On Friday, the Supreme Court announced that it would hear a challenge to the SEC’s appointment of its administrative law judges. Here’s the intro from this Bloomberg article:
The U.S. Supreme Court will decide whether the SEC’s in-house judges were appointed in violation of the Constitution, agreeing to hear a case that could upend administrative hearing systems across the federal government. The move came at the request of the Trump administration, which switched sides in November and told the justices it would no longer defend the SEC’s system.
The dispute could affect more than 100 cases currently at the SEC, along with a dozen that are on appeal in the federal courts. It also could have ramifications for other government agencies, including the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau, which have similar systems for appointing their administrative law judges.
As we blogged at the time, the Trump Administration’s decision to change the government’s position in this case led to the SEC’s reappointment of all its ALJs in an effort to cure any constitutional defects in the appointment process. Left unanswered for now is the question of the effect that a Supreme Court decision invalidating those prior appointments would have on previously adjudicated cases.
This D&O Diary blog has more details on the case and the issues involved – and says that the case is likely to be resolved during the current term.
SEC Updates “Enforcement Manual”
Recently, the SEC updated its “Enforcement Manual” – a great resource for those dealing with SEC enforcement investigations. And second only to our “SEC Enforcement Handbook” in that area.
Also, check out this new Cleary Gottlieb blog – “Cleary Enforcement Watch” – which covers global enforcement, white collar, and regulatory trends & developments.
We haven’t blogged much about FASB’s new lease accounting standard, but now that the new revenue recognition standard’s in place, here’s a reminder – the new lease standard will go into effect for fiscal years beginning after December 15, 2018.
With the deadline approaching, FASB recently issued an exposure draft of a new auditing standard update intended to ease the implementation process. According to FASB’s press release, the proposed ASU would:
– Add an option for transition to ASU No. 2016-02, Leases (Topic 842), that would permit an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements
– Add a practical expedient that would permit lessors to not separate nonlease components from the associated lease components if certain conditions are met. This practical expedient could be elected by class of underlying assets; if elected, certain disclosures would be required.
Yeah, I could pretend that I know what this means, but that wouldn’t be a smart play. Fortunately, there’s this Thompson Reuters article on FASB’s proposed action to help us all out. Comments on FASB’s exposure draft are due by February 5th.
The FASB lease accounting standard evolved over a period of years – but this recent blog from Steve Quinlivan says that another new standard designed to address “stranded tax effects” of the new tax reform legislation is being fast tracked. On second thought, since the proposed change has only a 15-day comment period, it might be more accurate to say that it’s being strapped to a rocket sled!
When Reg FD was adopted back in 2000, some predicted the death of the investor “one-on-one” – private meetings between investors and top corporate brass. That prediction turned out to be about as accurate as the one that said we’d all be flying our jetpacks to work by now.
Instead, these meetings remain common, particularly among companies seeking to raise their profile with investors. But now the smarty-pantses at Harvard Business School have published a new study that looks what gets asked at those meetings. While a lot of questions are pretty mundane – e.g. “what keeps you up at night?” – some clearly represent an effort to obtain more timely information about companies than what’s been publicly disclosed. Check out this excerpt:
The cash balance of the firm two months after the release of the quarterly report may be stale information. Understanding whether the firm has sufficient cash to continue operations may be salient for an investor’s investment decision so the investor will seek more timely information from management. From a regulatory perspective, timely questions appear to pose the greatest regulatory risk for managers in responding. Nonetheless, we find that most private interactions include at least one timely question posed to management.
Representative examples of timely questions include:
– “How much cash do you have now?”
– “Do you know additional sell side analysts that will be launching initiation reports?”
– “Are you done with recruitment or still enrolling?”
– “Are the Q2 earnings call expectations still valid?”
Management’s responses to any of these questions may raise Reg FD issues – and reaffirming quarterly guidance has been specifically flagged by the Staff as a problem under Reg FD. The study’s results suggest what many of us have long thought – that these private investor meetings are an FD compliance minefield.
