Tag: SEC Division of Enforcement
SEC charges UPS with failure to take goodwill impairment charge require by GAAP
Last week, the SEC announced settled charges against United Parcel Service Inc. for failing to take an appropriate goodwill impairment charge for a poorly performing business unit, thus materially misrepresenting its earnings. As alleged by the SEC, instead of calculating the write-down based on the price UPS expected to receive to sell its Freight business unit—as required under GAAP—UPS relied on a valuation prepared by an outside consultant, but “without giving the consultant information necessary to conduct a fair valuation of the business.” According to the Associate Director of Enforcement, “[g]oodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own….Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations.” UPS was charged with making material representations in its reporting, as well as violations of the book and records, internal accounting controls, and disclosure controls provisions of the Exchange Act and related rules. UPS agreed to adopt training requirements for certain officers, directors and employees, retain an independent compliance consultant and pay a $45 million civil penalty.
Happy Thanksgiving!
SEC charges director with proxy violation for failing to disclose personal relationship bearing on independence
Last week, the SEC announced settled charges against James R. Craigie, a former CEO, Chair and board member of Church & Dwight Co. Inc., an NYSE-listed “manufacturer of consumer-packaged goods,” for “violating proxy disclosure rules by standing for election as an independent director” without advising the board that maybe he really wasn’t quite so independent after all. This omission, the SEC alleged, caused the company’s proxy statements “to contain materially misleading statements.” Maybe you guessed that we’re not talking here about any of the NYSE-enumerated relationships that vitiate independence? No, we’re talking about something closer to the concept of “social independence”—something more amorphous than conventional, stock-exchange-defined independence—that some suggest can be even more compromising at times than the conventional variety. Craigie was alleged to have a “close personal friendship with a high-ranking Church & Dwight executive,” including paying more than $100,000 for the executive and his spouse to join Craigie and his spouse on “six trips that spanned eight countries on five continents.” Because Craigie never disclosed the relationship to the board and encouraged the executive to do the same, the SEC charged, the board was not aware of the relationship and the company’s proxy statements characterized Craigie incorrectly as an independent director. According to the Associate Director of the SEC’s Division of Enforcement, “[s]hareholders expect independent directors to exercise autonomous judgment in their decision making, free from undisclosed conflicts….By concealing his relationship with a company executive, Mr. Craigie undermined the board’s director independence process and compromised the company’s disclosures.” Craigie agreed to a five-year officer-and-director bar and to pay a civil penalty of $175,000. The case raises the thorny question of where to draw the line on personal relationships. Is an occasional dinner acceptable? If so, what about a weekend trip? A vacation trip? How many trips is too many? Just how thick do the personal connections have to be to taint independence? Caution seems to be the prescription here.
SEC brings securities fraud charges against Cassava Sciences
The SEC announced last week that it had filed a complaint against Cassava Sciences, Inc., a “pharmaceutical company with one primary drug candidate, PTI-125, a potential therapeutic for the treatment of Alzheimer’s disease,” for misleading statements about the results of a Phase 2 clinical trial for the potential therapeutic. Also charged in the complaint were the company’s founder and former CEO and its former Senior Vice President of Neuroscience. The complaint highlights and analyzes a number of misleading statements and omissions—an analysis that could be instructive for companies reporting on clinical trial results. In a related Order, the SEC also charged an associate medical professor at the CUNY, who was a consultant and the co-developer of the therapeutic, with manipulating the reported clinical trial results. The company agreed to pay a civil penalty of $40 million. The former CEO and former Senior VP agreed to pay civil penalties of $175,000 and $85,000, respectively, and to officer-and-director bars of three and five years. The consultant agreed to pay a civil penalty of $50,000. They were all charged with violating the antifraud provisions of the federal securities laws; the company was also charged with violating the reporting provisions. It’s been widely reported that, after the announcement of the settlement, the stock price fell by almost 11%. PTI-125 is now reported to be in Phase 3 clinical trials.
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.
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.”
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.
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.”
SEC charges Ideanomics for misleading revenue guidance
As discussed in this press release, the SEC has announced Orders settling charges against Ideanomics, Inc., its current CEO and former CFO, as well as its former Chair and CEO, for alleged misleading statements about the company’s financial performance between 2017 and 2019. There were multiple alleged fraudulent acts, but featured most prominently was an allegation that the Company and the former Chair/CEO reported 2017 revenue guidance that ended up being well off the mark, “despite numerous known issues indicating that the company would miss this guidance by a wide margin.” The Company later reported 2017 revenues that were less than half of the amount represented to the public in its guidance. According to the Associate Director of Enforcement, as the SEC alleged, “Ideanomics and its executives defrauded investors, including by misstating its financial statements and failing to disclose material information to investors….The investing public must be able to trust the accuracy of a company’s disclosures, and we will hold accountable executives who abuse that trust by engaging in fraud.”
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.”
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