Most corporate lawyers know that the False Claims Act is a formidable weapon for asserting claims against contractors who allegedly overcharge the federal government, but what many may not appreciate is that it also applies to efforts to evade customs duties and tariffs. This Nixon Peabody memo discusses this aspect of the FCA and other federal statutes that companies need to pay close attention to in light of the Trump administration’s dramatic changes to U.S. tariff policy. This excerpt addresses the application of the FCA to duties and tariffs:
The FCA both imposes liability for knowingly submitting false claims for payment to the government and knowingly avoiding obligations to pay money to the government (known as “reverse false claims”). In recent decades, DOJ and qui tam relators have leveraged the FCA primarily to pursue recoveries for noncompliance with federal healthcare program requirements. That enforcement trend, however, should not obscure the fact that the FCA is a multipurpose enforcement mechanism that is regularly employed by both DOJ and whistleblowers to target conduct across every economic sector. This includes defense, government procurement, and customs noncompliance, which triggers the FCA’s “reverse false claims” provision.
US importers must declare, among other things, their goods’ country of origin and value, whether the goods are covered by antidumping duties (i.e., tariffs on imported goods priced below their fair market value in the exporting country) or countervailing duties (i.e., tariffs that offset the effects of foreign government subsidies on exports), and the amount of duties owed. CBP relies on these representations to determine the correct amount of any duties.
Thus, importers bear an affirmative duty to use “reasonable care” to ensure that such information is accurate. Importers who fall short and knowingly provide false information to CBP risk FCA liability. Critically, because the FCA’s knowledge standard embraces not just actual knowledge but also deliberate ignorance or reckless disregard, taking affirmative measures to ensure reporting accuracy when goods cross US borders is essential to minimizing potential FCA exposure.
The memo notes that there have recently been significant financial settlements involving FCA actions based on avoidance of customs duties. Like the more familiar provisions of the FCA, these “reverse false claims” actions may be brought through qui tam lawsuits filed by third party plaintiffs as well as by the federal government.
Karl Marx famously said that history repeats itself – the first time as tragedy, and the second time as farce. That thought popped into my head when I read this BakerMcKenzie blog and realized that our self-inflicted tariff trauma requires us to revisit a topic that we last blogged about (see 2nd blog) at the onset of the pandemic. I’m talking about the possibility that force majeure clauses may be triggered allowing contracting parties to avoid performing their obligations. This excerpt addresses how the new tariffs may implicate these contract clauses:
The specific language of the force majeure clause will dictate its scope, applicability and effects. States’ approaches to force majeure clauses vary. Some (e.g., New York) interpret force majeure clauses narrowly, excusing non-performance only if the clause explicitly refers to the event in question, while some (e.g., California) uphold force majeure clauses even if the clause does not refer to the event at issue, as long as the event was unforeseeable when the contract was made.
If the clause expressly refers to new “tariffs” or “import duties” as force majeure events, the clause squarely applies to the White House’s recent trade measures. If the clause refers to “emergencies”, the clause may also apply because the White House declared a national emergency and relied on emergency powers to impose its latest tariffs in Executive Order 14257.
Given how frequently the media refers to the current situation as a “trade war”, companies might also argue that certain tariffs constitute “acts of war”, although the likelihood that this argument gains purchase is uncertain. The more clearly the language of the force majeure clause demonstrates that the parties intended to grant a party relief in a particular situation, the more likely a court will be to excuse a party’s non-performance if that situation arises.
That last argument about the trade war being an act of war seems pretty implausible, but then again, finding ourselves in a farcical situation like this one seemed pretty implausible less than a month ago too.
Tariffs are certain to be a hot topic for boards and audit committees, and this GrantThornton memo has some thoughts about the kind of tariff-related issues that boards and audit committees will want management to address:
Boards and audit committees will likely demand risk assessments related to tariffs – including scenario analyses and contingency plans. They may also want assurance that management is monitoring early warning signals of policy change (e.g. following Treasury announcements, engaging trade counsel). Strategic partnerships or joint ventures create new risks and monitoring requirements that should be of interest to audit committees. Finally, some companies are looking into trade disruption insurance, including policies that cover losses due to supply chain disruption. Legal and risk advisors should review contract clauses, and new contracts might explicitly include or exclude tariffs as force majeure events.
In addition to audit committee oversight, the memo observes that internal and outside auditors will look closely at how tariffs impact corporate balance sheets and income statements. For instance, the need to reflect duties paid in the value of inventory on the balance sheet could squeeze margins to the point where inventory write-downs are necessary. On the income statement side, determining the transaction price for revenue recognition purposes could be affected if surcharges or passthrough charges are implemented.
