Monthly Archives: September 2022

September 27, 2022

Related Party Transactions: SEC Hooks Auditor for Deficient Procedures

As tends to be the case in late September, and as John predicted last week, the SEC enforcement actions are coming in hot. Hat tip to friend of the sites and Maynard Cooper counsel Bob Dow for highlighting this $1.5 million settlement that landed Friday against an audit firm whose work for a SPAC and another public company was allegedly deficient in regards to identifying related party transactions. Here’s more detail from the complaint:

Friedman failed to exercise professional skepticism when reviewing work papers. First, the work papers that documented the details and testing of accounts receivable and prepaid expenses and other current assets contained names included on iFresh’s related party lists. Friedman did not identify the names on the work papers as related parties, so certain related party transactions were not disclosed in the financial statements.

Second, Friedman failed to recognize red flags that indicated undisclosed related parties. For example, schedules provided to Friedman by iFresh in connection with the 2018 through 2020 audits included names of entities that had similar names as iFresh subsidiaries, and transaction descriptions that were inconsistent with iFresh’s business.

Friedman also encountered numerous red flags of undisclosed related party transactions with Li Ba HVAC & Construction (“Li Ba”). Li Ba was a related party because it was owned by Deng’s brother.

The complaint goes on to detail other “red flags,” like this:

Friedman failed to design and to perform procedures to obtain a sufficient understanding of the following significant unusual transactions involving undisclosed related parties: 1) the sale of commercial refrigeration equipment to Li Ba and the resulting large receivable with long aging and little to no collection for the 2017 through 2020 audits; 2) a legal settlement paid by Li Ba on behalf of iFresh for the 2018 audit; 3) iFresh and Li Ba extending loans to each other for the 2019 and 2020 audits; 4) Deng’s payments to iFresh on behalf of White Plains for the 2020 audit; and 5) Jiutian’s capital contributions to iFresh on behalf of Deng for the 2020 audit.

There are few things that excite SEC Enforcement more than shady SPACs and related party transactions – and this enforcement action follows remarks by Enforcement Division Director Gurbir Grewal a year ago where he emphasized gatekeeper accountability. The cherry on top is that Friedman is now owned by Marcum LLP, which back in 2020 was sanctioned and prohibited by the PCAOB from conducting audits of China-based businesses for three years. As this Twitter thread from a whistleblower lawyer points out, some companies have used their audit by Friedman to certify compliance with the new HFCAA rules. This settlement doesn’t directly impact that approach.

Liz Dunshee

September 27, 2022

Related Party Transactions: Questions Audit Committees Should Ask

As the 2022 edition of Deloitte’s “Audit Committee Guide” points out, NYSE and Nasdaq rules require that an independent board committee review & oversee related-party transactions – and that responsibility often falls to the audit committee. Deloitte notes:

While these types of transactions often occur in the normal course of business, transactions among related parties are sometimes associated with the risk of misstatement or omission in financial reporting, whether by error or fraud. Auditors are required to scrutinize related-party transactions that may pose an increased risk of fraud. These include transactions involving directors, executives, and their families; significant unusual transactions that are outside the normal course of business; and other financial relationships with the company’s executive officers and directors. Audit committees must be alert to these transactions as part of their oversight responsibilities.

The Guide suggests that audit committees consider asking these 6 questions:

1. What are the business reasons for the transaction? Are these reasons in line with the company’s overall strategy and objectives?

2. Are the terms of the transaction consistent with the market? In other words, would these terms apply to an unaffiliated party?

3. When and how will the transaction be disclosed? How will investors view the transaction when it is disclosed?

4. What impact will the transaction have on the financial statements?

5. Which insiders could benefit from the transaction, and in what way?

6. Are outside advisers needed to help understand the implications of the transaction?

Visit our “Audit Committees” and “Related Party Transactions” Practice Areas for more guidance on these topics.

