This CLS Blue Sky blog from Wachtell discusses a late June jury verdict in United States v. Peizer, which the DOJ is calling the “first insider trading prosecution based exclusively on the use of a trading plan.” As Liz blogged when the charges were announced, the facts were in the DOJ’s favor. Peizer, CEO & Chair of a healthcare company, entered into two 10b5-1 trading plans shortly after learning bad news about a relationship with the company’s largest customer and refused to use any cooling-off period despite warnings from two brokers. In fact, he “shopped” for a broker who wouldn’t require one.
While the DOJ warned that this would not be its last 10b5-1 plan prosecution, the blog notes that the facts of this case are unlikely to recur — at least for plans entered into in compliance with Rule 10b5-1 in its current form.
[T]he trading in Peizer pre-dated the SEC’s amendments to Rule 10b5-1 (discussed here), which now require a 90-day minimum “cooling-off” period for directors and Section 16 officers following adoption of a 10b5-1 plan before trading may begin.
That being said, the blog continues:
Although the current version of Rule 10b5-1 would not allow the conduct at issue in Peizer (i.e., trading immediately following the implementation of a plan), the Peizer verdict nevertheless serves as an important reminder of law enforcement’s increased scrutiny of trading conducted pursuant to 10b5-1 plans.
[…] A 10b5-1 plan can provide protection only when an executive does not possess material nonpublic information at the time of implementing the plan. Moreover, a plan must be implemented and operated in good faith rather than as part of an effort to evade the prohibitions of Rule 10b5-1.
Although Peizer concerned the pre-amendment version of Rule 10b5-1, we expect the DOJ and the SEC to search for violations of the tightened standards. Indeed, echoing previous comments by the SEC, DOJ has announced that the Peizer indictment was the result of deploying “a data-driven initiative led by the Criminal Division’s Fraud Section to identify executive abuses of 10b5-1 trading plans.”
On Friday, Dave blogged about Thursday’s SCOTUS decision in SEC v. Jarkesy, in which a 6-3 majority found that the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for securities fraud. Dave shared some tidbits from a Politico article highlighting parts of Justice Sonia Sotomayor’s dissenting opinion, which called the decision “earthshattering.” In this post on the D&O Diary, Kevin LaCroix agrees, calling the Court’s decision a “blockbuster” and saying “the ramifications will ripple through the courts for many years to come.” Here’s why:
[T]he SEC has frequently used its authority to use [in-house proceedings to] pursue enforcement actions, where it has prevailed with much greater frequency than it has in civil actions in federal court. According to Justice Gorsuch, the SEC has won about 90% of its contested in-house proceedings compared to 69% of its cases in court. Without the ability to pursue claims in what has been for the SEC a more hospitable form, the agency at a minimum may not prevail as frequently, and perhaps might even pursue fewer enforcement actions. […]
The Court’s decision could also have important ramifications for other agencies’ abilities to pursue proceedings within their bailiwick in their own administrative courts. As Justice Sotomayor noted in her dissenting opinion, Congress has enacted more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations.
At least in statutory proceedings involving actions that are analogous to common law claims, the defendants in these actions potentially could argue that they are entitled to a civil court jury trial rather than an administrative proceeding and seek to have their claims dismissed. Potentially, the enforcement efforts of federal agencies generally could be significantly undermined, or at minimum substantially altered.
When it comes to pending administrative enforcement actions, this Gibson Dunn article says that the Commission “hasn’t pursued contested actions seeking penalties in its administrative forum. But long term, requiring the SEC to bring enforcement actions in federal court will afford defendants access to independent judges and juries, the rules of evidence and civil procedure, and other procedural protections.”
We’re posting this and other related memos in our “SEC Enforcement” Practice Area.
On Friday, Dave shared the SEC’s announcement that some website functions on sec.gov would be unavailable Friday evening for scheduled maintenance. Those of you who popped on sec.gov yesterday likely noticed the website’s new look and feel. The home page now includes a link to this page explaining the enhancements reflected in the new & improved site.
Importantly, the new site will automatically redirect users from old URLs to the new webpages, so you don’t necessarily need to update your bookmarks. That said, the SEC highlighted that many of the existing webpage addresses for EDGAR filer information and data will change and provided this crosswalk of key renamed webpages. Key to note:
– None of the changes impact EDGAR’s filing websites.
– The new URL for searching EDGAR by company is www.sec.gov/search-filings. Clicking the company’s CIK code when you search will navigate you to the EDGAR landing page we’ve become accustomed to.*
*TBH, while we’re making confessions, I’m one of those die-hard users of Classic EDGAR, which, for those kindred spirits out there, is still available in the upper right corner. Phew!
As I’m sure you’ve read, SCOTUS overturned the deferential Chevron doctrine on Friday — just a few days after its 40th birthday. The majority opinion concludes as follows:
Chevron is overruled. Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the [Administrative Procedure Act] requires. Careful attention to the judgment of the Executive Branch may help inform that inquiry. And when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it. But courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.
