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Earlier this month, the SEC’s Division of Enforcement entered a cease & desist order against the former CEO & CFO of UTi Worldwide, a multinational freight forwarding company.  The proceeding involved alleged failures to comply with S-K Item 303’s requirement to disclose in the MD&A section any “known trends and uncertainties” that are “reasonably likely” to impact a company’s liquidity.

UTi experienced delays in billing resulting from a new operating system.  This resulted in a hit to cash flow, and came at a time when the company was also struggling to comply with its debt covenants. The 10-Q for the relevant period didn’t address the billing problems and their cash flow impact. When UTi subsequently disclosed that it blew its debt covenants due to liquidity issues resulting from the billing problems, its stock cratered – and Enforcement came knocking.

This Cleary Gottlieb blog reviews the proceeding & the “known trends” requirement.  Here’s an excerpt discussing the SEC’s views about when known trends disclosure is required:

Regulation S-K Item 303 requires the “disclosure of a trend, demand, commitment, event or uncertainty…unless a company is able to conclude either that it is not reasonably likely that the trend, uncertainty or other event will occur or come to fruition, or that a material effect on the company’s liquidity, capital resources or results of operations is not reasonably likely to occur.” As the SEC noted in the Order, the “reasonably likely” standard is a lower standard than “more likely than not.”

What the SEC did not discuss, but what is equally important for companies that need to comply with the disclosure requirements to understand, is the probability floor for when this forward-looking disclosure is required. The good news is that the “reasonably likely” standard is a higher probability threshold than if a material effect is “reasonably possible” (which is the standard for the disclosure of contingent liabilities under ASC 450, Contingencies, and which would require disclosure in the event the likelihood of a “material effect is higher than remote”.

This Drinker Biddle blog notes that the case is the most recent example of the SEC’s increasing willingness to bring financial reporting & accounting actions that aren’t premised on financial statement materiality, and don’t involve fraud-based allegations.

Enforcement: SEC Stakes a Claim to Anti-Money Laundering Violations

This Ballard Spahr memo reviews recent cases where the SEC has used a new enforcement tool – the Bank Secrecy Act & its anti-money laundering (AML) regulations – against financial institutions.  While violations of these actions has traditionally been addressed by other regulators, this excerpt says that the SEC appears ready to flex its muscle more frequently in this area:

This most recent complaint filed by the SEC is not an isolated event, but rather part of a trend. Earlier this year, another broker dealer was charged in a similar civil enforcement action with failing to file SARs. These enforcement actions – and others – are consistent with the public pronouncements of the former SEC Enforcement Director, who has  stated that the SEC Broker Dealer Task Force must “pursue standalone BSA violations to send a clear message about the need for compliance.”

The memo compares the SEC’s decision to stake a claim in the AML arena to its decision to pursue FCPA cases – a statute that historically had been addressed by other agencies, but where the SEC now has an established role.

FCPA:  Many Derivative Actions Filed, But Few Make the Cut

Over on the ‘D&O Diary,’ Kevin LaCroix recently blogged about the fate of many derivative actions that follow on the heels of the announcement of an FCPA violation. Qualcomm announced a high-profile FCPA settlement with the SEC in March 2016, and a derivative action was filed shortly thereafter in Delaware Chancery Court. This case, like most other FCPA-based derivative claims, didn’t make the cut:

As I have observed in the past (for example), while plaintiffs’ lawyers frequently are quick to file follow-on civil suits in the wake of an FCPA investigation or enforcement action, in many instances these suits are unsuccessful as the suits often fail to clear the initial pleading hurdles. As was the case here, a frequent basis on which these suits are dismissed is the failure to establish demand futility. To be sure, there are FCPA follow-on actions that survive motions to dismiss (as discussed for example), but in many other instances the cases do not survive.

The blog notes that despite their poor track record, plaintiffs keep trying – which since the underlying FCPA cases are often based on significant misconduct, isn’t really surprising.

– John Jenkins