Paul Atkins was officially sworn in as SEC Chairman yesterday. The SEC’s announcement quotes Chairman Atkins as saying that he would join with his fellow commissioners & other SEC professionals to “advance [the agency’s] mission to facilitate capital formation; maintain fair, orderly, and efficient markets; and protect investors.” What does that mean in terms of his regulatory priorities? Chairman Atkins’ testimony during his confirmation hearing provides some clues. This excerpt from a recent Meridien Compensation Partners memo summarizes the key themes that he raised during his testimony:
Reaffirmation of the SEC’s Foundational Mission. Reiterating the agency’s statutory objectives, Chair Atkins called for a “reset of priorities” to restore “common sense and effectiveness” in regulation, reinforcing that the SEC’s primary function is to support well-functioning markets that foster economic opportunity and protect investors.
Emphasis on Practical, Investor-Focused Regulation. SEC regulations must be “smart, effective, and appropriately tailored,” with a focus on implementation that achieves intended outcomes without creating undue burdens. Chair Atkins acknowledged the gap that often exists between legal drafting and business application, underscoring the importance of translating complex regulatory requirements into actionable practices.
Investor Disclosures and Transparency Reform. Current disclosure requirements overwhelm rather than inform investors. Chair Atkins expressed his intent to simplify disclosures to better serve investor understanding and decision-making, which may signal future reforms to corporate reporting obligations.
Commitment to Capital Formation and Market Competitiveness. The current regulatory environment is overly complex, politicized and discouraging to investment. Chair Atkins pledged to advance policies that encourage innovation and capital access, particularly for U.S. businesses seeking to grow and compete globally.
Digital Asset Regulation as a Priority. The development of a “firm regulatory foundation” for digital assets is a top Commission priority to remove the current regulatory uncertainty which has become a barrier to innovation.
Depoliticization of Securities Regulation. SEC rulemaking and enforcement must be free from political influence, with the SEC’s work squarely on investor protection and market integrity, rather than on politically driven priorities.
Not surprisingly, these themes echo comments made by Acting Chair Uyeda and Commissioner Peirce prior to Chairman Atkins’ confirmation and are also reflected in the SEC’s actions in recent months. Of course, how much the need to address the fallout from a potentially extended period of tariff-related market volatility and the adequacy of the agency’s staffing will impact the SEC’s ability to execute this regulatory agenda remains to be seen.
While we’re on the topic of SEC staffing, Democratic senators Elizabeth Warren and Mark Warner have asked the GAO to investigate the impact of staffing cuts and related actions on the SEC’s ability to protect investors and comply with its statutory mandates. According to USA Today, the GAO is on the case:
The U.S. Government Accountability Office plans to scrutinize changes at the U.S. Securities and Exchange Commission, including any led by the White House or Elon Musk’s Department of Government Efficiency, according to a letter sent to Democratic lawmakers on Capitol Hill.
The GAO, Congress’ nonpartisan research arm, told Sens. Elizabeth Warren and Mark Warner it will review the SEC’s recent efforts to cut staff, end leases and consolidate its work, according to a copy of the April 8 letter seen by Reuters.
The lawmakers last month pressed the watchdog to investigate after Reuters and other media reported DOGE’s arrival and other major changes at the regulator, which oversees U.S. capital markets.
The report says that the GAO would begin its work within the next three months.
The senators’ letter also asked the GAO to conduct a detailed review of actions taken by SEC leadership, including acting leadership, to pause or halt enforcement and supervisory actions that were ongoing at the agency as of January 20, 2025, and to look into the involvement of the White House and DOGE in any of those decisions.
I don’t think there’s a more intimidating moment in a corporate lawyer’s career than the first time they’re asked to make a presentation to a board of directors. Heck, even experienced lawyers get a little nervous when they’re presenting to a board they haven’t worked with in the past or addressing a particularly complex topic. In this month’s issue ofThe Boardroom Insider, Ralph Ward offers some tips from personal development coach T.J. Walker on making more effective board presentations. I think this one is particularly relevant for lawyers:
You are the expert on the topic you’re addressing to directors, so the temptation is to stuff in every factoid and data bit you’ve accumulated. “The biggest problem I see is trying to cover too many facts. You don’t want them to think you’re stupid or unprepared, so you tell them everything you know.” This overwhelms the directors, and sets them to checking their cell phones. Write up your board talking points. Condense them. Then condense them some more.
