Category: Securities

9th Circuit decides Section 11 standing in a direct listing

When the SEC was considering the NYSE’s proposal to permit direct listings of primary offerings, one of the frequently raised problems related to the potential “vulnerability” of “shareholder legal rights under Section 11 of the Securities Act.” Section 11 provides standing to sue for misstatements in a registration statement to any person acquiring “such security,” typically interpreted to mean a security registered under the specific registration statement. The “vulnerability” was thought to arise as a result of the difficulty plaintiffs may have—in a direct listing where both registered and unregistered shares may be sold at the same time—in “tracing” the shares purchased back to the registration statement in question. In approving adoption of the NYSE rule, the SEC said that it did not “expect any such tracing challenges in this context to be of such magnitude as to render the proposal inconsistent with the Act. We expect judicial precedent on traceability in the direct listing context to continue to evolve,” pointing to Pirani v. Slack Technologies. As the NYSE had observed, only the district court in Slack had addressed the issue, and had concluded that, at the pleading stage, plaintiffs could still pursue their claims even if they could not definitively trace the securities they acquired to the registration statement. However, the NYSE noted, the case was on appeal. (See this PubCo post.) That appeal, Pirani v. Slack Technologies, has just been decided by a three-judge panel of the 9th Circuit. The Court affirmed, with one dissent, the district court’s order, ruling that the plaintiff had standing to sue under Section 11.

Corp Fin posts sample climate comment letter

This afternoon, Corp Fin posted a sample letter to companies containing illustrative comments regarding climate change disclosures. Presumably, the goal is to help companies think about and craft their climate-related disclosure. 

SEC Chair testifies before Senate Banking Committee—firmly denies paternity of all public companies!

On Tuesday last week, SEC Chair Gary Gensler gave testimony before the Senate Committee on Banking, Housing and Urban Affairs.  His formal testimony covered a number of topics on the SEC’s agenda that Gensler (and others) have addressed numerous times in past: market structure and equity markets, predictive analytics, crypto, issuer disclosure, China, SPACs and Rule 10b5-1 plans. (See, e.g., this PubCo post and this PubCo post.) While the formal testimony covered some well-trod territory, the questioning highlighted the political polarization that we are likely to see continue as these proposals are presented for consideration. 

SEC charges attorney rendering legal opinions with violations of Section 5

Attorneys who may think they can give short shrift to those pesky legal opinions to transfer agents might think twice after reading this complaint, SEC v. Frederick Bauman, filed on September 8, 2021, in the federal district court in Nevada.   As described in the SEC’s litigation release, the SEC charged Bauman “with playing a critical role as an attorney who facilitated the unregistered sale of millions of shares of securities by two groups engaged in securities fraud.” According to the SEC’s complaint, between 2016 and August 2019, Bauman issued at least a dozen legal opinions to transfer agents advising that certain shares of four public companies were unrestricted and freely tradeable and that the holders of the shares were not affiliates of the public company issuers. However, the SEC alleged, the shareholders were actually part of groups that controlled those issuers, which made them affiliates under the securities laws. In “each instance where Bauman’s opinion letters violated Section 5,” the SEC alleged, “he lacked a reasonable basis for representing that the shareholders were not affiliates.” The complaint charged that the sales by these control groups were unregistered and violated Section 5 of the Securities Act and that Bauman violated Sections 5(a) and 5(c) of the Securities Act.

How reliable is your company’s carbon footprint?

Just how reliable are those carbon footprints that many large companies have been publishing in their sustainability reports?  Even putting aside concerns about greenwashing, what about those nebulous Scope 3 GHG emissions?  As we all know, the SEC is now is the midst of developing a proposal for mandatory climate-related disclosure.  (See, e.g., this PubCo post and this PubCo post.)  The WSJ reports that “[o]ne problem facing regulators and companies: Some of the most important and widely used data is hard to both measure and verify.” According to an academic cited in the article, the “measurement, target-setting, and management of Scope 3 is a mess….There is a wide range of uncertainty in Scope 3 emissions measurement…to the point that numbers can be absurdly off.”

SEC’s Investor Advisory Committee to consider recommendations regarding SPACs

Tomorrow, in addition to Rule 10b5-1 plan recommendations (see this PubCo post), the SEC’s Investor Advisory Committee is slated to take up draft subcommittee recommendations regarding SPACs. The new SPAC recommendations address SPAC regulatory and investor protection issues that have been under scrutiny as a result of the proliferation of SPACs in 2020 and 2021. The IAC subcommittee observes that the SEC and its staff have addressed many issues related to SPACs in staff guidance, and the topic’s appearance on the SEC’s most recent agenda signals that it may be headed for further regulatory action. With that in mind, the recommendations are focused “on the practical challenges SPAC investors face in fully assessing the risks and opportunities associated with these investment vehicles.” In light of the dynamic nature of the SPAC market in recent months, however, the subcommittee frames its recommendations as “preliminary,” and indicates an intent “to revisit the issue of SPAC governance” in the future as more data becomes available. [Update: this recommendation was approved by the Committee for submission to the SEC.]

