Category: Litigation
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.
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?
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