Governance Survey: Silicon Valley v. S&P 100
The latest edition of Fenwick & West’s annual governance study surveys the governance practices of companies in the Silicon Valley 150 Index and compares them with those found at S&P 100 companies. Here are some of this year’s highlights:
– Adoption of dual-class voting stock structures has emerged as a recent clear trend among the mid-to-larger SV 150 companies. 11% of Silicon Valley companies surveyed had dual-class structures in 2017 compared to 9% of the S&P 100.
– Classified boards are now significantly more common among SV 150 companies than among S&P 100 companies. Compared to the prior year, classified boards remained fairly consistent, holding steady at slightly less than 7% for the top 15 companies in the SV 150 while the S&P 100 has been at 4% since 2016.
– Fewer Silicon Valley companies have adopted majority voting policies than their S&P 100 counterparts. Approximately 60% of the SV 150 companies have majority voting policies, compared with 97% of the S&P 100.
– 2017 continued the long-term trend in the SV 150 of increasing numbers of women directors and declining numbers of boards without women members. the rate of increase in women directors for SV 150 overall continues to be higher than among S&P 100 companies. When measured as a percentage of the total number of directors, the top 15 of the SV 150 now slightly exceed their S&P 100 peers (the top 15 averaged 25.4% women directors in the 2017 proxy season, compared to 23.9% in the S&P 100).
The study also addresses other governance metrics & tracks changes over time.
Buybacks: Primed for a Tax & Activist Driven Comeback?
I recently blogged about reports on the decline in stock buybacks during most of 2017. Well, it looks like those might come roaring back to life in the new year. This article from “TheStreet.com” says that stock buybacks will be driven by an increased ability to repatriate foreign cash – and pressure from activist hedge funds. Here’s an excerpt:
Activists typically pressure corporations with a lot of cash on their balance sheet to either spend it on the business, launch a big stock buyback program or issue a special dividend. In many cases, corporations have put their cash overseas to avoid U.S. taxes. However, the historic passage of a $1.5 trillion tax overhaul legislation is expected to change the calculus on off-shore cash, considering that a vital component of the package is a provision imposing a low 15.5% repatriation tax for money held offshore. Expect the rule to drive activist hedge funds to put new pressure on companies to repatriate cash, then distribute it to shareholders.
On the other hand, not everybody is buying into this narrative – this Bloomberg article suggests that most Wall Street analysts expect companies to use their tax windfall to increase their capital investments.
Here’s the results from our recent survey on director compensation in the wake of the 2015 Citrix decision:
1. When it comes to limits on our director pay:
– Yes, we have adopted limits since Citrix – 51%
– Yes, we had limits even before Citrix – 22%
– No, we don’t have limits – 26%
2. For those that have limits, our limits apply to:
– Cash only – 0%
– Equity only – 56%
– Both cash & equity – 44%
3. For those that have equity limits, our limits are based on:
– Dollar limit – 85%
– Share limit – 33%
4. For those that have limits, our limits are based on:
– Multiple of annual compensation – 35%
– Maximum number based on estimates of future compensation for a set period – 36%
– Other – 35%
5. For those that have limits, our limits are based on:
– Peer review – 43.6%
– What we could derive from the case law & settlements – 20.0%
– Our discretion – 58.2%
– Other – 16.4%
Privilege: “Oral Download” of Investigation Results to SEC May Waive Work-Product Protection
This Cleary memo addresses a recent decision by a Florida federal magistrate that could throw a monkey-wrench into a common method of informing the SEC’s Enforcement Division about information obtained in an internal investigation.
It’s not unusual for outside counsel retained to conduct that investigation to share factual information conveyed in witness interviews with the Division of Enforcement. That’s frequently done orally, and under the assumption that conveyance of this information won’t waive the protection of the attorney-work product doctrine for the underlying documentation of those interviews. The memo says this decision calls that assumption into question. Here’s the intro:
On December 5, 2017, Magistrate Judge Jonathan Goodman in the United States District Court for the Southern District of Florida held in SEC v. Herrera that the “oral download” of external counsel’s interview notes to the Securities and Exchange Commission (“SEC”) waived protection from disclosure under the attorney work product doctrine. In the same order, Magistrate Judge Goodman held that providing similar access to the client’s auditor did not result in a waiver.
As a result of the decision, the law firm was ordered to disclose to certain former employees of its client the interview notes that were orally conveyed to the SEC. The firm subsequently moved for clarification or reconsideration of the order – and an evidentiary hearing is scheduled for January 10th.
