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Monthly Archives: May 2018

May 31, 2018

Lease Accounting: Analysts Say “Meh”. . .

While accounting departments throughout the nation may be pulling their hair out in an effort to get ready for FASB’s new lease accounting standard, this FEI article says that Wall Street analysts don’t seem to care very much about the new standard. Here’s an excerpt:

Despite the increasing drumbeat of concern regarding implementation of new lease accounting rules from financial preparers, there is palpable ambivalence from at least one major consumer of the new disclosures: Wall Street research analysts. Few, if any, analysts have questioned financial executives about their lease plans during the Q&A sessions of recent earning calls, where a majority of the accounting discussions revolved around revenue recognition issues.

And even once implementation begins in earnest as the 2019 deadline grows nearer, equity analysts admit they see fewer ramifications on their buy/sell decisions and models. “Revenue recognition affects all companies, while with leasing you may have some very specific industries and companies that are impacted significantly. From an equity analysis perspective we expect the lease accounting changes to be less complex,” says Zhen Deng, a senior analyst with CFR.”

This must be very encouraging news for those of you who just spent part of your holiday weekend dealing with some aspect of preparing for the new standard. As a colleague once said to me when a merger agreement I worked all weekend on got tossed into the garbage because the seller decided not to move forward, “Hey, at least it’s appreciated.”

Sell-Side Analysts: Still “Lake Wobegon U” Grads?

Speaking of securities analysts, remember former SEC Chair Arthur Levitt’s famous crack about them? “I worry that investors are being influenced too much by analysts whose evaluations read like they graduated from the Lake Woebegon [sic] School of Securities Analysis – the one that boasts that all its securities are above average.”

Levitt made those comments in a 1999 speech – and despite all of the water that’s gone under the bridge since then, this Marketwatch article says that Lake Wobegon U is still cranking out securities analysts:

There are no companies in the benchmark S&P 500 with majority “sell,” or equivalent, ratings among analysts. For the S&P 500, there are actually 505 stocks because five of the companies in the index have two classes of common stocks. Among the 505 stocks, analysts have majority buy ratings on 266.

For example, there are still 47 analysts who cover Amazon.com Inc. AMZN, -0.12% and 45 rate the stock “buy.”

There’s exactly one S&P 500 stock for which 50% of analysts rate the shares a sell: News Corp.’s class B shares NWS, +0.00% But it turns out that only two analysts cover the class B shares, while 13 analysts cover the class A shares NWSA, -0.06% For class A, four of the analysts rate the shares a buy, with eight neutral ratings and one sell rating.

The article says the same thing that many were saying back in the ’90s – read these reports for the valuable information they provide on companies & industries, but don’t rely on them for recommendations.

A member points out that it should be “Lake Wobegon,” and not – as Arthur Levitt & I originally spelled it – “Lake Woebegon.”  I’ve learned my lesson, and that’s the last time I’ll ever rely on a former SEC Chair for spelling advice!

Analysts: From Russia with Guts

So is there any place where analysts call ’em as they see ’em?  It turns out that the answer is yes, and it’s in the unlikeliest of places – Vladimir Putin’s Russia.  This “FT Alphaville” blog tells the story of a brave man named Alex Fak, who until recently served as the head of research at Russia’s Sberbank.  Here’s an excerpt:

Fak – who worked at the FT on a three-month fellowship in 2004 – was asked to resign after publishing a report that opined state gas monopoly Gazprom was ignoring its bottom line and benefiting its top contractors, including companies owned by Putin’s friends.

“Gazprom’s investment program,” which is seeing it spend $93.4bn on mega-projects like the Power of Siberia gas pipeline to China, Nord Stream-2 to Germany, and Turkish Stream, Fak and Anna Kotelkina wrote, “can best be understood as a way to employ the company’s entrenched contractors at the expense of shareholders.”

Fak went on to argue that Gazprom had abandoned other, cheaper capex projects that would have limited contractors’ ability to profit. If Gazprom were to be reformed after a recent government reshuffle and broken up into its components, Fak estimated, it would be worth $185bn – three times its current share price.

The blog says that Fak’s not the first analyst to be punished by a Russian bank for calling out inefficient state companies whose CEOs are “well connected.”  Would a U.S. bank do the same?  With all the Lake Wobegon U grads out there, it seems unlikely that we’ll ever know.