SEC charges Kraft Heinz with improper expense management scheme

On Friday, the SEC announced settled charges against Kraft Heinz Company, its Chief Operating Officer and Chief Procurement Officer for “engaging in a long-running expense management scheme that resulted in the restatement of several years of financial reporting.” According to the SEC’s Order regarding the company and the COO, as well as the SEC’s complaint against the CPO, the company employed a number of expense management strategies that “misrepresented the true nature of transactions,” including recognizing unearned discounts from suppliers, maintaining false and misleading supplier contracts and engaging in other accounting misconduct, all of which resulted in accounting errors and misstatements. The misconduct, the SEC contended, was designed to allow the company to report sham cost savings consistent with the operational efficiencies it had touted would result from the 2015 merger of Kraft and Heinz, as well as to inflate EBITDA—a critical earnings measure for the market—and to achieve certain performance targets. And, once again, charges of failure to design and implement effective internal controls played a prominent role. After the SEC began its investigation, KHC restated its financials, reversing “$208 million in improperly-recognized cost savings arising out of nearly 300 transactions.” According to Anita B. Bandy, Associate Director of Enforcement, “Kraft and its former executives are charged with engaging in improper expense management practices that spanned many years and involved numerous misleading transactions, millions in bogus cost savings, and a pervasive breakdown in accounting controls. The violations harmed investors who ultimately bore the costs and burdens of a restatement and delayed financial reporting….Kraft and its former executives are being held accountable for placing the pursuit of cost savings above compliance with the law.” KHC agreed to pay a civil penalty of $62 million. Interestingly, this case comes on the heels of an earnings management case brought by the SEC against Healthcare Services Group, Inc. for alleged failures to properly accrue and disclose litigation loss contingencies. 

How did COVID-19 affect financial reporting and financial health?

Audit Analytics has just released a deep dive into the impact of COVID-19 on financial reporting and financial wellbeing. To assess the effect of the pandemic, the report looked at going-concern audit opinions, impairment charges, late filings and changes in the control environment, as well as restatements. Some of the results might be surprising.  For example, the pandemic had a significant impact on impairment charges, but the number of going-concern qualifications in audit opinions?  Not so much.

SEC’s Investor Advisory Committee to consider Rule 10b5-1 plan recommendations

This month, the SEC’s Investor Advisory Committee will be taking up draft subcommittee recommendations regarding two hot topics—Rule 10b5-1 plans and SPACs—both of which have now been posted. The wide berth Rule 10b5-1 gives insiders to conduct transactions under Rule 10b5-1 plans, together with the absence of public information requirements, has long fueled controversy about these plans.  Potential problems with 10b5-1 plans have been recognized in many quarters—including by former SEC Chair Jay Clayton and current Chair Gary Gensler—and the IAC subcommittee believes there is “strong bipartisan support” for improvements to Rule 10b5-1 that would enhance the rule’s effectiveness and “improve transparency regarding insider trades and enable effective investigation and enforcement of violations.” The IAC subcommittee recommends that the SEC “move quickly to close identified gaps in the current rule.” Given the widespread advocacy for modification of Rule 10b5-1, is it practically a fait accompli? This month, the SEC’s Investor Advisory Committee will be taking up draft subcommittee recommendations regarding two hot topics—Rule 10b5-1 plans and SPACs—both of which have now been posted. The wide berth Rule 10b5-1 gives insiders to conduct transactions under Rule 10b5-1 plans, together with the absence of public information requirements, has long fueled controversy about these plans.  Potential problems with 10b5-1 plans have been recognized in many quarters—including by former SEC Chair Jay Clayton and current Chair Gary Gensler—and the IAC subcommittee believes there is “strong bipartisan support” for improvements to Rule 10b5-1 that would enhance the rule’s effectiveness and “improve transparency regarding insider trades and enable effective investigation and enforcement of violations.” The IAC subcommittee recommends that the SEC “move quickly to close identified gaps in the current rule.” Given the widespread advocacy for modification of Rule 10b5-1, is it practically a fait accompli? [Update: This recommendation was approved by the Committee for submission to the SEC, subject to the opportunity to reconsider after addition of a footnote clarifying that the recommendation was not intended to address corporate buybacks.]

Are SPACs really “investment companies”?

Not according to 49 major law firms! Earlier this month, a shareholder of Pershing Square Tontine Holdings, Ltd., filed derivative litigation against the company’s board, its sponsor and other related companies, contending that the company, a SPAC organized by a billionaire hedge-fund investor, is really an investment company that should be registered under the Investment Company Act of 1940 and that its sponsor is really an investment adviser that should be registered under the Investment Advisers Act of 1940. Had they registered, so the argument goes, they would have been subject to substantial regulation regarding the rights of the SPAC’s shareholders and the form and amount of the SPAC managers’ compensation. According to the complaint, under the ICA, “an Investment Company is an entity whose primary business is investing in securities. And investing in securities is basically the only thing that PSTH has ever done.” The complaint sought “a declaratory judgment, damages, and rescission of contracts whose formation and performance violate” the ICA and IAA. What’s especially notable about the litigation—aside from its novel premise—is that the plaintiff’s lawyers include Yale law professor John Morley and Robert Jackson, an NYU law professor and former SEC Commissioner.  Now, a group of 49 major law firms—including Cooley—have issued a joint statement pushing back on the plaintiff’s claims, asserting that there is no legal or factual basis for the allegation that SPACs are investment companies.