As a Cleveland Browns fan, I thought I’d seen it all over the course of the past two decades – a veritable “12 Days of Christmas” of incompetence & hilarity:
The Browns have been so dependably inept for so long that they’ve lent their name to a new word to describe staggeringly incompetent behavior – “Brownsing.” So, I guess I shouldn’t have been completely surprised when the SEC announced that (now former) Browns LB Mychal Kendricks had been charged with insider trading. But as jaded as I am about my favorite team, this was something new:
The SEC alleges that after meeting at a party, Mychal Kendricks began receiving illegal tips from Damilare Sonoiki, an analyst at an investment bank who had access to confidential, nonpublic information about upcoming corporate mergers. Kendricks allegedly made $1.2 million in illegal profits by purchasing securities in companies that were soon to be acquired and then selling his positions after the deals were publicly announced, in one instance generating a nearly 400 percent return on his investment in just two weeks.
In return for $1.2 million in alleged profits, Kendricks lost a $3.5 million payday from the Browns, will undoubtedly face a significant civil penalty from the SEC, and – because the US Attorney’s Office in Philly has also brought criminal charges – potentially faces up to a year in prison. Yes, this is some next-level Brownsing for sure.
Kendricks isn’t the first NFL player to get on the wrong side of the securities laws. Former NY Giants DB Will Allen pled guilty last year to charges brought in connection with his role in an investment scheme targeting athletes. In 1999, Hall of Fame QB Fran Tarkenton consented to an injunction against future violations of the securities laws, including Rule 10b-5, for his role in an alleged fraud scheme.
Materiality Definition: FASB Goes Back to SAB 99
We’ve previously blogged about FASB’s controversial efforts to amend the definition of “materiality” for purposes of financial statement disclosure. At the end of August, FASB amended Accounting Concepts Statement No. 8 to address materiality.
This recent blog from Cydney Posner says that with the amendment, FASB has hopped into Marty McFly’s DeLorean & traveled about a decade back in time. Here’s the intro:
In 2015, FASB sent a number of stakeholders into a tizzy when it issued two exposure drafts, part of its disclosure framework project, intended to “clarify the concept of materiality.” After hearing from any number of preparers, practitioners and other commenters, FASB has now reversed course.
According to FASB, the “main amendment” in Amendments to Statement of Financial Accounting Concepts No. 8, issued at the end of August, “reinstates the definition of materiality that was in FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, which was superseded in 2010.” In other words, it’s back to SAB 99.
Elad Roisman Confirmed as SEC Commissioner
Yesterday, the Senate confirmed former Senate Banking Committee staffer Elad Roisman to serve as an SEC Commissioner. Once he is sworn in, his appointment means that the SEC will finally have a full slate of 5 Commissioners – at least for now. Commissioner Kara Stein is expected to leave her post at year end.
While media reports indicate that President Trump is likely to nominate Commissioner Stein’s former aide Allison Lee to fill Kara’s upcoming vacancy, that hasn’t happened yet. CNN Congressional Correspondent Phil Mattingly tweeted that it was interesting that Commissioner Roisman’s nomination was not paired with a nominee recommended by the Democrats, as often has been the case..
Tune in tomorrow for the webcast – “Nasdaq Speaks: Latest Developments & Interpretations” – to hear senior Nasdaq Staffers Arnold Golub, Lisa Roberts, Nikolai Utochkin and John Zecca discuss all the latest that Nasdaq-companies need to know.
Narcissism: Not a Desirable Part of a CEO’s Skill Set
This Stanford article says that a recent study concluded that companies led by overconfident, self-centered risk takers are likely to face a lot of lawsuits. Here’s an excerpt:
In an article published in Leadership Quarterly, O’Reilly and colleagues Bernadette Doerr and Jennifer A. Chatman of the University of California, Berkeley, show that narcissistic CEOs subject their organizations to potentially ruinous legal risks as well. Not only are they more likely to become embroiled in protracted litigation, but their personality traits make them less sensitive to objective assessments of risk. Narcissists are less willing to take advice from experts and to settle lawsuits — even when it’s likely that the company will lose.