John Jenkins

May 30, 2018

Auditor Ratification: The Biggest (Almost) Losers

Broc recently blogged about the rough sledding that GE experienced when it went to shareholders for ratification of its appointment of KPMG – “no” votes represented more than 35% of the votes cast on the proposal at this year’s annual meeting. However, this “Audit Analytics” blog says that the GE result didn’t even manage to crack the ‘Top 3’ no-vote getters for the three years ended December 31, 2017.

For the record, the blog says that the biggest (almost) losers were:

– Plymouth Industrial REIT (2015) – 49%
– HealthWarehouse.com (2016) – 45%
– Planet Fitness (2017) – 37%

In 2017, 15 companies received more than 20% of votes against ratification. In addition to Planet Fitness, Consolidated-Tomoka Land and Kulicke & Soffa Industries, each received more than 36% of votes against auditor ratification.

Auditor Ratification: So What Happened Next?

I’m sure you’re curious about what our biggest (almost) losers did in response to their high percentage of ‘no’ votes on auditor ratification proposals.  I checked the SEC’s Edgar, and the short answer is – nothing.  There were no changes in audit firms in response to the votes.  In fact, neither of the other two companies referenced by Audit Analytics as having received more than 36% ‘no’ votes in 2017 changed audit firms either.

Of course, these are non-binding votes, because otherwise they’d violate Sarbanes-Oxley’s requirement that the audit committee call the shots on independent auditors. Still, a big no vote sends a pretty strong message – but I guess the bottom line is that “a win’s a win.”

UK shareholders don’t appear as reluctant to pull the plug on auditors as their counterparts here in the US. In fact, this article says nearly 80% of the shareholders of SIG plc, a British construction supplier & FTSE 250 component, voted against the ratification of its auditor – and the firm was fired that same day.

Fake SEC Filings: Rockwell Medical’s Alternative Realities

Last week, Liz sent an email to Broc & me asking if we’d been following the “dueling 8-Ks” from Rockwell Medical.  I’d glanced at Matt Levine’s column about it, but it was when she characterized the situation as a “fake filing, but from the inside” that I realized we needed to say something about it here.

If there’s one thing we love on this blog, it’s “fake SEC filings.” But as Liz pointed out, this fake filing is a little different. This excerpt from Matt Levine’s second column about this company’s competing realities summarizes the situation:

We talked yesterday about the mysterious doings at Rockwell Medical Inc., where the universe has split into two alternate realities, in one of which (which I called RMTI-A) the board of directors has fired the chief executive officer, and in the other one (which I called RMTI-B) it absolutely has not, and in fact the directors are themselves in trouble for doing some unspecified bad things. Both sides raced to file dueling 8-Ks explaining their side of the story, leaving investors to try to figure out who is really in charge, the CEO or the board.

Here’s RMTI-A’s Form 8-K – and here’s the RMTI-B’s Form 8-K.  This is a strange brew even in a “post-truth” era – but believe it or not, the plot got even thicker. That’s because the company’s largest shareholder amended its 13D to disclose a letter supporting the board’s decision to fire the CEO – and calling for the scalp of the CFO, who the letter claims helped the CEO make his 8-K filing.

The board of RMTI-A then formally terminated the CFO and issued a press release updating shareholders about the week’s festivities. The whole mess has apparently ended up in the lap of some poor state judge in Michigan – who promptly sent both sides to their respective corners & gave them 21 days to try to work things out.

John Jenkins

May 29, 2018

Dodd-Frank Reform: Small Caps & Privates Join in Banks’ Party (Reg A+ & 701)

Most of the attention on the Dodd-Frank reform bill that President Trump signed last Friday has focused on the law’s impact on financial institutions – but this Duane Morris blog points out that there’s something in the new law for other companies as well. In particular, the legislation expands the class of companies that are eligible to use Reg A+ to include already public companies. This excerpt explains:

The President today signed the “Economic Growth, Regulatory Relief and Consumer Protection Act.” Most of the bill is centered around easing some Dodd-Frank restrictions as they apply to smaller banks. But buried in Section 508, called “Improving Access to Capital,” Congress adopted a major change to Regulation A+.

