Broc recently blogged about last month’s Rule 701 enforcement proceeding against Credit Karma. As he pointed out, Rule 701 enforcement actions are pretty rare, but this “Compliance Week” article suggests that more may be on the way – thanks to an enforcement “sweep” being conducted out of the SEC’s San Francisco regional office. This excerpt says the sweep’s another reminder that private companies aren’t immune from SEC scrutiny:
“They came out pretty loudly in 2016 and said they had concerns that, as private companies grow ever-larger without going public, the SEC Enforcement Division ought to be paying more attention to those companies,” says Michael Dicke, co-chair of law firm Fenwick & West’s securities enforcement group, formally associate regional director for enforcement in the SEC’s San Francisco regional office.
“Everybody needs to understand that just because you are not a public or publicly reporting company you cannot think that the securities laws don’t apply to you. It doesn’t mean that the SEC cannot investigate you.”
Recently the Enforcement Division conducted a “sweep” through its San Francisco office and sent Rule 701 information requests to large pre-IPO companies.
“When they do a sweep, they are not targeting a particular company—and when they ask for information, they usually have a specific reason to ask for it,” Dicke explains.
The article says that the sweep may have been prompted by employee complaints about companies’ failure to provide the disclosures required under Rule 701.
This “Audit Analytics” blog reports that tax reform’s impact has added complexity to 4th quarter earnings disclosures – and that its effects on earnings will remain a moving target throughout the year:
Although the SEC issued guidance on how companies should explain the Tax Cut and Jobs Act’s impact in their fourth quarter earnings releases, the SEC said companies can use “reasonable estimates” to report charges or benefits now and update those figures later.
From a practical perspective, it means that the numbers may change throughout the year and that we would not understand the full impact of the tax reform until the end of 2018. While the Commission provided a general guideline, certain nuances of the disclosure such as presentation in the non-GAAP section, are out of the scope of the guidance.
In the past few years, aggressive non-GAAP adjustments were criticized more than once for masking significant expenses. Yet, in this case, companies almost have to exclude the one-time tax reform impact from the non-GAAP EPS data during earnings calls to give investors a more-accurate picture of company’s earnings.
The blog notes that 80% of S&P 500 companies adjusted their GAAP EPS for the impact of tax reform. Of those, 72% present the adjustment as a separate line item, while 28% combined it with other tax related items. Audit Analytics says it’s important to differentiate between adjustments related to tax reform & other non-standard tax adjustments, and points out some disclosure practices that it views as potential “red flags.”
Tax Reform: Financial Statement Impact
Tax reform disclosures are challenging because the legislation impacts financial statements in so many ways. Unrepatriated foreign earnings, tax levies, stranded tax effects, valuation allowance and disclosures all need to be addressed in financial reporting. This FEI blog reviews the potential impact of tax reform on each of these matters. Here’s an excerpt addressing stranded tax effects:
The tax effect related to changes in the tax law is always reflected in income tax expense (or benefit) from continuing operations, regardless of where the related tax provision or benefit was previously recorded. For entities that must remeasure for example, their available for sale security deferred tax positions for the new rate change, that may create a mismatch with the remeasured deferred tax position and the contra-AOCI asset or liability embedded in ‘All Other Comprehensive Income.’
Under FASB ASU 2018-02, entities must reclassify the stranded tax effects from AOCI to retained earnings for each period in which the effect of the tax rate change is recorded. The amount of the reclassification would be the difference between (1) the amount initially charged or credited directly to OCI at the previously enacted U.S. federal corporate income tax rate that remains in AOCI, and (2) the amount that would have been charged or credited directly to OCI using the newly enacted 21 percent rate, excluding the effect of any valuation allowance previously charged to income from continuing operations.
We’ve previously blogged about the recent popularity of the “Simple Agreement for Future Tokens” among companies engaging in coin offerings – and noted that questions had been raised about whether it was a viable solution for securities law compliance in token deals. Now, this “Crowdfund Insider” article suggests that Corp Fin may have a problem with the SAFT’s structure.