I’ve gotta say, I’m pretty skeptical about this study – after all, this management style worked well for Hank Scorpio.
Securities Litigation: #MeToo Class Actions the New Normal?
Last week, a shareholder class action was filed against CBS following revelations of alleged sexual harassment by CEO Les Moonves. Over on the D&O Diary, Kevin LaCroix recently blogged that these lawsuits may represent the “new normal” for shareholder litigation. Here’s an excerpt:
The securities suit against CBS follows a now growing list of companies that have been hit with D&O lawsuits following revelations of sexual misconduct by one of the firm’s executives. Earlier this summer, National Beverage Corp. was hit with a securities suit following allegations that its CEO had sexually harassed company employees. Earlier suits have arisen involving Wynn Resorts and 21st Century Fox.
Kevin says it is increasingly clear that the accountability process arising out of revelations of sexual misconduct won’t just target the wrongdoer, but also other executives who allegedly facilitated the misconduct or turning a blind eye.
Time for an update on the Wu-Tang Clan’s crypto activities – and I’m afraid the news is bad. Very bad. Remember when I blogged about Ghostface Killah’s planned ICO for his C.R.E.A.M. (Cash Rules Everything Around Me) token? Sadly, this “Digital Music News” story reports that it has, shall we say, “underperformed”:
Back in January, a cryptocurrency company called Cream Capital hoped to raise $30 million through an initial coin offering (ICO). The company was named after the Wu-Tang Clan’s 1993 song, ‘C.R.E.A.M.’, which stands for ‘Cash Rules Everything Around Me’. Wu-Tang’s Ghostface Killah was a founding member of the company, and hoped his involvement with the cryptocurrency would help raise funds during its initial coin offering.
However, it appears as though the ICO hasn’t gone well, as the coin’s value has plunged more than 96% since it launched back in January. The Cream Dividend token initially went on sale back in November of 2017, when coins were sold for as little as $0.02 per coin. The price for the cryptocurrency subsequently spiked in January to a high of $0.12, before riding a downward trending wave. The current value of the coin at the time of writing is just $0.0045, making it a crypto-flop.
So, Ghostface Killah’s C.R.E.A.M. coin has lost 96% of its value. That’s not good – but if it’s any consolation, he’s got a lot of company among much higher-profile cryptocurrencies.
Sarbanes-Oxley Compliance: You Know It Don’t Come Easy. . .
Protiviti recently released its annual “Sarbanes-Oxley Compliance Survey”, which reviews companies’ compliance efforts & the costs associated with them. This year’s survey says even after 16 years, this stuff’s still not easy – costs for many companies continue to rise, & the hours commitment continues to grow. Here’s an excerpt with some of the key takeaways:
– Compliance costs continue to rise for many organizations but remain dependent on size, SOX year, filer status and more – Many organizations experienced increases in their SOX compliance costs during their last fiscal year, and those spending $2 million or more grew as well. However, annual compliance costs did decrease from the prior year for certain groups of companies.
– SOX compliance hours have increased significantly – There are likely many factors at play here, including changing organizational structures resulting from ongoing digital transformation efforts, as well as continuing PCAOB inspections of external auditors that are placing increased demands on their clients to perform more rigorous SOX compliance testing and reporting.
Perhaps surprisingly, the survey also says that the use of automated controls testing & process automation remains low – and that implementing these technologies represents a significant opportunity to improve the efficiency of the compliance process.
Sustainability: More On “Will Delaware’s Statute Move the Needle?”
I’ve previously blogged about Delaware’s new sustainability certification statute. This recent blog from Lois Yurow reviews the statute & considers the “why bother?” question. Here’s an excerpt:
So why would a company bother getting a certificate (and paying fees, and assuming a disclosure obligation)?