Previously, the Reg A+ rules required, in Section 251(b)(2), that a company cannot use Reg A+ if it is subject to the SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act immediately prior to the offering. This includes, for example, every company listed on a national exchange such as Nasdaq or the NYSE and many companies that trade over-the-counter. The new law reverses that and orders the SEC to change the rules to permit reporting companies to utilize Reg A+.

Along the same lines, the new statute also provides that companies can satisfy their Reg A+ periodic reporting obligations through the filing of the Exchange Act reports mandated for other reporting companies.

Stinson Leonard Street’s Steve Qunilivan also points out that there’s good news for private companies too – the new law relaxes some of the requirements under Rule 701:

Section 507 of the bill directs the SEC to increase Rule 701’s threshold for providing additional disclosures to employees from aggregate sales of $5,000,000 during any 12-month period to $10,000,000. In addition, the threshold is to be inflation adjusted every five years.

We’re posting memos about the new law in our “Regulatory Reform” Practice Area

Reg A+ May Actually be Working!

Reg A+’s expansion may turn out to be bigger news than you might think. A lot of questions have been raised about the efficacy of the JOBS Act’s efforts to rejuvenate Reg A – but this recent study reviews experience under the new regime & suggests that those efforts appear to be working. Here’s an except:

Not only has the use of Regulation A grown exponentially, but the exemption may now rival or even surpass its previously more popular predecessor, Regulation D’s Rule 506. Regulation A+ is an example of Congress using its legislative powers to take something that was structurally flawed and problematic and making it into a regulation that, while still having some flaws, now appears to be more appealing to emerging growth and start-up companies.

But the study also says that success has brought its own problems:

By the same token, Regulation A+ is not an unqualified success. The considerable increase in the use of Regulation A has surfaced potential problems such as the increased exposure of this option to “lay” investors; i.e. investors with modest income, modest net worth, and little to no financial sophistication. While these are the investors that Regulation A actively seeks, there are concerns about how issuers, regulators and the market as a whole will react if/when these investors suffer significant losses in this private equity startup company space.

SEC Commissioner Nominees: Another Senate Banking Staffer?

Want to become an SEC Commissioner? You’d better have the Senate Banking Committee on your resume. According to this WSJ article, the Committee’s chief counsel, Elad Roisman, may be the choice to fill the slot of departing Commissioner Mike Piwowar:

The White House is considering nominating a top aide to the Senate Banking Committee chairman for a GOP opening on the Securities and Exchange Commission, according to people familiar with the matter. Elad Roisman, the chief counsel to the banking panel led by Mike Crapo (R., Idaho), is a top contender to succeed Michael Piwowar at the top U.S. markets regulator, these people said. Mr. Piwowar plans to leave the SEC by July.

The article points out that Roisman – who’s only 37 years old – would join a long list of former Banking Committee staffers who have gone on to serve as SEC Commissioners – including Piwowar and current SEC commissioners Kara Stein & Hester Peirce. The logic being – if you work for the Senate Banking Committee, your Senate confirmation hearings are likely to be smooth…

John Jenkins

May 25, 2018

An Anti-ESG Campaign Begins

Here’s something that I blogged yesterday on our “Proxy Season Blog”: The National Association of Manufacturers (NAM) and other conservative-leaning organizations have launched a new campaign, the “Main Street Investors Coalition” – with a multi-million dollar budget – to limit the influence of large asset managers that they feel wield too much power on ESG initiatives. As we’ve previously blogged, more support from Vanguard is one factor that has led to higher approval rates for ESG proposals – and, as noted in this blog, BlackRock has also urged companies to develop a long-term strategy that accounts for their societal impact.

This Axios article says that the group’s first focus will be writing studies & op-eds backing up their positions – which is interesting in light of recent DOL guidance that restricts ERISA fiduciaries from pursuing ESG initiatives in the absence of data showing that the initiatives will lead to higher returns. It’s not clear yet whether this group will also pursue the tactic of submitting its own shareholder proposals, in order to beat ESG activists to the punch.

The Axios article notes that this campaign comes at a time when “shareholder advocacy” has been producing more social change among companies than legislation. And here’s an excerpt from an op-ed by Bloomberg’s Matt Levine:

The interesting development will be if this (pro-corporate, anti-environmentalist, etc.) group makes common cause with the more left-ish critics of institutional investors who worry that they create antitrust problems. Having most of corporate America controlled by a handful of giant institutions: It makes a lot of people nervous.

