Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Last week, a new study by an accounting professor and a doctoral student became a minor media darling as it shows that stock trades by SEC Staffers produce abnormal returns. Here are the study’s two findings, which I’ll quote from the bottom of page 1: “We find that at least some of these SEC employee trading profits are information based, as they tend to divest (i) in the run – up to SEC enforcement actions; and (ii) in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC and the appearance of the electronic record of such sale online on EDGAR.” [Here’s my 4-minute video on “5 Reasons Why ‘SEC Staff as Insider Traders’ Study Is Bogus.”]
The Mass Media Blindly Eats It Up
Even though there are a kabillion studies every year, this one was reported by one media outlet – and a few others followed like lemmings. Some were really out of hand such as this one entitled “The SEC Should Really Start a Hedge Fund.” That articles notes there were 4k trades in individual stocks – over a period of 2.25 years – made by 4k staffers and claims it was excessive trading! Really? An average of one trade per Staffer over two years is excessive? Journalism today! If I report it, it must be true.
How the Study Was Conducted
Anyways, let’s go ahead and analyze the study. The authors were able to obtain data of the trades made by all Staffers over this 2-year period – but not the identity of the traders. This means they couldn’t tell if an individual trader made or lost money in a transaction – nor whether those trading worked in jobs where they might have advance knowledge of actions that could move a stock price.
Those are pretty big limitations – but yet this professor is telling reporters: “It does suggest it is likely, or probable, that something is going on.” Pretty damaging thing to say. Hopefully, it’s based on some knowledge of how the SEC’s ethical rules work – and how SEC Staffers are (and aren’t) permitted to trade? Yeah, right. At the bottom of page 3 of the study, the authors say “Insiders file open market transaction records with the SEC every month.” Um, the Section 16 rules were revised over a decade ago requiring Form 4s to be filed within 2 business days of the trade. Clearly, this accounting professor & student don’t know much about the SEC’s rules. Anyways, let’s forget that we’re not dealing with securities law gurus and get to the meat…
The SEC Staff’s “Form 144” Informational Advantage? A Real Laugher!
I’m gonna deal with the study’s second finding first because it’s so ridiculous. The authors completely don’t understand Form 144s – which are still required to be filed on paper – and the timing of when they are filed. As noted on page 24-25 of the study, they think that the Staff gets access to the information on them before the same data is filed on Form 4s on EDGAR. They think Staffers are running down to the Public Reference Room in the SEC’s basement to look at the lone filing cabinet containing the paper filings of Form 144s (I recently visited that filing cabinet and no one ever visits it; a separate blog on that is forthcoming).
In fact, the real world is that the complete opposite happens! That’s one of the reasons we submitted this rulemaking petition to the SEC a few months ago asking that the agency require electronic filing of Form 144 (and thus we would have joint Form 4/144 filings). In our petition, we argue that the Form 144s for insiders are currently useless because the information they contain typically has already been filed on Form 4s!
Let’s get to the heart of the other part of the study – trading in the “run up” to Enforcement actions. Here are five explanations that could debunk the theory that SEC Staffers are insider trading – there probably are more, but five should be enough to give someone pause before saying something that would needlessly damage the agency’s reputation:
1. SEC Staffers Forced to Sell Financial Services Stocks After Join the Staff – SEC Staffers are not allowed to hold financial-related stocks – but those restrictions only kick in after they join the agency. That means that there is a steady stream of sales of financial stocks as new employees join. The study shows just that: SEC employees sell financial stocks much more than they buy them, and more than other types of stocks. If over the period in the study, financial stocks underperform the broader market (as they did, returning -5% while the market grew by +24%), a virtual portfolio that net sells financials would outperform a baseline portfolio. [I got this one from a comment on a news article.]
In other words, there is a sell-side bias in the SEC’s trading due to forced divestment – so comparing the percentage of sell transactions by the SEC Staff to the 50% figure for the market as a whole (a pretty trivial figure, because the market as a whole has to balance buys and sells or else the market wouldn’t clear) is not very meaningful.