Coming Attractions: Securities Class Actions for Cyber Breaches
This Davis Polk memo says that securities class actions surrounding cybersecurity breaches are just a trickle now – but may soon become a wave:
The existence of securities fraud litigation following a cyber breach is, to some extent, not surprising. Lawyer-driven securities litigation often follows stock price declines, even declines that are ostensibly unrelated to any prior public disclosure by an issuer. Until recently, significant declines in stock price following disclosures of cyber breaches were rare. But that is changing. The recent securities fraud class actions brought against Yahoo! and Equifax demonstrate this point; in both of those cases, significant stock price declines followed the disclosure of the breach. Similar cases can be expected whenever stock price declines follow cyber breach disclosures.
The memo addresses emerging theories of liability in these cases & steps that companies can take to reduce their risk of a securities class action in the event of a cyber breach.
Last month, the WSJ published an investigative report that suggested that hundreds of corporate insiders frequently had uncanny timing when it came to gifts of company stock.
The WSJ examined 14,000 donations of stock to private foundations by insiders – and found that 3x as many were made before price declines of 25% or more than were made prior to comparably-sized price increases. It quoted a professor as saying that the chance that this kind of timing could result from random luck is “extremely small.” If luck’s not involved, what’s behind the fortuitous timing of these gifts? This excerpt speculates that this may be a case of old wine in new bottles:
Good luck or coincidence is one explanation for many of the well-timed stock gifts. Academic researchers say another possible explanation for some, given the outsize number of such gifts, is that some donors might be guided by inside information or backdating their stock gifts. Legal experts don’t agree on whether donating based on nonpublic information would be unlawful. Backdating a gift could be tax fraud, tax lawyers said.
When I first read this story, I thought the use of inside information was a more plausible explanation than backdating. Even after the Supreme Court’s decision in Salman, it’s not at all clear that a stock gift can give rise to insider trading liability. What’s more, some insider trading policies don’t apply to gifts of stock, it’s certainly plausible that insiders might capitalize on non-public information when it comes to gifting stock.
On the other hand, I was pretty skeptical about the idea that people are backdating gifts. I’ve been involved with a number of gifting situations involving insiders over the years – and large gifts usually involve pretty extensive planning by wealthy, well-advised individuals. So, I guess I wasn’t surprised that research showed that their timing is generally pretty good. But Broc reminded me that this is the kind of thing people said about options backdating a decade ago as well, so I did a little digging.
The most interesting thing I found was this study by an NYU professor referenced in the WSJ report. That study reached similar conclusions about the timing of CEO stock gifts almost a decade ago. It concluded that legal use of inside information could be part of the story, but also flagged evidence that strongly suggested that some insiders were backdating gifts as well:
Tests used to infer the backdating of executive stock option awards yield results consistent with the backdating of CEOs’ family foundation stock gifts. For instance, I find that the apparent timing of certain subsamples of family foundation stock gifts improves as a function of the elapsed time between the purported gift date and the date on which the required stock gift disclosure is filed by the donor with the SEC. This association between reporting lags and favorable gift timing does not hold for CEOs’ stock gifts to other recipients. Stock gifts of all types, including family foundation gifts, are also timed more favorably if they are larger and if they occur in months other than December, when many tax-driven charitable contributions ordinarily take place.
Ahem… well, it looks like my skepticism may just turn out to have been naivete. This could get interesting. . .
Insider Loans: SEC Brings a Rare Enforcement Proceeding
Since we’re sort of taking a stroll down memory lane today, I thought it was appropriate to flag this recent blog from Steve Quinlivan about a recent enforcement proceeding involving violations of Sarbanes-Oxley’s prohibition on loans to insiders. Here’s an excerpt summarizing the proceeding:
According to the SEC in an order settling an enforcement action, Alan Shortall was CEO and Chairman of Unilife Corporation, a Nasdaq listed issuer. According to the SEC, Shortall arranged for Unilife to make personal payments on his behalf aggregating approximately $340,000 over four years. The advances were outstanding for five to 36 days. According to the SEC, this violated provisions of the Sarbanes-Oxley Act which prohibits public companies from making loans to directors and executive officers, as codified in Section 13(k) of the Exchange Act.