The issue seems to be whether the structure complies with the requirements of Securities Act CDI 139.01, which relates to registration of convertible securities and says that in the case of securities convertible only at the option of the issuer, the underlying securities must be registered at the time the convertible securities are registered. Here’s an excerpt:
A SAFT sold in a private security sale would give the investor the right to automatically receive tokens once the issuer registers its tokens with the SEC for public sale. Put another way, by using a SAFT an issuer is essentially doing a private pre-sale of its future public securities which is a big no-no in eyes of the SEC.
The above C&DI may not seem readily applicable on its face. However, I am currently working with CERES Coin LLC in connection with its proposed Rule 506(c)/Regulation A+ cryptocurrency offering, and have personally discussed this issue directly with the SEC.
The most important language with respect to the use of SAFTs is the underlined language above. As the SEC sees it, if a SAFT investor will automatically receive tokens in the future when (and if) the tokens are registered, without any other investor involvement, then the tokens need to be registered as of the date the SAFT is sold … period.
This Proskauer blog also suggests that the SAFT structure is under scrutiny by the SEC. Given the SAFT’s apparent popularity, if the concerns reflected in the article represent the Staff’s consensus view, some more formal guidance may be appropriate. Don’t forget our upcoming webcast: “The Latest on ICOs/Token Deals.”
ICOs: Blue Sky Cops Are On the Crypto Beat
This Cleary blog says that it isn’t just the SEC that’s on the prowl for rogue coin deals – the blue sky folks are getting into the game as well. The blog reports that Massachusetts just made a big splash by putting a halt to 5 offerings that failed to comply with state securities registration requirements. Here’s the intro:
On March 27, 2018, Massachusetts Secretary of State William Galvin announced that the state had ordered five firms to halt initial coin offerings (“ICOs”) on the grounds that the ICOs constituted unregistered offerings of securities but made no allegations of fraud. These orders follow a growing line of state enforcement actions aimed at ICOs.
This was not Massachusetts’s first foray into regulating ICOs. On January 17, 2018 the state filed a complaint alleging violations of securities and broker-dealer registration requirements against the company Caviar and its founder for an ICO that sought to create a “pooled investment fund with hedged exposure to crypto-assets and real estate debt.”
As the blog suggests, Massachusetts isn’t alone – other states are applying a gimlet eye to coin offerings in their jurisdictions.
It looks like the message regulators are sending about the applicability of the securities laws to token deals is getting across. For instance, this WSJ article says that cryptocurrency firm Coinbase is exploring the possibility of registering as a broker-dealer.
ICOs: Your Wu-Tang Clan Crypto Update
When we last updated you on the Wu-Tang Clan’s cryptocurrency activities, we reported that Ghostface Killah was planning to launch his own $30 million coin offering. We don’t know whether the current regulatory environment has put a damper on that deal – but this “Coindesk” article says that another person connected to the Wu-Tang Clan is launching an ICO of his own:
The son of ODB, the late hip-hop artist and Wu-Tang Clan member who passed away in 2004, is launching a cryptocurrency.
Young Dirty, real name Bar-Son James, is the face of the appropriately named Dirty Coin, a cryptocurrency being produced in partnership between the estate of Ol’ Dirty and Link Media Partners, an entertainment industry firm. Dirty Coin (ticker symbol ODB) will exist as a token on the TAO blockchain network, and is set to be traded on the AltMarket exchange later this year when the coin goes live.
It’s a notable launch, given last year’s spate of celebrity-endorsed ICOs – and the subsequent warning from the U.S. Securities and Exchange Commission that such endorsements may break “anti-touting” laws.
In the case of Dirty Coin, the project is aimed at both serving as a funding base for an upcoming Young Dirty album, as well as a means for fans to access shows and buy merchandise. The coin will be able to be used to purchase merchandise tied to the late rapper as well.
In 2010, the SEC issued guidance about climate change disclosures. The GAO recently issued this report reviewing steps that the SEC has taken since then to clarify climate-related risk disclosure requirements, the SEC’s climate disclosure review process, & the constraints the SEC faces in that process. The report also assessed stakeholder views of climate-related risk disclosures.