2. “Need to Know” Culture Severely Limits Opportunities – Having worked at the SEC twice – and in a role dealing with a lot of Enforcement actions – I can tell you that very few Staffers have access to how a particular investigation is going. All employees have access to a database showing all of the investigations – but the ratio of investigations that appear in that database compared to ones that ultimately go anywhere probably is in the 50-to-1 range. On page 10 of the study, the authors note that the SEC has 4000 open investigations at a time.
If an Enforcement Staffer comes across anything suspicious, they will open a “Matter Under Investigation” (known as a “MUI”) – but in most cases, these MUI’s don’t go anywhere. Sort of like a sales lead. Over the course of a month, a salesperson might have hundreds of leads, but maybe pursue only a few dozen – and close only two sales. So having knowledge that a MUI exists is fairly meaningless. Which means that this statement on page 5 of the study is without a basis: “While many bureaucratic government positions provide opportunities for access to privileged information on which the bureaucrat can trade profitably, few agencies provide such opportunities with the regularity of the SEC.”
The SEC has rules to safeguard confidential information – so knowledge about the details of specific matters and facts are limited to those working on the matter. So only those 2-3 persons in Enforcement actively working an investigation will be the ones who know whether a particular case might be going anywhere. And there are all sorts of investigations that wouldn’t move a stock price even they became publicly known (eg. garden variety insider trading case). The real market movers are the financial fraud cases – and there are not that many of those cases brought by the SEC. A handful each year.
3. Enforcement Staff Knows They Are Under Surveillance – When you join the SEC and you see how the Market Surveillance Unit in Enforcement can so easily catch folks who conduct trades based on illegal material nonpublic information, you become amazed that anyone would be so stupid to try to insider trade. This Unit investigates all trades with abnormal returns – that is, all trades just before a major announcement. While not everyone on the Staff is a genius, there are very few who would be dumb enough to engage in one of those abnormal trades when they are so aware how closely other SEC Staffers are looking at them.
4. If SEC Staffers Really Wanted to Profit, They Wouldn’t Sell – They Would Buy – Generally, stock prices go up once settlements with the SEC are announced since that ends the uncertainty which the market detests. If a SEC Staffer has inside knowledge about a pending settlement, why would they sell? Yet, the study is mostly about Staffers profiting from selling.
5. SEC Staffers Should Know The Market Better – This one is from King & Spalding’s Russ Ryan: It should not be surprising that people who are so interested in the securities markets – and who devote their entire careers to the subject matter – are likely to be better educated, sophisticated, and able to understand risks, disclosures, and financial records than the average bear. By analogy, I suspect that on average, high school varsity athletes do better at fantasy sports than the student body at large, and no rational person would suspect cheating based on that correlation.
The Bottom Line: Irresponsible Academics & Journalists
I’m not saying it’s not possible that a few rogue Staffers somehow work the halls and find out information that allow them to trade favorably. This would involve breaking the SEC’s ethics rules, which happens occasionally rarely. If more than a handful of SEC Staffers truly were doing this, news would have leaked well before this.
The bottom line is that the notion that there is more than a tiny fraction of the SEC staff that would risk their jobs and reputations like this is absurd. The SEC Staff typically come in two types (with many hybrids): Those who hope to work there for a long time – and those who hope some day to parlay their experience into a higher paying job in the private sector. Getting caught at insider trading would be so obviously fatal to either path that it is virtually inconceivable that someone would take that risk, especially knowing what a unique media feeding frenzy would accompany any discovery of insider trading by a Staffer of the very agency that polices it.
So let’s take this study means with a lot of salt please. It’s mind-boggling to me that a professor would take the time to slug through all this data and draw up some conclusions without doing any research into the subject matter and considering a variety of possible explanations. I’m not as surprised about the mass media not bothering to ask anyone with real knowledge to verify the study – as I gave up on most journalists a long time ago…
More on the Bogus Study: A Possible Sixth Reason
And here’s another possible explanation for the study results that is more subtle that I received from a member:
This possible explanation would require a bit of research. With respect to the six companies that are featured in Table 3 (Bank of America, General Electric, Citi, Johnson & Johnson, JP Morgan, and General Electric), measuring sales 30, 45, 60, and 90 days before the announcement of the SEC’s enforcement action may tell you little or nothing about an SEC Staff “informational advantage” if those companies had already publicly disclosed the SEC investigation during one of those time periods, or even before them, as many companies do these days.
