Category: Litigation
What’s going on with the SEC’s proxy advisor rules?
Shall we catch up on some of the recent developments regarding the SEC’s proxy advisor rules? First, let’s take a look at what’s happening with the appeal of the opinion of the D.C. Federal District Court in ISS v. SEC, which, in February of this year, vacated the SEC’s 2020 rule that advice from proxy advisory firms was a “solicitation” under the proxy rules. Both the SEC and National Association of Manufacturers had filed notices of appeal in that case, but the SEC has mysteriously dropped out of that contest. Then, with regard to the separate ongoing litigation over the 2022 amendments to the proxy advisor rules—which reversed some of the key provisions in the 2020 rules—a new decision has been rendered by a three-judge panel of the 6th circuit, U.S. Chamber of Commerce v. SEC, upholding the 2022 amendments, thus creating a split with the recent decision of the 5th Circuit, National Association of Manufacturers v. SEC, on the same issue.
In an Enforcement sweep, SEC charges seven companies with violations of whistleblower rule
On Monday, the SEC announced an Enforcement sweep involving settled charges against seven companies for violation of the whistleblower statute and rule. The charges stemmed from provisions that the SEC claimed impeded whistleblowers from reporting potential misconduct to the SEC contained in employment, separation and an array of other agreements. In some instances, according to the Orders, the provisions expressly stated that they did not preclude employees from filing an administrative charge or participating in whistleblower programs, but instead involved only a waiver of their rights to recover a monetary award for participating in an investigation by a government agency. At least one of the companies sought to qualify the waiver of the recovery right by adding “[t]o the extent permitted by law.” But, to no avail. In none of these cases was the SEC aware of actions by the charged company to enforce the waiver provisions or instances in which the affected employees declined to speak with the SEC about potential violations of securities laws. Nonetheless, the SEC viewed these agreements as creating impediments to participation in the SEC whistleblower program. The companies agreed to pay civil penalties of just over $3 million in the aggregate, revised their internal agreement forms and notified affected employees. According to the Director of the SEC’s Denver Regional Office, the “SEC’s whistleblower program strengthens market integrity by providing protection and incentives for those who come forward and report potential violations of the securities laws….According to the SEC’s orders, among other things, these companies required employees to waive their right to possible whistleblower monetary awards. This severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.” Reuters reported that a representative of TransUnion, one of the companies charged, characterized the “SEC’s engagement on this matter” as an example of “what good regulatory supervision can look like.”
Are you ready for anti-anti-ESG?
You all remember the reams of anti-ESG bills that poured out of some of the states, not to mention the U.S. House? According to Reuters, some “states have unleashed a policy push to punish Wall Street for taking stances on gun control, climate change, diversity and other social issues, in a warning for companies that have waded in to fractious social debates.” A 2022 Reuters analysis found that there were at least 44 bills or new laws in 17 states “penalizing such company policies, compared with roughly a dozen such measures in 2021.” (See this PubCo post.) In 2023, an article in Institutional Investor reported, 198 pieces of legislation were introduced, 23 laws passed and 6 resolutions adopted. And in 2024, the article reports, state legislators wrote 161 bills and resolutions in 28 states for consideration, with six bills passed so far. (See this PubCo post.) Recently, however, ESG proponents have begun to employ a more aggressive strategy regarding anti-ESG legislation. They’re now playing in the same sandbox as the anti-ESG groups, pursuing anti-anti-ESG litigation—premised in part on…wait for it…the First Amendment, one of the favored legal strategies, of course, of the anti-ESG groups. What’s good for the goose is good for the gander? What goes around comes around? As the call, so the echo? A couple of cases may illustrate the phenomenon. Will we see more?
SEC charges Icahn and publicly traded partnership with failure to disclose pledged securities
Here’s a reminder for all of us about the need to disclose securities pledged as collateral for margin loans—a reminder that comes at the expense of Carl Icahn and his affiliated master limited partnership, Icahn Enterprises L.P. In these Orders, the SEC disclosed settled charges against Icahn and IEP for failure to “disclose information relating to Icahn’s pledges of IEP securities as collateral to secure personal margin loans worth billions of dollars under agreements with various lenders.” According to the Chief of SEC Enforcement’s Complex Financial Instruments Unit, the “federal securities laws imposed independent disclosure obligations on both Icahn and IEP. These disclosures would have revealed that Icahn pledged over half of IEP’s outstanding shares at any given time….Due to both disclosure failures, existing and prospective investors were deprived of required information.” To settle the charges against them, Icahn and IEP agreed to pay civil penalties of $500,000 and $1.5 million. According to this article in Axios, the loans cost Icahn a lot more than $2 million. See also, these articles from AP, Reuters and CNBC.
