October 5, 2016

Section 16: Ex-NY Governor Cops to Violations

Here’s something that Alan Dye blogged last week on his “Section Blog” :

Last Friday, the SEC initiated cease & desist proceedings against three outside directors of a now-defunct public company, Moon River Studios, alleging that each director failed to file a Form 3 within ten days of becoming a director and also failed to report an initial acquisition of issuer stock on Form 4 within two business days or on a Form 5 for the year in which the acquisition occurred. Two of the directors consented to the entry of a cease and desist order and agreed to pay a civil money penalty of $25,000. The third director did not offer to settle.

The case is interesting mainly because the directors were not charged with violations of any other provisions of the federal securities laws, which is unusual given that most Section 16(a) claims (other than those that resulted from the 2014 “sweeps”) are add-ons to more serious claims, usually involving fraud. At the same time the SEC initiated the cease and desist proceedings, though, it also filed a fraud action against three of the issuer’s executive officers, alleging that they misappropriated funds for personal use rather than using the funds to build and operate, in Savannah, Georgia, “the largest movie studio in North America.”

The case is also interesting because two of the directors, both of whom served on the issuer’s board for only a short time, are politically connected. One of the settling directors, David Paterson, is a former governor of New York. The non-settling director, Matthew Mellon, is a former chairman of the New York Republican Party Finance Committee.

Both of the settling directors filed a Form 3 and a Form 4 after the SEC commenced its investigation and after resigning from the issuer’s board. The SEC noted in its orders that the respondents’ “remedial acts” and “cooperation” shaped the terms of settlement.

Failure to Report Unregistered Sales: New SEC Enforcement Actions

Here’s news from this blog by Steve Quinlivan:

On two successive days, the SEC brought settled enforcement actions against issuers for failure to report sales of unregistered securities. Under Item 1.01 of Form 8-K, a registrant must disclose its entry into a material definitive agreement, not made in the ordinary course of business of the registrant, that provides for obligations that are material to and enforceable against the registrant.

Under Item 3.02 of Form 8-K, certain unregistered sales of equity securities must be reported. Likewise, under Item 2 of Form 10-Q, a registrant must furnish the information required by Item 701 of Regulation S-K as to all equity securities of the registrant sold by the registrant during the period covered by the report that were not registered under the Securities Act unless it was previously included in a Current Report on Form 8-K.

Also check out this blog by Steve about the SEC suspending a Regulation A+ offering…

Insider Trading: Supreme Court Hears Arguments on “Personal Benefit”

This Paul Weiss memo notes that the Supreme Court will hear oral arguments today in Salman v. United States – a case that could have a major impact on insider trading law.  Here’s an excerpt:

The question before the Court in Salman v. United States is technically a somewhat narrow one: whether a gift of confidential information to a trading friend or relative constitutes the type of personal benefit necessary to give rise to insider trading liability. The implications of the Court’s decision, however, will likely be far broader than that.

Salman provides the Court an opportunity to provide some much-needed clarity. It remains to be seen, however, whether the Court will try to limit its holding to the narrow set of facts presented or more broadly address the scope of the personal benefit requirement. The Court could even revisit the need for the personal benefit requirement altogether.

John Jenkins