Liz’s recent blog about the importance of crypto issues made me feel a little guilty, since when it comes to crypto stuff I usually either avoid blogging about it or just make fun of it. So, to atone for my sins against the Blockchain, I offer up this Foley blog, which reviews various ongoing civil and criminal actions involving NFTs.  This excerpt from the intro explains why these cases are important:

These actions provide a glimpse into how NFTs will be integrated into existing legal frameworks, and may provide clarity over legal questions that loom large over companies and individuals in the business of creating or selling NFTs. For instance, recent actions show that courts and government authorities are beginning to uncover or take jurisdiction over assets on the decentralized blockchain.

Based on recent indictments, individuals are finding out the hard way that digital assets held on the blockchain—while often thought to be anonymous—are not beyond the purview of government enforcement and cannot be used to hide illicit gains. The methods used to uncover the identities of token or NFT holders may have implications not only for criminal enforcement, but also for actions where the identification or recovery of assets is significant such as divorce and bankruptcy. Recent enforcement activity by the United States and foreign governments should serve as a warning to those who think they can use digital assets for unlawful means.

Specific proceedings addressed in the blog the SEC’s Ripple enforcement proceeding, as well as the US Attorney for the SDNY’s criminal prosecution of the guys allegedly behind the “Frosties” rug-pull caper. But to me, the most interesting piece of litigation covered in the blog is Miramax’s lawsuit against Quentin Tarantino, who was apparently planning to auction scenes from Pulp Fiction in the form of NFTs. That suit was ultimately settled, but I’m sure Tarantino would say that it was yet another example of how “the path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men. . .”

– John Jenkins

This Woodruff Sawyer blog reviews the issues surrounding hedging & pledging of company stock by insiders and discusses the unfavorable publicity & ongoing books and records litigation that Peloton has faced as a result of its CEO’s pledging of a significant amount of stock. For Woodruff Sawyer, the bottom line is that the best practice is to ban both insider hedging and insider pledging:

It’s uncommon to find a company that permits hedging of its shares by insiders. As discussed above, allowing hedging by insiders is frowned upon, which may be an understatement, and ISS views hedging by insiders as a failure of risk oversight by the board. Failure of risk oversight by a board could lead proxy advisory firms to a vote against or withhold election recommendations for directors. All said, specific to hedging by insiders, it’s best to prohibit it. Peloton’s decision to permit pledging should serve as a cautionary tale: Pledging by insiders is not an area of focus by third parties when share prices are high, but it can be fodder for investors, plaintiff attorneys, and the media if share prices drop significantly and insiders must respond to margin calls.

If a company permits pledging by insiders, there should be guardrails. Peloton reported certain guardrails in its proxy statements. Peloton stated that its insider trading policy administrators would have to authorize any pledges and that “an individual may only pledge up to 40% of the value of such individual’s vested and outstanding securities.” Taking that approach could become overly burdensome for the person(s) administering the insider trading policy since they would conceivably have to track individual shareholdings to ensure that pledged amounts did not go over the set threshold. This may not be worth the headache for some companies.

– John Jenkins

Quarterly earnings releases are a big event in the life of any public company, and Goodwin recently posted a couple of new resources to help companies navigate the issues that may arise.  The first is a 23-page Earnings Release Compliance Checklist, which addresses topics ranging from the earnings release process and the typical contents of a release to the wide variety of specific securities law issues that may be implicated in a release. The second is a 16-page Earnings Release Review Guide, which walks through the federal securities laws implicated in each step of the earnings release process and offers guidance on how to review earnings releases and related materials for compliance with key requirements.

For more practical guidance on this topic, make sure to mark your calendar for November 16th, 2-3pm Eastern, for our webcast, “Dissecting the Quarterly Earnings Process” – with Goodwin’s Sean Donahue, O’Melveny’s Shelly Heyduk, and Cooley’s Reid Hooper. Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. 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. The webcast cost for non-members is $595.

– John Jenkins

Last week, in a blistering opinion, U.S. District Court Judge Ronnie Abrams took the SEC to task for its “neither admit nor deny” settlement policy.  This excerpt provides a sense of the opinion’s tone & the judge’s concerns about the 1st Amendment implications of the SEC’s “gag orders”:

By preventing defendants from publicly defending themselves, or even criticizing the SEC’s handling of the case (thereby “creating the impression” that the Commission sanctioned them without basis), the Provision denies the public the opportunity to scrutinize the government’s enforcement practices. Indeed, the very people who are arguably “in the best position to know” of governmental abuse, Bd. of Cnty. Comm’rs v. Umbehr, 518 U.S. 668, 674 (1996)—that is, those who have been subjected to the SEC’s enforcement actions—are those who are muzzled by the Provision from speaking out. “Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true.” Vitesse Semiconductor, 771 F. Supp. 2d at 309. While this “might be defensible if all that were involved was a private dispute between private parties,” id., here, the Provision is used by an agency of the federal government to shield itself from public view.

