Category: Litigation
SEC’s Spring 2024 agenda delays most actions until 2025
As reported by Bloomberglaw.com, during an interview in February on “Balance of Power” on Bloomberg Television, SEC Chair Gary Gensler said that he does not intend to “rush” the SEC’s agenda “to get ahead of possible political changes in Washington,” that is, in anticipation of the November elections. According to Bloomberg, Gensler insisted that he’s “‘not doing this against the clock….It’s about getting it right and allowing staff to work their part.’” The SEC has just posted the new Spring 2024 Agenda and, looking at the target dates indicated on the agenda, it appears that Gensler is a man true to his word. The only new item (relevant to our interests here) slated for possible adoption this year is a distinctly apolitical proposal about EDGAR Filer Access and Account Management. And, while a few proposals are targeted for launch (or relaunch) this year—two related to financial institutions and, notably, a proposal for human capital disclosure—most are also put off until April next year—post-election, that is, when the agenda might look entirely different. (Of course, the SEC sometimes acts well in advance of the target.) According to the SEC’s preamble, the items listed in the Regulatory Flexibility Agenda for Spring 2024 “reflect only the priorities of the Chair.” In addition, information on the agenda was accurate as of May 1, 2024, the date on which the SEC staff completed compilation of the data. In his statement on the agenda, Gensler said that “[i]n every generation since the SEC’s founding 90 years ago, our Commission has updated rules to meet the markets and technologies of the times. We work to promote the efficiency, integrity, and resiliency of the markets. We do so to ensure the markets work for investors and issuers alike, not the other way around. We benefit in all of our work from robust public input regarding proposed rule changes.”
In SEC v. Jarkesy, SCOTUS puts kibosh on administrative enforcement proceedings for civil penalties
Near the end of its term, SCOTUS decided SEC v. Jarkesy, the case challenging the constitutionality of the SEC’s administrative enforcement proceedings. There were three questions presented, and Jarkesy had been successful in the appellate court on all three:
“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.
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.
Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.”
Had SCOTUS broadly decided that the statute granting authority to the SEC to elect to use ALJs violated the nondelegation doctrine, the case had the potential to be enormously significant in limiting the power of the SEC and other federal agencies beyond the question of ALJs. After all, Jarkesy had contended that, in adopting the provision in Dodd-Frank permitting the use of ALJs but by providing no guidance on the issue, “Congress has delegated to the SEC what would be legislative power absent a guiding intelligible principle” in violation of that doctrine. A column in the NYT discussing Jarkesy explained that, if “embraced in its entirety, the nondelegation doctrine could spell the end of agency power as we know it, turning the clock back to before the New Deal.” And in Bloomberg, Matt Levine wrote that “a total victory on the nondelegation argument…could mean that all of the SEC’s rulemaking (and every other regulatory agency’s rulemaking) is suspect, that every policy decision that the SEC makes is unconstitutional. Much of U.S. securities law would need to be thrown out, or perhaps rewritten by Congress if they ever got around to it. Stuff like the SEC’s climate rules would be dead forever.” (For a discussion of the nondelegation doctrine, see the SideBar in this PubCo post.) But that didn’t happen. During oral argument, the Justices did not even give lip service to the nondelegation question—the discussion was instead 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 (see this PubCo post). In its decision, the majority held that, in the SEC’s action seeking civil penalties against Jarkesy for securities fraud, Jarkesy was entitled to a jury trial under the Seventh Amendment. And, “[s]ince the answer to the jury trial question resolve[d] this case,” SCOTUS did “not reach the nondelegation or removal issues.” Nevertheless, it was yet another strike against the administrative state.
SEC charges RR Donnelley with control failures related to cybersecurity incident
In this June Order, SEC Enforcement brought settled charges against R.R. Donnelley & Sons, a “global provider of business communications services and marketing solutions,” for control failures: more specifically, a failure to maintain adequate disclosure controls and procedures related to cybersecurity incidents and alerts and a failure to devise and maintain adequate internal accounting controls—more specifically, “a system of cybersecurity-related internal accounting controls sufficient to provide reasonable assurances that access to RRD’s assets—its information technology systems and networks, which contained sensitive business and client data—was permitted only with management’s authorization.” RRD agreed to pay over $2.1 million to settle the charges. Interestingly, in a Statement, SEC Commissioners Hester Peirce and Mark Uyeda decried the SEC’s use of “Section 13(b)(2)(B)’s internal accounting controls provision as a Swiss Army Statute to compel issuers to adopt policies and procedures the Commission believes prudent,” not to mention its “decision to stretch the law to punish a company that was the victim of a cyberattack.”
SCOTUS overrules Chevron—a gut punch to the administrative state?
