At our “Women’s 100” event in NYC, Shelley Dropkin of Citigroup was honored with a lifetime achievement award. Shelley was kind enough to let us blog about her remarks. Here’s an excerpt:
Before I close, I would like to pay tribute to three women who in very different ways inspired and guided me. Interestingly, they are all named Ruth.
For years I carried for inspiration the words of Ruth Bader Ginsburg – who spoke most eloquently about what the support of her mother had meant to her – she described her mother as “the bravest and strongest person I have known, who was taken from me much too soon. I pray that I may be all that she would have been had she lived in an age when women could aspire and achieve and daughters are cherished as much as sons.”
The second is my sister-in -law Ruth Hochberger – Ruth was the editor in chief of the New York law journal raising her children in New York City when we met. She had figured out that balance that so many women were searching for and that I had just begun to grapple with. It was with her as a role model that I figured out that I could make a life as a mother and a professional work – and for that I am grateful.
Finally – and this is the most difficult – is my mother Ruth, who I lost way too young. She believed in me as only a mother can and made me believe in myself. I can only hope that I have provided that same foundation of love and support to my boys. It is to my mom that I dedicate this award.
Our “Women’s 100” Events: 10 Things We Discussed
Our annual “Women’s 100 Conferences” – in both Palo Alto & NYC – continue to be my favorite thing. Here are 10 discussion topics that Aon’s Karla Bos & I came up with for our “Big Kahuna” session:
1. Linking executive compensation to E&S/sustainability metrics: will it get much traction outside of energy companies?
2. State Street’s new “R-Factor” ESG rating
3. Investor & company views on the “Long-Term Stock Exchange”
4. Providing non-GAAP reconciliations in the CD&A
5. Proxy advisor/shareholder proposal reform
6. How to get started with sustainability reporting
7. Investor & company views on involving IR in engagement meetings
8. Equal pay audits & disclosure
9. Investor expectations for “human capital” disclosure
10. How to interact with shareholder proponents at meetings
Sights & Sounds: “Women’s 100 Conference ’19”
This 45-second video captures the sights & sounds of the “Women’s 100” events that recently wrapped up in Palo Alto & NYC:
Since 2002, the Nasdaq & NYSE definitions of “Family Member” have differed – and that’s caused more than a few headaches for anyone who has to prepare or complete a D&O questionnaire or analyze director independence. According to this notice published yesterday by the SEC, the discrepancies are all due to an oversight when Nasdaq paraphrased its definition 17 years ago – and now the exchange is proposing changes to Rule 5605(a)(2) that would essentially revert back to the old formulation.
If the revisions are approved, the Nasdaq definition will no longer include step-children – and there will also be a carve-out for domestic employees who share a director’s home. Of course, the board still has to make an affirmative determination that no relationship exists that would interfere with a director’s ability to exercise independent judgment, and those relationships can be considered as relevant factors. Comments are due in mid July.
On Monday, the SEC also published this notice of an immediately-effective Nasdaq rule change that adds a definition of “Derivative Securities” to the Rule 5615 corporate governance & IM-5620 annual meeting exemptions – and modifies & adds exemptions for issuers of only non-voting preferred securities & debt securities. Nasdaq noted that the proposed changes would substantially conform to the existing rules of NYSE Arca.
Board Leadership Structure: Governance Impact
Investors remain mixed in their view of whether companies should have an independent chair. In this “CLS Blue Sky Blog”, ISS Analytics examines the gap between board leadership practices in the US and the rest of the world – and the possible consequences. Here’s an excerpt:
In relation to board composition, board refreshment and gender diversity improve as independent leadership on the board increases. In addition, shareholder rights and responsiveness to shareholders also improve with increased board leadership.
On the compensation front, companies that lack board leadership tend to pay their CEO at a higher multiple compared to the CEOs of peer companies. However, pay equity within the C-Suite mainly correlates with whether the roles of Chair and CEO are combined. Combined CEO-Chairs tend to get paid more relative to the rest of their executive team regardless of whether there is a Lead Director on the board.
One of the next logical questions is, “Do these consequences ultimately impact company performance?” As you might expect from an academic paper entitled “Irrelevance of Governance Structure,” a couple of researchers say that “shareholder rights” might not matter.
