Liz’s change in status has prompted us to rethink how we email our blogs to you each morning. At the end of the month, we’re going to change over from our current practice of having our blogs come from the email address of one of our editors. Going forward, all of our blogs will be sent from Editorial@TheCorporateCounsel.net. Our objective is to establish a sender address that won’t need to be changed every time there’s a change on the editorial masthead, which hopefully means that this will be the last time we have to ask you to take the time to whitelist our email addresses.
We know that whitelisting is kind of a pain in the neck, so we’ve put together this whitelisting instruction page to help you and your IT department understand what actions you may need to take in order to ensure there’s no disruption in delivery. We’re going to begin to send blogs from the Editorial@TheCorporateCounsel.net address over the course of the next several weeks, so please be sure to whitelist the new address at your earliest convenience. We’re going to do this incrementally across our sites, and we’ll keep you apprised of when we plan to make the change for a specific site.
There are a couple of things that I also want to mention about this change. First, the name of the author of a blog will always appear in the email, so if you want to respond to the author, you can just click on the author’s name and their email address will pop up. Second, Editorial@TheCorporateCounsel.net isn’t a black hole. If you hit reply, your message will go to a folder that I’ll have access to. I’ll check that every few days and forward your email to the appropriate editor. Finally, thanks for your patience and cooperation.
I think most securities lawyers are a little paranoid when it comes to their public company clients’ interactions with securities analysts. After all, the 2nd Cir. famously compared these interactions to “a fencing match conducted on a tightrope” in SEC v. Bausch & Lomb, (2d. Cir. 9/77), and we’ve become accustomed to advising clients of the parade of horribles that can result when a discussion with securities analysts goes awry. However, a recent 4th Cir. decision provides a refreshing reminder that a company isn’t always on the hook for the spin that analysts put on its management’s remarks to them.
Boykin v. K12 Inc., (4th Cir. 11/22), arose out of statements made by a public company’s CEO concerning a potentially lucrative business relationship with the Miami-Dade School District. These comments were characterized by analysts as the CEO essentially confirming the existence of a “signed contract” between the parties. The potential deal subsequently unraveled, and the plaintiffs sued the company alleging that its CEO had made material misstatements about the status of the business deal. The Court disagreed, and this excerpt from the 10b-5 Daily’s blog on the decision explains the court’s reasoning:
On appeal from the district court’s dismissal of the complaint, the Fourth Circuit found that the company’s statements about the Miami-Dade deal “could well have factored into the run-up of K12 shares during the summer of 2020.” As to the falsity of the statements and the defendants’ scienter (i.e., fraudulent intent), however, the court was less convinced.
First, the falsity element is based on a reasonable investor’s view of the company’s statements, “not any individual investor’s reaction.” If the analysts believed that the CEO had confirmed the existence of a done deal, they were simply incorrect given that the CEO never “attested unambiguously to having a signed agreement.” And to the extent that the CEO “was gesturing to an extensive working relationship between K12 and Miami-Dade,” that was factually accurate at the time. Indeed, Miami-Dade’s superintendent even signed the completed contract in mid-August, but it was never returned to K12.
The Court also concluded that the plaintiffs’ failed to adequately allege scienter, noting both that the timeline was consistent with the CEO’s “anticipation in mid-August of a consummated deal with Miami-Dade” and that if the CEO’s goal had been to inflate K12’s stock price, “he could have chosen far less ambiguous language than he did.”
While this case’s result is somewhat reassuring, I suppose it’s still a bit of a cautionary tale about the risks of letting analysts’ mischaracterizations of management comments go unaddressed. After all, the company only got to this outcome after a couple of years of litigation involving a not insignificant amount of expense and distraction.
Will the fallout from 2022’s crypto meltdown lead to an SEC enforcement sweep targeting crypto exchanges in 2023? Former SEC Internet Enforcement Chief John Reed Stark says “you bet!” In fact, a looming enforcement sweep tops his list of 12 crypto predictions for 2023:
An Enforcement sweep carried out by the U.S. securities and Exchange Commission (SEC) of crypto-intermediaries is clearly coming in 2023. Senior SEC crypto-officials have promised as much too many times for a crypto-sweep not to happen. Just read the following recent quotes from the three most important SEC crypto-enforcement officials. In my experience, the SEC does not make idle threats and the “runway” no longer runneth over:
November 15, 2022: Per SEC Crypto Unit Chief David Hirsch at the SEC Enforcement Forum: “We want people to come in and register so that investors can decide on what risks they would like to take. There is a runway for crypto intermediaries and exchanges to come in and get registered, but I think that RUNWAY is growing shorter and SEC enforcement is willing to move forward and bring enforcement actions as appropriate.” (emphasis added)
December 8, 2022: Per SEC Chair Gary Gensler on Speaking with Yahoo!: “I’ve got one goal is that these platforms, the exchanges, the lending platforms come into compliance. They can do that appropriately working with the SEC. Or we can continue on the course with more enforcement actions. And I would have to say that the RUNWAY is getting shorter.” (emphasis added)
December 13, 2022: Per SEC Enforcement Director Gurbir Grewal at the DOJ FTX Press conference: “Grewal warned investors and customers to remain cautious on crypto platforms, which he said “don’t provide [customers] with the same robust level of disclosures and protections against fraud and conflicts of interest” as SEC-registered platforms do. As Chair Gensler has made clear, the RUNWAY is getting shorter for them to come in to register with us. And for those who do not, the Enforcement Division stands ready to take action.” (emphasis added)
Stark goes on to give the crypto industry a thorough – and quite entertaining – thrashing. Here’s an example:
Gensler, Gurbir and Hirsch could not say it any plainer. Fail not at your peril crypto-ecosystem, you are all squarely within the SEC’s sights. By calling themselves “exchanges,” “brokers,” and “market-makers,” crypto firms co-opt historically powerful nomenclature that implies trust, oversight and consumer protection, etc. This is a material ruse. It’s like if a drug dealing gang suddenly offered to perform brain surgery for customers, yet had never gone to med school, never done a hospital internship or residency and their only health training consisted of watching a few TikTok videos.