Deloitte Fined $500k for Faulty Audit

Yesterday, as noted in this article, the PCAOB levied a hefty $500k upon Deloitte for missing material accounting errors in three consecutive audits of a client…

Memorial Day Weekend

In addition to pausing to remember friends & family in the armed forces, I’ll be watching this 30-second video from “Kida The Great” (past winner of “So You Think You Can Dance: The Next Generation”) and hoping for a visit from the ice cream truck…

Liz Dunshee

May 24, 2018

Annual Meetings: Ban the Press?

Some companies decide to ban reporters from their annual meetings. The risk in doing this is that it backfires and draws even more negative publicity. Here’s one example of negative press due to a ban – and this MarketWatch article looks at another recent uproar. Nell Minow is quoted:

It’s not unusual for companies to say that meetings are for shareholders only. But I think that it’s best practice for them to allow press in so that shareholders who can’t be there in person can learn about the sole opportunity shareholders have to see the board and executives in person – how they present themselves when they control the process, and how they respond to questions when they do not. If the answer is cutting off access to the press, the obvious question is, what are they trying to hide?

Our “Checklist: Annual Meetings – Dealing with the Press” outlines logistics to think about if you want media coverage at your meeting – or if you don’t. It also considers the possibility of using rules of conduct to limit the type of coverage – e.g. a ban on recording devices. But this article shows that those types of restrictions should also be handled carefully.

Poll: Dealing with Media at Annual Meetings?

Please take a moment for our anonymous poll:

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Annual Meetings: Be Consistent With Your Admission Policies

It’s always smart to be consistent when restricting shareholder attendance at your annual meeting. Some companies require beneficial holders to show proof of ownership in order to gain admittance. But if you’re going to use that as a means to prohibit people from being admitted, it can be risky to make exceptions in exchange for a vow of silence.

This article highlights that risk – here’s an excerpt:

After the attorneys summoned security guards to physically block Danhof from the meeting room – and threatened to call the police – Danhof gave up and opted to file a complaint with the SEC. He had begun to suspect that the situation involved more than a simple miscommunication when the company offered to let him attend if he didn’t make any comments or attempt to address the meeting.

“That leads me to believe that they did some quick research, they figured out I was there, that I was an activist investor, that I ask tough questions and put CEOs on the spot, and they wanted to do whatever they could to make sure their CEO didn’t have to answer the question,” he said.

Liz Dunshee

May 23, 2018

“Dual Class” Companies: CII Supports 7-Year Sunsetting

Recently, CII responded to MSCI’s proposal to weight companies in its indexes based on whether they have unequal voting structures – i.e. “dual class” companies. Since CII wants alignment between economic & voting rights, it’s not surprising that they support the proposal. But – consistent with these letters that CII recently sent to two IPO candidates – they suggest exemptive relief for companies that adopt a 7-year sunset provision.

CII also thinks that it would be reasonable for a sunset structure to be renewable for additional 7-year terms if approved by a majority of the shares with inferior voting rights – and that existing index constituents should have 3 years to adopt a sunset provision before getting dinged by MSCI’s weighting feature. CII’s response differs from BlackRock’s. As I recently described on “The Mentor Blog,” BlackRock wants indexes to reflect the entire investable marketplace.

Sustainability: More Talk Than Action?

This Ceres report finds that few companies are taking a “systemic approach” to sustainability. Sure, lots of proxy statements make reference to sustainability as a board responsibility, but just 13% of large companies have formalized that in committee charters and/or disclosed board-management engagement – and 83% of boards don’t have a director with sustainability expertise. Similarly, a third say they link executive pay to sustainability – but most don’t describe the specific goals that are incentivized.

Ceres found that companies that are more precise in these areas are at least twice as likely to have strong sustainability commitments. On each topic, the report highlights disclosure from companies with leading practices – a good starting point if you’re looking to bolster your own systems.