On Friday, SCOTUS issued its decision 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. To be sure, the transcendent significance of these cases has little to do with fishing and everything to do with the authority of administrative agencies to regulate: the question 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” (think, “reasonable”) interpretation of a law unless it is arbitrary or manifestly contrary to the statute. In a majority opinion by Chief Justice John Roberts, the Court rejected the doctrine: the “deference that Chevron requires of courts reviewing agency action cannot be squared with the [Administrative Procedure Act].” In case you scoff at the significance of the decision, consider the seminal nature of the doctrine as described in this 2006 article by Cass Sunstein: Chevron “has become foundational, even a quasi-constitutional text—the undisputed starting point for any assessment of the allocation of authority between federal courts and administrative agencies. Ironically, Justice Stevens, the author of Chevron, had no broad ambitions for the decision; the Court did not mean to do anything dramatic. But shortly after it appeared, Chevron was quickly taken to establish a new approach to judicial review of agency interpretations of law, going so far as to create a kind of counter-Marbury for the administrative state.” Alluding to language from Marbury, Sunstein proclaimed that “Chevron seemed to declare that in the face of ambiguity, it is emphatically the province and duty of the administrative department to say what the law is.” Not anymore. A six-justice majority of the Court has just overruled Chevron, with concurrences by each of Justices Clarence Thomas and Neil Gorsuch and a dissent by Justice Elena Kagan, joined by Justices Sonia Sotomayor and Ketanji Brown Jackson (only on Relentless). The implications of the decision are almost boundless—every current and future federal regulatory regime could be affected. As Kagan wrote in her dissent, this decision “puts courts at the apex of the administrative process as to every conceivable subject—because there are always gaps and ambiguities in regulatory statutes, and often of great import. What actions can be taken to address climate change or other environmental challenges? What will the Nation’s health-care system look like in the coming decades? Or the financial or transportation systems? What rules are going to constrain the development of A.I.? In every sphere of current or future federal regulation, expect courts from now on to play a commanding role.”
Fifth Circuit vacates SEC rescission of “notice-and-awareness” provisions in proxy advisor rules
Is it ok for an agency to change its mind? Well that depends. If the agency was “arbitrary and capricious” in failing to provide an adequate explanation to justify its change, a court may well vacate that about-face. At least, that’s what just happened to the SEC and Chair Gary Gensler in the Fifth Circuit in National Association of Manufacturers v. SEC, the case challenging the SEC’s rescission in 2022 of some of the key controversial provisions governing proxy voting advice that were adopted by the SEC in July 2020 and favored by NAM—the notice-and-awareness provisions that were designed to facilitate engagement between proxy advisors and the subject companies. You may recall that, in July 2022, NAM filed a complaint asking that the 2022 rescission be set aside under the Administrative Procedure Act and declared unlawful and void, and, in September, NAM filed a motion for summary judgment, characterizing the case as “a study in capricious agency action.” The Federal District Court for the Western District of Texas begged to differ, however, issuing an Order granting summary judgment to the SEC and Gensler and denying summary judgment to NAM and the Natural Gas Services Group in this litigation (see this PubCo post). NAM appealed. In August last year, a three-judge panel of the Fifth Circuit heard oral argument on NAM’s appeal, and it was apparent that the Court was none too sympathetic to the SEC’s case, with Judge Edith Jones mocking the SEC’s concern with the purported burdens on proxy advisors as “pearl-clutching.” (See this PubCo post.) Now, almost a year later, in an opinion by Judge Jones, the panel has concluded “that the explanation provided by the SEC was arbitrary and capricious and therefore unlawful,” reversing the district court’s judgment and vacating and remanding to the SEC the 2022 rescission in part.
Delaware SB 313, controversial proposed corporate law amendments, heads to Governor for signature
What’s the latest on SB 313, the proposed amendments to the Delaware General Corporation Law largely designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company? That case invalidated portions of a stockholder agreement relinquishing to a founding stockholder control over certain corporate governance matters, a decision that many practitioners viewed as inconsistent with current market practice. The proposed amendments in SB 313 would add a new subsection (18) to Section 122 of the DGCL to allow corporations to enter into the types of stockholder contracts at issue in Moelis, even if the provisions are not set forth in a certificate of incorporation. As discussed in this PubCo post and this PubCo post, those proposed amendments have turned out to be highly contentious: a number of academics and jurists, including Delaware Chancellor Kathaleen McCormick in a seven-page letter to the Delaware State Bar Committee, raised objections to the haste and timing (prior to adjudication of an appeal by the Delaware Supreme Court) of the legislation. And Law360 reports that posts by Vice Chancellor Travis Laster (purportedly not acting as vice chancellor) questioned “S.B. 313’s terms” and contended that “[c]laims by critics that the Moelis decision put thousands of agreements at risk, the vice chancellor wrote, ‘smacks of hyperbole.’” Adding even more fuel to the fire was a letter submitted to the Delaware legislature, posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments, along with these separate posts by noted academics on the HLS Forum and on the CLS Blue Sky blog, with this lonely post in favor. But the bill then “sailed through” the Delaware Senate “without debate or an opposing vote,” on to the Delaware House. (See this PubCo post.) The bill has now passed the House and been forwarded to the Governor for signature—but not without some acrimony.