Based on comparing “real world” outcomes to a constructed model of an efficient universe, they conclude that “the relationship between the allocation of control rights and firm performance is more complex than just holding conflicted managers accountable.” In the model, the governance structure was irrelevant when other factors were at play – e.g. shareholders having imperfect information or market power, and managers having meaningful career concerns.
Boards Around The World
Spencer Stuart has taken data from its well known “Board Indexes” (here’s the US version) and created this interactive tool to compare “average” board practices around the world. Topics include board composition, diversity, director pay and board assessments.
Recently, ISS ESG (the “responsible investment” arm of ISS) announced its annual ratings of ESG performance for companies across the globe. At first glance, things look good:
This year’s report finds the share of companies covered by ISS’ Corporate Rating and assessed as “good” or “excellent” (both assessments lead to Prime status) now stands at 20.4 percent, up from just over 17 percent in the previous year. This year’s report also shows that the group rated with medium or excellent performance (on a four-category scale of poor, medium, good or excellent) now includes more than 67.5 percent of covered companies in developed markets. This represents an all-time high over the 11-year history of the report. Similar patterns can be observed among companies in emerging markets, the report finds, albeit at a considerably lower level.
But the jury’s still out on whether companies are following through on the sustainability strategies that they’re touting. We’ve blogged that CSR statements might serve as the basis for plaintiffs’ claims – and the ISS ESG analysis confirms that these types of disputes are on the rise. Here’s an excerpt:
Meanwhile, Norm-Based Research, which identifies significant allegations against companies linked to the breach of established standards for responsible business conduct, saw a more than 40 percent rise in the number of reported controversies across all ESG topics. This exemplifies a growing misalignment of corporate practices with stakeholder expectations that are grounded in UN Global Compact and the OECD Guidelines for Multinational Enterprises.
At the close of 2018, failures to respect human rights and labour rights together accounted for the majority (56 percent) of significant controversies assessed under ISS ESG’s Norm-Based Research. Industries that are most exposed to controversies in the environmental area are Materials, Energy, and Utilities. On social matters, Materials is also leading, similarly followed by Energy and Capital Goods. The governance area sees most controversies within Banks, Capital Goods, and Pharmaceuticals & Biotechnology.
ESG Ratings: Making Sure They’re Accurate
This 19-page DFin paper points out that it’s increasingly important to understand your ESG ratings and correct any errors, because investors are using them to evaluate non-financial performance and compare your company to other investment alternatives (e.g. this blog says that the universe of “sustainable funds” grew by 50% last year – also see this WSJ article). In addition to outlining the issues that factor into ratings, DFin gives seven steps to ensure accurate scoring:
1. Learn about existing ESG ratings frameworks
2. Know your ESG scores
3. Compare yourself to your peers
4. Understand how the various ratings standards compare to one another
5. Attend to the raw data your company provides – the data comes from SEC filings, your website, blogs, social media, etc.
6. Supply information proactively
7. Sharpen your communications
ESG: Advantages for Small & Mid-Cap Companies
We’ve blogged (sometimes more than we’d like) about the growing interest in ESG topics – among institutional as well as retail shareholders, and even credit rating agencies. While most large cap companies are now publishing sustainability reports and incorporating ESG metrics into business decisions, many smaller companies are just beginning that journey.
This blog from Next Level Investor Relations explains how even thinly-staffed small & mid-cap companies can identify strategic & disclosure-based ESG improvements that can improve their business, make important customers happy, and enhance their access capital. Here’s an excerpt (also see this blog from the Governance & Accountability Institute addressing ROI for sustainability efforts):
As highlighted in recent Gartner supply chain research, “ESG has emerged as a source of growth & innovation strategy for supply chains, spurring better performance & mitigating supply chain risks.” So why develop the widget (or ESG disclosure) that nobody wants? What are your customers (and competitors) focusing on in their ESG/Sustainability disclosure and supplier questionnaires?
AlphaSense search on ‘ESG Sustainability AND Profitability’ for the latest 12 months found 56 small and mid-cap companies across 10 sectors, with related disclosure including supply chain policies, expectations and supplier audit practices across the cap range, from $266mm market cap Natural Grocers by Vitamin Cottage [$NGVC] to Tetra Tech [$TTEK] and Goodyear [$GT], market cap $3.3bn and $4.2bn, respectively.