If a company has already disclosed the investigation, and particularly if it has disclosed a Wells notice or an agreement in principle to settle the SEC matter, then the SEC enforcement case would already be reflected in the market price of the stock by the time the SEC got around to publicly announcing the case, negating an “informational advantage” for the SEC Staff.
In that situation, you also would be particularly likely to see the “uncertainty-ending” upward bounce that you suggest below. Needless to say I have no idea what you would see if you looked at SEC Staff transactions 30-90 days before the company’s disclosure of the SEC matter, but the data wouldn’t be the same as the data the authors present, and also would be measured by an event that the Staff couldn’t control, which also would blunt the “informational advantage” that the authors seem so confident about.
Finally, unless I missed it, the study doesn’t say what happened to the six companies stock prices post-enforcement action. It wouldn’t shock me if some – or most – of them went up once the SEC case was behind them. If that were the case, the SEC Staffers missed out on some gains.
Webcast: “M&A Litigation: The View from Both Sides”
Tune in today for the DealLawyers.com webcast – “M&A Litigation: The View from Both Sides” – to hear Robbins Geller’s Randy Baron, Wilson Sonsini’s David Berger, Grant & Eisenhofer’s Stuart Grant and Morris Nichols’ Bill Lafferty analyze the latest wave of M&A litigation that has permeated nearly all deals. This program features two lawyers from the plaintiff’s side – and two from the defense perspective.
On February 26, 2014, the Supreme Court decided Chadbourne & Parke LLP v. Troice, 571 U.S. ___ (2014), ruling by a 7-2 vote that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not bar state-law securities class actions in which the plaintiffs allege that they purchased uncovered securities that the defendants misrepresented were backed by covered securities.
The decision is the first in which the Court has held that a state-law suit pertaining to securities fraud is not precluded by SLUSA, suggesting that there are limits to the broad interpretation of SLUSA’s preclusion provision that the Court has recognized in previous cases. While Chadbourne leaves many questions unanswered concerning the precise contours of SLUSA preclusion, and could encourage plaintiffs to pursue securities-fraud claims under state-law theories, the unusual facts in Chadbourne could limit the reach of the holding and provide defendants with avenues for distinguishing more typical state-law claims in other cases.
DC’s Big Snow Storm: Will the SEC Still Declare Your Filings Effective?
In DC, all federal government agencies are closed due to yet another snowstorm. I’ve blogged numerous times over the years about the impact of a closed government on the operations of the SEC and Corp Fin specifically. Even though there is no weather-related information posted on the SEC’s site so far today, we can assume that the information in this blog holds true today. The main points are:
– EDGAR Still Operational – Federal government closings due to weather doesn’t shut down EDGAR – so filings can continue to be made despite the snow storm (so yes, any forms due today are still due today – many 10-Ks are due today).
– Critical Registration Statements Can Still Be Declared Effective – Corp Fin has procedures in place to help as Staffers are available to assist with filings even though the government is shut down by the storm. When OPM shuts down the government in DC, emergency personnel (ie. “essential”) still must show up for work – and as a result there will be Corp Fin staffers available to ensure that essential operations continue.
The most important thing when faced with this situation is getting in touch with someone at the SEC – leaving a message with the examiner assigned to your filing probably isn’t going to be sufficient. Rather, you will need to work the phones to get in touch with (or leave a message for) the Assistant Director of the group that is handling your filing, or call the Corp Fin Front Office. These numbers are available in our constantly-updated “Corp Fin Staff Organization Chart.” To play it safe, you should attempt to make contact with the Staff as soon as possible if you anticipate a need to go effective this week so that any last minute issues can be resolved.
– Non-Critical Registration Statements Not Going Anywhere Today – If you are expecting comments from Corp Fin and there is no urgent need to go effective, you may experience some delay in the processing of your filing thanks to the snow. There is no need to contact the limited Staff available to ask about the status of your comments, because they probably won’t be able to step in and move the process along, particularly right now. The Staffers that are available during the government shutdown are really there to deal with the most urgent situations, so bogging them down with less urgent matters is not the best idea…
Our March Eminders is Posted!