The GAO says that the biggest constraint that the SEC faces in reviewing the adequacy of climate-related disclosure is its dependence on self-reporting. Here’s an excerpt:
SEC faces constraints in reviewing climate-related and other disclosures because it primarily relies on information that companies provide. SEC senior staff explained that SEC’s Division of Corporation Finance Staff assess filings for compliance with federal securities laws—which require companies to disclose material risks—but do not have the authority to subpoena additional information from companies. Additionally, companies may report similar climate-related disclosures in different sections of the filings, and climate-related disclosures in some filings contain disclosures using generic language, not tailored to the company, and do not include quantitative metrics.
When companies report climate-related disclosures in varying formats & specificity, Corp Fin reviewers and investors may find it difficult to compare & analyze related disclosures across companies’ filings. The SEC has tools, mechanisms and resources — including internal supervisory controls, regulations & guidance, a two-level filing review process, internal & external data, and staff training and experience — that help SEC staff consistently review filing disclosures, according to SEC documents and staff.
In fairness, the GAO was asked to look into the constraints on the SEC’s disclosure review by Congress – but this conclusion is still kind of goofy. The GAO is essentially saying that the SEC’s ability to review disclosures is constrained by the content of the disclosures that companies provide. Exactly! That’s how this works. . .
The GAO also found that, not surprisingly, companies think they’re doing enough in terms of climate-related risk disclosure. But while some investor groups push for more, the GAO says there’s not a clear consensus on how big a priority this should be.
Enforcement: The SEC Cyber Unit’s First 6 Months (And What’s Next)
Last September, the SEC highlighted its increasing enforcement emphasis on cyber-related threats by announcing the creation of a “Cyber Unit” within the Division of Enforcement. This Cleary memo reviews the Cyber Unit’s first six months of work & previews coming attractions. The memo notes that – so far – the unit’s attention has focused on allegedly improper trading involving hacking and cryptocurrency & ICO fraud claims. And it speculates that the next target may be cybersecurity lapses. Here’s an excerpt:
While it is safe to assume that the Cyber Unit will pursue trading, cryptocurrency, and disclosure cases in the months ahead, there are also signs that the SEC may seek to bring enforcement actions in an area that has been somewhat less publicized — alleged failures to maintain reasonable cybersecurity safeguards. In a October 2017 speech, Avakian identified safeguarding information and ensuring system integrity as another area of “enforcement interest” for the Cyber Unit.
The memo says that the speech pointed to SEC Regulations S-P, SCI and S-ID – which require that covered entities “understand the risks they face & take reasonable steps to address those risks” – including putting “reasonable safeguards in place to address cybersecurity threats.” While noting that no cases involving failure to maintain proper cybersecurity safeguards have been brought as yet, other enforcement proceedings under those rules may provide a roadmap for future actions.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– Risk Reduction from Sustainability is a Myth?
– White Collar: DOJ Extends FCPA Declinations Policy
– Foreign Affiliates: BEA Survey Forms Issued
– Blockchain: “Read All About It!”
– How ISS Analyzes Proxy Fights
This MarketWatch article says that some companies have included the potential impact of a trade war in their Form 10-K “risk factors” disclosure. The article provides some examples of companies that have flagged the current unpleasantness between the U.S. & China as a potential risk – and suggests that more companies may opt to address the risks of a trade war in future filings.
This Form 10-K (pg. 26) from TravelCenters of America has the most extensive disclosure among the examples cited in the article. This excerpt provides a summary:
“Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in ‘trade wars,’ in increased costs for goods imported into the United States, which may reduce customer demand for these products if the parties having to pay those tariffs increase their prices, or in trading partners limiting their trade with the United States,” according to TravelCenters’ filing. “If these consequences are realized, the volume of economic activity in the United States, including trucking freight volume, may be materially reduced. Such a reduction may materially and adversely affect our sales and our business.”
The article cites two other companies – Fossil Group (pg. 27) and Amphenol (pg. 13) – that disclosed the risk of a trade war in their 10-Ks. However, unlike TravelCenters, their disclosures were not broken out under a separate caption. Instead, they were included in a bullet point list of various risks associated with their operations.
Based on a recent Edgar search for 10-Ks referencing “trade war” or “trade wars,” it looks like the approach taken by Fossil Group and Amphenol is more typical – at least so far. I found a total of twelve 10-Ks that contained either of these terms. And only one company – G-III Apparel Group (pg. 30) – broke out the risk of a trade war separately in its 10-K.