Walker also cautions against being too formal in your approach – writing out and memorizing your comments will put the board to sleep. It’s okay to make a verbal slip every now and again, because trying to perfectly script yourself will cause any stumble to throw you off and will make you less flexible in responding to questions from directors.
In prior blogs, Liz and Dave touched on risk factor and MD&A disclosure issues arising out of President Trump’s tariff-related actions. However, I wanted to address those issues again, because if you’re preparing your first quarter Form 10-Q, the timing of the President’s actions and the potential for another shoe to drop in less than 90 days create almost perfect conditions for companies to stumble into traps for the unwary when addressing these line-item disclosure requirements.
“Liberation Day” occurred on April 2nd, shortly after calendar year companies completed their first fiscal quarter. As a result, the financial statements for the first quarter that will appear in Form 10-Q filings typically won’t reflect the impact of the current tariff regime or the one that may be in place in 90 days. However, it’s pretty clear that most companies are already experiencing the impact of the change in tariff policy on their business – and that’s where the potential traps for the unwary start to unfold.
Under Item 105 of Regulation S-K, the fact that tariffs only began to impact a company’s business after the end of the quarter means that drafters should be particularly conscious of the “hypothetical” risk factor issue when updating risk factor disclosure. With events unfolding so rapidly, today’s risk may be tomorrow’s reality, and those responsible for drafting the 10-Q need to pay even closer attention to developments in the business than they have for previous filings.
There’s reason to think that in its current configuration, the SEC may be less enthusiastic about hypothetical risk factors as a basis for enforcement actions, but the same probably can’t be said for the plaintiffs’ bar. Since that’s the case, in updating risk factor disclosure companies should remember the Fifth Circuit’s admonition that “[t]o warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.” Huddleston v. Herman & MacLean, 640 F. 2d 534, 544 (5th Cir. 1981). If you make disclosure in a risk factor, you need to be very clear about events that have occurred and those that may occur – otherwise you’re likely only digging a deeper hole.
Second, events that are currently impacting a company’s business but that are not reflected in the financial statements included in a periodic report are precisely what Item 303’s “known trends” disclosure requirement is intended to capture. What’s more, companies aren’t just dealing with the current tariff regime, but the more draconian one that may be in place a few months from now. That future tariff regime is a contingency, and when it comes to contingencies, the SEC’s position is that known trends disclosure under Item 303 is triggered by any contingent event that is “reasonably likely” to occur and would be material if it did. Here’s how the SEC characterized its standard in its 2020 MD&A Release:
[W]hen applying the “reasonably likely” threshold, registrants should consider whether a known trend, demand, commitment, event, or uncertainty is likely to come to fruition. If such known trend, demand, commitment, event or uncertainty would reasonably be likely to have a material effect on the registrant’s future results or financial condition, disclosure is required.
Known trends, demands, commitments, events, or uncertainties that are not remote or where management cannot make an assessment as to the likelihood that they will come to fruition, and that would be reasonably likely to have a material effect on the registrant’s future results or financial condition, were they to come to fruition, should be disclosed if a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the registrant’s disclosures.
The TL;DR version of this standard is that if a contingent event likely would be material if it occurred and management can’t conclude that it isn’t reasonably likely to occur, then the MD&A discussion must address the consequences of that event assuming that it occurred. So, when assessing their MD&A disclosure obligations, companies should consider the implications of the current tariff regime and, unless they conclude that it’s not reasonably likely to be implemented, the more draconian one that may come into effect in a few months.
ISS-Corporate has a new report on the number of women serving as named executive officers in Russell 3000 companies. The report says that while there’s been some slow improvement in recent years, women are underrepresented among NEOs. Here are some of the key findings:
– Women occupy less than 17% of the NEO positions at Russell 3000 companies, and over the last five years that percentage has only grown by about 1% per year.
– The good news is that over the past 10 years, the percentage of women serving in NEO positions has doubled, going from 9.5% to 16.4%.
– The industries with the highest percentage of female NEOs are Household & Personal Products (25.2%), followed by Utilities (24.2%) and Consumer Discretionary Distribution & Retail (23%). The laggards are Semiconductors & Semiconductor Equipment (11%), Energy (12.2%), and Automobiles and Components (13.1%).
The report also found that women are least likely to hold the CEO position (7%), and most likely to hold a Human Resources position (68%).