SEC charges Ideanomics for misleading revenue guidance
As discussed in this press release, the SEC has announced Orders settling charges against Ideanomics, Inc., its current CEO and former CFO, as well as its former Chair and CEO, for alleged misleading statements about the company’s financial performance between 2017 and 2019. There were multiple alleged fraudulent acts, but featured most prominently was an allegation that the Company and the former Chair/CEO reported 2017 revenue guidance that ended up being well off the mark, “despite numerous known issues indicating that the company would miss this guidance by a wide margin.” The Company later reported 2017 revenues that were less than half of the amount represented to the public in its guidance. According to the Associate Director of Enforcement, as the SEC alleged, “Ideanomics and its executives defrauded investors, including by misstating its financial statements and failing to disclose material information to investors….The investing public must be able to trust the accuracy of a company’s disclosures, and we will hold accountable executives who abuse that trust by engaging in fraud.”
In litigation over the SEC climate disclosure rules, have petitioners created a strawman?
As soon as the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings” in March (see this PubCo post, this PubCo post, this PubCo post, and this PubCo post), there was a deluge of litigation—even though, in the final rules, the SEC scaled back significantly on the proposal, putting the kibosh on the controversial mandate for Scope 3 GHG emissions reporting and requiring disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers and only when those emissions are material. Those cases were then consolidated in the Eighth Circuit (see this PubCo post) and, in April, the SEC determined to exercise its discretion to stay the final climate disclosure rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions.” (See this PubCo post.) There are currently nine consolidated cases—with two of the original petitioners, the Sierra Club and the Natural Resources Defense Council, having voluntarily exited the litigation (see this PubCo post), and the National Center for Public Policy Research having filed a petition to join the litigation more recently. (See this PubCo post). In June, petitioners began to submit their briefs (see this PubCo post). Now, the SEC has filed its almost 25,000-word brief in the consolidated case, contending that petitioners have set up a “strawman—challenging reimagined rules that the Commission did not enact and criticizing a rationale that the Commission expressly disclaimed.” More specifically, the SEC’s brief defends its authority to adopt these rules and the reasonableness of its actions and process under the APA and contends that, as compelled commercial (or commercial-like) disclosure, the rules are consistent with the First Amendment.
Delaware Supreme Court considers advance notice bylaws
In this recent case, Kellner v. AIM ImmunoTech, the Delaware Supreme Court articulated a two-part framework for judicial consideration of advance notice bylaws in the event of a challenge to their adoption, amendment or enforcement. If the bylaws are contested, they must be “twice-tested—first for legal authorization, and second by equity”: first, a court must evaluate “whether the advance notice bylaws are valid as consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter”; second, a court must evaluate “whether the board’s adoption, amendment, or application of the advance notice bylaws were equitable under the circumstances of the case.” Also, it’s a good idea to make the bylaws “intelligible.” In this case, the Court held that “(1) one ‘unintelligible’ bylaw is invalid; (2) the remaining amended advance notice bylaws subject to this appeal are valid because they are consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter; and (3) the AIM board acted inequitably when it adopted the amended bylaws for the primary purpose of interfering with, and ultimately rejecting, Kellner’s nominations. Thus, the remaining bylaws challenged on appeal are unenforceable.” Nevertheless, Kellner’s deceptive conduct meant that his nominations notice would not stand.
With the demise of Chevron deference, will the courts now turn to Skidmore?
In Loper Bright v. Raimondo, which overturned the 40-year-old doctrine of Chevron deference (see this PubCo post), SCOTUS highlighted the continued relevance of the doctrine articulated in Skidmore v. Swift & Co., often described as a principle of appropriate “respect” for agency interpretations, but something less than deference—i.e., the court must still be persuaded. The doctrine of Chevron deference, as you know, mandated that, if a statute did not directly address the “precise question at issue” or if there was ambiguity in how to interpret the statute, courts had to accept an agency’s reasonable interpretation of a law unless it was arbitrary or manifestly contrary to the statute. In Loper Bright, SCOTUS made clear that, while Chevron deference might now be toast, courts could still, in exercising their independent judgment in determining the meaning of statutory provisions, “seek aid from the interpretations of those responsible for implementing particular statutes,” citing Skidmore. Will Skidmore be the new go-to doctrine for courts adjudicating agency regulations? Not so far, according to this new article from Bloomberg.
Cooley Alert: Federal Court Dismisses Bulk of SEC’s Complaint Against SolarWinds in Cyberattack Case
The 2020 SolarWinds hack was perhaps one of the worst cyberattacks in history, reportedly directed by the Russian intelligence service and affecting 18,000 customers, including some very well-known companies and about a dozen government agencies including the Treasury, Justice and Energy departments. Following the cyberattack, the SEC filed a complaint against SolarWinds and its Chief Information Security Officer, charging securities “fraud and internal control failures relating to allegedly known cybersecurity risks and vulnerabilities.” (See this PubCo post.) SolarWinds and Brown then moved to dismiss the complaint for failure to state a claim. On July 18, 2024, a federal district court issued a 107-page opinion, dismissing most of the SEC’s case against SolarWinds and its CISO.
You must be logged in to post a comment.