This is one of those blogs that I probably should’ve figured out a way to get out before the holidays, since I’m sure a number of our readers found themselves at holiday parties where they were expected to be talking law books about the DOJ’s criminal proceeding against FTX founder Samuel Bankman-Fried.
In any event, better late than never, here’s a recent blog from Columbia Law Prof. John Coffee that discusses the legal theories the government is pursuing. This excerpt highlights some of the challenges prosecutors face as a result of FTX’s use of The Bahamas as the home base for its operations:
A quick look at the SBF indictment shows that the SDNY is hoping to apply the federal wire fraud statute and the anti-fraud provisions of the federal securities laws extraterritorially against a defendant who largely acted outside the U.S. To succeed, prosecutors will need to rely on the second step analysis, as neither statute reveals on its face a congressional intent to apply it extraterritorially.
The wire fraud statute was modelled after the mail fraud statute, which was passed in 1872, and that 1872 Act was primarily intended to protect the mails from corruption and misuse. Congress had learned that post offices were being used to further gambling, pornography, and the dissemination of counterfeit money, and it sought to put a stop to such use. In the case of the federal securities laws, the facts of Morrison show that the mere sending of mail by the defendant National Australia Bank into the U.S. was insufficient to satisfy Morrison’s “focus” test.
Doug Chia recently blogged his thoughts on how to build a perfect virtual annual meeting. The best thing about the blog is that Doug doesn’t just tell us what he considers best practices for virtual meetings, but also includes screenshots and links to the meetings he highlights so we can see the examples for ourselves.
Many companies are likely to continue with virtual meetings this year, and Doug’s probably attended more virtual meetings as an observer than anyone else I know. So, if you’re working with a company that’s interested in improving the user experience at its virtual meeting, I’d definitely spend some time with this blog. On the other hand, if a company isn’t looking to improve the VSM user experience, well, it probably should be. That’s because Doug says that average virtual annual meeting is pretty from ideal:
Unfortunately, on the whole, the quality of VSMs hasn’t gotten much better since the VSM tsunami of 2020. They continue to be short (average duration has been dropping at a steady clip to well under 20 minutes), perfunctory, and boring. They are almost always audio-only (percentage of companies that used video in 2022 was still in the single digits), with minimal use of imagery or multimedia content, bland management presentations containing no new information, and limited Q&A.
After three years of VSMs, this kind of “let’s just mail it in” approach to them seems to be a missed opportunity for companies to provide a positive engagement experience to a large number of shareholders. Even if your company can’t afford the technological bells & whistles necessary to achieve VSM perfection, the blog may give you some ideas on how to improve your shareholders’ experience.
A few years ago, I blogged about the 2nd Circuit’s decision in U.S. v. Blaszczak, (2d. Cir.; 12/19), which addressed the elements that prosecutors had to establish in a criminal insider trading case under 18 U.S.C.§1348. That statute has become an increasingly popular alternative for prosecutors because on its face it doesn’t require them to establish some of the more difficult elements of a 10b-5 claim (such as a relationship of trust or confidence and a personal benefit) in order to obtain an insider trading conviction.
In its 2019 decision, the 2nd Circuit held that 18 U.S.C. §1348 doesn’t require the DOJ to prove that the defendant received a personal benefit, and affirmed convictions arising out of the defendants’ use of MNPI obtained from an employee of the federal government’s Center for Medicare and Medicaid Services (CMS) concerning potential changes reimbursement rates.
Last month, however, the 2nd Circuit overturned those convictions in light of the SCOTUS’s 2020 decision in U.S. v. Kelly, which held that federal fraud laws require that the defendants aim to “obtain money or property.” This Proskauer blog discusses the 2nd Circuit’s decision, and this excerpt addresses the conclusion that the information obtained from the CMS didn’t constitute “money or property”:
The majority held that CMS’s confidential, pre-decisional regulatory information was not CMS’s “property” here because “CMS is not a commercial entity; it does not sell, or offer for sale, a service or a product.” Moreover, the planned regulation, even if prematurely disclosed to outsiders, remained “within the exclusive control of CMS”; its disclosure thus had “no direct impact on the government’s fisc,” even if the leak “might well impact CMS’s subsequent regulatory choices.” The court therefore ruled that “merely obtaining advance information as to what the agency’s preferred regulation would be, and when it would be announced, cannot properly be considered the agency’s money or property or a thing of value that could be ‘convert[ed].’”
