Tag: securities fraud
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 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.”
Another EV manufacturer charged for material misrepresentation to investors
It’s almost as if someone put a hex on electric vehicle manufacturers that went public through de-SPACs. In 2022, SEC Enforcement charged Nikola Corporation, an aspiring manufacturer of low- or zero-emission semi-trucks, alleging that Nikola “defrauded investors by misleading them about its products, technical advancements, and commercial prospects,” leading to a $125 million settlement. (See this PubCo post.) Then we had a twofer—settled actions against two manufacturers of electric vehicles for misleading investors. In the first case, Hyzon Motors Inc., a maker of hydrogen fuel cell electric vehicles, was charged with misleading investors about the status of Hyzon’s products, business relationships and vehicle sales, agreeing to pay a civil penalty of $25 million. Then, the predecessor to Spruce Power Holding Corporation, XL Fleet, which provided fleet hybrid electrical vehicles, was alleged to have misled investors about its sales pipeline and revenue projections. As the successor, Spruce agreed to pay a civil penalty of $11 million. (See this PubCo post.) But that’s not the end of it. Now we have charges against Lordstown Motors Corp., a manufacturer of electric vehicles focused on the commercial fleet market, for “misleading investors about the sales prospects of Lordstown’s flagship electric pickup truck, the Endurance.” Lordstown went public through a de-SPAC transaction in 2020 and filed for bankruptcy in 2023. As a result of this action, Lordstown agreed to a cease-and-desist order and disgorgement of $25.5 million.
SEC reports Enforcement stats for fiscal 2023 —with big contributions from whistleblowers
The SEC has announced its Enforcement stats for fiscal 2023, which revealed that the SEC filed 784 total enforcement actions, up 3% from the 760 filed in fiscal 2022. However, the level of financial remedies declined in fiscal 2023 to $4.9 billion from a record $6.4 billion last year. Nevertheless, it was still the second highest amount in SEC history. (Of course, you might recall that Gurbir S. Grewal, Director of the Division of Enforcement, said last year that the SEC didn’t expect to break last year’s records and set new ones every year because they “expect behaviors to change. We expect compliance.”) Of those financial recoveries, in fiscal 2023, the SEC distributed $930 million to harmed investors, representing the second consecutive year of distributions in excess of $900 million. But the standout statistics this year related to the SEC’s whistleblower program, where new records were set with whistleblower awards totaling almost $600 million, and 18,000 whistleblower tips in fiscal 2023, about 50% more tips than were received in fiscal 2022. A new record was also set with a $279 million award to one whistleblower. Overall, in fiscal 2023, the SEC received over “40,000 tips, complaints, and referrals in total,” a 13% increase over last year. According to SEC Chair Gary Gensler, the “investing public benefits from the Division of Enforcement’s work as a cop on the beat….Last fiscal year’s results demonstrate yet again the Division’s effectiveness—working alongside colleagues throughout the agency—in following the facts and the law wherever they lead to hold wrongdoers accountable.” Grewal added that “[i]nvestor protection and enhancing public trust in our markets requires that we work with a sense of urgency, using all the tools in our toolkit. As today’s results make clear, that’s precisely what the Enforcement Division did in fiscal year 2023….Whether it was by leveraging risk-based initiatives, seeking robust remedies, rewarding cooperation, protecting whistleblowers, or returning nearly a billion dollars to harmed investors, the Enforcement Division stood up for the investing public.”
Is political corruption securities fraud?
You remember Matt Levine’s mantra in his “Money Stuff” column on Bloomberg: “everything is securities fraud”? “You know the basic idea,” he says, a
“company does something bad, or something bad happens to it. Its stock price goes down, because of the bad thing. Shareholders sue: Doing the bad thing and not immediately telling shareholders about it, the shareholders say, is securities fraud. Even if the company does immediately tell shareholders about the bad thing, which is not particularly common, the shareholders might sue, claiming that the company failed to disclose the conditions and vulnerabilities that allowed the bad thing to happen. And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got. Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly.” (Money Stuff, 6/26/19)
(See this PubCo post.) But here’s a new one—bribery and political corruption as securities fraud. As described in this press release, in the fiscal-year-end enforcement crush, the SEC brought settled charges against Exelon Corporation, a utility services holding company, and its subsidiary, electric utility company Commonwealth Edison Company (ComEd), and filed a complaint against ComEd’s former CEO alleging “fraud in connection with a multi-year scheme to corruptly influence and reward the then-Speaker of the Illinois House of Representatives.” Exelon and ComEd agreed to settle the charges, with Exelon paying a civil penalty of $46.2 million. The charges against the CEO are headed for trial. So how is this securities fraud? According to the Chief of the SEC Enforcement Division’s Public Finance Abuse Unit, the CEO’s “remarks to investors about ComEd’s lobbying efforts hid the reality of the long-running political corruption scheme in which they were engaged….When corporate executives speak to investors, they must not mislead by omission.”