The last few weeks have been a rollercoaster ride for investors, but a recent Financial Times article says that despite the wild gyrations that have followed “Liberation Day,” so far markets haven’t experienced a liquidity crisis. The article says that last year’s move to T+1 settlement is a big part of the reason they haven’t:
Shorter settlement time not only cuts the collateral that traders have to put up, but also reduces the risk that counterparties have disappeared by the time a trade settles. During periods of extended volatility, that fear can lead to a reduction in liquidity that, in turn, leads to even more volatility.
The article also notes that in addition to the direct benefit of a shorter settlement time, the investments made in preparation for T+1 improved communications among market participants and allowed them to better identify and address risks before they escalated out of control.
We (John) first addressed the topic of “remote-only” or “remote-first” public companies — that claim to have no physical address — (not surprisingly) in 2021. At the time, he shared that the SEC cleared an IPO S-1 even though the cover page did not identify the address of the company’s principal executive offices. John’s last blog about “remote-first” public companies was just over three years ago now, and, by that time, the SEC Staff would no longer declare a registration statement effective unless and until it included a physical address in response to the requirement to disclose principal executive offices. Consider not just the cover page requirement, but also the rules that require certain communications to be sent to the principal executive offices — like Rules 14a-8 and 14d-3(a)(2)(i).
Fast forward to 2025. Comment and response letters related to the same company’s 2022 and 2023 10-Ks were just made public, and the Staff is now saying it needs to disclose its principal executive offices. Here are the threerelevantcomments and responses on this issue:
Please revise your filing to provide the address of your principal executive offices.
The Company advises the Staff that since May 2020 the Company has been, and continues to be, a remote-first company with no headquarters or principal executive offices. Furthermore, the Company’s executive team and Board of Directors (the “Board”) are distributed. Since May 2020, all Board meetings have been held virtually with the exception of one meeting in 2023, which was held at a location that was not in the Company’s offices. Substantially all of the Company’s executive team meetings are also held virtually, with meetings occasionally held in-person at locations that are either not in the Company’s offices or in various of the Company’s offices distributed around the world. The Company holds all of its stockholder meetings virtually. The Company’s employees are distributed across over 40 states and ten countries.
Because it does not have a headquarters or principal executive offices, the Company currently includes a footnote on the cover page of its periodic and current reports filed with the Commission providing that stockholder communications be directed to an email address set forth in the Company’s proxy materials and/or identified on the Company’s investor relations website and, beginning with its Form 10-Q for the quarter ended September 30, 2023, the Company will update this footnote to further provide such email address, as well as the address of its agent for service of process in the state of Delaware, for purposes of receiving physical mailings from its stockholders and regulatory communications from the Commission.
We note your response to prior comment 2 and reissue. Please revise disclosure in future filings to provide the address of your principal executive offices. While we note that you are a remote-first company and you have provided the address of your agent for service of process, identification of a principal executive office is a requirement of Form 10-K.
The Company acknowledges the Staff’s comment and advises the Staff that as described in the Company’s response to prior comment 2, since May 2020 the Company has been, and continues to be, a remote-first company with no headquarters or principal executive offices. As previously noted, the Company’s employees are distributed across over 40 states and ten countries, the Company’s executive team and Board of Directors (the “Board”) are geographically distributed, and meetings of the executive team and the Board are generally held virtually. However, in response to the Staff’s comment, the Company advises the Staff that the Company has initiated a process to identify an address to satisfy the principal executive offices requirement for purposes of its filings with the Commission and will disclose such address in the Company’s future filings with the Commission no later than the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 (the “2024 Form 10-K”).
We note your response to prior comment 1 that you have “initiated a process to identify an address to satisfy the principal executive offices requirement for purposes of [your] filings with the Commission and will disclose such address in the Company’s future filings with the Commission no later than the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.” Please disclose the address of your principal executive offices in your next Exchange Act report.
The Company advises the Staff that beginning with the Company’s Current Report on Form 8-K filed in connection with the Company’s public release of earnings for the quarter ended September 30, 2024 the Company has included, and will include in future filings with the Commission, an address as requested by the Staff.
John’s prior blog noted that the Staff sometimes accepted a P.O. Box and one company that had its related registration statement declared effective even said that any stockholder communication required to be sent to its principal executive offices may be directed to its agent for service of process. It’s unclear to me whether these options are still accepted. For similarly situated companies, the company did include an address on the cover of its 8-K and 10-Q, but it continues to omit a phone number and includes a footnote that reads: “We are a remote-first company. Accordingly, we do not maintain a headquarters. We are including this address solely for the purpose of compliance with the Securities and Exchange Commission’s rules. Stockholder communications may also be sent to the email address: secretary@coinbase.com.”