On Friday of last week, the SEC announced that it had filed a complaint charging AT&T, Inc. and three of its Investor Relations executives with violations of Reg FD as a result of one-on-one disclosures of AT&T’s “projected and actual financial results” to a number of Wall Street research analysts by the three executives. In March 2016, the SEC alleges, AT&T learned that, as a result of a “steeper-than-expected decline in smartphone sales,” AT&T’s first quarter revenues would fall short of analysts’ estimates by over a $1 billion. The three IR executives were then asked to contact the analysts whose estimates were too high to “walk” them down. This case illustrates the tightrope that IR personnel walk when talking one-on-one with analysts in the context of Reg FD.
Last week, Allison Lee, Acting Chair of the SEC, directed the staff of Corp Fin to “enhance its focus on climate-related disclosure in public company filings.” Yesterday, the SEC announced that the new climate focus would not be limited to Corp Fin—the SEC has created a new Climate and ESG Task Force in the Division of Enforcement. According to the press release, the initial focus of the Task Force will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules, giving us all another reason to excavate the staff’s 2010 interpretive guidance regarding climate change. (You may recall that the guidance addressed in some detail how existing disclosure obligations, such as the Reg S-K requirements for business narrative and risk factors, could apply to climate change. See this PubCo post.) Apparently, however, the remit of the Task Force goes beyond climate to address other ESG issues. Lee said that the Task Force is designed to bolster the efforts of the SEC as a whole in addressing climate risk and sustainability, which “are critical issues for the investing public and our capital markets.”
Disclosure of executive perks is once again in the SEC Enforcement spotlight. Just last year, there were two actions against companies for disclosure failures regarding perks—Hilton Worldwide Holdings Inc. (see this PubCo post) and Argo Group International Holdings, Ltd. (see this PubCo post). Now, Enforcement has brought settled charges against Gulfport Energy Corporation, a gas exploration and production company that filed for Chapter 11 in November, and its former CEO, Michael G. Moore, for failure to disclose some of the perks provided to Moore as well as related-person transactions involving Moore’s son. The case serves as a reminder that the analysis of whether a benefit is a disclosable perk can be complicated.
The SEC has just filed a complaint against Sequential Brands Group, Inc., a brand management company, for failing to take timely and appropriate goodwill impairment charges as required by GAAP and the federal securities laws, despite “clear evidence of goodwill impairment” (according to the press release). As a result, the SEC alleges, the company “materially understated its operating expenses and net loss and materially overstated its income from operations, goodwill, and total assets” in its SEC filings, turning “a net loss into income” for financial statement purposes.
SEC brings settled charges against GE for disclosure violations and inadequate accounting and disclosure controls
Right on the heels of the SEC’s action against Cheesecake Factory for misleading public statements regarding its financial performance (see this PubCo post) comes this settled action against General Electric Company—also for misleading public statements about its financial performance. In this action, the SEC alleged that GE failed to provide material information that would have allowed investors to understand how it was generating profits and cash flow in two key segments, power and insurance, the quality of those earnings and the underlying risks. And, as challenges in these segments were later disclosed, the company’s stock price fell almost 75%. As reported in the WSJ, the SEC and DOJ were “investigating GE’s accounting for about two years after the company disclosed large write-downs tied to its insurance business and its power business. The SEC had warned GE in September that it was preparing civil charges, and GE said it had set aside $100 million to resolve the matter.” That reserve turned out to be somewhat optimistic—a bit like some of GE’s insurance reserves—as the final civil penalty was actually $200 million. It’s worth noting here that, as stated in GE’s 8-K regarding the settlement, in its Order, the SEC “makes no allegation that prior period financial statements were misstated. This settlement does not require corrections or restatements of GE’s previously reported financial statements, and GE stands behind its financial reporting.” That is, in the end, the charges were not about funny accounting—even though some might question certain of the judgments—they were about the disclosures about the accounting, the controls over the accounting and the controls over the disclosures.
Failure to disclose perks seems to be a fairly attractive target for SEC Enforcement these days. In another fiscal year-end action, Enforcement has charged Hilton Worldwide Holdings Inc. with failure to disclose in its proxy statements various perks and personal benefits provided to its executive officers. This action has the distinction of being the result of the staff’s use of risk-based data analytics to uncover potential violations related to corporate perks. The case serves as a reminder that the analysis of whether a benefit is a disclosable perk can be complicated and is not the same as the “business purpose” test used for tax purposes.
Enforcement has certainly been busy at the end of the SEC’s fiscal year, with disclosure violations receiving their fair of attention. In this action against HP Inc., the company was charged with failing to disclose known trends and uncertainties regarding the impact of sales and inventory practices, as well as failure to maintain adequate disclosure controls and procedures. HP was ordered to pay a penalty of $6 million.
All the focus on COVID-19 disclosures notwithstanding, the SEC has not taken its collective eyes off the basics. This Order discusses settled charges against Argo Group International Holdings, Ltd. related to its failure to disclose in its proxy statements—for five years—millions in personal expenses and perks paid to its CEO, such as personal use of corporate aircraft and cars, “personal services provided by Argo employees and watercraft-related costs.” Not to mention that the CEO was able to approve his own expense reports. According to the press release, Enforcement continues “to focus on whether companies are fully disclosing compensation paid to their top executives and have appropriate internal controls in place to ensure that shareholders receive information to which they are entitled.”
It’s not just the Justice Department that’s looking into PPP loans—although there appears to be plenty of that going on—the SEC’s Division of Enforcement is also conducting an investigation into “Certain Paycheck Protection Program Loan Recipients” to determine whether there have been violations of the federal securities laws. To that end, Enforcement is conducting a “fact-finding inquiry,” requesting that certain PPP loan recipients produce a variety of documents. While the primary focus of DOJ prosecutors appears to be whether representations made in certifications to the SBA to obtain the PPP loans were fraudulent, the SEC is apparently looking at PPP loans and related company disclosures from a different angle.
In his keynote address to Securities Enforcement Forum West 2020, SEC Enforcement Co-Director Steven Peikin discussed some of the efforts of the Division of Enforcement to detect misconduct arising out of the COVID-19 pandemic and related market disruption, including the formation of a steering committee to proactively identify and monitor areas of potential misconduct. Of particular interest here are the focus on insider trading and financial and disclosure-related fraud.