The New York Times reports that the Chevron decision is “one of the most cited in American law.” The dissent says SCOTUS alone “has upheld an agency’s reasonable interpretation of a statute at least 70 times” and references a law review paper to say that Chevron was cited in more than 18,000 federal court decisions at last count. While, as Bloomberg Law reports, “the majority tempered the latest ruling to some degree by saying past decisions that upheld regulations on the basis of Chevron would remain in force,” the dissent didn’t take much comfort in this:
Some agency interpretations never challenged under Chevron now will be; expectations formed around those constructions thus could be upset, in a way the majority’s assurance does not touch.
And anyway, how good is that assurance, really? The majority says that a decision’s “[m]ere reliance on Chevron” is not enough to counter the force of stare decisis; a challenger will need an additional “special justification.” […] Courts motivated to overrule an old Chevron-based decision can always come up with something to label a “special justification.” Maybe a court will say “the quality of [the precedent’s] reasoning” was poor. Or maybe the court will discover something “unworkable” in the decision—like some exception that has to be applied. All a court need do is look to today’s opinion to see how it is done.
This DLA Piper article attempts to define the significant impact this decision will have on all three branches of government and regulated entities:
Among other things, this blockbuster ruling:
– Charges courts with supplying the interpretation of ambiguous statutory provisions, even where technical and scientific expertise may be implicated;
– Increases the likelihood of success of those challenging federal regulations;
– Limits executive agencies’ ability to fill gaps in the laws or to address situations not expressly anticipated by Congress, and may cause agencies to proceed more cautiously and narrowly in adopting regulations; and
– Places pressure on Congress to legislate with greater specificity (or at least to make express delegations of interpretative authority, where permissible).
Together with the major questions and non-delegation doctrines, the decision is likely to have a particular impact in areas where Congress hasn’t passed meaningful legislation, which seems to implicate some major hot topics, including for the SEC — think crypto, AI and climate change.
In February, John shared a scoop from Orrick’s Bobby Bee that the SEC has to submit a “Semi-Annual Report to Congress on Machine Readable Data for Corporate Disclosures” every 180 days until December 23, 2029. The report must identify which corporate disclosures are expressed as machine-readable data and which are not, so we get regular 6-month updates of an iXBRL form check tool from the SEC.
Currently, there are 54 forms, schedules, and statements containing disclosures required under Securities Act Section 7, Exchange Act Section 13, or Exchange Act Section 14. About three-quarters (42 of 54) of those forms, schedules, and statements require some machine-readable data, while about one-quarter (12) do not require any machine-readable data.
Since the last report, the Repurchase Rule was vacated, thereby eliminating Form F-SR, and the Commission adopted a new rule under the Exchange Act requiring reporting on Form SHO, a new disclosure form.
Here’s the Form 10-Q-related excerpt from the Appendix:
– Cover page information (e.g., registrant name, form type, filer size, public float, ticker symbol) must be tagged in Inline XBRL.
– Financial statements must be tagged in Inline XBRL.
– Disclosure required by Item 408(a) of Regulation S-K (registrant’s insider trading arrangements and policies) must be tagged in Inline XBRL.
On the enforcement side, in addition to the charges against six public companies and several related individuals for engaging in “earnings management” practices described in the prior report, the latest report says “Enforcement used and analyzed machine-readable data during the underlying investigation of one other action brought in 2023. In the course of performing background due diligence, Enforcement staff reviewed financial statements and notes and was able to view period-over-period changes more efficiently due to the machine readability of the data.”
Liz previously flagged other uses by the SEC Staff, including identifying issuers that are subject to the Holding Foreign Companies Accountable Act, identifying counting, sorting, comparing, and analyzing registrants and their disclosures and making preliminary assessments of compliance with PVP disclosure requirements. In addition to those uses, the report flags the following:
Corporation Finance staff and Division of Economic and Risk Analysis (DERA) staff review machine-readable financial statement information contained in filings under Commission rules. In connection with these reviews, the staff has issued comment letters to some individual issuers regarding the Inline XBRL tagging requirements.
The staff has also used its findings to publish observations on data quality and analyses of custom tags. On September 7, 2023, Corporation Finance published a sample letter to companies regarding their XBRL disclosures. The letter included sample comments that, depending on the particular facts and circumstances, and type of filing under review, Corporation Finance staff may issue to certain companies.
The tagging requirements of filing fee-related information, adopted in 2021, will enable EDGAR to determine automatically in many cases whether a registrant’s filing fee calculations have been performed correctly. Filings that use the SEC’s optional fee-tagging tool and test filings that do not pass specific validation tests will be flagged before the related live filing is filed.
This will allow filers to correct any filing fee calculation errors without needing to wait for Commission staff to verify the calculations manually, and without having to subsequently revise an already-filed document and adjust any fees owed due to an erroneous calculation.