While only a dozen companies referenced a trade war in their 10-Ks, there are a couple of things to keep in mind. First, it’s possible that others that others may have addressed the risk using other terminology – e.g. “retaliatory tariffs” – which wouldn’t have been caught by my search. Second, many larger companies would have made their filings before the President fired what may turn out to have been the trade war’s first volley on March 1st.
Enforcement: SEC Targets the Man Who Traded Gretzky
If you’re not a hockey fan, the name Peter Pocklington probably doesn’t mean much to you. But if you are, you’ll always remember him as the man who traded Wayne Gretzky to the Los Angeles Kings. That decision earned Pocklington the undying enmity of many Edmonton Oilers fans and – at least temporarily – the title of “the most hated man in Canada.”
Apparently, the SEC’s not too fond of him either. Last week, the agency announced an enforcement action alleging that Pocklington, a convicted felon, concealed his ownership & control of a company from investors in a private placement.
I’m not an Oilers fan, so I don’t have a dog in this fight – like any good citizen, I simply hope that justice prevails. On the other hand, if this was Art Modell. . .
Warm Remembrances: A Farewell to Fred Cook
Here’s a note from Broc: I’m sad to report that Fred Cook passed away last week. Widely considered “the Dean” of the compensation consulting world, Fred was much more than just a genius. Warm, kind – always with a sparkle in his eye. I was pretty new to the executive pay world when I launched CompensationStandards.com and our annual “Proxy Disclosure Conference” fifteen years ago – but Fred was more than willing to spend time with me and explain the basics. When I last saw him two years ago, he still seemed so young – so eager to share.
Fred always talked truth. And with his vast experience, he could give the proper perspective to what makes sense – and what doesn’t. Take some time to find out for yourself – this speech by Fred that we transcribed in 2005 still can provide numerous valuable learning lessons. We will miss you Fred!
Fred was married for 54 years and raised three daughters. Here’s an excerpt from Fred’s obituary in the NY Times:
Fred had a lifelong passion for the outdoors and physical fitness, completing many marathons without once training on a treadmill, and climbing the 46 High Peaks in New York State’s Adirondack Mountains. He climbed many of those peaks multiple times, in both summer and winter. He particularly loved introducing his family and friends to the Adirondacks he loved so much, with large family reunions, college reunions, hikes to swimming holes, outdoor hot tub soaks, and trips with his granddaughters up some of those same High Peaks. In life as in business, he loved to create traditions and share his passions.
We’ve all heard the mantra that blockchain is a disruptive technology that will turn entire industries upside down, including legal services and public accounting. Well, according to this Bloomberg blog, the big winners of disruption in the accounting industry will be – wait for it – the Big 4!
Wait – what? Yup, that’s what it says. This excerpt notes that the Big 4’s key advantage is their technology infrastructure:
As a result of technology transforming the accounting profession, “If you look at the breakdown of the profession over the next five to eight years you are going to see much more consolidation than we have seen in the past. The top four are going to be acquiring some of those in the next twenty firms. Auditing is going to be done by firms with far more technical ability than we have seen in the past. I think a large number of firms are going to disband,” said Richardson.
Translation? Regardless of your firm’s aggregate technical knowledge in auditing procedures and regulatory guidance, if you don’t have the technology systems in place, or are shortly behind in development, you simply won’t be able to keep pace with those who do.
As the accounting profession migrated from a paper and pen to fingers and spreadsheets, there was a element of instability that rocked the industry. The transition to nodes and blocks will be even more uncomfortable, but the ultimate beneficiaries will remain the same. Expect another generational wave of “Big Four” dominance in the accounting sector, even in a blockchain disrupted universe. If anything, it is another layer of concrete on top of a foundation that never seems to crack.
So, in the accounting profession, the results of this revolution may end up looking a lot like many others before it – “Meet the new boss. Same as the old boss.”
Big Data: Facebook Sells User Data – But Edgar Gives it Away!