Every company is at liberty now, certificate or no certificate, to voluntarily issue a sustainability report. Indeed, 85% of the Fortune 500 published a sustainability report in 2017. No doubt those reports represent a genuine commitment on the part of the issuing companies. Still, it pays to consider who chooses what a given company reports on: what goals it adopts, what metrics it uses to gauge progress, who measures that progress, and what specific information will be shared. With voluntary reporting, companies have almost infinite flexibility.
Under the Certification Act, reporting entities will need to disclose “objective and factual” performance results, and each entity’s governing body will be required to specifically address those results, offering its view of whether they represent success. By imposing these rules, the statute responds to the ever lingering concern that at least some sustainability reports are as much about marketing as they are about real change. The public in general, and investors in particular, may find the Certification Act’s data-heavy reports more valuable.
We’ll see how this plays out – I guess I’m still in the “corporate equivalent of buying a Subaru” camp when it comes to this statute, but this is the first piece I’ve seen that articulates what might be in it for companies that are looking to do more than just signal their virtue.
Earlier this year, we blogged about the GAO’s assessment of the SEC’s efforts to promote better climate change disclosure. According to the GAO, the biggest constraint that the SEC faced in its efforts was its need to rely on self-reporting. But this Bloomberg article says that the SEC isn’t pushing companies to improve disclosure in this area:
The SEC last issued a climate change-related public comment letter in September 2016, when it asked Chevron to expand its risk factor disclosure related to California’s greenhouse gas emission regulations. Typically, the SEC issues such letters to companies with suggestions on how they can fill in gaps. But the agency has been silent during this administration.
The article says that during the Obama administration, the SEC issued 44 climate change-related comment letters, while the SEC under Chairman Jay Clayton hasn’t issued any.
In another climate change disclosure-related development, the WSJ recently reported that SEC has dropped its investigation of ExxonMobil’s disclosures about how it accounted for oil and gas assets. As the WSJ reported in 2016, the investigation centered on the impact of climate change on the company:
The SEC’s probe is homing in on how Exxon calculates the impact to its business from the world’s mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects.
The SEC’s investigation followed on a similar one initiated by the NY & Massachusetts AGs. That investigation continues, as does private class action litigation surrounding the company’s climate disclosure.
#Crypto Utopia: A Very Deep Dive on the Crypto Economy
Want to get up to speed fast on all things crypto? Check out #Crypto Utopia, a 124-page presentation on the current state of the cryptoeconomy – including an analysis of the market environment and regulatory & legal issues – from Autonomous.com and Latham & Watkins.
This recent “D&O Diary” blog says that the securities class action bar has latched on to Elon Musk’s ill-considered tweetstorm. Here’s an excerpt on the winners of the race to the courthouse:
On Friday, two Tesla shareholders filed separate securities class action lawsuits in the Northern District of California against Tesla and Musk. The first of the lawsuits, filed by Tesla shareholder William Chamberlain, purports to be filed on behalf of a class of shareholders who purchased or sold Tesla shares between August 7, 2018 and August 10, 2018, inclusive.
The second of the two lawsuits, filed by Tesla investor Kalman Isaacs, purports to be filed on behalf of a class of shareholders who purchased Tesla securities after 12:48 pm EST on August 7, 2018 (the time of Musk’s first take-private tweets) and including August 8, 2018. According to news reports, Issacs is a short seller who sustained significant losses purchasing shares at the inflated price to cover his short position. Both complaints allege that Musk’s tweets contained material misrepresentations in violation of the federal securities laws and seek to recover damages on behalf of the plaintiff class.
Subsequently, the class action lawsuits have continued to roll-in – and the alleged class period for the more recent complaints extends from August 7th through August 14th. That time frame includes the dates when media reports began to surface about the SEC’s decision to subpoena Tesla for information surrounding the tweets, when Elon penned a blog purporting to explain what he meant by “funding secured” (we’ll get to that in a minute), and when he apparently had a bizarre house guest.
Since 75% of those of you who took our recent poll are of the view that either Musk’s tweets violated the securities laws or that he is a supervillain, I don’t expect that you’re shedding a lot of crocodile tears over these developments.