Liz Dunshee

September 26, 2022

Pay Vs. Performance: Tackling Your Disclosures

The SEC’s newly adopted “pay vs. performance” disclosure rules are one of the most significant changes to executive compensation disclosure in the past decade. The new disclosures will require multiple years of information and new calculations for equity awards – and they’re required in 2023 proxy statements!

On Thursday, November 10th from 1-4pm ET, join us for a special session on “Tackling Your Pay Vs. Performance Disclosures” – featuring Compensia’s Mark Borges, Morrison Foerster’s Dave Lynn, WilmerHale’s Meredith Cross, Sidley’s Sonia Barros, SGP’s Rob Main, Fenwick’s Liz Gartland, Gibson Dunn’s Ron Mueller, and more.

This is a 3-part, 3-hour special session that will cover:

1. Navigating Interpretive Issues – we are already getting lots of questions in our Q&A forum about how to apply the new rules, and we know that new issues are arising daily. We’ll be sharing practical guidance and any SEC updates that you need to know – including what you’ll need to tell your board and executives.

2. Big Picture Impact – how will the disclosure mandate affect say-on-pay models and shareholder engagements? This session will provide context and pointers for bolstering executive compensation & compensation committee support during proxy season.

3. Key Learnings From Our Sample – attendees of this event will get first access to our sample disclosures, prepared by Mark Borges and Dave Lynn. Hear “lessons learned” from their drafting effort that will guide you through your own process and jumpstart your disclosures.

This event is available at a reduced rate of only $295 for anyone who is already a member or who is signed up to attend our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” on October 12th – 14th – where we’ll be setting the stage with key takeaways from the pay vs. performance rule and the steps that you need to take now to be ready to comply. Register for the “special session” here for the member rate (or, if you are not a member but you are signed up for our “Proxy Disclosure & 19th Annual Executive Compensation Conferences,” contact for the special rate).

For non-members, the cost to attend is $595. If you’re not yet a member of, try a no-risk trial now. We’ll be continuing to add practical guidance on this topic to as disclosure hurdles & consequences come to light – such as this great podcast that Dave already taped with Gibson Dunn’s Ron Mueller about “first impressions” of the rule, emerging interpretive issues, possible pitfalls, and more.

All that to say, a membership be an essential ongoing resource if you are involved with pay vs. performance. Plus, our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. Register for the “special session” here if you are a non-member and are not attending our Conference.

Liz Dunshee

September 26, 2022

Electronic Form 144: The Future Is Now

The SEC announced on Friday that the EDGAR system is now ready to accept electronic Form 144 filings. Under rules that were adopted this past June, most Form 144 filings will be required to be made electronically beginning as early as March 2023 (the SEC will announce the exact compliance date when the final rule is published in the Federal Register, which is expected to happen within the next few weeks and will begin the 6-month countdown).

The SEC has launched a page with resources for filing Form 144 electronically. Here’s what you need to do now:

1. Make sure all of your company’s insiders have an EDGAR account and that their codes are up & running. The page explains how to search for lost codes.

2. If any reporting person doesn’t already have an EDGAR account, apply for one now. Applications require individual review by the Staff, and they expect a rush of submissions as the compliance date nears, so don’t be caught at the back of the line. The page explains the steps to apply.

3. Brush up on Form 144 CDIs for questions about when you need to file an amended Form, etc. Remember that we also have a “Rule 144 Q&A Forum” for questions about the Rule itself.

4. Check out the SEC’s page for step-by-step guidance for using the online fillable Form 144 and Frequently Asked Questions.

We’ll be discussing the implications of electronic Form 144 filings – along with many other practical topics – at our virtual “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – coming up in only two weeks, October 12th – 14th. There is still time to register! Here’s the agenda – 18 essential sessions over the course of three days. Sign up online (with the “Conference” drop-down, and the “PDEC” options), email, or call 1-800-737-1271. Bundle your registration with our “1st Annual Practical ESG Conference” and get a discounted rate!

Liz Dunshee

September 26, 2022

Quick Poll: Who Will Handle Electronic Form 144 Filings?