Facebook’s in the hot seat these days for its practices regarding user data – but move over Mark & Sheryl, because it turns out that Edgar just might be a gold mine for data harvesters too. According to this Matt Levine column, a new study reveals that not only can you review a company’s SEC filings, but you can often find out who else has taken a peek. Here’s an excerpt:
But here’s another wild thing about this paper: You can go find out which hedge funds accessed which documents on Edgar! I mean, that seems wild to me, but the authors’ literature summary mentions several other papers that use the same technique. In each case researchers use public records to figure out which hedge funds own which IP addresses, and then match the IP addresses to Edgar traffic logs that the SEC makes available.
The Edgar logs are posted quarterly with a six-month lag, and you can’t necessarily match up every hedge fund with an IP address, so you can’t find out, say, what companies Dan Loeb or Bill Ackman are looking at today. But you can at least find out what companies some hedge funds were looking at a year ago, and what sort of research they did. It might tell you interesting things about their investing processes.
I had no idea that you could do that, and I doubt many other people did either. But whether the info is dated or not, in an era where everyone’s an activist target and hedge funds rely so much on stealth, is there any reason that companies shouldn’t put their big data folks to work crunching those traffic logs?
ESG: 85% of S&P 500 Issue Sustainability Reports
According to this new report from the Governance & Accountability Institute, 85% of the S&P 500 published sustainability or corporate responsibility reports in 2017. As this excerpt illustrates, that percentage has risen dramatically since 2011:
During the year 2011, just under 20% of S&P 500 companies reported on their sustainability, corporate social responsibility, ESG performance and related topics and issues;
– In 2012, 53% of S&P 500 companies were reporting — for the first time a majority;
– By 2013, 72% were reporting — that is 7-out-of-10 of all companies in the popular benchmark;
– In 2014, 75% of the S&P 500 were publishing reports;
– In 2015, 81% of the total companies were reporting;
– In 2016, 82% signaled a steady embrace by large-cap companies of sustainability reporting;
– And in 2017, the total rose to 85% of companies reporting on ESG performance.
This Audit Analytics blog reviews the 13 reasons why (sorry, Netflix – I couldn’t help myself) companies amended their Form 10-Ks last year. Not surprisingly, the most common reason was a need to include Part III information due to an inability to get their definitive proxy materials on file within 120 days of the fiscal year end. In fact, these amendments accounted for 52% of total 10-K/A filings in 2017. In fact, here are the top 5 reasons for filing a 10-K/A:
– Part III information – 52%
– Signatures & exhibits – 8%
– Auditor’s consent – 7%
– Auditor’s report – 7%
– CEO & CFO certifications – 6%
Most of these reasons for amending involved pretty technical stuff – but there were some more problematic reasons for amending a 10-K as well. Modifications to disclosure controls & procedures or ICFR disclosures accounted for 5% of amended filings, while restatements accounted for 4%.
Reflecting in part the continuing downward trend in the number of public companies, a total of 340 10-K/As were filed last year – that’s a decline of nearly 20% from the roughly 420 10-K/As filed in 2016.
Lease Accounting: Fear & Loathing on “The Implementation Trail”
According to this recent Deloitte survey, all is not well on the path to implementation of FASB’s new lease accounting standard. With less than 9 months to implement the new standard, most public companies are still woefully underprepared. Here’s an excerpt from the press release announcing the survey results:
Just 21.2% of finance, accounting and other professionals say their companies are “extremely” or “very” prepared to comply with the FASB’s and International Accounting Standards Board’s (IASB) respective new lease accounting standards, according to a recent poll from the Deloitte Center for Controllership™. That’s more than double the number expressing confidence from early 2016 (9.8 percent), when the standards were initially issued, but still relatively low as the deadline for adoption (Jan. 1, 2019 for U.S. publicly traded companies) draws closer.
Most survey respondents don’t think that the FASB’s recent efforts to ease the implementation process will make their lives easier as they work toward compliance. In fact, only 10% of respondents anticipate the FASB’s measures will reduce the amount of time and effort needed to implement the new standard.
Transcript: “Activist Profiles & Playbooks”
We have posted the transcript for the recent DealLawyers.com webcast: “Activist Profiles & Playbooks.”