Last December, Broc blogged about the second-ever attempt at using proxy access – via a Schedule 14N filed for “The Joint Corp.” This Form 8-K reports that the nominee was elected – along with all of the incumbents that the company nominated. It doesn’t look like the company put up much of a fight (at least not publicly). The filings indicate that the proxy access nominee was added to the slate in lieu of one of the prior-year directors, who wasn’t renominated.
Our “Proxy Disclosure Conference”: Reduced Rates End This Friday
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
Reduced Rates – act by June 14th: Proxy disclosures are in the cross-hairs like never before. With Congress, the SEC Staff, investors and the media scrutinizing disclosures, it is critical to have the best possible guidance. This pair of full-day Conferences will provide the latest essential—and practical—implementation guidance that you need. So register by June 14th to take advantage of the discount.
Tomorrow’s Webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures”
Tune in tomorrow for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
– Liz Dunshee
At a recent meeting of the Twin Cities Chapter of the Society for Corporate Governance, Dorsey’s Bob Cattanach shared details on California’s Consumer Privacy Act – or as he called it, “the single most difficult cyber development in the US over the last decade.”
With the legislation set to become effective next January, Bob & other litigators are predicting a surge in class actions for companies that do business in that state. That’s because the provision that allows consumers to recover up to $750 in damages per incident makes it much easier to show that the breach caused injury (and as this Womble Bond Dickinson chart says, a pending amendment may even allow consumers to sue for violations other than data breaches). So plaintiffs’ firms are lining up – and there’s reason to think twice about automatically treating any cyber incident as a “breach,” before you’re certain that breach notification & disclosure requirements have been triggered.
Bob noted that practicing mock breach scenarios under your “incident response plan” is now all the more important. With so much more soon to be at stake, you will need to anticipate the challenges of assessing your many overlapping disclosure obligations, and the likely lack of sufficient & reliable information necessary to make decisions under increasingly shortened time periods, in advance.
Cyber Breach Disclosure: 90% of Incidents Aren’t “Material”?
One of the many things that makes cyber breach disclosure a tricky issue is that the market can get info from notices that are required by state law, even if a company doesn’t disclose the incident in a press release or 8-K. Last summer, I blogged that SEC Commissioner Rob Jackson was concerned that this creates an opportunity for “arbitrage” – and market overreactions.
Disclosure of cyber incidents seems to be trending up, but it’s still rare. That’s according to this WSJ article, which says that Rob is still focused on the issue – and that he thinks companies might benefit from a bright-line disclosure rule. According to his latest research, 10% of known cyber incidents were disclosed in SEC filings in 2018. That compares to 3% in 2017, before the SEC issued its disclosure guidance.
Consistent with those findings, this Audit Analytics blog reports that 121 breaches were disclosed in SEC filings last year – compared to the thousands of breaches & “incidents” identified in Verizon’s latest “Data Breach Investigations Report.” Audit Analytics also found that it takes companies a little over a month to discover a breach and another 4-6 weeks to report it – i.e. 2-5 months between the time of the initial breach and the time of disclosure – and companies vary widely in the level of detail they disclose about the breach.
Meanwhile, this blog says that the SEC’s Enforcement Division remains focused on cybersecurity controls & inadequate disclosure. Relevant factors for investigations include “how the information was accessed, whether there were sufficient walls in place, when the company knew about the intrusion, what the company did in response to the intrusion, and when the company came forward.”
Cybersecurity: When the Threat Comes From Inside
A significant number of cybersecurity incidents & breaches are the result of “privilege misuse” by employees and independent contractors, according to Verizon’s 11th annual “Data Breach Investigations Report.” It also says that “miscellaneous errors” are the second-most common cause of breaches! Hacks can happen if an employee or director is using a personal email account to send confidential documents, or faxing information to an unconfirmed number.
This “Insider Threat Report” – also from Verizon – suggests ways to minimize these internal risks through internal controls. The report’s sample fact patterns could serve as “table top exercises” to help you simulate all of the issues that arise when a data breach happens – including the need to make disclosure & insider trading decisions. Note that Verizon recommends limiting employee access to sensitive data (pg. 9), which is a step some companies are also taking to prevent insider trading. Also see this blog about how law firms can help clients address the risk of internal threats.