We have posted the March issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
In her blog, Francine McKenna describes – in great detail – how an audit committee member came to become a whistleblower. That’s something I had never heard of happening before. The whistleblower director was at AgFeed, one of the Chinese frauds in the news…
Cat Fight? NASAA Kindly Objects to SEC’s Regulation A+ Proposal – Other State Commissioners Not So Much
As Keith Bishop blogs, the association for state securities regulators – NASAA – recently submitted this comment letter on the SEC’s Regulation A+ proposal, objecting to potentially being exempted from these offerings.
Keith goes on to note 3 other comment letters – from the state securities commissioners in Arkansas, Nebraska and Massachusetts – who complained much more loudly. As Keith notes, states really have lost much of their regulatory authority over the years and maybe they are at that “last gasp” stage. Sorry states! It’s not a battle you are likely to win. The “futures” on blue sky lawyers just went down another 10%…
Next-Gen Datarooms
In this DealLawyers.com podcast, Matt Little of PKWARE explains how his software enables lawyers and other deal participants to securely access and share files without using a data room, including:
– What can happen if practitioners don’t address data security issues if they aren’t using a traditional or virtual data room?
– Minimum someone should do to address data security challenges?
– What Viivo is, and how it’s used in the context of a deal?
– What factors should be considered in determining whether to use a product like Viivo vs. a data room?
– What are some success stories?
One of the strangest things in corporate governance is that more than a few companies take the cardinal rule of “Our customers are always right” – and add the premise of “But our owners are always wrong.” I’m worldly enough to recognize that not all shareholders are the same – and thus, some truly are adversarial to management – but that still doesn’t explain why some companies go to great lengths to treat most shareholders with little respect (for example, holding annual meetings in far-flung locations).
To highlight this oddity, we have entered into an era of “shareholder engagement.” A good thing – but it boggles my mind that companies hadn’t been engaging with their shareholders all along. Anyways, the latest wisdom in this area is the new “SDX Protocol,” which is a set of 10 common sense principles that companies & shareholders can use to help them engage (you have to register to access it, but it’s free).
In this podcast, Anthony Goodman of Tapestry Networks (who led the SDX Protocol meetings) explains the new SDX Protocol, including:
– Can you explain who you and Tapestry are?
– What were the origins of the project?
– How often did the working group get together?
– Any principles left on the cutting room floor?
– What exactly is management’s role in engagement?
– Any surprises by the reaction to the announcement of the protocol?
– Any additional activity going forward?
By the way, in his blog last night, Mark Borges highlighted a nice piece of disclosure by a company about its shareholder engagement efforts – includes disclosure of the % of shareholders that were engaged…
Icahn Weighs In: The SDX Protocol
Meahwhile, Carl Icahn weighed in on the new protocol by saying it has “tremendous potential” – and noting that he doesn’t buy positions of a company for a quick pop. Carl provides a table with a list of his investments and the tenure of his holdings. Here is an excerpt from his piece:
It is, of course, incumbent upon institutional shareholders to be responsible stewards of the funds they manage, and the Shareholder-Director Exchange has the potential to create an open path for these shareholders to engage in meaningful dialogue with the directors who oversee their investments. However, as highlighted by Kenneth Squire, publisher of The Activist Report, there are some troubling aspects of the 10-point protocol for engagement that was released by the Shareholder-Director Exchange. For example, I see no reason why a director should consider a shareholder’s voting history when deciding whether or not to hear that shareholder’s concerns. No shareholder should ever be penalized for exercising their inherent right to vote how they see fit.
Nevertheless, the formation of the Shareholder-Director Exchange is in and of itself a positive development if for no other reason than to stand in stark contrast to the hawkish approach that has for years been championed by firms, such as Wachtell, Lipton, Rosen & Katz LLP (“Wachtell Lipton”) and Goldman, Sachs & Co., who have made fortunes from corporate conflicts by spreading the implementation of entrenchment devices, like the poison pill and staggered board. Just recently Wachtell Lipton promoted a new entrenchment scheme whereby incumbent directors unilaterally amend a company’s bylaws to disqualify certain individuals from challenging their positions on the board – a move that was widely criticized and quickly discredited.