Ceres & “The B Team” also released this “Climate Smart Primer” to help directors understand the potential material impact of sustainability issues…

“Bipartisan Banking Act” Will Soon Become Law

Here’s a nice infographic from Davis Polk about the “Bipartisan Banking Act” – which the House passed yesterday – that makes big changes to the regulation of banking organizations. It’s expected to be signed by the President shortly. Also see this MoFo memo

Liz Dunshee

May 22, 2018

Pay Ratio: A Congressman Weighs In (With a Study)

Here’s something that I blogged yesterday on CompensationStandards.com: A member of Congress is now using pay ratio data to examine income inequality. This study from Rep. Keith Ellison’s staff (D-Minn) looked at pay ratios from 225 large companies that were responsible for employing more than 14 million workers. When it comes to “extreme gaps,” it “names names” – and it also seems to assume that companies that excluded portions of their workforce were doing so to keep their ratio down.

This article describes the findings – here are the main ones:

1. Pay ratios ranged from 2:1 to 5000:1. The average was 339:1 – compared to 20:1 in 1965

2. 188 companies had a ratio of more than 100:1 – so the CEO’s pay could be used to pay the yearly wage for more than 100 workers

3. Median employees in all but 6 companies would need to work at least one 45-year career to earn what their CEO makes in a single year

4. The consumer discretionary industry had the highest average pay ratio – 977:1

I think it’s easy to become numb to high CEO pay when you work with it all the time and you’re focused on the mechanics of programs and disclosures. This study is a reminder that no matter how useless pay ratio seems to companies, people outside of this field are paying attention – and they’re synthesizing the data not just to compare companies, but to show that outsized executive pay is a pervasive issue that interests many.

Pay Ratio: Customer Fallout?

As highlighted in Rep. Keith Ellison’s study, the consumer discretionary industry is shaping up to have the highest average pay ratios – 977:1 among the S&P 500. That compares to a supposedly ideal ratio among consumers of 7:1, according to this study. And while the high numbers aren’t surprising given the workforce for most of those companies, this WSJ article says it could impact their bottom line. Here’s the high points:

A recent study found that consumers are significantly less likely to buy from companies with high CEO pay ratios. First, it found that sales declined for Swiss companies when their high pay ratios were publicized.

In a follow-up experiment, people had the chance to win a gift card to one of two retailers. In the absence of pay-ratio information, 68% of people chose one retailer’s card and 32% chose the other. But when participants were informed that the first of those retailers had a 705:1 pay ratio and the second had a 3:1 ratio, just 44% of people chose gift cards from the first retailer while 56% chose the second.

It’ll be interesting to see whether this holds true in “real life,” where customers probably aren’t looking at pay ratios at the same time they’re making a purchase – and may not have the option to buy from a company with a 3:1 ratio. The lowest ratios I’ve seen for that industry are around 100:1.

By the way, here’s this CNBC piece entitled “Companies with Closer CEO Pay Ratios May Generate Higher Profit Per Worker.”

UK’s “Enron”: Parliament Committees Recommend Governance Reform

Last week, two Parliament committees issued their final report on the collapse of Carillion – which had been the UK’s second-largest construction group. The situation has been called the British “Enron” and could lead to sweeping reform. As described in this ”Financial Times” article, the report comes down hard on the Big Four auditors – and also blames the implosion on the board and lax regulations. It includes these findings:

– Carillion’s directors elected to increase its dividend every year, come what may. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses.

– Government should refer the statutory audit market to the Competition and Markets Authority. Possible outcomes considered should include breaking up the audit arms of the Big Four, or splitting audit functions from non-audit services. The lack of competition in the audit market “creates conflicts of interest at every turn.”

– In its failure to question Carillion’s financial judgements and information, KMPG was “complicit” in the company’s “questionable” accounting practices, “complacently signing off its directors’ increasingly fantastical figures” over its 19 year tenure as Carilion’s auditor.

– The regulators are wholly ineffective – they only started investigating after the company collapsed and are more interested in apportioning blame than in proactively challenging companies and averting avoidable failures.

– The regulators’ mandate should be changed to ensure that all directors who exert influence over financial statements can be investigated and punished.

Also, the British have a way with words. Here are comments from one MP:

“Same old story. Same old greed. A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners. This is a disgraceful example of how much of our capitalism is allowed to operate, waved through by a cozy club of auditors, conflicted at every turn. Government urgently needs to come to Parliament with radical reforms to our creaking system of corporate accountability. British industry is too important to be left in the hands of the likes of the shysters at the top of Carillion.”

