Yesterday, the SEC announced enforcement proceedings against 27 firms and individuals arising out of alleged violations of the “anti-touting” provisions of the federal securities laws . According to the SEC’s press release, the defendants left the impression with investors that their publications promoting various company stocks were independent & unbiased – when in fact the writers were compensated for touting them. Here’s an excerpt describing the allegations:
SEC investigations uncovered scenarios in which public companies hired promoters or communications firms to generate publicity for their stocks, and the firms subsequently hired writers to publish articles that did not publicly disclose the payments from the companies. The writers allegedly posted bullish articles about the companies on the internet under the guise of impartiality when in reality they were nothing more than paid advertisements. More than 250 articles specifically included false statements that the writers had not been compensated by the companies they were writing about, the SEC alleges.
“If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public. These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses,” said Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement.
According to the SEC’s orders as well as a pair of complaints filed in federal district court, deceptive measures were often used to hide the true sources of the articles from investors. For example, one writer wrote under his own name as well as at least nine pseudonyms, including a persona he invented who claimed to be “an analyst and fund manager with almost 20 years of investment experience.” One of the stock promotion firms went so far as to have some writers it hired sign non-disclosure agreements specifically preventing them from disclosing compensation they received.
Fraud charges were filed against 7 stock promotion firms & 3 public companies – 2 company CEOs, 6 individuals at the firms, and 9 writers were also charged. The SEC announced that 17 of the defendants agreed to settlements ranging from approximately $2,200 to nearly $3 million based on the frequency & severity of their actions. Actions against 10 other defendants are pending in a New York federal court.
One other settled action is worth noting – the SEC brought separate charges against another company that was in registration at the time the publications were circulating. The agency alleged that these communications were therefore prospectuses that didn’t comply with Section 10 of the Securities Act.
My initial thought was that this was an unprecedented “sweep” – but it turns out that the SEC did something similar 19 years ago, when it brought anti-touting actions against 44 defendants in connection with Internet promotional scams.
SEC Enforcement: Harder Line on Private Equity?
This blog from Jenner & Block’s Andrew Lichtman and Howard Suskin says that the SEC may be taking a harder line in enforcement actions involving private equity fee allocations & conflicts of interest:
Over the last several years, the SEC has targeted private equity funds for various fee allocation arrangements and conflicts of interest. Rather than describing the fee practices as fraudulent, which would require a showing of scienter, the SEC has concluded that the private equity advisers committed disclosure violations. However, a recent proceeding in which the SEC secured a settlement based on both breach of fiduciary duty and fraud may foreshadow a more aggressive approach.
The SEC’s first private equity enforcement proceeding of 2017, In re SLRA Inc. (Feb. 7, 2017), involved allegations of breach of fiduciary duty & fraud against Scott Landress, the founder of a private equity fund, in connection with improper withdrawals of fees from the fund. While the SEC’s decision to pursue fraud charges may simply reflect its assessment of the egregiousness of the conduct at issue, the blog suggests that there’s reason to believe that fraud allegations may be on the table in a broader range of fee disclosure settings:
The SEC’s order stated that the failure to disclose the related-party transaction was a breach of fiduciary duty “[e]ven if” Landress had in fact hired the affiliate to perform the work. That finding suggests that the SEC may be more inclined to bring breach of fiduciary duty or fraud claims where private equity advisers fail to disclose improper fee arrangements.
Crystal Ball: Justice Gorsuch on Securities Law
The Supreme Court’s newest member doesn’t have a long record of securities law opinions as an appellate judge, but this recent post from “The Boardroom Blog” reviews Justice Neil Gorsuch’s more significant opinions & speculates that he’s likely to be skeptical of both securities plaintiffs’ claims and the idea of judicial deference to the SEC.
– John Jenkins