Tesla Tweets: “Why, Elon, Why?”
Even if you’re enjoying his predicament (shame on you), you’ve got to be wondering – why on earth did Elon Musk end his tweet with the phrase “funding secured?” Lots of other people had the same question – and so he posted this blog explaining his comment:
Why did I say “funding secured”?
Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction. . .
Yada, yada, yada . . . Anyway, this goes on for another 424 words, making a total of 518 carefully chosen and undoubtedly heavily-lawyered words to explain 2 very ill-considered ones. Still, the manure content in this statement seems pretty high. This “MarketWatch” article says that the SEC still has lots of questions for Elon, so my guess is that his word count will go much higher before this is over (and Broc is quoted in that article).
I recently blogged about how CoinBase is laying the groundwork to possibly become the first “token securities exchange.” If so, it may want to take the recent comments from FinCEN’s Director Ken Blanco in this “ABA Journal” article to heart. He says that financial crimes enforcers are watching the crypto space—and they don’t like what they see.
The Treasury’s Financial Crimes Enforcement Network and the Internal Revenue Service “have examined over 30 percent of all registered virtual currency exchangers and administrators since 2014,” said Kenneth Blanco, FinCEN’s director, in an Aug. 9 speech to the Block (Legal) Tech conference at Chicago-Kent College of Law. “And there is no question we have noticed some compliance shortcomings.” Specifically, Blanco maintains that adequate money laundering controls are not put in place until a trading platform or peer-to-peer exchanger gets an investigation notice.
“Let this message go out clearly today: This does not constitute compliance,” he said. “Compliance does not begin because you may get caught, or because you are about to be discovered. That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate.”
Blanco’s comments were echoed by Amy Hartman, Assistant Director of the SEC’s Enforcement Cyber Unit, who expressed concerns about the potential for fraud associated with stateless virtual currencies & advised any company thinking about a coin offering to “engage competent securities counsel.”
My wife recently announced that we’re having a garage sale – which bums me out because now I have to help her clean the garage so the strangers who stop by to peruse our junk won’t think less of us. Anyway, last Friday, the SEC announced some garage cleaning of its own – in the form of this 314-page release adopting amendments to certain “redundant, duplicative, overlapping, outdated, or superseded” disclosure requirements.
There’s a lot to digest in the release, but this Steve Quinlivan blog provides a helpful guide to the changes. Here’s an excerpt summarizing the revisions to Item 101 of S-K:
The amendments revise Item 101 of Regulation S-K to eliminate required disclosures in the business description regarding:
– Financial information about segments
– Research and development spending
– Financial information about geographic areas, such as revenues from external customers in the issuers country of domicile and foreign countries, but where material must be covered in the MD&A
– Risks attendant to the foreign operations and any dependence on one or more of the registrant’s segments upon such foreign operations, but where material should be covered in risk factors
The SEC’s press release notes that the rule changes are part of Corp Fin’s initiative to review & improve disclosure requirements for the benefit of investors and issuers. We’re posting memos about this in our “Fast Act” Practice Area.
Beyond “Bedbugs”: More Corp Fin Actions to be Posted on Edgar
While this doesn’t appeal to the prurient interest nearly as much as the recent decision to post “bedbug” letters on Edgar, Corp Fin announced yesterday that it has decided to post more Staff actions on Edgar. Here’s an excerpt from the announcement:
Starting October 1, 2018, the Division will begin to release through EDGAR orders we issue granting or denying regulatory relief on behalf of the Commission, as identified below. We intend to continue our efforts to enhance transparency in subsequent phases by releasing additional types of documents, including those memorializing actions or positions taken by the Division staff, such as interpretive guidance and no-action relief.
Orders that will soon become available include Reg A & 1934 Act orders of effectiveness, orders declaring 1933 Act registration statements abandoned, and orders granting exemptions under the tender offer rules. This is pretty prosaic stuff, but stay tuned – availability of interpretive guidance & no-action relief on Edgar could be more interesting.