Pay Ratio Miscellany: Shareholder Proposals & Disclosures
With over 120k comments received by the SEC, the pay ratio proposal officially has garnered the 2nd highest number of comments in the SEC’s history. Just throwing that out there. For an example of a company that has used internal pay equity for years in setting its senior manager’s pay, check out this blog by Mark Borges, which summarizes the latest disclosures from Whole Foods.
Also, in the shareholder proposals area, some predicted there might be pay cap proposals that use pay ratios as the formula – particularly in light of what happened in Switzerland. This request for no-action relief by 3M bears that out…
With news of Rep. John Dingell announcing yesterday that he was retiring – the longest-serving Congressman in history – it brought back memories of “Dingell-grams.” In the ’90s, as head of the House Oversight Committee, Rep. Dingell would regularly send letters to the SEC asking for all kinds of information. This was a significant drain on senior SEC Staff resources.
At the time, I thought how crazy this was. Little did I know that – fast-forwarding two decades later – that Congressional requests to the SEC would increase by a factor of at least 3 or 4. It’s no longer just the heads of the Senate Banking & House Financial Service Committees that are interacting with the SEC – it’s nearly every member of those committees and their staff.
I’m not saying the SEC should be free from oversight. But many of the requests are “for show” – just like many Congressional hearings are – and the questions presented are made with minimal knowledge of the subject matter. It’s a shame and it’s a real problem because some experienced practitioners who might otherwise take a pay cut to serve our country working for the agency take a pass. They understandably don’t want to get caught up in the political maelstrom that permeates the halls of federal agencies these days. And those stuck working in the federal government spend a lot of time catering to Congress rather than focusing on their core mission…
What The? Exclusive Preview of Warren Buffett’s Annual Letter to Shareholders?
When I first saw the title of this Fortune article, I thought Warren Buffett’s popular letter to shareholders was now publicly available (and on it’s way to being furnished to the SEC, it is not “filed”). But I was surprised to see that the article was based on an “exclusive excerpt from his upcoming shareholder letter.” The article is general investment advice and not about Berkshire Hathaway – so I have no securities law concerns – it’s just so unusual to see a “special sneak” preview of a letter from the CEO…
Webcast: “The SEC Staff on M&A”
Tune in today for the DealLawyers.com webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Brian Breheny of Skadden Arps, Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.
I have just posted these recent survey results on conflict minerals:
1. We are a downstream company (ie. uses minerals in design/manufacture) required to conduct a “reasonable country of origin inquiry” (RCOI) and our process is:
– Engage 1st-tier suppliers with questionnaire; review responses; check any smelters identified against independent verified lists; no further action if no reason to believe from responses received (even if less than 100% response rate) that the conflict minerals may have originated in the covered countries – 65%
– Engage 1st-tier suppliers with questionnaire; review responses; check any smelters identified against independent verified lists; for unresponsive suppliers, perform further engagement (including 2nd-tier and above) – 25%
– No direct engagement with suppliers; rely solely on smelters identified on independent verified lists – 0%
– Outsource entire process to 3rd-party service provider & rely on their conclusions – 0%
– Other – 10%
2. We are a downstream company that sends questionnaires to 1st-tier suppliers and they’re non-responsive/unable to answer completely and our next step is:
– Nothing, we’re done – and will disclose that we have no reason to believe that conflict minerals may have originated in the covered countries – 3%
– Further engage 1st-tier supplier (eg. calling, e-mails) but not 2nd-tier supplier, etc. – 82%
– Further engage 1st-tier supplier, 2nd-tier supplier, etc. – 10%
– Other – 5%
3. If you choose “a” in #2 above, would you consider the company to have satisfied its RCOI obligation:
– Yes – 24%
– No – 38%
– Depends on what others are doing – 14%
– Not sure – 24%
4. Are you taking measures to ensure that your RCOI covers new products manufactured by the company up until December 31st:
– Yes, we have controls to monitor for new products with conflict minerals on a real time basis – 22%
– Yes, we have controls to monitor for new products with conflict minerals on a quarterly basis – 11%
– Yes, we have controls to monitor for new products with conflict minerals on a semi-annual basis – 16%
– Yes, we perform our RCOI once per year as of December 31 – 24%
– No, we perform our RCOI earlier in the year and do not worry about scanning for new products through December 31 – 27%
5. Has your company adopted a conflict minerals policy:
– Yes, we are adopting one responding to the new rule – 51%
– Yes, we had one prior to the new rule – 0%
– Yes, we had one prior to the new rule, but have updated it for the new rule – 0%
– No, but we’re considering it – 33%
– No, and we don’t plan to – 15%
6. If your company had to perform Step 3 of the new rule, how long did it take (soup-to-nuts)
– 0-3 months – 4%
– 3-6 months – 19%
– 6-9 months – 23%
– 9-12 months – 23%
– More than 12 months – 31%
Please take a moment to anonymously participate in our “Quick Survey on Proxy Drafting Responsibilities & Time Consumed” and “Quick Survey on D&O Questionnaires and Director Independence.” And here is an Akin Gump blog about the recent oral arguments in the appeal of the conflict minerals case.