The blog also highlights a concurring opinion questioning whether it was appropriate not to require the government to establish a personal benefit in tipper-tippee cases brought under 18 U.S.C. §1348. The concurring judges pointed to the incongruity & potential unfairness of having a criminal statute requiring the government to establish fewer elements than it would be required to establish in order to prevail in a civil 10b-5 insider trading case. If the concurrence gets traction with other federal courts, the DOJ could find it much harder to use this particular end-around Rule 10b-5 in future cases.
For a long time, a lot of companies seem to have preferred buybacks to dividends as a way to return capital to stockholders. Among other things, buybacks offer companies an opportunity to boost ROE & EPS by reducing the number of shares outstanding, provide a non-dilutive source for equity awards and give each investor the ability to choose whether to participate. On the other hand, sharp criticism of the amount of money devoted to them has resulted in the imposition of a 1% excise tax and will likely soon result in significant new disclosure requirements.
With all the noise surrounding buybacks, it shouldn’t come as a surprise that the good ol’ fashioned dividend has been experiencing a bit of a renaissance. As this excerpt from a recent WSJ article explains, 2022 was a banner year for dividends – and 2023 is likely to be even bigger:
S&P 500 companies spent a record amount on dividends this year, a trend that is expected to continue in 2023 despite a slowing economy as more of the companies that had suspended or cut their dividends early in the pandemic resume payouts. Companies in the S&P 500 allocated an estimated $561 billion toward dividends in 2022, up from $511.2 billion in 2021 and the highest amount on record, according to S&P Dow Jones Indices, a unit of S&P Global Inc. Dividend spending is poised for another record in 2023 as companies are under pressure from investors to keep increasing returns, said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.
Despite the headwinds they’re facing, buybacks aren’t likely to go away. While buybacks by S&P 500 companies, declined by 10% in the third quarter, the article says they’re expected to decline only slightly from the $963 billion that companies spent on them this year.
The adopting release for the SEC’s recent Rule 10b5-1 amendments provides that the new rules will go into effect 60 days after the release’s publication in the Federal Register. Well, the clock is officially running, because the release was published in the Federal Register on Thursday, December 29, 2022. That means the changes to Rule 10b5-1 will become effective on February 27, 2023.
In addition to the Rule 10b5-1 amendments, the SEC adopted new disclosure & tagging requirements as well as changes to Section 16 forms. The adopting release provides the following compliance dates for those changes:
– Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023; and
– Issuers that are SRCs will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after October 1, 2023.
– All other issuers will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.
A recent “Audit Analytics” blog highlights current market share leaders among transfer agents. This excerpt says that aside from one merger, the scene looks pretty much the same as last year:
One event significantly impacted the transfer agent market. In December 2021, Siris Capital Group completed the acquisition/combination of Equiniti and American Stock Transfer. As previously separate firms, these two transfer agents were each in the top 5 by market share annually.
The total market share for transfer agents among active SEC registrants remains mostly unchanged relative to 2021, besides the EQ/AST combination. The top 5 transfer agents for the total population market share include: Computershare, Equiniti Trust Co/American Stock Transfer & Trust, Continental Stock Transfer & Trust, BNY Mellon, and Broadridge.
Computershare maintains its lead with 25.7% market share in 2022 compared to 27.2% in 2021. Equiniti Trust Co/American Stock Transfer & Trust holds a 20.4% market share in 2022. Computershare and EQ/AST hold nearly half of the clients in the Audit Analytics database. Finally, Continental Stock Transfer & Trust hold a market share of 12.7% compared to 11.9% in 2021.
The blog says that three transfer agents dominate the large cap market, with Computershare serving as the transfer agent for 57% of the S&P 500. Equiniti Trust Co/American Stock Transfer & Trust follows with 35% of the large cap market share, while Broadridge Corporate Issuer solutions rounds out the top 3 with a market share of 7%.
Shortly before the holidays, the SEC announced that General Counsel Dan Berkovitz will leave the agency and that Principal Deputy General Counsel Megan Barbero will assume the GC position effective January 23, 2023. This excerpt from the SEC’s press release provides more details on Megan Barbero’s background:
Ms. Barbero joined the SEC in July 2021 and currently advises the Commission on complex legal issues relating to rulemaking initiatives and litigation strategy. Before joining the SEC, Ms. Barbero served as Deputy General Counsel for the U.S. House of Representatives, where she managed strategic litigation for the House.
Prior to her work at the House, Ms. Barbero served as an attorney for the U.S. Department of Justice Civil Appellate staff, where she represented the United States and its agencies as lead counsel in the federal courts of appeals. Ms. Barbero previously worked in the Supreme Court and appellate litigation practice at WilmerHale. Ms. Barbero clerked for Judge Rymer on the U.S. Court of Appeals for the Ninth Circuit. She is a graduate of Harvard University and Stanford Law School.