Jury convicts former executive for insider trading and fraudulent use of Rule 10b5-1 plan
Back in March 2023, the DOJ unsealed an indictment against Terren Peizer, formerly the executive chair of Ontrak, Inc., representing the first time, according to the press release, that the DOJ brought “criminal insider trading charges based exclusively on an executive’s use of 10b5-1 trading plans.” The DOJ charged that Peizer entered into a fraudulent scheme using 10b5-1 plans and engaged in insider trading, both of which charges carry stiff criminal penalties. Peizer, the DOJ alleged, “avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material, nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract.” According to the WSJ, the trial continued for nine days. On Friday, Bloomberg reports, a jury in the U.S. District Court for the Central District of California found Peizer “guilty of one count of securities fraud and two counts of insider trading.” In a statement, Peizer’s counsel, as reported by Law360, said that the “testimony from all the witnesses at trial showed that Mr. Peizer did not operate the company, and relied on his management team for updates….That same management team told Mr. Peizer that there was no material nonpublic public information at the time he entered in his trading plans, and those plans were supposed to protect him. Mr. Peizer was entitled to rely on that advice. In our view, this result is a travesty of justice, as Terren Peizer is innocent of these charges. We will not rest until it is overturned.” The head of the DOJ’s criminal division observed, in the DOJ press release, that when Peizer “learned significant negative news about Ontrak, he set up Rule 10b5-1 trading plans to sell shares before the news became public and to conceal that he was trading on inside information….With today’s verdict, the jury convicted Peizer of insider trading. This is the Justice Department’s first insider trading prosecution based exclusively on the use of a trading plan, but it will not be our last. We will not let corporate executives who trade on inside information hide behind trading plans they established in bad faith.” Notably, Peizer wasn’t just convicted despite his use of 10b5-1 plans, he was convicted because of his use—a use that the jury found to be fraudulent.
The Chamber and NCPPR file brief challenging SEC climate disclosure rule
As you probably recall, on March 6, the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings.” (See this PubCo post, this PubCo post, this PubCo post, and this PubCo post.) Even though, in the final rules, the SEC scaled back significantly on the proposal—including 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—all kinds of litigation immediately ensued. 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.” There are currently nine consolidated cases—with two petitioners, the Sierra Club and the Natural Resources Defense Council, having voluntarily exited the litigation (see this PubCo post), and a new petition having just been filed by the National Center for Public Policy Research, a familiar presence in various cases, such as the legal challenges to the Nasdaq board diversity rules (see this PubCo post), state and corporate DEI initiatives (see this PubCo post and this PubCo post), and litigation over shareholder proposals (see this PubCo post). Petitioners have recently begun to submit briefing. One that has been made available is the brief that was filed on behalf of the U.S. Chamber of Commerce, Texas Association of Business, Longview Chamber of Commerce and the National Center for Public Policy Research.
Court calls a halt to Exxon case against Arjuna
In January, ExxonMobil filed a lawsuit against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal submitted to Exxon, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. Then, the two proponents notified Exxon that they had withdrawn their proposal and promised not to refile; therefore, they said, the case was moot. But Exxon refused to withdraw its complaint because it believed that there was still a critical live controversy for the Court to resolve. And the Federal District Court for the Northern District of Texas agreed—at least as to Arjuna. While the Court dismissed the case against Follow This, an association organized in the Netherlands, for lack of personal jurisdiction, it allowed the case against Arjuna to proceed on the basis of both subject matter and personal jurisdiction, citing precedent that “a defendant’s voluntary cessation of a challenged practice does not deprive a federal court of its power to determine the legality of the practice.” (For background on this case, see this PubCo post.) According to the Court, the “voluntary-cessation doctrine requires more than platitudes to render a case moot;…to moot Exxon’s claim, Defendants must show that it is ‘absolutely clear’ the relevant conduct ‘could not reasonably be expected to recur.’” But the argument continued, even after the decision was rendered, as Arjuna continued to submit letters to Exxon in which Arjuna “unconditionally and irrevocably covenant[ed] to refrain henceforth from submitting any proposal for consideration by Exxon shareholders relating to GHG or climate change,” and Exxon continued to contend that the letters were not enough. (See this PubCo post.) Finally, yesterday, after a hearing on the matter, the Court called a halt, issuing an Order that Exxon’s claim was moot and dismissing the action without prejudice. But not before the Court got in a few digs at Arjuna, activism and even at the SEC.
Controversial Delaware legislation breezes through Delaware Senate
Controversy notwithstanding, the proposed amendments to the Delaware General Corporation Law in Senate Bill 313 have reportedly “sailed through” the Delaware Senate and are scheduled to move to the Delaware House this week. (See, e.g., this article in Bloomberg.) The proposed amendments were largely designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, which invalidated portions of a stockholder agreement relinquishing to a founding stockholder control over certain corporate governance matters, a decision that many practitioners viewed as inconsistent with current market practice. But, as discussed in this PubCo post, those proposed amendments have turned out to be highly contentious: a number of academics and jurists, including Delaware Chancellor Kathaleen McCormick in a seven-page letter to the Delaware State Bar Committee, raised objections to the haste and timing (prior to adjudication of an appeal by the Delaware Supreme Court) of the legislation. Adding even more fuel to the fire was a letter submitted to the Delaware legislature, posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments, along with these separate posts by noted academics on the HLS Forum and on the CLS Blue Sky blog, with this lonely post in favor. (See this PubCo post.)
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