As John blogged in June, one of the questions surrounding the move to paperless Form 144 filings is whether brokers will continue to handle this step in the trading process – or if, because EDGAR codes are now involved and it can be a real mess if those get bungled, the Form 144 filings will now fall to company counsel.

In addition to discussing this with plan sponsors and other brokers, it’s helpful to get a sense of what other companies are planning to do. Please participate in this anonymous poll to share your thoughts:

Liz Dunshee

September 23, 2022

Enforcement: SEC Brings Action Against Boeing & Former CEO for Alleged 737 MAX Misstatements

Yesterday, the SEC announced settled enforcement proceedings against Boeing & former CEO Dennis Muilenburg arising out of alleged misstatements surrounding the catastrophic crashes of two of its 737 MAX aircraft.  This excerpt from the SEC’s press release summarizes the alleged misstatements:

According to the SEC’s order, one month after Lion Air Flight 610, a 737 MAX airplane, crashed in Indonesia in October 2018, Boeing issued a press release, edited and approved by Muilenburg, that selectively highlighted certain facts from an official report of the Indonesian government suggesting that pilot error and poor aircraft maintenance contributed to the crash. The press release also gave assurances of the airplane’s safety, failing to disclose that an internal safety review had determined that MCAS posed an ongoing “airplane safety issue” and that Boeing had already begun redesigning MCAS to address that issue, according to the SEC’s orders.

Approximately six weeks after the March 2019 crash of Ethiopian Airlines Flight 302, another 737 MAX, and the grounding by international regulators of the entire 737 MAX fleet, Muilenburg, though aware of information calling into question certain aspects of the certification process relating to MCAS, told analysts and reporters that “there was no surprise or gap . . . that somehow slipped through [the] certification process” for the 737 MAX and that Boeing had “gone back and confirmed again . . . that we followed exactly the steps in our design and certification processes that consistently produce safe airplanes.”

Without admitting or denying the SEC’s allegations, Boeing & its former CEO consented to separate orders (here’s Boeing’s order and here’s the CEO’s order) to cease and desist from future violations of Section 17(a)(2) and 17(a)(3) of the Securities Act. Boeing agreed to pay a $200 million civil penalty and its CEO agreed to a $1 million penalty.

I told everyone to prepare for a torrent of high-profile enforcement proceedings as the SEC’s fiscal year winds down. It will be interesting to see what next week brings. Stay tuned.

John Jenkins

September 23, 2022

More on “Shareholder Meetings: No Time to Vote?”

Following my recent blog on Jim McRitchie’s commentary about how little time many companies were giving shareholders to vote, Carl Hagberg reached out and pointed me toward his Shareholder Service Optimizer article on “How and When to Properly Open and Close the Polls. This kind of topic is right in Carl’s wheelhouse & he’s got some suggestions on best practices for voting procedures. Here’s an excerpt with some of his thoughts:

– Declare that “the polls are now open for voting” when the Meeting is called to order – or, at the very latest, when it is time to begin the introduction of all proposals on the ballot, i.e., “the official business of the meeting.”

– Our own view is that the “best practice” is to introduce proposals one-by-one – and to ask if there is any discussion, which most of the time these days is no – but if so, to hear it then and there. If there is any discussion, allow a brief pause (a few seconds should be fine here) for voters to amend their votes if they wish to, before moving to the next item.

– When all the proposals have been introduced, move to the General Discussion Period – and announce that the polls will be open for 10 more minutes “to allow voters who have not yet voted or who wish to change their votes online to do so.” Yes, a few holders may have to ‘multi-task’ but so be it, we say.

Carl also recommends providing a “fair warning” & another “last and final warning” during the few minutes prior to the time that the polls will close.

John Jenkins

September 23, 2022

The Book of Jargon: Sound Like a Crypto Hipster – Not a Lame Boomer!

As a parent of three kids who straddle the Millennial – Gen Z divide, I know that one of the (many) ways that Boomers like me really make members of younger generations roll their eyes is by being clueless about the latest pop culture jargon. I admit that I’m not real up to speed on that stuff.  I mean, I know a little about hip-hop and have picked up some of the jargon over the years, but as I’ve said before, my kids think I’m dorkier than Ari Melber when I attempt to use it.