PCAOB Seeks Comment on Draft Strategic Plan For 1st Time
The PCAOB recently issued a draft of its 5-year Strategic Plan – and the accompanying press release notes that for the first time, it’s soliciting comments from the public. Here’s an excerpt from the press release with an overview of the key goals of the plan:
After its own careful study and a survey of PCAOB staff and the public, the new Board intends to:
– Broaden its approach to driving improvement in the quality of audit services and more clearly communicate how it is driving that improvement.
– Ensure that its inspections and standard-setting activities are responsive to and do not impede technological innovations.
– Engage proactively more often and directly with investors, audit committees, and other stakeholders to encourage relevant and timely conversations about the quality of audit services.
– Optimize PCAOB operations to more efficiently and effectively use resources.
– Reinforce the PCAOB’s culture of integrity, excellence, effectiveness, collaboration, and accountability.
So what’s behind the PCAOB’s decision to seek public input on its strategic plan? Here’s some insight from a recent Gibson Dunn blog:
Coming on the heels of a complete turnover of the Board and the subsequent departure of numerous senior personnel, the process by which the Board is crafting its strategic plan provides further evidence—if any were necessary—that this Board intends to seek out new ways to operate and to fulfill the PCAOB’s mission.
On Friday, President Trump announced via Twitter (naturally) that he had asked the SEC to study the possibility of moving from quarterly to semi-annual reporting for public companies. As we’ve previously blogged, this isn’t a new idea. Less frequent reporting also dovetails with recent calls from a “Who’s Who” of business groups & CEOs to eliminate the practice of providing quarterly earnings forecasts – but even many of these business leaders continue to endorse quarterly SEC reporting.
But if the SEC did move to a semi-annual reporting system, would that really help promote a longer-term focus? Would it even change the practice of releasing quarterly results? This MarketWatch editorial from last year by a group of B-school profs who studied the issue suggests that the answer to both questions may be “no.” Here’s an excerpt:
In 2014, the U.K. followed the E.U.’s directive and eliminated the requirement for quarterly reporting. Yet, less than 10% of all U.K. public companies have so far moved to semi-annual reporting. These were mainly companies involved in the energy and utility sectors, where investments of 20-30 years are typical. However, the investment level of companies moving back to semiannual reporting did not increase more than those companies continuing to report quarterly.
Accordingly, our research strongly suggests that moving from quarterly to semi-annual reporting is not an effective response to concerns about the undue corporate emphasis on short-termism. If quarterly reporting focuses company executives on profit maximization in the upcoming three months, then semi-annual reporting might logically focus these executives on attractive investments in the upcoming six months — not over the next three to five years.
In contrast, another recent study suggests that less frequent reporting may help reduce short-termism – but that study was based on a review of the effect of changes in reporting mandates that occurred long before the advent of the 24-hour news cycle, the Internet & social media.
In our current information-saturated environment, it might be a stretch to conclude that the behavior of public companies & investors would change much based solely on the SEC’s decision to reduce the frequency of mandatory reporting. I doubt companies would alter their internal accounting cycle or stop generating quarterly financials for internal use (and many probably would also voluntarily file 10-Qs). My guess is that our experience would mimic the UK’s – although you never know…
Investor groups are likely to strenuously oppose any effort to move to semi-annual reporting – this press release from the CII in response to the President’s announcement is a case in point. Also see this Vox article – and Cooley blog.
”The Accountable Capitalism Act”: Attacking Short-Termism From the Left
Meanwhile, in a parallel universe, Sen. Elizabeth Warren introduced her own prescription for short-termism – ”The Accountable Capitalism Act”. Under her proposal, all companies with $1 billion in annual revenues would be required to be chartered by the federal government. As this New Republic article explains, those federally-charted companies would also have some pretty unusual governance provisions:
Under the federal charter, companies would be required to consider the interests of workers, customers, communities, and society before making major decisions. Employees would elect at least 40% of all company directors, giving them representation on corporate boards.
