Category: Securities
Will the SEC’s shadow trading theory fall to SCOTUS’s major questions doctrine?
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. But it wasn’t your average run-of-the-mill insider trading case. Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction. No, according to the SEC, he engaged in what has been referred to as “shadow trading”; he used the information about his employer’s acquisition to purchase call options on another biopharma, which the SEC claimed was comparable to Medivation. (See this PubCo post.) Since then, we’ve seen the usual moves on the chess board (discussed briefly below). But what’s particularly interesting, as Alison Frankel pointed out in Reuters, is the amicus brief filed by the Investor Choice Advocates Network, a self-described “nonprofit, public interest organization focused on expanding access to markets by underrepresented investors and entrepreneurs.” In its brief, ICAN contended that the SEC’s invocation of the novel “shadow-trading” theory made this a “major questions” case—a judicial torpedo that we might begin to see fired with some regularity.
SEC approves Nasdaq rule change regarding reverse stock splits
In August, the SEC posted a proposed Nasdaq rule change that would establish listing standards related to notification and disclosure of reverse stock splits. According to the Nasdaq proposal, the volume of reverse splits processed by Nasdaq has increased substantially from 94 in 2020, 31 in 2021and 196 in 2022 to 164 reverse splits—just as of June 23, 2023. In most cases, Nasdaq observed, the purpose of the reverse splits was to comply with Nasdaq’s $1 minimum bid price requirement to remain on the Capital Market tier. In light of this increased volume, Nasdaq proposed amendments to its listing rules to “enhance the ability for market participants to accurately process these events, and thereby maintain fair and orderly markets.” Failure to comply could result in a trading halt. Last week, the SEC approved the proposed rule change. It’s worth noting that, as a corollary to the new reverse split listing standards, Nasdaq has also submitted to the SEC a separate rule proposal to adopt a new regulatory halt procedure specific to securities in the process of a reverse split.
SEC charges SolarWinds and CISO with securities fraud and control failures
You remember the 2020 SolarWinds hack, perhaps one of the worst cyberattacks in history? As NPR described it in 2021, we all regularly receive routine software updates like this one:
“‘This release includes bug fixes, increased stability and performance improvements’…. Last spring, a Texas-based company called SolarWinds made one such software update available to its customers. It was supposed to provide the regular fare—bug fixes, performance enhancements—to the company’s popular network management system, a software program called Orion that keeps a watchful eye on all the various components in a company’s network. Customers simply had to log into the company’s software development website, type a password and then wait for the update to land seamlessly onto their servers. The routine update, it turns out, is no longer so routine. Hackers believed to be directed by the Russian intelligence service, the SVR, used that routine software update to slip malicious code into Orion’s software and then used it as a vehicle for a massive cyberattack against America. ‘Eighteen thousand [customers] was our best estimate of who may have downloaded the code between March and June of 2020,’”
according to the Company’s CEO. And not just any customers—the Company determined that many very well-known companies and about a dozen government agencies were compromised, including the Treasury, Justice and Energy departments, the Pentagon and, ironically, the Cybersecurity and Infrastructure Security Agency, part of the Department of Homeland Security. On Monday, the SEC announced that it had filed a complaint against SolarWinds and its Chief Information Security Officer, Timothy G. Brown, charging ‘fraud and internal control failures relating to allegedly known cybersecurity risks and vulnerabilities.” In the complaint, the SEC charges that “SolarWinds’ public statements about its cybersecurity practices and risks painted a starkly different picture from internal discussions and assessments about the Company’s cybersecurity policy violations, vulnerabilities, and cyberattacks.” According to Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, the SEC’s enforcement action “underscores our message to issuers: implement strong controls calibrated to your risk environments and level with investors about known concerns.”
Gensler talks climate with the Chamber
In his introduction to a conversation late last week with SEC Chair Gary Gensler on “Climate Disclosure Developments: The SEC, California, and EU Extraterritoriality,” the President and CEO of the U.S. Chamber of Commerce’s Center for Capital Markets, observed that, although companies have voluntarily responded to investors by increasingly disclosing information on climate, now policymakers in different states and across the globe are working to impose a plethora of mandatory reporting requirements for climate disclosure. The thing is, they’re not consistent. While the Chamber supported disclosure of material climate information, he cautioned that the actions by these policymakers have created a real risk that companies will face duplicate, differing, overlapping and even conflicting requirements. The SEC’s proposal to enhance standardization of climate disclosure might offer some real relief on that score, and that makes it all the more important, he said, for the SEC to act within its authority. The potential for public companies to become ensnared in this labyrinth of overlapping and conflicting regulation was the apparent subject of this conversation. In the end, however, Gensler’s steady focus was on the remit of the SEC under U.S. law. Risks to issuers arising out of inconsistency with California and the EU—well, not so much.