Citing New York Times v. Sullivan, Judge Abrams said that this is precisely the kind of societal harm that the 1st Amendment was intended to protect against: “The dominant purpose of the First Amendment was to prohibit the widespread practice of governmental suppression of embarrassing information . . . . Secrecy in government is fundamentally anti-democratic, perpetuating bureaucratic errors. Open debate and discussion of public issues are vital to our national health.”

Given this fire & brimstone, you might be surprised to learn that the judge approved the proposed settlement – although both parties requested that he do so. However, that highlights the larger issue of how the procedural posture of cases where the SEC’s settlement policy is challenged limits a court’s ability to address that policy. This Proskauer blog says that recent 2nd Circuit and 5th Circuit decisions illustrate that point:

Both decisions turned at least in part on the very narrow bases available for relief from a judgment under Federal Rule of Civil Procedure 60(b). And Novinger turned entirely on that ground. Two of the three judges concurred in the judgment affirming denial of relief, but expressly noted (in an opinion by Judge Edith Jones) that nothing in the court’s unanimous ruling “approves of or acquiesces in the SEC’s longstanding policy that conditions settlement of any enforcement action on parties’ giving up First Amendment rights.”

To the contrary, the two concurring judges opined that “[a] more effective prior restraint is hard to imagine.” The concurring judges also noted that a petition to review and revoke the SEC’s policy had been filed nearly four years ago, but the SEC has not yet responded to it. “Given the agency’s current activism, I think it will not be long before the courts are called on to fully consider this policy.”

The blog goes on to note that the SEC’s neither admit nor deny policy was attack in a different context, courts might well “take a different view of the relevant arguments.” Of course, be careful what you wish for – because the blog also points out SEC may be currently inclined to seek more admissions, rather than gag orders, as a condition of settlement.

– John Jenkins

According to a recent BDO survey of nearly 250 public company directors, 57% said that oversight of ESG matters falls to the Nominating and Governance Committee, while only 13% of directors surveyed said that their companies have a separate ESG Committee. This excerpt indicates that when it comes to having a standing ESG Committee, size matters – and that other standing board committees often find ESG issues ending up on their plate:

In 2021, more than one-third of directors (35%) said they planned to create an ESG-specific committee during the next three years. As of now, just 13% indicated they have done so. Boards with smaller market capitalization (81% of our survey respondents sit on at least one board with small or micro-sized stock shares) may not have the resources or incentives to create a separate ESG committee. By comparison, approximately 31% of the S&P 100 have a separate ESG committee of the board.

Whether or not a dedicated ESG committee exists, ESG factors touch various committees across the board. For example, we increasingly see the compensation committee getting involved in many more human capital matters beyond compensation packages for the CEO and executive team. In many cases, we see boards changing the names of their committees to reflect the expanding duties to consider employee needs more broadly.

– John Jenkins

Liz recently blogged about the SEC’s announcement of an April 13, 2023 deadline for the transition to electronic Form 144 filings. This Perkins Coie blog has some practical advice on what companies should be doing in advance of that deadline to prepare for electronic filings – whether or not they plan to continue to rely on brokerage firms to make Form 144 filings for their affiliates.  This excerpt discusses the need to come up with filing procedures for your company, your affiliates and their brokers:

Come up with a plan for how to handle Form 144 filings so they don’t slip through the cracks:

– Will you try to mandate that your insiders’ brokers continue to make the Form 144 filings on behalf of your insiders?

– Do you want to take on the responsibility for filing these forms to ensure they get filed on time and correctly?

– Consider whether your existing insider trading policy currently requires your insiders to pre-clear all transactions, and if not, whether you should recommend adding that feature as a way to help your insiders remember to provide you with advance notice of any contemplated sales so that you can prepare and timely file the Form 144.

Whatever your plan is, communicate it to all relevant parties so everyone is on the same page before this new requirement kicks in six months from now

The blog also addresses a number of other topics, including the need to obtain EDGAR codes for some affiliates that may not already have them, and the need to communicate with your affiliates and their brokers about filing responsibilities.

– John Jenkins