That would involve worker representatives in decisions like whether to engage in political spending, which would require sign-off from 75% of all directors and shareholders. Finally, executives who receive shares of stock as compensation would have to hold them for at least five years.
Sen. Warren explained the rationale for her legislation in this WSJ editorial. Here’s an excerpt:
As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” This approach worked. American companies and workers thrived.
Late in the 20th century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns. By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”
That shift has had a tremendous effect on the economy. In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. Because the wealthiest 10% of U.S. households own 84% of American-held shares, the obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer.
I’m no pundit, but I’ll still go out on a limb and say that in the current political climate, my beloved Cleveland Browns have a better chance of winning the Super Bowl than this legislation does of getting enacted.
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This FEI blog reports that the number of Form 8-K filings peaked in 2005 & is now approaching pre-Sarbanes-Oxley levels. The SEC’s rules expanding the items triggering an 8-K reporting obligation went into effect in August 2004. Over 112,000 8-Ks were filed in 2005 – the first full year of the new regime – and the number’s been on the decline ever since. Last year, approximately 69,000 8-Ks were filed, compared with 65,000 during 2003.
Why the decline? The blog speculates that increased use of social media for communicating information to investors may have something to do with it. But I kind of think that ignores the elephant in the room – the number of public companies has fallen off a cliff.
Here are some thoughts from WilmerHale’s David Westenberg on what’s behind the decline in 8-K filings:
I think the most important reason for the decline in 8-K filings is the change in executive compensation disclosure requirements. This trend is evident when you look at the data on a per-issuer basis. Below is an extract from my IPO book, describing an analysis we did on this subject. I have not yet updated the data for 2017 but do not expect any significant change in this trend.
“Since 2003, many new categories of reportable events were added to the Form 8-K rules, moving Exchange Act reporting closer to a real-time basis. As a result, a typical public company now files many more Form 8-Ks per year than it did prior to the rule changes.
Based on an unscientific sampling of Form 8-K filings by 57 public companies of various sizes across sectors, the median number of Form 8-Ks filed by these companies annually between 2000 and 2002, the three-year period before the rule changes, was 2.67, and the median number of Form 8-Ks filed by the same companies annually between 2005 and 2007, the three-year period following the rule changes, was 13.33.
In the 2000 to 2002 period, the most Form 8-K filings by any of the surveyed companies in any one year was 28; two of the surveyed companies did not make a single Form 8-K filing during this period, and five companies filed only one Form 8-K each.
In the 2005 to 2007 period, the most Form 8-K filings by any of the surveyed companies in any one year was 53, and the fewest was five. Form 8-K filings have since declined in number due to further rule amendments in late 2006 and subsequent SEC staff interpretations regarding the reporting of executive compensation arrangements.
Between 2008 and 2016, among the 38 companies from the original sample that remained independent throughout this period, the median number of Form 8-Ks filed annually was 11.95; the highest number of Form 8-K filings in any one year was 41, and the lowest was four. All of the foregoing data includes Form 8-Ks that are “furnished” under Item 2.02 and Item 7.01 rather than “filed.””
Board Diversity: An Activism Repellant?
If you need another reason to increase the number of women on your board, try this one on for size – there’s a study suggesting a correlation between the number of women directors a company has & the likelihood that it won’t be an activist target. This excerpt from a recent “Corporate Secretary” article lays it out:
According to a study of 1,854 public groups by the Alvarez & Marsal (A&M) consultancy, European businesses that have more female directors are less likely to be targeted by activist investors. The analysis found that companies not targeted by hedge fund activists had, on average, 13.4 percent more women on their boards.
Paul Kinrade, managing director at A&M, said there are many factors that can result in a business coming under scrutiny from activists, including diversity. ‘We would not go so far as to say that gender mix is a primary driver of shareholder activism, but our research shows it is certainly a factor and it demonstrates the value of a greater diversity of thinking at board level,’ he said. ‘A board that contains a broader and more rounded view on the disruptive forces in their given markets will increase a company’s resilience and flexibility.’
The study only addressed European companies, but it would be interesting to see data on the US experience.