Webcast: “The SEC Staff on International Issues”
Tune in today for the webcast – “The SEC Staff on International Issues” – to hear Paul Dudek, Chief of Corp Fin’s Office of International Corporate Finance, Alex Cohen of Latham & Watkins and Nick Kronfeld of Davis Polk discuss the latest rulemakings and interpretations on the international front.
Your Conflict Minerals Toolkit! January-February Issue of The Corporate Counsel
Dave & the gang did a yeoman’s job for the January-February issue of The Corporate Counsel that was just mailed, putting together a group of sample documents to go along with their analysis of complying with the new conflict mineral rules. The issue includes:
– Memorandum on Conflict Minerals Compliance
– Framework for the Analysis
– Conflict Minerals Policy
– Form SD and Conflict Minerals Report
Act Now: Get this issue rushed to when you try a 2014 No-Risk Trial today.
Mark Cuban takes in a securities law conference! News at 11! As noted in this DealBook article, Mark was tweeting up a storm during PLI’s “SEC Speaks” on Friday. Wearing a grey hoodie – gotta love that (jealous! although maybe akin to my hat-wearing at the Society conference last summer), Mark apparently sat through the entire day on Friday. Impressive stamina!
Here is a handful of Cuban’s tweets during the conference:
You might recall I had my own run-in with Cuban on Twitter last month, as noted in this blog…
One Degree of Separation: Me & Mark Cuban
So I didn’t go to the conference – and thus missed Mark – but Terence Rasmussen of CarMax caught up with Cuban & here is a pic of them together:
And then here is a pic of me with Terence a few hours later:
SCOTUS Briefs: SEC Files In Halliburton Fraud-on-the-Market Case
Over the weekend, the SEC posted its 49-page amicus curiae brief for the Supreme Court’s Halliburton Co. v. Erica P. John Fund case. Here’s a list of all the briefs so far. Oral argument is less than two weeks away, on Wednesday, March 5th…
In today’s entry on “The Mentor Blog,” I discuss an amicus brief submitted by the SEC in a whistleblower case…
Did you know that the disclaimer that SEC Staffers give when they speak is actually required by law? I recently learned that on my own even though I gave that disclaimer many times when I spoke in my capacity as a Staffer. Here is a 1-minute video about the disclaimer’s origins – I tried to inject some humor at the end:
Farewell to Sandra Folsom Kinsey
I’m sad to inform you that Sandra Folsom Kinsey recently passed away. Sandra worked at Hogan Lovells twice, both before and after a 12-year stint in Corp Fin during the ’90s and early ’00s, where she primarily worked in the Office of International Corporation Finance. She was a real sweetheart and we will miss her. She was married to Walt Kinsey, who also worked at the SEC. Here is an obituary, that also has a guest book.