In addition, an unnamed director of Unilife was going default on loans secured by a pledge of Unilife shares. Shortall agreed to arrange for Unilife to cover the loans. As Shortall understood Unilife could not loan money to the director, Shortall told the Chief Accounting Officer the loan was for the benefit of an external consultant. The SEC also found these transactions violated Section 13(k) of the Exchange Act.
Our more veteran readers may remember how much angst Sarbanes-Oxley’s prohibitions on loans to insiders caused at the time of their enactment. Interestingly though, it hasn’t resulted in a lot of enforcement activity. There may be a few others, but I’m only aware of one other enforcement proceeding dealing with loans to insiders – and that was way back in 2005.
First backdating & now loans to insiders – I think it may be time to get a MySpace account…
Audit Reports: PCAOB Staff Updates Guidance
I recently blogged about the PCAOB Staff’s implementation guidance on the new audit report regime. Last week, the Staff issued updated guidance providing additional information on determining auditor tenure – see page 4 of the updated document. We’re posting memos on the new audit report standard & the implementation guidance in our “Audit Reports” Practice Area.
– 37% of S&P 500 companies’ proxy statements present enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm, up from 13% in 2014.
– 24% of mid-cap companies show enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm (up from 10% in 2014) compared to 17% of small-cap companies (up from 8% in 2014).
– 38% of S&P 500 companies disclose criteria considered when evaluating the audit firm, a jump from 8% in 2014.
– 28% of mid-cap companies disclose criteria considered when evaluating the audit firm (up from 7% in 2014) compared to 27% of small-cap companies (up from 15% in 2014).
The report’s conclusions are consistent with the other studies on audit committee disclosure trends that we’ve blogged about in recent months. Investors want more information from audit committees – and audit committees seem to be responding.
Cannabizfile: “I’m From the Government, & Dave’s Not Here, Man”
California hasn’t always been recognized as a place that goes out of its way to attract new businesses – but this Keith Bishop blog flags a new state initiative trying to make life easier for one particular class of entrepreneur:
California Secretary of State Alex Padilla wants to help entrepreneurs in California by launching a new online business portal. According to Secretary of State’s press release, the new portal, coined “Cannabizfile”, provides useful information about cannabis-related business filings with the Secretary of State’s office. The Secretary of State has even published a public service announcement featuring actor Cheech Marin.
Casting Cheech Marin (of Cheech & Chong fame) in a PSA is inspired & shows a sense of humor that’s almost always lacking in government initiatives. The one disappointing aspect of the Cannabizfile website is that the FAQ section offers no insights into Dave’s whereabouts.
Our January Eminders is Posted!
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Many conservative groups have criticized federal agencies for allegedly using “guidance” as a substitute for the traditional “notice & comment” rulemaking process. In recent years, these complaints have gotten some traction in federal court & in Congress, but many agencies – including the SEC – continue to rely heavily on the use of guidance as part of their oversight activities.
That’s why this recent memo from Attorney General Jeff Sessions is big news – it basically says that the DOJ is out of the “rulemaking by guidance” business. Here’s an excerpt from the press release accompanying Sessions’ memo:
In the past, the Department of Justice and other agencies have blurred the distinction between regulations and guidance documents. Under the Attorney General’s memo, the Department may no longer issue guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch.
The press release says that the Attorney General’s Regulatory Reform Task Force will review existing DOJ documents and will recommend candidates for repeal or modification in the light of the memo’s principles.
It’s unknown whether the SEC or other agencies will feel compelled to follow the DOJ’s lead – but coming on the heels of the GAO’s recent decision that banking agencies’ leveraged lending guidelines were actually rulemaking subject to the Congressional Review Act, the AG’s action is another sign that agency guidance practices are being viewed with a jaundiced eye in DC.
Bye-Bye Buybacks? (Maybe Not)
Bad news for all you financial engineers out there – this WSJ article says that it looks like stock buybacks may be falling out of favor:
Companies in the S&P 500 are on pace to spend $500 billion this year on share buybacks, or about $125 billion a quarter, according to data from INTL FCStone. That is the least since 2012 and down from a quarterly average of $142 billion between 2014 and 2016.