Lease Accounting: Things Are Looking Sort of Grim
When we last updated you about the status of implementation efforts for FASB’s new lease accounting standard, nobody was ready, Wall Street analysts didn’t care, but the SEC very much did. According to this recent Deloitte report, the clock is still ticking – but the mood among financial execs is darkening. Here’s an excerpt from the press release announcing the report:
Deloitte’s April 2018 poll of more than 2,170 C-suite and other executives shows confidence is declining as those feeling unprepared to comply (29.5%) nearly double those feeling prepared (15.6%). This represents a drop from January 2018 statistics: unprepared (22.4%) and prepared (19%). Moreover, nearly one-half of executives (49.3%) report they are either “very” or “somewhat” concerned about implementing on time—up from 47.1% in May 2017.
The new standard goes into effect on January 1, 2019, and while FASB continues to try to lift accountants’ spirits by providing additional relief from certain aspects of the new standard, it still looks like things might get ugly.
Yesterday, a federal grand jury indicted Congressman Chris Collins (R-NY) on a variety of fraud-related charges arising out of alleged insider trading in an Australian biotech company for which he served as a director. He was also charged with making false statements to the FBI. Parallel civil securities fraud charges were filed by the SEC (for the newbies out there, the SEC only has the authority to bring civil charges; not criminal).
According to the indictment, Rep. Collins disclosed to his son the negative results of a clinical trial for a drug being developed by his company. In turn, Collins’s son, along with his future father-in-law, allegedly sold shares in the company on the basis of the non-public information about the trial results & tipped other persons who also traded. Both of those men were also indicted.
Rep. Collins’s involvement with this company has been the subject of an investigation by the House Ethics Committee. He has denied the charges made against him.
Members of Congress have long demonstrated uncanny abilities as stock pickers – particularly when it comes to industries for which they have oversight responsibilities. In 2012, Congress enacted the STOCK Act, which was intended to combat legislative insider trading. But according to this “Washington Post” editorial, its results have been mixed. The number of trades by legislators has declined sharply since the statute was enacted, but as this excerpt notes, problematic trading practices remain:
Of the senators who remain active in the stock market, they have a high propensity for trading stocks in businesses they directly oversee from their committees. From these perches, members of Congress often are privy to information that could directly affect the value of stocks, posing a serious conflict of interest when trading in those markets.
Politico found a similarly disturbing trend in both chambers of Congress. Politico identified about 30 percent of members of the House and Senate who are currently active in the stock market. Several of these members play in the markets over which they have some direct legislative responsibility — in some cases, even sponsoring legislation that could have a direct bearing on their stock investments.
Regardless of its outcome, the Collins case is a reminder that insider trading on Capitol Hill remains a live issue – and that there’s still a lot of work necessary to drain this part of the swamp.
More On “To Reg FD & Beyond!” – Mr. Musk, We’d Like a Word With You. . .
In what may be the least surprising development in the history of securities regulation, the WSJ is reporting that the SEC has come knocking on Tesla’s door to discuss Tuesday’s series of extraordinary events:
Securities regulators have inquired with Tesla about Chief Executive Elon Musk’s announcement that he may take the company private and whether his claim was factual, people familiar with the matter said.
The SEC has asked the company whether Mr. Musk’s unusual surprise announcement on Tuesday was factual, the people said. The regulator also asked about why the disclosure was made on Twitter rather than in a regulatory filing, and whether the firm believes the announcement complies with investor-protection rules, the people said.
Meanwhile, there continues to be media speculation about whether Musk’s announcement of a possible Tesla buyout via Twitter violated the securities laws.
Poll: Did He or Didn’t He?
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So, Elon Musk arrived at work yesterday and decided to tweet this:
Utter chaos then ensued. More tweets followed, Tesla’s stock soared, shorts got squeezed, Nasdaq halted trading, Tesla blogged more details, and the stock began trading again & closed up 11% on the day. Meanwhile, people began to chatter about whether Musk violated Reg FD – or whether he might face bigger legal woes.