Spotify’s novel approach to the IPO process – and by that I mean, not having an IPO process – has attracted a lot of media attention. Media reports dutifully check-off all the ways that Spotify’s direct listing differs from an IPO, but the one that I find most intriguing is the absence of a lock-up to prevent insiders from selling shares for 6 months after the deal.
Bloomberg’s Matt Levine writes that if this goes well, Spotify may inspire other unicorns to emulate many of the aspects of its non-IPO – even if they opt for the traditional IPO route. This excerpt suggests that this may include leaning on the underwriters to forget about a lock-up and some other terms “near & dear” to bankers’ hearts:
More substantively, if you want to do an IPO but don’t want to lock up your existing shareholders from selling stock for three to six months afterwards, maybe you could say no to that too? Or if you want to do an IPO but don’t want to give the banks a “greenshoe” option to help them stabilize the shares? The banks will freak out about this and tell you that these are essential elements of the IPO process, and that eliminating them is risky and almost unprecedented. But if Spotify eliminated them and did fine, then why can’t you?
No lock-up? No shoe? “Oh brave new world that has such creatures in it!” Naturally, the push-back against Spotify’s assault on the citadel appears to have already started – check out the excerpt from this Forbes article:
Spotify’s direct listing with no lock-up seems to indicate that at least some of the insiders can’t wait to bail on this thing. That could mean that they don’t see a long-term future for the company (and maybe even the streaming delivery side of the music industry in general), or don’t think the prospect of an acquisition to be very high. Otherwise, they would have endured a traditional IPO along with its customary lock-up period without a blink of an eye, or at the very least imposed some sort of partial lock-up into the direct listing where only a certain percentage of stock could be sold.
So, depending on your point of view, Spotify’s non-IPO is either a bold strike at “Big IPO” or just an innovative new way for insiders to bail-out of an investment whose best days are behind it. However innovative Spotify’s approach may be, the reaction to it proves once again that “for every buyer, there’s a seller. . .”
Theranos: A Wake-Up Call for Private Companies
Unless you’ve been in a coma, by now you’re aware of the SEC’s recent enforcement action against Theranos and two of its executive officers. This recent blog from Kevin LaCroix says that the case has important lessons for unicorns:
The simple but important point that should not be lost amidst the more attention-grabbing aspects of this situation is that a private company and its executives can be held liable for violations of the federal securities laws. While there is nothing revolutionary or even new about this point, it is one that is often overlooked when distinctions are being drawn between private and publicly traded companies.
Private companies and their execs are every bit as subject to liability under the securities laws as their public company counterparts. As Co-Director of Enforcement Steve Peikin put it in the SEC’s press release announcing the proceeding, “there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention.”
Theranos: When Unicorns “Neither Admit Nor Deny” They’ve Gone Bad
Speaking of the Theranos press release, the SEC did one of the things that it does regularly when announcing settlements that just leaves me shaking my head. The release alleges a “Massive Fraud” and says that CEO Eleanor Holmes was stripped of control for “defrauding investors” in an “elaborate, years long fraud.” Of course, several paragraphs – six but who’s counting? – after this chest thumping comes the inevitable coda:
“Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint.”
You can count me among those who think that “neither admit nor deny” settlements are generally a good idea. But when you throw around phrases like this and accompany them with a “neither admit nor deny” settlement, you set yourself up for the inevitable question – if it was so bad, why was this all you got?
Remember when Ohio State’s then-president Gordon Gee infamously remarked that the school’s desultory 13-13 tie with Michigan in 1992 was “one of our greatest wins ever?” This isn’t quite at that level, but there’s a similar disconnect between rhetoric and reality here, and media reports like this MarketWatch article suggest that it undermines the Division of Enforcement’s credibility.
I read that somebody in Pennsylvania apparently hit the $457 million Powerball jackpot last week. That lucky individual is probably the only person in America who had a better week than the three people who the SEC announced hit its whistleblower jackpot to the tune of $83 million – the largest payday in the history of the SEC’s whistleblower program.
The SEC doesn’t disclose information that might identify a whistleblower – but according to this Reuters article, the trio earned their “WhoWantstobeaMillionaire.gov” payday for their assistance in an enforcement action involving Merrill Lynch that resulted in a $415 million settlement.