Buybacks have been popular in recent years, in part because tepid economic growth limited perceived investment opportunities as well as expected returns on new plant and expanded operations. Adding to their appeal, repurchases can make shares more attractive to investors by lowering the share count and accordingly increasing earnings per share. The post crisis surge in buybacks has been frequently cited by stock-market bears as a sign that the market’s eight-year-long advance has been driven more by financial engineering than by long-term growth.
The article says that companies’ decisions to ease up on the throttle when it comes to buybacks are a result of an improving global economy, rising consumer & investor sentiment, and concerns about the staying power of this year’s stock market rally.
Wait a sec. . . According to this MarketWatch article, reports of buybacks’ demise may be greatly exaggerated. In fact, they appear to have exploded this month – perhaps hinting at what companies intend to do with the increased cash they expect to have on hand post-tax reform.
Bye-Bye CEOs? One in Three Gets Pushed Out
Earlier this year, I blogged about the research firm called “exechange” – and the “Push-out Score” model it uses to analyze the extent to which CEO departures were voluntary or involuntary. Based on the firm’s analysis of more than 200 changes in top management of public companies, a whole lot of CEOs are getting kicked to the curb. Here’s an excerpt from the firm’s recent study:
exechange uses a scoring system with a scale of 0 to 10 to determine the likelihood of a forced executive change. A Push- out Score of 0 indicates a completely voluntary management change, and a score of 10 indicates an overtly forced departure. The Push-out Score incorporates facts from company announcements and other publicly available data, including the age of the outgoing manager, time in office and share price performance. The system also interprets the sometimes-cryptic language in corporate communications, using a proprietary algorithm.
Around 36 percent of the Push-out Scores of CEO departures in the U.S. from the past 12 months reached values between 6 and 10, which suggest strong pressure on the outgoing CEO. Every third CEO in the U.S. steps down under pressure.
Mel Brooks’ version of Louis XVI said it was “good to be da King” – and a quick glance at any summary comp table says that there’s plenty of evidence for that. However, this report suggests that Shakespeare’s Henry IV also was on to something when he said, “uneasy lies the head that wears a crown.”
Last week, SEC Chair Jay Clayton issued another cautionary statement on cryptocurrencies & ICOs. The statement covers a lot of ground – and it zeroes in on the professionals involved in these deals & their actions following the SEC’s 21(a) Report:
Following the issuance of the 21(a) Report, certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.
Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law. On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities. I urge you to be guided by the principal motivation for our registration, offering process and disclosure requirements: investor protection and, in particular, the protection of our Main Street investors.
That boldface type isn’t from me – it’s from Jay Clayton. This is what a warning shot looks like, folks – and if you’ve been talking yourself into concluding that your client’s coin offering is different than all the rest, think again.
ICOs: SEC Halts ICO Offering
Just to make sure nobody missed the message, on the same day that Chair Clayton’s statement was issued, the SEC announced that it had entered a C&D order halting an ICO on the basis that it involved an unregistered public offering.
The SEC’s order is worth reading – if for no other reason than to drive home the point that a token can be a security even if it has some “utility”:
Even if MUN tokens had a practical use at the time of the offering, it would not preclude the token from being a security. Determining whether a transaction involves a security does not turn on labeling – such as characterizing an ICO as involving a “utility token” – but instead requires an assessment of “the economic realities underlying a transaction.” Forman, 421 U.S. at 849. All of the relevant facts and circumstances are considered in making that determination.
Interestingly, the issuer of the token contended in its offering materials that it had conducted a “Howey analysis” and that the tokens did not “pose a significant risk of implicating federal securities laws.” The SEC thought otherwise.
ICOs: Meanwhile, Over at the Plaintiffs’ Bar…
I recently blogged that the plaintiffs’ bar has jumped in on the ICO fun – and this recent blog from Kevin LaCroix at the “D&O Diary” highlights another new securities class action suit involving a coin offering. A company called Centra apparently raised $30 million in a token offering that was completed in October 2017. As this excerpt notes, that’s when things got interesting:
On October 27, 2017, shortly after the company completed its ICO, Centra was the subject of an unflattering profile in the New York Times entitled “How Floyd Mayweather Helped Two Young Guys From Miami Get Rich”). Among other things, the article disclosed that on Oct. 5, the company’s co-founders, Sam Sharma and Raymond Trapani, had been indicted by a Manhattan grand jury in connection with their testimony in a July trial involving drunk-driving charges against Sharma.