PCAOB Rule 3526 requires auditors to communicate with audit committees concerning relationships that might impact their independence. Last week, the PCAOB issued guidance concerning the communications that are required under this rule when the auditor identifies one or more violations of applicable independence rules – but doesn’t think the violations disqualify it from continuing to serve as the auditor. The PCAOB also issued this summary of the guidance. This excerpt from the guidance document details the disclosures required by the rule:
The Firm would comply with Rule 3526 by:
a. summarizing for the audit committee each violation that existed during the year;
b. summarizing for the audit committee the Firm’s analysis of why, for each violation and notwithstanding the existence thereof, the Firm concluded that its objectivity and impartiality with respect to all issues encompassed within its engagement had not been impaired, and why the Firm believes that a reasonable investor with knowledge of all relevant facts and circumstances would have concluded that the Firm was capable of exercising objective and impartial judgment on all issues encompassed within the Firm’s engagement;
c. if more than one violation existed during the year, providing to the audit committee a separate analysis of why, notwithstanding all of the violations taken together, the Firm concludes that its objectivity and impartiality with respect to all issues encompassed within its engagement has not been impaired, and why the Firm believes that a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the Firm was capable of exercising objective and impartial judgment on all issues encompassed within the Firm’s engagement;
d. engaging in dialogue with the audit committee regarding the violation(s) and the Firm’s related analyses (as described in (a)-(c) above);
e. documenting the substance of the Firm’s discussion(s) with the audit committee (as described in (d) above); and
f. affirming in writing to the audit committee that, except for the violation(s) expressly identified, the Firm would be independent in compliance with Rule 3520.
In a nutshell, the auditor must consider the impact of the violation or violations on its objectivity and impartiality. It then communicates that analysis to the audit committee, which makes its own decision about whether to continue to retain the audit firm.
There are several other components to the guidance, and one of the more interesting is the PCAOB’s view that in this situation, the auditor “should not state in its required annual affirmation that the auditor is independent, but instead indicate that the auditor would be independent except for the violation or violations that it has identified and discussed with the audit committee.”
However, the auditor may issue its report without altering the required title: “Report of Independent Registered Public Accounting Firm.” The PCAOB views this as stating a legal requirement, and not a specific assertion of compliance with the applicable PCAOB rule.
Internal Controls: More ICFR Risk Factors in Wake of SEC Enforcement Action
I’ve blogged a few times (here’s the most recent) about the SEC’s enforcement action against a handful of companies that couldn’t get their acts together when it came to addressing material weaknesses in ICFR. Now, this Audit Analytics blog says that some companies with material weakness disclosures extending over multi-year periods are including “Risk Factor” disclosure specifically addressing the risk of SEC enforcement resulting from their inability to resolve those issues.
This excerpt suggests that we’re likely to see more disclosure along these lines as the year progresses:
It appears public companies are taking notice of the SEC’s January statement that merely disclosing ICFR material weakness is not enough. This year we may see more companies disclose ineffective controls, and this is meaningful because of the SEC’s scrutiny.
In conclusion, analysts and investors need to be on guard for more companies disclosing material weakness with ICFR. Further, they need to consider that admission of weak internal controls doesn’t necessarily mean 2018 was the first year the firm had problems. It’s possible historical filings could show years of ineffective ICFR.
Transcript: “How to Handle an SEC Enforcement Inquiry Now”
We have posted the transcript for our recent webcast: “How to Handle an SEC Enforcement Inquiry Now.”
Whistleblowers: Can In-House Lawyers Walk the Ethical Tightrope?
Under the attorney conduct rules adopted by the SEC following Sarbanes-Oxley, there are limited circumstances under which attorneys may be obligated to “report out” – i.e., blow the whistle to the SEC – on client misconduct. These obligations are not consistent with many states’ ethics rules, but the SEC brushed those concerns aside by saying that its rules preempted those standards. Now, according to this recent “Dimensions” article, the federal courts are starting to weigh in:
A California federal court held that in-house counsel could be a whistleblower under the federal statutes because the SEC rules preempt the state’s very strict duty of confidentiality. The case is on appeal and, the authors surmise, the holding will be limited because counsel reported internally, not to the SEC, before being fired (and thus falling outside the Dodd-Frank definition of a whistleblower).