The Reg FD issue is an interesting one. Over on “Broc Tales,” Broc had a great blog a while back about the perils of CEO social media accounts & the potential need for a “Twitter baby-sitter.” Mindful of the Netflix 21(a) report, I took a quick look at Tesla’s investor page & didn’t notice anything indicating that Elon’s twitter feed would be a channel of investor information – but that’s because it happened so long ago, in a 2013 Form 8-K (hat tip to this MarketWatch article). Tesla did this in November 2013, the tail end of when a slew of companies filed this type of 8-K in the wake of the SEC’s latest social media guidance (companies seem to have stopped filing those 8-Ks, but that’s for another blog). So, maybe there’s an issue – or maybe there’s not?
Elon Musk has 22 million followers & has been using his Twitter account to share info with investors for years, so it seems like a stretch to say that his tweets aren’t a “recognized channel” for Tesla information by now – particularly given that Tesla 8-K’ed about it five years ago. He’s practically. . . umm – is “presidential” the right word? – in his use of social media to get information out, so while I doubt Elon cares much about Reg FD, my initial impression is that he’s got a decent argument that he hasn’t run afoul of it.
In any case, Reg FD just might turn out to be the least of Elon’s problems when it comes to his unconventional approach to disclosure. As Prof. John Coffee noted in this “Yahoo! Finance” article, Musk may face some exposure if he fudged about the financing:
If Musk’s aim was to temporarily boost Tesla’s stock in order to force losses on short sellers, it could be considered stock manipulation, which is illegal. “That’s too inviting to a plaintiff’s lawyer not to sue,” says Coffee. “This would be an attractive lawsuit. The people who think he’s manipulating the market would say they’ve suffered an injury, and you could pull all those losses together in a class action.”
If, on the other hand, Musk can demonstrate that he has actually arranged financing for a private buyout, or made serious efforts to do so, he might be off the hook.
It should be very entertaining to watch this whole thing unfold, but there’s one question that I’m just dying to get an answer to – what did Elon’s lawyers do to make him hate them this much? Tesla lawyers, the Excedrin’s on me!
Sustainability: Beware The Golden State, Delaware Virtue Signalers!
A few weeks ago, I blogged about Delaware’s new voluntary sustainability certification regime. The state’s new statute goes to considerable lengths to disclaim any liability for actions that boards & corporations take with respect to it – but this recent blog from Keith Bishop says “not so fast.”
It turns out that those companies that want to hang out Delaware’s gold star for sustainability may find themselves in the cross-hairs in California. Here’s an excerpt:
California has enacted an extremely broad unfair competition law, Bus. & Prof. Code § 17200, that seeks to protect both consumers and competitors from any unlawful, unfair or fraudulent business act or practice. By proscribing unlawful competition, California’s UCL does not enforce the borrowed statute, but treats them as unlawful practices that the UCL makes independently actionable. Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999).
When the inevitable UCL suit is filed in California against a Delaware corporation for allegedly false or misleading “virtue signaling” under the Delaware statute, the California courts will face interesting questions of conflict of laws and comity.
Looks like there’s still no such thing as a free lunch.
Succession Planning: Most CEOs Say They Weren’t Ready
CEO succession planning has become an increasingly important issue – and as Broc recently noted, one that’s even made an appearance in pop culture. However, if you measure a company’s succession planning efforts by the readiness of a new CEO to grab the reins, this Harvard Business Review article says that there’s a lot more work to be done.
According to the article, 68% of CEOs say that they weren’t fully ready for their job – and as this excerpt suggests, that’s not the only shortcoming when it comes to succession planning:
This signals that something is missing in internal hiring and development processes, and in board management of CEOs. Indeed, among CEOs who’d risen in the ranks through their firms, only 28% told us they’d been adequately prepared for the top job, and among all respondents, only 38% said they turned to their board chairman for honest feedback, while only 28% sought counsel from non-chairmen directors.
Egads! That’s practically the definition of a dysfunctional process.