The SEC today announced its highest-ever Dodd-Frank whistleblower awards, with two whistleblowers sharing a nearly $50 million award and a third whistleblower receiving more than $33 million. The previous high was a $30 million award in 2014.
“These awards demonstrate that whistleblowers can provide the SEC with incredibly significant information that enables us to pursue and remedy serious violations that might otherwise go unnoticed,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.”
The SEC’s press release also noted that it has awarded more than $262 million to 53 whistleblowers since the program’s inception in 2012.
Be sure to check out this blog from Kevin LaCroix addressing some of the implications of these recent awards in light of the Supreme Court’s Digital Realty Trust decision. His bottom line is that these developments add fuel to the already burgeoning cottage industry in whistleblowing – and that even more whistleblowers will be encouraged to come forward.
SCOTUS: ’33 Act State Court Jurisdiction Lives!
Last week, in Cyan v. Beaver County Employees Retirement Fund, a unanimous Supreme Court held that class actions alleging claims under the Securities Act of 1933 may be heard in state court. It also held that if those claims are brought in a state court, they can’t be removed to federal court.
This Woodruff Sawyer blog notes that the Cyan decision is a big win for the plaintiffs’ bar – and bad news for IPO companies & their D&O carriers. Here’s an excerpt:
Companies that have recently gone public: buckle up. This is especially true for companies that are headquartered outside of California since California-based companies have already been living with this reality for several years.
While there have been some non-California-headquartered companies that were sued in California state courts over their S-1 filings, most of the suits brought against IPO companies in California state court have a clear California nexus.
With the ruling in Cyan, other state courts will be opening their doors for IPO-suits.
As we’ve previously blogged, California courts have been a preferred venue for plaintiffs in IPO lawsuits due to their relaxed pleading standards – which result in a lower dismissal rate than cases filed in federal court. Filing suit in a California state court also avoids application of the automatic stay in discovery that would apply to federal cases under the PSLRA.
Now it looks like IPO companies in other jurisdictions need to be prepared to be on the receiving end of Securities Act claims in plaintiff-friendly state courts as well. We’re posting the horde of memos in our “Securities Litigation” Practice Area.
Blockchain: “Solving Section 11 Tracing Problems Since ’20??”
If this Katten memo is right, then the Supreme Court’s Cyan decision may soon not be the only reason that Securities Act plaintiffs have to rejoice. It turns out that our new pal blockchain may solve the 1933 Act’s version of the “Riddle of the Sphinx” – Section 11’s tracing requirement. Here’s an excerpt:
The manner in which stock transactions are currently cleared, settled and recorded makes it impossible to trace a single share of stock once the issuer makes a second offering or other shares enter the market through, for example, the exercise of options or the lapse of share restrictions. As a result, broad swaths of stockholders are effectively barred from maintaining claims under Section 11 or Section 12(a)(2).
The application of blockchain technology to stock ledgers could result, over the ensuing years, in the gradual movement away from the masses of fungible stock held by investors indirectly through the DTC, which makes tracing currently impossible, to a system in which stock transactions for each individual share of stock are recorded in a blockchain ledger.
The only good news for potential defendants is that the shift to blockchain technology hasn’t happened yet. But once DTC implements blockchain ledgers, the most formidable impediment to Section 11 claims may well be eliminated.
Shortly after his confirmation, SEC Chair Jay Clayton promised that the agency was “open for business.” This recent memo from Orrick’s Ed Batts says that Corp Fin seems committed to making that slogan a reality. This excerpt summarizes some notable efforts to streamline the Staff’s processes:
– The most significant development is the dramatic shift in receptiveness for waivers for audited financial statements where the production may be burdensome but not clearly material to investors. Such waivers are being granted specifically with respect to financial statements in cases of marginal significance tests or where fully audited financials would involve significant cost but not necessarily provide substantial incremental useful information.
– In addition, the Staff continue to emphasize eligibility for all filers (and not just “emerging growth companies” under the JOBS Act) to take advantage of confidential preliminary registration statements for IPOs as well as follow-on offerings occurring within one year of IPO.
– The number of Staff comments issued upon review of registration statements have declined significantly, in an effort toward a speedier path to encourage use of public markets.
