Continuing on the enforcement theme, there was more to share from the “SEC Enforcement and Investigations” panel at SRI. Goodwin’s Jonathan Hecht stressed during the panel that, while SEC leadership has focused on overt misconduct in speeches and statements, there are factors that keep less egregious disclosure cases in the SEC’s crosshairs (even when negligence is involved rather than knowing or reckless fraud). Specifically:

– The SEC is focused on individual accountability and measurable investor harm, both of which are implicated in disclosure cases. Senior executives are directly involved. They speak on earnings calls and have to certify SEC filings, so the risk of individual accountability and liability is high. 

– The SEC perceives investor harm as acute when disclosures are at issue because they can point to the market reaction when corrective disclosures are made. That gives measurable materility of the investor harm (that could be addressed by a fair fund) from the misstatement or omission.

The speakers called out the life sciences space as an area that continues to be ripe for enforcement. For example, near the end of last month, the SEC settled proceedings against former executives of biopharmaceutical company Spero Therapeutics for omissions and mischaracterizations of the FDA’s communications regarding the efficacy of the company’s lead drug candidate that misled investors. As this Foley blog highlights, this case notably involved non-scienter-based charges, despite the factual allegations, that were only brought against individuals.

Needless to say, it behooves all securities lawyers to continue reading their clients’ disclosures with healthy skepticism and an eye for consistency. Now, I know no one’s going to reduce the rigor around their financial reporting process just because SEC leadership says it’s focused on lying, cheating and stealing, but it seems worth reiterating because everyone’s paying close attention to rapidly evolving areas like AI, where everything’s new and shiny and moving a mile a minute — and disclosure controls may be struggling to keep up.

– Meredith Ervine