panuwat’s investment, and Mr. Panuwat’s reasons for making the investment were entirely separate from the Medivation sale process and consistent with his prior investment practices.” The SEC responded that Panuwat’s “actions fit squarely within the misappropriation theory of insider trading” and that his “actions provide strong evidence of his scienter.” The District Court for the Northern District of California has just rendered its decision. Did the Court take issue with the SEC’s application of this novel theory of shadow trading? Not so much. Indeed, the Court appears to treat the case as just another version of “misappropriation” of material nonpublic information. According to the Court, the SEC showed that there were “genuine disputes of material fact concerning (i) whether Panuwat received nonpublic information, (ii) whether that information was material to Incyte, (iii) whether Panuwat breached his duty to Medivation by using its confidential information to personally benefit himself, and (iv) whether Panuwat acted with scienter.” Accordingly, the Court denied Panuwat’s motion for summary judgment. In its Order, the Court reminded the parties to schedule a settlement conference. Will the parties settle? Or will this case go to trial?
You must be logged in to post a comment.