Cybersecurity: “Yahoo!” for Plaintiffs in Landmark Class Settlement
Over on “The D&O Diary,” Kevin LaCroix recently blogged about Yahoo’s landmark $80 million shareholder class action settlement in a case that arose out of the massive data breaches it announced in 2016. Kevin points out that although derivative suits have followed on the heels of other high-profile breaches, this settlement represents the first time that shareholder plaintiffs have really hit the jackpot in data breach litigation.
This excerpt suggests that the suit could be a preview of coming attractions:
The Yahoo settlement (assuming it is approved by the court) is the first significant data breach-related shareholder lawsuit settlement. The plaintiffs’ lawyers have now figured at least one way they can make money off of this type of litigation. Interestingly, this settlement coincidentally comes just days after the SEC released new guidance in which the agency underscored the disclosure obligations of reporting companies that have experienced data breaches. It is hard to know for sure, but it could be this milestone settlement together with the SEC’s new disclosure guidelines could mean that data breach-related shareholder litigation could be an area of increased focus for the plaintiffs’ lawyers.
Wells Fargo: When All Else Fails, Send in the Nuns!
To say that Wells Fargo’s had a bumpy ride lately is a big understatement, but it now it looks like the bank may have finally “got religion” – albeit in a rather unorthodox way. Here’s an excerpt from this CNBC report:
A group of nuns and religiously-affiliated investors said Wells Fargo & Co. has agreed to publish a review that shows the root causes of the systemic lapses in governance and risk management that have led to ongoing controversies, litigation and fines. As a result of the company’s commitment, the Interfaith Center on Corporate Responsibility will withdraw a resolution filed for the 2018 proxy calling for the review.
The engagement was spearheaded by Sister Nora Nash of the Sisters of St. Francis of Philadelphia – and the shareholder proposal had 22 other co-filers from the Interfaith Center for Corporate Responsibility, as well as the Treasurers of Rhode Island and Connecticut.
Last week, Broc blogged about the latest batch of Staff comments on revenue recognition under the new FASB standard. The folks at Audit Analytics have been pouring through companies’ SEC filings as well – and this recent blog says that there’s trouble brewing. Here’s the intro:
We have been asked several times whether or not the adoption of the new revenue recognition standard will cause an increase in the number of restatements and control failures. While it may be early to say, our review of SEC filings provides a strong indication that we will see an uptick in revenue recognition accounting failures.
Back in October, based on the analysis of Q2 filings, we found that some companies seemed to be struggling with the ASC 606 adoption. For most of the companies, the moment of truth came on December 15, 2017, the deadline to begin reporting with the new standard.
As we were working on the Q3 update, we identified a number of companies for which the controls were found to be ineffective and a material weakness was directly attributed to the lack of progress in the ASC 606 implementation.
The blog goes on to review specific disclosures by some companies that have encountered hiccups in the implementation process for the new standard.
Former SEC Chair: Securities Lawyers Need to be “Adults in the Room”
This Bloomberg article discusses former SEC Chair Mary Jo White’s comments at a recent conference. She spoke about some of the implications of the current deregulatory mood in DC – but also had some rather pointed comments about the role of lawyers in the current environment:
According to former Chair White, in a deregulatory environment, it is incumbent upon private sector lawyers to step up and be “the adults in the room.” She urged practitioners to focus on what is best in terms of disclosure and business, and not just on what is permissible. It is important to “step up the quality of lawyering” and advise as to what the optimal is, not just what the client can and cannot do.
These steps will reduce the risk of reputational loss to both client and counsel, she noted. She closed by suggesting that attorneys should follow the counsel of the late Archibald Cox, long-time law professor and Watergate special prosecutor, who urged lawyers to have the confidence to tell their clients that “’yes, the law lets you do that, but don’t do it—it’s a rotten thing to do.’”
March-April Issue: Deal Lawyers Print Newsletter
This March-April issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a no-risk trial):
– Tax Reform’s Impact on Private Equity & M&A
– Delaware Supreme Court Reverses Controversial Dell Appraisal Ruling
– All Merger Side Letters Must Now Be Included in HSR Filings
– California Law Provides Private Company Dissolution Alternatives
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