SEC charges GTT with disclosure failures and control violations
This press release announces settled charges brought by the SEC against GTT Communications, Inc., a multinational telecommunications and internet service provider, for failure to disclose material information about “unsupported adjustments of more than $35 million” that had the effect of reducing COR, i.e., cost of revenue, and increasing reported operating income by at least 15% in three quarters from 2019 through 2020. According to the Order, in 2017 and 2018, GTT rapidly expanded its business through multiple acquisitions, but had difficulty absorbing and integrating the operations of the acquired, sometimes distressed, companies, especially with regard to accounting and controls. As a result, GTT was never able to reconcile data from two critical operating systems used to determine COR, ultimately leading to data integrity issues in its financial statements. In an attempt to achieve some consistency between the two systems, the SEC alleged, the company began to make accounting adjustments that, in the absence of effective controls, were “highly uncertain” and devoid of proper support. Moreover, the SEC alleged, GTT failed to provide adequate disclosure about the adjustments. In addition to antifraud violations, the SEC charged GTT with control violations: although GTT knew that its systems were inadequate to accurately report COR, “GTT failed to implement and maintain policies and procedures designed to provide reasonable assurance that the COR reflected in GTT’s financial statements was based on reasonable support.” However, because of GTT’s prompt self-reporting, remedial measures and substantial cooperation, the SEC did not impose a civil penalty. But perhaps the real penalty can be found here: in 2021, GTT was delisted from the NYSE, terminated its Exchange Act registration and filed for bankruptcy. GTT emerged in 2022 as a private company owned by certain of its former creditors—but eligible to use “Fresh-Start Reporting.”
Sustainability reports—not a liability-free zone
In April of last year, as described in this press release, the SEC filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. In discussing the charges, the press release made reference to the SEC’s Climate and ESG Task Force formed in 2021 in the Division of Enforcement “with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by Vale.” On Tuesday, the SEC announced that Vale had agreed to pay $55.9 million to settle the SEC charges. According to the Associate Director of Enforcement, the SEC’s “action against Vale illustrates the interplay between the company’s sustainability reports and its obligations under the federal securities law….The terms of today’s settlement, if approved by the court, will levy a significant financial penalty against Vale and demonstrate that public companies can and should be held accountable for material misrepresentations in their ESG-related disclosures, just as they would for any other material misrepresentations.”
SEC reports Enforcement stats—the “risk-reward calculation is not what it was”
The SEC has announced its fiscal 2022 Enforcement stats, which hit new records. According to the press release, during the year, the SEC filed 760 total enforcement actions, representing a 9% increase over the prior year. That total included 462 new, or “stand-alone,” enforcement actions, which “ran the gamut of conduct, from ‘first-of-their-kind’ actions to cases charging traditional securities law violations.” The SEC also recovered a record $6.4 billion in civil penalties, disgorgement and pre-judgment interest in SEC actions, an increase of 68% from $3.8 billion in the prior year. Civil penalties, at $4.2 billion, were also the highest on record. The press release emphasized that the increase in penalties is intended to “deter future misconduct and enhance public accountability.” In a number of cases, the SEC “recalibrated penalties for certain violations, included prophylactic remedies, and required admissions where appropriate” to make “clear that the fines were not just a cost of doing business.” According to Director of Enforcement Gurbir Grewal, the SEC doesn’t “expect to break these records and set new ones each year because we expect behaviors to change. We expect compliance.” Interestingly, disgorgement, at $2.2 billion, declined 6% from last year. As reported by the WSJ, Grewal, speaking at a recent conference, highlighted the fact that the SEC imposed more penalties than disgorgements, which, in his view, “demonstrated that ‘the potential consequences of violating the law are significantly greater than the potential rewards.’… He added that the SEC ordered more than twice as much in disgorgements as it did in penalties for the five fiscal years before the last one. ‘So while disgorgement was slightly down from the prior year…it is the first time that the amount ordered to be paid in penalties has been double the amount ordered to be paid in disgorgement,’ he said. ‘The increased penalty-to-disgorgement ratio nonetheless demonstrates that the risk-reward calculation is not what it was even a few years ago.’”
After dam collapse, SEC alleges false safety claims in sustainability reports and SEC filings
As described in this press release, the SEC has filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. According to Gurbir Grewal, Director of Enforcement, “[m]any investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions….By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.” Notably, the press release refers to the SEC’s Climate and ESG Task Force formed last year in the Division of Enforcement “with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by Vale.” The SEC’s charges arising out of this horrific accident are a version of “event-driven” securities litigation—brought this time, not by shareholders, but by the SEC.
Company charged for improper intra-company foreign exchange transactions
On Tuesday, the SEC announced settled charges against Baxter International Inc., its former Treasurer and Assistant Treasurer, for misconduct related to improper intra-company foreign exchange transactions that resulted in the misstatement of the company’s net income. From at least 1995 to 2019, the SEC alleged, Baxter converted foreign-currency-denominated transactions and assets and liabilities on its financial statements using its own “convention”—not in accordance with U.S. GAAP. Then, beginning around 2009, the SEC charged, Baxter leveraged the convention to devise a series of non-operating intra-company foreign exchange transactions “for the sole purpose of generating foreign exchange accounting gains or avoiding foreign exchange accounting losses.” In the order against Baxter, the SEC found that the company violated the negligence-based anti-fraud, public reporting, books and records, and internal accounting controls provisions of the federal securities laws and imposed an $18 million penalty. In this order and this order, the SEC found that the company’s Treasurer “did not take any steps to investigate how Baxter’s treasury department generated consistent gains or whether the transactions that generated the gains were permissible,” and that the Assistant Treasurer, working with others at his direction, was “primarily responsible for executing the transactions.” The Treasurer and Assistant Treasurer were determined to have violated the negligence-based anti-fraud provisions of the federal securities laws and to have caused Baxter’s public reporting and books and records violations.
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