The article also detailed that Sharma and Trapani had no prior professional experience associated with the debit cards they hoped to build. Their prior business experience consisted of running a luxury rental car company. The Times was also unable to confirm with the major credit card companies the supposed business arrangement Centra had described on its website.
The company subsequently announced that the two founders were stepping aside – and a class action lawsuit was filed on December 13th…
The Trump administration on Wednesday abandoned its defense of the Securities and Exchange Commission’s in-house judicial system, siding with opponents who say the hiring process for the SEC’s judges is unconstitutional. In a brief filed with the U.S. Supreme Court, lawyers for the Justice Department wrote they now consider the SEC’s administrative law judges to be officers like other presidential appointees, instead of employees who are picked through a human-resources process. That means the way the SEC hires the judges may violate a constitutional clause that safeguards separation-of-powers principles.
The Justice Department’s brief didn’t explicitly describe the judges’ appointments as unconstitutional, but said the selection process for the in-house judge at issue in the case “did not conform” to a constitutional requirement. Mark Perry, a partner at Gibson, Dunn & Crutcher LLP who represented the challengers, said the Supreme Court’s involvement is still needed to resolve a disagreement between lower courts over the judges’ status. The Supreme Court would have to appoint an outside party to argue the case since the Justice Department has turned its back on defending it, the brief says. “We are one step closer to victory,” Mr. Perry said Wednesday.
The SEC didn’t sign the Justice Department’s brief. The regulator likely felt it couldn’t join the position because SEC commissioners have previously issued opinions in contested cases stating that judges are employees, not officers, said Andrew Vollmer, a professor at the University of Virginia School of Law and a former deputy general counsel of the SEC. An SEC spokesman declined to comment.
SEC Ratifies ALJ Appointments: Are Prior Decisions at Risk?
In response to the Trump administration’s action, the SEC announced that it had ratified its prior appointments of its current ALJs in order to resolve “any concerns that administrative proceedings presided over by its ALJs violate the Appointments Clause.”
The SEC’s decision to ratify these prior appointments raises an important issue – are cases that were previously decided at risk of being invalidated? Check out this tidbit from a K&L Gates memo about the D.C. Circuit case challenging the ALJ system that’s currently before the Supreme Court:
Despite a question from the bench, the parties did not discuss potential remedies to the possible Appointments Clause violation in detail. Should the D.C. Circuit rule in favor of Petitioners, the SEC Commissioners could ameliorate the issue simply by reappointing the Commission’s five ALJs directly. Because the SEC may risk invalidating other adjudicated findings of liability by acknowledging that its ALJs are unconstitutionally appointed, the SEC may instead choose to stay all administrative proceedings in which a respondent has the option to seek review in the D.C. Circuit while it appeals the case to the Supreme Court.
Interestingly, as part of its order ratifying the ALJ appointments, the SEC lifted a stay on administrative proceedings subject to the jurisdiction of the 10th Circuit that it had put in place in response to a decision in that circuit holding that they were unconstitutionally appointed. So, it looks like the SEC is all-in on the ratification approach.
When you think about it, the administration’s action left the SEC with no other choice – but it looks like there’s really big can of worms that could be opened depending on how the Supreme Court ultimately resolves the issue.
Late last month, the DOJ announced a revised FCPA corporate enforcement policy. The policy – which builds upon the DOJ’s pilot program that we’ve previously blogged about – is intended to provide further enhancements for cooperation. This Simpson Thacher memo reviews the key elements of the new policy (we’ve posted oodles of memos in our “FCPA” Practice Area). Here’s the intro:
On November 29, 2017, Deputy Attorney General Rod J. Rosenstein announced a revised U.S. Department of Justice Foreign Corrupt Practices Act Corporate Enforcement Policy, designed to further incentivize companies to self-report potential FCPA violations. Building on the framework announced in a DOJ pilot program last year, the new policy offers companies that voluntarily self-disclose, fully cooperate, and timely and appropriately remediate substantial cooperation credit—including the presumption of a declination from DOJ criminal prosecution (absent certain aggravating circumstances).
