March 28, 2019

Lorenzo v. SEC: SCOTUS Gives the SEC a Big Win

Yesterday, in Lorenzo v. SEC, the US Supreme Court held – by a 6-2 vote – that dissemination of false statements with intent can fall within the scope of Rules 10b–5(a) & (c), even if the disseminator did not “make” the statements & consequently falls outside Rule 10b–5(b).

That’s a big win for the SEC – and a big loss for the securities defense bar.  The decision is a retreat from the Court’s position in the Janus case, where it held that liability under Rule 10b-5(b) was limited to the “maker” of a false or misleading statement.  As Broc subsequently blogged, the SEC responded to Janus by emphasizing its view that 10b-5(a) & (c) had a more expansive reach.  The Lorenzo decision vindicates the SEC’s position. Here’s an excerpt from Justice Breyer’s opinion for the Court:

It would seem obvious that the words in these provisions are, as ordinarily used, sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud. By sending emails he understood to contain material untruths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to defraud” within the meaning of subsection (a) of the Rule, §10(b),and §17(a)(1). By the same conduct, he “engage[d] in a[n]act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under subsection (c) of the Rule.

Justices Thomas & Gorsuch dissented from the ruling, with Justice Thomas stating that the decision “eviscerates” Janus’s distinction between primary & secondary liability “by holding that a person who has not ‘made’ a fraudulent misstatement can nevertheless be primarily liable for it.”  Justice Kavanaugh participated in the D.C. Circuit’s ruling on the case & recused himself from the Court’s deliberations.  We’re posting memos in our “Securities Litigation” Practice Area.

Board Refreshment: What Do Companies Want From New Directors?

According to this Deloitte/Society for Corporate Governance Board Practices Survey, there are several characteristics that companies look for in new director candidates. This excerpt suggests that diversity – and specifically, gender diversity – tops the list:

94% said their boards are looking to increase board diversity. Of these, the majority (61%) said their boards are looking to increase gender diversity – far exceeding race and ethnicity (48%) and professional skills or experience (43%). Boards seeking to increase their diversity most commonly look to referrals from current directors (77%), suggesting that networking is still key to board succession, though search firms came in a close second (73%).

When it comes to professional experience, companies are most interested in directors who know the industry & those with leadership, accounting or tech backgrounds:

Specific industry experience topped the list. Also in the top 10: business leadership; accounting; digital or technology strategy (e.g., artificial intelligence, cryptocurrency, and social media); cyber; and IT (e.g., infrastructure, operations). While other types of professional experience, such as marketing and HR, may be overdue for board representation (and could contribute to diversity), they do not seem to be gaining traction as stand-alone recruitment priorities.

The survey covered 102 companies, the vast majority of which were either large or mid-caps, although a handful of small-cap companies were also included.

Board Refreshment: What Do They Get?

Okay, so now we know what companies say they want in a new board member – this recent EY survey on 2018’s class of new independent directors at Fortune 100 companies sheds some light on what they actually get. Here are some of the highlights:

– In 2018, 71% of the reviewed companies added at least one new nominee and 27% added two or more. This represents an increase from prior years when the levels were generally steady at around 56% and 21%, respectively.

– The areas of expertise most frequently cited in new nominations were: international business; corporate finance, accounting; and industry expertise. Around half of the new class was recognized for expertise in at least one of these categories. The next most common areas — technology; operations, manufacturing; and board service, corporate governance — were cited in 40% to 45% of new nominations.

– Women continued to represent around 40% of new nominees, contributing to a slight increase in overall board gender diversity; in 2018, 27% of existing independent directors were women, up from 25% in 2016.

Approximately half of 2018’s new class of directors consisted of the usual suspects – current & former CEOs, and that group was predominantly male. But when it came to non-CEO nominees, the genders were more balanced, and most of the new directors from non-corporate backgrounds were women.

Overall, the takeaway seems to be that Fortune 100 companies are adding new directors more frequently, and that those directors are increasingly younger & more female. While the characteristics & qualifications of new directors generally align with what companies say they’re looking for, it also looks like their fixation on former CEOs is working at cross-purposes with their diversity initiatives.

John Jenkins