Liz Dunshee

May 21, 2018

Drafting Integrated Reports: How Hard Is It?

Some advocates have been pushing companies to put together “integrated reports.” To illustrate how easy they think it is to do so, a couple of researchers recently prepared this 40-page mock “Integrated Report” for ExxonMobil (starts at page 18). As they describe in this Forbes article, they used publicly-available info – the 10-K, proxy statement, citizenship report, annual report, etc. – and said it took them about 40 hours to edit & organize it into the framework.

Some might say that the 40-hour estimate to draft an integrated report isn’t realistic. Perhaps their effort overlooks the amount of time associated with ensuring the various components of an integrated report work together appropriately – and all the layers of review that a company (who has real potential liability for the end product) must go through.

By the way, according to this announcement, the next step for these researchers is to create an “Integrated Report Generator Tool” – which will “provide stakeholders with a way to create integrated reports.”

Poll: Challenges of Drafting Integrated Reports

Please take a moment to participate in our anonymous poll:

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Bank Examiners Can’t Override Privilege: 7-Firm Memo

This “7-Firm Memo” asserts that bank examiners aren’t entitled to privileged material from financial institutions – and shouldn’t condition favorable examination results & relationships upon “voluntary” waivers. The analysis relies heavily on recognition of the attorney-client privilege by the SEC & DOJ. Both agencies have said they don’t require privilege waivers in order to deem a company “cooperative.”

Liz Dunshee

May 18, 2018

“Going Concerns”: Going. . . Going. . . But Not Gone

This “Audit Analytics” blog reviews its recent survey of 17 years of auditor opinions containing “going concern” qualifications.  Not surprisingly, going concern opinions peaked in 2009 – a total of 3,551 were issued for financial statements covering that year.  But since then, they’ve been on a steady decline, with only 1,970 issued for 2016 financials.

That seems like good news, but it’s complicated by the fact that attrition played a large role in the decline between 2015 and 2016.  However, the number of first time going concerns is estimated to be 467, which would be the 6th consecutive year in which that number was under 600.

The survey’s most troubling conclusion is that once a company finds itself slapped with a going concern opinion,it’s becoming increasingly difficult for them to dig out from under it:

The number of companies that improved well enough to shed their going concern status is tied for the second lowest population of companies that recovered during the 16 years analyzed. This very low number of improving companies indicates that many companies with going concerns are still experiencing difficulties and are unable to improve enough to rid the going concern status.

Crowdfunding: More Bang for Your Buck

One of the problems with crowdfunding under Regulation CF is that you don’t get a lot of bang for your buck – issuers can only raise $1 million per year. But this recent blog from Andrew Abramowitz highlights a potential workaround for companies looking to raise more money – a simultaneous Regulation CF & Rule 506(c) offering. Here’s an excerpt:

One might think that a way to do this would be to conduct a traditional private placement under Rule 506(b), which has no dollar limit, alongside the Regulation CF offering. However, this is a poor fit because of so-called “integration” issues. Regulation CF permits general solicitation, subject to limits, while Rule 506(b) by definition prohibits the “blast-it-out” approach, so efforts to spread the word on the Regulation CF offering could be deemed to be improper promotion of the Rule 506(b) offering.

A better fit would be another exemption arising out of the JOBS Act: a Rule 506(c) offering to all accredited investors, with no dollar limitation, which can be offered through the same portals that are required for Regulation CF offerings. Because general solicitation is permitted under both exemptions, there is not the same integration issue as with Rule 506(b).

By combining Regulation CF and Rule 506(c) in an offering via a web portal, companies can raise essentially any amount needed. The portal would steer non-accredited investors to the Regulation CF bucket, and accredited investors would invest under Rule 506(c). This allows companies to allow for small increment investments in situations where it doesn’t want to limit its shareholder base to accredited investors, while not being constrained meaningfully by the offering dollar limit.

Companies opting for this approach need to pay close attention to the respective rules for each exemption – particularly those imposing restrictions on communications outside the portal during a Regulation CF offering.