Companies will still be required to pay all disgorgement, forfeiture, and/or restitution resulting from any misconduct at issue. The policy has been added to the U.S. Attorneys’ Manual, which guides prosecutors on when and how to exercise discretion in reaching charging decisions.
The policy has no impact on other U.S. or foreign enforcement authorities, including the SEC.
This blog from Bass Berry’s Jay Knight flags a “sleeper issue” arising out of the lower corporate rates in the tax bill recently passed by the Senate & House – and if you’ve got deferred tax assets on your balance sheet, it just might cause you a few sleepless nights. Here’s the skinny:
At a high level, deferred tax assets are reported as assets on the balance sheet and represent the decrease in taxes expected to be paid in the future because of net operating loss (NOL) and tax credit carryforwards and because of future reversals of temporary differences in the bases of assets and liabilities as measured by enacted tax laws and their bases as reported in the financial statements. NOL and tax credit carryforwards result in reductions to future tax liabilities, and many of these attributes can expire if not utilized within certain periods. If a company believes it is more likely than not that some portion or all of the deferred tax asset will not be realized, a valuation allowance must be recognized.
By “recognized,” of course, Jay means “run through your income statement.” He highlights some disclosure from a major financial institution about the income statement impact of the UK’s rollback of corporate rates in 2013 – and suggests flagging this issue to your audit committee and reviewing your disclosures.
Do You Need an 8-K for the “Deferred Tax Assets” Sleeper?
Another thing to keep in mind is the possibility of tripping an 8-K requirement. For instance, if your deferred tax asset is impaired, you may need to consider whether an Item 2.06 Form 8-K is required. See this one, for example…
Release of “After-Hours” Info: SEC Approves NYSE Rule
On Monday, the SEC approved an NYSE rule limiting listed companies’ ability to issue material news releases shortly after the close of the market. Here’s an excerpt from this Ning Chiu blog summarizing the new rule:
A listed company must not issue material news after the NYSE closes trading until the earlier of (a) publication of the company’s official closing price on the Exchange or (b) five minutes after the Exchange’s official closing time. The NYSE amended its initial rule filing to make clear that the one exception to this revised requirement would be to permit companies to still publicly disclose material information following a nonintentional disclosure, if needed to comply with Regulation FD.
Trading on the Exchange ends at the Exchange’s official closing time of 4pm Eastern, or 1pm Eastern on certain days. The designated market maker, after close, facilitates the close of trading in an auction. Because there is trading of company securities on other exchanges and non-exchange venues even after the Exchange closes, there can be a significant price difference if a company issues news immediately after 4pm Eastern but before the closing auction on the Exchange is completed, leading to investor confusion.
In approving the rule change, the SEC noted that the price difference could increase market disruption and reduce investor confidence in trading on the Exchange, given that orders cannot be cancelled or modified to take into account the material news though the Exchange closing price may not yet have been established by the closing auction process. At the same time, however, the Commission recognizes that Section 202.05 of the Listed Company Manual requires a company to release quickly any news or information that might be expected to materially affect the market for its securities.
SCOTUS: Can State Courts Still Hear ’33 Act Claims?
Last week, the Supreme Court heard oral arguments in Cyan, Inc. v. Beaver County, which raises the issue of whether SLUSA strips state courts of jurisdiction over Securities Act claims. This recent blog from Lyle Roberts at “The 10b-5 Daily” reviews the arguments. Here’s an excerpt summarizing the legal background:
Congress passed the Private Securities Litigation Reform Act (PSLRA) to protect corporate defendants from meritless securities class actions. The PSLRA, however, only applied to federal cases. To evade the PSLRA’s impact, plaintiffs began filing securities class actions in state court, usually based on state law causes of action.
Congress passed SLUSA to close this loophole. Due to unclear drafting, however, there has been confusion in the lower courts over whether SLUSA also makes federal court the sole venue for class actions alleging Securities Act claims (which historically enjoyed concurrent jurisdiction in state or federal court).
