May 19, 2020

PPP Loans: SEC Enforcement Sweep of Public Company Borrowers?

Public company borrowers under the Paycheck Protection Program have received plenty of criticism. Now, according to this Bryan Cave blog, their hot seat just got even hotter, because these companies appear to be targets in an SEC enforcement sweep. Here’s the intro:

We understand that several issuers and regulated entities that publicly disclosed their receipt of funds from the SBA’s Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have received requests for information from the SEC’s Division of Enforcement. In general, the requested information appears to concern the recipients’ eligibility and need for PPP funds, the financial impact on recipients of the pandemic and government response, and recipients’ assessment of their viability and access to funding.

This SEC outreach is rumored to be part of a sweep styled In the Matter of Certain Paycheck Protection Program Loan Recipients. The SEC is reportedly investigating whether certain recipients’ excessively positive or insufficiently negative statements in recent 10-Qs may have been inconsistent with certifications made in PPP applications regarding the necessity of funding. These information requests are voluntary at this time, and it appears that not all PPP loan recipients are receiving document requests.

There may be a correlation between large funding amounts and SEC scrutiny, both in terms of attracting interest and avoiding the impact of the SBA’s announced safe harbor for loans less than $2 million (though the safe harbor does not explicitly affect the SEC). Recent news reports indicate that the Department of Justice Fraud Section also is investigating possible misconduct by PPP loan applicants. Initial DOJ actions have focused on potential overstatement of payroll costs and/or employee headcount, as well as misuse of PPP proceeds.

In addition to public company borrowers, we have heard anecdotally that investment advisors and brokerage firms that received PPP loans are also targeted in the sweep. The blog says that while existing allegations appear to focus on “extreme behavior,” it is expected that less egregious borrowers may be caught up in the dragnet.

SEC Enforcement: Covid-19 Steering Committee Established

News of a potential enforcement sweep came only a few days after co-director of the SEC’s Division of Enforcement Steve Peikin gave a speech announcing that the Division had formed a steering committee to coordinate Covid-19 related enforcement activities:

In late March my co-Director, Stephanie Avakian, and I formed a Coronavirus Steering Committee to coordinate the Division of Enforcement’s response to coronavirus-related enforcement issues. The Steering Committee comprises approximately two dozen leaders from across the Division, including representatives from our various specialized units, from our Home Office and various regional offices, and from our Office of Market Intelligence.

The Steering Committee’s mandate is to proactively identify and monitor areas of potential misconduct, ensure appropriate allocation of our resources, avoid duplication of efforts, coordinate responses as appropriate with other state and federal agencies, and ensure consistency in the manner in which the women and men of the Division address coronavirus-related matters.

While the speech didn’t specifically identify PPP loan recipients as potential targets, it did identify a number of other areas of emphasis, including microcap fraud and insider trading.

Steve Peikin also said that the Division has developed a “systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry” and “disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.” Stay tuned.

NYSE Temporarily Eases Approval Requirements for Covid-19 Share Issuances

Earlier this month, I blogged about Nasdaq’s adoption of a temporary rule easing the shareholder approval requirements applicable to listed companies looking to raise private capital during the Covid-19 crisis.  Last week, the SEC approved a similar NYSE rule proposal.  This Stinson memo has the details. Here’s an excerpt:

The SEC has approved, effective immediately, new Section 312.03T of the NYSE Listed Company Manual. Section 312.03T provides a limited, temporary exception from the shareholder approval requirements in Section 312.03(c), accompanied, in certain narrow circumstances, by a limited exception from Sections 312.03(a) and (b) and Section 303A.08. The exception in Section 312.03T is available until and including June 30, 2020.

Among other things, and subject to certain exceptions, Section 312.03(c) of the Manual requires shareholder approval for certain issuances of over 20% of outstanding shares or voting power. Section 312.03(a) references the requirement for shareholder approval of equity compensation plans set forth in 303A.08 of the Manual. Section 312.03(b) requires shareholder approval for issuance of equity securities to certain related parties.

Listed companies may take advantage of the temporary rules only in limited circumstances arising out of Covid-19’s impact on their results of operations and financial condition. Companies must also jump through a number of other hoops, including audit committee and NYSE approval. Additional conditions apply for issuances under the other temporary rules.

John Jenkins