It’s not over till it’s over: Petition filed for rehearing en banc on Nasdaq board diversity rule
As discussed in this PubCo post, on October 18, a three-judge panel of the Fifth Circuit denied the petitions filed by the Alliance for Fair Board Recruitment and the National Center for Public Policy Research challenging the SEC’s final order approving the Nasdaq listing rules regarding board diversity and disclosure. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Yesterday, the Petitioners filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. Not that politics has anything to do with it, of course.
Is there an alternative to Scope 3?
As you know, the SEC has proposed a sweeping set of regulations for disclosure on climate (see this PubCo post, this PubCo post and this PubCo post), and we anxiously wait to see what the final rules have in store (obviously not happening in October as the SEC had previously targeted). One controversial part of that proposal draws on the Greenhouse Gas Protocol, requiring disclosure of a company’s Scopes 1 and 2 greenhouse gas emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company’s emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 data for large accelerated filers and accelerated filers. There haven’t been many complaints about the Scope 1 and Scope 2 requirements, but Scope 3 is another matter. According to the SEC, some commenters indicated that, for many companies, Scope 3 emissions represent a large proportion of overall GHG emissions, and therefore, could be material. However, those emissions result from the activities of third parties in the company’s “value chain,” making collection of the data much more difficult and much less reliable. In two articles published in the Harvard Business Review—“Accounting for Climate Change” and “We Need Better Carbon Accounting. Here’s How to Get There”—Robert Kaplan and Karthik Ramanna from Harvard Business School and the University of Oxford, respectively, propose another idea—the E-liability accounting system. The GHG protocol is, at this point, deeply embedded. Would the E-liability system work? Should the SEC or other regulators make room for a different concept?
Relentless Inc. v. Dept. of Commerce: SCOTUS grants cert. to another case about Atlantic herring—and Chevron deference
On October 13, SCOTUS granted cert. in the case of Relentless, Inc. v. Dept of Commerce, a case about whether the National Marine Fisheries Service has the authority to require herring fishing vessels to pay some of the costs for onboard federal observers who are required to monitor regulatory compliance. Does that ring a bell? Probably, because it’s exactly the same issue on which SCOTUS has already granted cert. in Loper Bright Enterprises v. Raimondo. (See this PubCo post.) Why grant cert. in this case too? It’s been widely reported that the reason was to allow Justice Kenji Brown Jackson, who had recused herself on Loper Bright, to participate in what will likely be a very important decision: 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 (such as the National Marine Fisheries Service or, as has happened fairly often, the SEC, see this Cooley News Brief). The question presented is “ [w]hether the Court should overrule Chevron or at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.” The decision could narrow, or even completely undo, that deference. The grant of cert provided that the two cases will be argued in tandem in the January 2024 argument session. Mark your calendars.
Fifth Circuit denies petition challenging Nasdaq’s board diversity rule
On Friday, August 6, 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) As anticipated, a court challenge to these rules didn’t take long to materialize. On Monday, August 9, the Alliance for Fair Board Recruitment filed a slim petition under Section 25(a) of the Exchange Act in the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post.) That petition was soon followed by a new petition challenging the rules filed by the National Center for Public Policy Research and subsequently transferred to the Fifth Circuit where the earlier filed petition was pending. (See this PubCo post.) Yesterday, a three-judge panel of the Fifth Circuit—by repute, the Circuit of choice for advocates of conservative causes—denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. According to the unanimous decision, “AFBR and NCPPR have given us no reason to conclude that the SEC’s Approval Order violates the Exchange Act or the APA.” The case is Alliance for Fair Board Recruitment, National Center for Public Policy Research v. SEC.
ICYMI: column from Matt Levine on SEC Enforcement’s “silly season”
After all the PubCo posts on the avalanche of SEC enforcement cases muscled into the last couple of days before the SEC’s fiscal year end, I thought this column in Bloomberg from Matt Levine might be of particular interest. The relevant portion of the column, called the “SEC silly season,” discusses the apparent scramble by the SEC at the end of its fiscal year to bring as many enforcement actions as possible in response to “performance-reporting pressures,” that is, the pressures to make its stats to achieve optimal Congressional funding. According to academic research cited in the column, that scramble is not just “apparent,” it’s real, and it has practical implications for enforcement behavior. The research showed that the average number of cases filed in September “is almost double the average in other months,” and that the “spike is larger when case totals are behind pace to meet last year’s case total, which likely serves as a de facto performance benchmark.” The SEC achieves this fiscal-year-end increase, according to the research, “by changing its enforcement behavior related to substantive cases,” that is, through prioritization of less complex cases and imposition of more lenient penalties, including financial discounts, relative to other periods. For example, the September cases are “significantly more likely to reference defendant cooperation and to only name companies as defendants, and are less likely to include a fraud allegation and to reference parallel criminal proceedings.” Accordingly, the authors found that the “evidence is consistent with the SEC agreeing to more lenient settlement terms to increase case volume at fiscal year-end—an unintended consequence of performance reporting that undermines the SEC’s core values.” As the authors of the research suggest, might defendants familiar with this “regulatory inconsistency” be able to use it to their advantage?
You must be logged in to post a comment.