The parties have put forward three competing interpretations of SLUSA. The petitioners say that SLUSA divests state courts of jurisdiction, the respondents say that it doesn’t – and the Solicitor General says that you can file in state court, but that cases can be removed to federal court.
We’ve previously blogged about the growing popularity among plaintiffs of state courts as a forum for Securities Act litigation – and about some of the steps that public companies have taken in response.
Whatever their underlying merits, coin offerings have quickly attracted their fair share of fraudsters – and the bad guys’ propensity for ICO scams hasn’t been lost on the SEC. In an October speech, Enforcement Co-Director Stephanie Avakian said that concerns about abuses in this area were one of the factors that led the SEC to create a new “Cyber Unit” in the Division of Enforcement:
As folks likely know, the Commission recently issued a Report of Investigation cautioning that offers and sales of digital assets by “virtual” organizations – often referred to as “Initial Coin Offerings” or “Token Sales” – are subject to the requirements of the federal securities laws, which can include the registration of securities offerings.
Blockchain technology presents many interesting issues and can of course present legitimate opportunities for raising capital. But, like many legitimate ways of raising capital, the popular appeal of virtual currency and blockchain technology can be an attractive vehicle for fraudulent conduct. We think that creating a permanent structure for the consideration of these issues within the Cyber Unit will ensure continued focus on protecting both investors and market integrity in this space.
Earlier this week, the Cyber Unit made its first big splash with the announcement that it had obtained an emergency asset freeze to stop what it called “a fast moving fast-moving Initial Coin Offering (ICO) fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.”
The alleged scam involves a recidivist securities law violator and his company, and the SEC’s complaint alleges that the defendants marketed and sold securities called “PlexCoin” – claiming that investments in PlexCoin would yield a 1,354% profit in less than 29 days.
The announcement notes that this represents the first action filed by SEC’s new Cyber Unit – and the extent of the ICO fraud problem strongly suggests that it won’t be the last. We’re posting memos in our “ICOs” Practice Area.
ICOs: Offerings Continue to Boom – But Class Actions Start to Bloom
The potential fraud issues associated with coin offerings haven’t just attracted the attention of the SEC. While these offerings continue to attract a high-level of investor interest, this “D&O Diary” blog points out that they’re also becoming an attractive target for securities class actions. Here’s the intro:
According to the latest update on the CoinSchedule website, there have been a total of 228 initial coin offerings so far this year through mid-October, raising a total of over $3.6 billion. At least five of this year’s ICOs have raised over $100 million. This burgeoning activity notwithstanding, ICOs are at the center of controversy.
Among other things, China and South Korea have banned ICOs. The SEC has already shown its willingness to pursue enforcement actions against ICO sponsors, as discussed further here. And now a high-profile statement by one of the country’s leading securities regulation experts suggests even greater scrutiny may lie ahead. In the meantime, as discussed below, ICO and cryptocurrency-related litigation appears to be proliferating.
The blog goes on to provide details on several recent class action lawsuits involving coin offerings.
Whistleblowers: Supreme Court Hears Argument on Internal Whistleblower Issue
Last week, the Supreme Court heard oral arguments in Somers v. Digital Realty Trust – which gives the Court an opportunity to resolve a split between the circuits concerning whether Dodd-Frank’s whistleblower protections extend to individuals who report wrongdoing internally, but don’t reach out to the SEC. This recent blog from Cydney Posner reviews the case and the issue before the court. Here’s an excerpt:
In this case, the 9th Circuit had refused to dismiss Somers’ whistleblower claim brought under Dodd-Frank’s anti-retaliation provision, even though he had failed to report the violation to the SEC. As you may recall, Dodd-Frank added Section 21F to the Exchange Act, establishing new incentives and protections for whistleblowers, including monetary awards for reporting information, confidentiality provisions and employment retaliation protections.
The statute defines “whistleblower” as a person who reports potential violations of the securities laws to the SEC; however, in promulgating rules under the statute, the SEC distinguished the whistleblower anti-retaliation provisions from the award provisions, applying a broader definition in the context of anti-retaliation that would not require reporting to the SEC.
The 2nd Circuit agrees with the 9th Circuit’s approach – but the 5th Circuit has held that in order to qualify for protection, a whistleblower must report the wrongdoing to the SEC.