Yahoo! & Loss Contingencies: The Shoe That Didn’t Drop

As a follow-up to last month’s blog about the Yahoo! enforcement proceeding, here’s a recent memo from Locke Lord’s Stan Keller discussing an issue that the SEC didn’t raise in the Yahoo! case:

The SEC’s Yahoo enforcement action did not address the failure of Yahoo’s financial statements to include disclosure (and possibly an accrual) under Accounting Standards Codification 450-20 for the potential loss contingencies resulting from the 2014 data breach. Not much imagination typically is required to foresee the potential for significant liabilities arising from a massive cyberbreach and therefore the importance of considering the financial statement implications of that breach among other required disclosures.

Stan contrasts the Yahoo! proceeding with the SEC’s 2017 enforcement action against General Motors – where ASC 450 was specifically referenced. In both cases, the loss contingencies involved unasserted claims that, under ASC 450-20, required an assessment concerning whether claims were “probable” and, if so, whether a material loss was “reasonably possible.” If this test is met, disclosure is required, and the estimated range of loss must be quantified if an estimate can be made. Any loss that is probable and can be estimated must also be accrued as a charge to the income statement.

The SEC may not have brought ASC 450 up in the Yahoo! case, but let’s face it – that seems to have been a pretty target rich environment, so we probably shouldn’t read too much into that. Companies considering disclosure issues around data breaches would be smart to keep ASC 450’s requirements in mind.

John Jenkins

May 17, 2018

The SEC’s “HoweyCoins.com”: Investor Protection As Performance Art!

I’ve been impressed by the FTC’s use of its “Competition Matters” blog to provide antitrust guidance – and I’ve wondered why the SEC was so. . . well. . . “stodgy” in its approach to this kind of thing.  Then this press release with the headline “The SEC Has an Opportunity You Won’t Want to Miss: Act Now!” hit my inbox with the following news (also see this WSJ article):

Check out the SEC’s Office of Investor Education and Advocacy’s mock initial coin offering (ICO) website that touts an all too good to be true investment opportunity. But please don’t expect the SEC to fly you anywhere exotic—because the offer isn’t real.

The SEC set up a website, HoweyCoins.com, that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on “Buy Coins Now” will be led instead to investor education tools and tips from the SEC and other financial regulators.

So I clicked on the link, and I’ve got to say it’s about the most out-of-character thing I’ve ever seen the SEC do – right down to having the Chief Counsel of the SEC’s “Office of Investor Education & Advocacy” portray HoweyCoins.com’s fraudster-in-chief.

I don’t know that I’d put this on the same level with Andy Kaufman’s stuff when it comes to performance art, but it’s pretty good for government work!

“The Crypto Deals. . . Have Lots of Fraud. . . Deep in the Heart of Texas”

The SEC’s fraud warnings about coin deals seem pretty timely. For instance, this Jones Day memo says that Texas blue sky regulators went hunting for fraud in crypto deals – and found a whole bunch of it. Here’s the intro:

As the price of bitcoin rose to unprecedented levels in 2017, regulators began focusing more enforcement resources on cryptocurrency offerings, both at the federal and state levels. At the state level, the Texas State Securities Board (“TSSB”) has led the way. In late 2017, the TSSB quietly launched an investigation into cryptocurrency offerings being made to Texas investors.

The TSSB announced the results of that investigation last month, indicating that it had found widespread fraud in cryptocurrency offerings. As a result of that investigation, the TSSB has brought nine enforcement actions over a span of less than six months. Given the growing investment in cryptocurrencies, we expect to see continued use of enforcement actions by the TSSB and other state regulators as one of the principal tools to regulate this growing market.

We’ve previously blogged about how the blue sky cops are on the crypto beat – and The Lone Star State’s experience suggests that bad guys are not in short supply.

ICOs: Are They or Aren’t They?

The SEC didn’t come up with the name “HoweyCoins.com” out of thin air. Ever since it issued its 21(a) Report on ICOs last summer, the SEC has made it clear that it thinks tokens are “securities” under the Howey test.” Now, John Reed Stark reports that the first court test of this position is underway in a federal district court in Brooklyn. The issue is being contested in the context of a criminal proceeding in which the defendant has filed a motion to dismiss based on, among other things, an argument that the tokens he sold were not securities. The SEC has also brought civil charges in the case.

Oral arguments on the motion to dismiss were held last week – and the blog provides a link to the transcript. As for the outcome, John says it’s a slam dunk: “The SEC and DOJ will win. Easily. Quickly. Handily.”

John Jenkins