Timing is also key to a case now pending in the Eastern District of Pennsylvania. In-house counsel seeks Dodd-Frank protection from retaliation for reporting to the SEC while still an employee. The company has counterargued that, prior to the report, it gave notice that counsel would be fired. A decision in the District of New Jersey denied Dodd-Frank protection to an attorney fired for reporting to FINRA, rejecting the argument that this was tantamount to reporting to the SEC, which supervises FINRA, while still employed.
Whistleblowers: Internal Whistleblower Rings the Bell for $4.5 Million
While lawyers may get tied-up in ethical knots for decades over whistleblower issues, for those who are unencumbered by such concerns, the SEC recently provided another example of just how lucrative whistleblowing can be. Late last month, it announced a $4.5 million award to a whistleblower, but as this excerpt from the SEC’s press release points out, this award had a unique fact pattern:
The whistleblower sent an anonymous tip to the company alleging significant wrongdoing and submitted the same information to the SEC within 120 days of reporting it to the company. This information prompted the company to review the whistleblower’s allegations of misconduct and led the company to report the allegations to the SEC and the other agency. As a result of the self-report by the company, the SEC opened its own investigation into the alleged misconduct.
Ultimately, when the company completed its internal investigation, the results were reported to the SEC and the other agency. This is the first time a claimant is being awarded under this provision of the whistleblower rules, which was designed to incentivize internal reporting by whistleblowers who also report to the SEC within 120 days.
As I blogged at the time, in 2018 the SCOTUS held that purely internal whistleblowers weren’t entitled to the protections of Dodd-Frank. Concerns were subsequently expressed that the decision would incentivize people to go to the SEC before the company was even aware of the potential problem.
That didn’t happen here – but because the whistleblower dropped a dime on the company to the SEC within 120 days of making an internal report, the person was credited with the results of the company’s investigation. As the SEC’s release noted, the policy establishing that 120 reporting period was intended to promote internal reporting, and in this case, it seems to have worked.
This WSJ article says that whistleblower lawyers are skeptical that this will be anything more than a one-off event, and that since internal whistleblowers are at risk for retaliation without Dodd-Frank’s protections, blowing the whistle to the SEC first is likely to remain the preferred path.
Yesterday, the SEC announced an enforcement proceeding against Kik Interactive, which allegedly has engaged in a $100 million unregistered token offering. Here’s the SEC’s complaint. Ordinarily, the SEC’s decision to bring an enforcement action is the big news, but I’ve kind of buried the lede here. Why? Because this Forbes article says that Kik & its affiliated entity, the Kin Ecosystem Foundation, are positively itching for a fight:
Two years ago, messaging app Kik raised about $100 million in an initial coin offering for the Kin token. Three days later, the SEC reached out, and after much back and forth, finally notified Kik last fall that it intended to pursue an enforcement action against both Kik and the Kin Ecosystem Foundation.
However, Kik and Kin made a surprise move: It published its response to the SEC, detailing what seems like a pretty strong case for why their token sale was not an offering of securities and why their token currently does not meet the definition of a security. They also announced in the Wall Street Journal their plan to fight this out in court.
In order to fund their defense, these crypto folks did a very crypto thing – they started a legal defense fund called “Defend Crypto” to which people can contribute bitcoin & other cryptocurrencies. What’s the sales pitch? In short, they say that “the future of crypto is on the line,” & they’re fighting Cryptomageddon:
For the future of crypto, we all need Kin to win. This case will set a precedent and could serve as the new Howey Test for how cryptocurrencies are regulated in the United States. That’s why Kin set up the Defend Crypto fund to ensure that the funds are there to do this the right way.
The message seems to be resonating with its intended audience. The fund raised over $4.5 million even before the SEC filed its action. What’s more, these guys seem positively thrilled that they’ve been sued. This WSJ article quotes KiK’s CEO as saying in reaction to the SEC’s complaint that what’s “exciting” to him “is that this industry is finally going to get the clarity it so desperately needs.”
“Clarity” is a word that crypto-evangelists use a lot when it comes to the securities laws. Sure, there are aspects of the SEC’s position on digital assets that are murky, but every time I hear somebody from the crypto crowd speak, I get the sense that they believe “clarity” means having regulators tell them what they want to hear. Anyway, enjoy the heck out of your enforcement proceeding. . .