I’m not much of a crypto or Web 3.0 guy either, and I bet the same is true for many of you as well. But maybe Latham & Watkins’ latest “Book of Jargon” can help us out. It’s a glossary of jargon relating to blockchain technology, cryptocurrency, Web3, NFTs, and the metaverse & is likely indispensable if you find yourself having to fake your way through a meeting with folks in this, uh, “space.”

On the other hand, your facility with this jargon probably won’t impress your kids, unless of course they work in crypto – in which case why should you care if they’re impressed, since they’ve probably moved back into your house by now?

John Jenkins

September 22, 2022

Enforcement: SEC Finds a Couple of 10b5-1 Plan Poster Children

Yesterday, the SEC announced settled enforcement proceedings involving alleged insider trading by Cheetah Mobile’s CEO and its former president. Insider trading cases are a dime a dozen, but this one has given the Division of Enforcement something it has coveted for quite some time – an insider trading case involving senior executives allegedly misusing a Rule 10b5-1 plan.  Here’s an excerpt from the SEC’s press release:

The Securities and Exchange Commission today charged the CEO of Cheetah Mobile Inc. and the company’s former President with insider trading for selling Cheetah Mobile’s securities, pursuant to a purported 10b5-1 trading plan, while in possession of material nonpublic information. The SEC’s order finds that Sheng Fu, the company’s CEO, and Ming Xu, its then-President and Chief Technology Officer, jointly established a purported 10b5-1 trading plan after becoming aware of a significant drop-off in advertising revenues from the company’s largest advertising partner.

According to the SEC’s order, in 2016, Sheng Fu and Ming Xu sold 96,000 Cheetah Mobile American Depository Shares under the trading plan and avoided losses of approximately $203,290 and $100,127, respectively. Cheetah Mobile is based in China and offers various technology products, including mobile games and other applications.

“This case serves as yet another example of the SEC’s resolve to hold executives accountable when they try to skirt federal securities laws to illegally trade on nonpublic information,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. “While trading pursuant to 10b5-1 plans can shield employees from insider trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it.”

Under the terms of the SEC’s order, the defendants, without admitting or denying the agency’s allegations, agreed to cease and desist from future violations of the antifraud provisions of the federal securities laws & to provide advance notice of any transactions in Cheetah Mobile securities to the Director of the Market Abuse Unit in the Division of Enforcement. They also agreed to pay civil penalties.

As everyone reading this knows, the SEC has proposed changes to Rule 10b5-1 that will impose significant additional conditions and limitations on its use.  One of the criticisms of that proposal has been the absence of any enforcement proceedings directed at 10b5-1 plans.  Now the SEC has one.

John Jenkins

September 22, 2022

“The First Thing We Do, Let’s Pay All the Lawyers”: The Rise of GCs Among NEOs

Equilar & BarkerGilmore recently published their annual report on GC pay trends.  As always, the report has a lot of detail on compensation components, demographic information and commentary on the state of the market for GC positions.  But to me, the most interesting aspect of the report is its acknowledgement of the increasing number of GCs who are appearing as NEOs in public company comp tables:

One measure of the ascension of the role over the past half-decade is an increase in GC reported among the named executive officer (NEO) population. In 2021, 175 Equilar 500 companies included a General Counsel among their NEOs. This is up from a five-year low of 167 in 2018. The total of 175 is the same number as reported by the group in 2020, and at 4.8% growth in the last four years, the rate of increase is more modest than the 8.2% rise reported between 2016 and 2020 seen in the 2021 edition of General Counsel Pay Trends. Ongoing growth nevertheless serves to underline the continued evolution of the role.

The report says that GCs aren’t ascendant across all industries. The number of GCs identified as NEOs fell in prevalence among companies in both the consumer cyclical and consumer defensive sectors, and rose more modestly in some others, including healthcare and basic materials.

John Jenkins