FINRA Proposes More Changes to Corporate Financing Rule
In this blog, Steve Quinlivan notes that FINRA has proposed even more changes to Rule 5110 – on top of the ones I blogged a few weeks ago. These new proposed changes would impact unfair arrangements, termination fees and right of first refusals…
Hat tip to Bryan Cave’s Randy Wang & Jake Bielema – who represented the plaintiff Express Scripts – for alerting me to this summary judgment order by a federal court judge in Missouri against John Chevedden for including false & misleading statements in his proposal. As I blogged last month, this case was one of a few filed earlier this year against John – and the first time a judge has ruled against John outside of Texas.
Obviously, my prediction that John would win this case was dead wrong (my theory was the Corp Fin staff normally allows proponents to correct false & misleading statements before granting an exclusion request). In this case, the judge ruled that four statements were demonstrably false based on the company’s public filings and didn’t give an opportunity to cure.
Meanwhile, a new lawsuit was filed by EMC recently against Chevedden on ‘proposal by proxy’ grounds in a federal court in Massachusetts. Here is the complaint, posted in our “Shareholder Proposals” Practice Area…
Off & Running: 1st Say-on-Pay Failure of the Year
As noted in its Form 8-K, a nano-cap company, CSP is the first company holding its annual meeting in 2014 to fail to gain majority support for its say-on-pay with only 42% voting in favor. Hat tip to Karla Bos for pointing this out!
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Majority Support Prompts Verizon Bylaw on Proxy Access
– How to Update D&O Questionnaires for “Bad Actors”
– New Defensive Tactic Leads to Negative Recommendations for Director Elections
– 2014 Proxy Season Checklists
– Group of 70 Investors Pressure Companies to Assess Climate Change
– Survey: Directors Split on Governance Engagement
I recently field a question in our “Q&A Forum” – #7944 – about trends in new risk factors for this proxy season. I noted that some companies are revisiting their cybersecurity risk factor is light of the Target situation and the other security breaches in recent months.
Brink Dickerson of Troutman Sanders also noted that he is a bit surprised that more companies are not including conflict minerals risk factors. While he doubts that the conflict mineral disclosure regime is material, or that the failure to comply will in the early years have significant consequences, it is a big enough issue with some socially responsible investors and special interest groups that he was expecting to see more Form 10-K disclosure. Here is an example of a risk factor that he has suggested as a starting place:
The Company is subject to recently adopted SEC disclosure obligations relating to its use of so-called “conflict minerals” – columbite-tantalite, cassiterite (tin), wolframite (tungsten) and gold. These minerals are present in a significant number of the Company products. The disclosure obligations are complex, and there is little formal guidance with respect to their application. The first reports under the disclosure obligations are due to be filed with the SEC not later than May 2014 and cover the Company’s activities during 2013.
Although the Company expects to be able to file the required report on time, in preparing to do so it is dependent upon the implementation of new systems and processes and information supplied by its xxx+ suppliers of products that contain, or potentially contain, conflict minerals. To the extent that the information that it receives from its suppliers is inaccurate or inadequate or its processes in obtaining that information do not fulfill the SEC’s requirements, the Company could face both reputational and SEC enforcement risks.
He also expected to see more references in Item 1 or elsewhere to the existence of conflict minerals policies.
And then Dave Lynn added: I think another take on the conflict minerals disclosure that I have seen is that efforts to comply with the disclosure rules and to otherwise implement conflict-free sourcing policies is the extent to which changes to the supply chain can disrupt existing supply sources or cause more uncertainty with respect to the company’s supply chain. You could also envision how this might be relevant for the description of Business and perhaps MD&A as well depending on an issuer’s particular circumstances.
Steve Quinlivan notes that an industry group has launched the first integrated conflict minerals database for suppliers called “BOMcheck,” currently used by over 560 manufacturers to gather materials declarations from over 3,500 suppliers worldwide for more than 1.6 million parts.
Cybersecurity: SEC Calendars a Roundtable
On Friday, the SEC announced that it will hold a March 26th roundtable to discuss cybersecurity and the challenges it raises for market participants and companies, and how they are addressing those concerns.
Transcript: “How to Sell a Division: Nuts & Bolts”
I have posted the transcript for our recent DealLawyers.com webcast: “How to Sell a Division: Nuts & Bolts.”