Endangered Species: Quarterly Guidance on the Way Out?
It wasn’t all that long ago that most public companies seemed to view providing quarterly forecasts as just one of the costs of being public. That sure doesn’t seem to be the case anymore. In fact, this recent OZY article reports that the practice of providing quarterly guidance may be going the way of the Dodo:
The number of American companies releasing guidance every three months has dropped from 75 % in 2003 to 27% in 2017, according to a new report by the nonprofit FCLT Global, which advocates against quarterly earnings guidance. The phenomenon is even rarer outside the United States. Among listed companies on the Euro Stoxx 300, less than 1 percent issued quarterly guidance between 2010 and 2016.
Several publicly listed companies that release quarterly sales and revenue information are joining the chorus against short-term financial thinking. Large publicly traded companies such as Cisco, GSK, Barclays and Unilever, along with some state pension funds and global investment firms, are among the members of FCLT, an acronym for Focusing Capital on the Long Term. The group presents data showing that such forecasting does not, as many argue, reduce stock price volatility.
Despite this research and the calls of prominent investor & corporate advocates to end quarterly guidance, I suspect that the practice will remain pretty resilient at the lower end of the food chain. Smaller caps are often desperate to please analysts and maintain whatever coverage they may have, so until securities analysts jump on the bandwagon, some of these companies are likely to still keep sticking their necks out.
More On “NYSE Proposes to Tweak Equity Compensation Plan Rules”
Last week, I blogged about the NYSE’s proposed changes to the definition of “fair market value” in Rule 303A.08. Troutman Sanders’ Brink Dickerson points out that there seems to be a bit of a disconnect between the NYSE’s proposal & the approach taken by Item 402 of S-K:
The change to 303A.08 is interesting in that it does not reconcile nicely with S-K 402(d)(2)(vii), which requires a separate column when the exercise price is “les than the closing market price of the underlying security.” A lot of my clients now use the closing price on the date of grant (1) to avoid this extra disclosure, and (2) because they would prefer the stock price to be unknown at the time of grant to minimize bullet-dodging, etc. Surprising that the NYSE would not go with the SEC’s default approach. Under the NYSE construct, you can only avoid the extra column with certainty if you make a grant after the market closes but not on the next day.
You’ve got to hand it to college fraternities – their members have an uncanny knack for getting themselves into serious trouble. Most fraternity misconduct is the predictable result of their often over-the-top drinking culture & reckless hazing practices. But while that kind of stuff has become a cliché, it doesn’t mean that frat boys are incapable of more innovative misconduct.
Here’s a case in point: according to this SEC press release, one enterprising young man has allegedly been running a Ponzi scheme out of a University of Georgia frat house! This excerpt from the press release indicates that the Division of Enforcement decided that when it comes to dealing with this kind of alleged misconduct, Dean Wormer had it right – “the time has come for somebody to put his foot down, and that foot is me”:
The Securities and Exchange Commission today announced an emergency action charging a recent college graduate with orchestrating a Ponzi scheme that targeted college students and young investors. The SEC is seeking an asset freeze and other emergency relief.
The SEC’s complaint alleges that Syed Arham Arbab, 22, conducted the fraud from a fraternity house near the University of Georgia campus in Athens, Georgia. Arbab allegedly offered investments in a purported hedge fund called “Artis Proficio Capital,” which he claimed had generated returns of as much as 56% in the prior year and for which investor funds were guaranteed up to $15,000.
Arbab also allegedly sold “bond agreements” which promised investors the return of their money along with a fixed rate of return. The SEC’s complaint alleges that at least eight college students, recent graduates, or their family members invested more than $269,000 in these investments.
According to the SEC’s complaint, no hedge fund existed, Arbab’s claimed performance returns were fictitious, and he never invested the funds as represented. Instead, as money was raised, Arbab allegedly placed substantial portions of investor funds in his personal bank and brokerage accounts, which he used for his own benefit, including trips to Las Vegas, shopping, travel, and entertainment.
As noted in the press release, the SEC is seeking an asset freeze & a whole bunch of other emergency relief. Still, I was a little disappointed to find no reference to “double secret probation” in the SEC’s complaint.
In a little noticed-development last week, the U.S. Supreme Court denied the petition for a writ of certiorari in Hagan v. Khoja, in which former officials of a bankrupt pharmaceutical company sought to have the Court review a decision by the Ninth Circuit to revive a securities class action lawsuit against them.
Had the petition been granted, the Court would have been called upon to consider the controversial question of whether public companies have a duty to update prior disclosures that were accurate when made. The Court’s cert denial leaves the Ninth Circuit’s ruling standing and the questions surrounding the existence and requirements of a duty to update remain unsettled.
Insider Trading: Don’t Look Now, But Here Comes Congress. . .
This NYT DealBook article reports on “The Insider Trading Prohibition Act,” which recently cleared the House Financial Services Committee. The proposed legislation is intended to eliminate some of the uncertainty surrounding insider trading law – and expand the government’s ability to bring insider trading cases. This excerpt provides an example of the greater flexibility the legislation would provide to prosecutors:
The legislation also would move insider trading law away from its focus on a duty to keep information confidential by more broadly describing what constituted “wrongful” trading or transmission of confidential information. There would be four ways to show that the information had been obtained wrongfully: by theft, bribery or espionage; by violation of any federal law protecting computer data; by conversion, misappropriation or unauthorized and deceptive taking of information; and by breach of a fiduciary duty or breach of “any other personal or other relationship of trust and confidence.”
By expressly including a breach of a federal data privacy law or theft of information, the legislation would eliminate some of the uncertainties surrounding the application of insider trading law to the kind of “outsider trading” schemes exemplified by the 2016 hack on the SEC’s Edgar database.
This WilmerHale memo suggests that prosecutors have already found a work-around for some of the issues that Congress is trying to address with this legislation – a federal statute that was added to their arsenal as part of the Sarbanes-Oxley Act.
Check out the latest report from BarkerGilmore – a boutique executive search firm – about in-house counsel compensation trends. Among the findings:
– The average annual salary increase rate for all positions across industries increased to 4.4%, up 0.6% from the previous year.
– 41% of all respondents believe their compensation is below or significantly below that of their peers in other organizations, with labor & employment lawyers and insurance reporting the greatest dissatisfaction.
– 38% of respondents indicate that they would consider a new position within the next year due to compensation issues, 3% less than the previous year.
– Public company lawyers make more than private company lawyers, and public company GCs make a lot more – 41% more to be precise.
– On average, female in-house counsel earn 85% of what male in-house counsel earn. The disparity is largest at the General Counsel level, with a 17% gap, 5% smaller than the previous year.
On a completely unrelated note, when I saw BarkerGilmore’s press release on the study, I noticed that they were headquartered in Fairport, NY. This charming canal town is the hometown of the late Philip Seymour Hoffman, who once described it as being “like Kansas, if Kansas was in New York.” Why do I know so much about this little upstate New York burg? Well, Mr. Hoffman isn’t the only one who grew up there. (Hi Mom!)
“Finders”: Lawsuit Pushes Back Against SEC on Broker Registration
The SEC has historically taken a very limited view of the role that “finders” who are not registered broker-dealers can play in financings. But this recent blog from Andrew Abramowitz notes that one company has filed a lawsuit that pushes back against the SEC’s position. Here’s an excerpt:
A company proposing to do business as an unregistered finder, Platform Real Estate Inc., has now filed suit in the Southern District of New York against the SEC, seeking a declaratory judgment to the effect that broker-dealer registration is not required for the plaintiff and similar companies acting as a finder on behalf of private companies.
The essence of Platform Real Estate’s argument is that the Exchange Act generally, and Section 15(a) (the section requiring registration of those acting as broker-dealers) in particular, are intended to protect investors in the secondary market, like those purchasing shares traded on an exchange. The transactions that Platform Real Estate would be involved in, in contrast, are primary transactions, where a company issues and sells new shares to accredited investors who represent as to their intent to hold the shares potentially indefinitely.
In discussing the case, Andrew makes a point that I think a lot of lawyers representing small companies would agree with – most registered broker-dealers don’t want to deal with this segment of the market. There’s just not enough money to be made in these financings to justify their commitment of resources. That means there’s a real market need that is being filled by finders, and makes it critical to get some clear rules governing what they can and can’t do.
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