According to a recent BTI study, the number of businesses facing “bet-the-company” litigation has quadrupled since 2014. BTI interviewed over 300 lawyers at US companies with more than $1 billion in annual revenues, & over 50% of those companies reported dealing with bet-the-company suits in 2016. This compares to 37% in 2015 and just 12% in 2014.
Big-ticket litigation is widely perceived to be a uniquely American phenomenon, but Kevin LaCroix has been following developments on the international front – & there may be storm clouds gathering there as well, as this excerpt from a recent D&O Diary blog suggests:
A number of high-profile cases are now working their way through European courts. These cases are being closely watched and their progress could affect the likelihood of further future litigation. If the claims are successful, they could “pave the way” for similar shareholder actions in the future.
These cases include actions in the U.K. involving RBS and Tesco, as well as actions filed in Germany against Volkswagen.
D&O Liability: On the Rise Globally
Consistent with these litigation trends, this recent Allianz study says that D&O liability exposure is increasing across the globe. Here’s an excerpt from the study’s executive summary:
Tightening regulations, emerging technologies, increasing shareholder activism, intensifying class action litigation activity, escalating merger objections and IPO activity and the rise of regulator activism are among the many challenges facing corporate directors and officers. Executive liability is increasing yearly, particularly in areas such as employment and data protection.
The study flags the growing influence of third party litigation funders in the growth of collective actions & notes the impact of an increasingly aggressive regulatory environment on D&O liability:
There is a growing trend towards seeking punitive and personal legal action against officers for failure to follow regulations and standards. According to AGCS analysis, the number one cause of D&O claims by number and value is non-compliance with laws and regulations.
Take Shelter: The Securities Litigation Storm is Here!
I feel a bit like the prophet Jeremiah this morning – so here’s some more glum news from the D&O Diary, which provides this summary of Cornerstone Research’s annual class action review:
There were a record 270 securities class action lawsuits filed in 2016, which is 44 percent greater than the number in 2015 (188) as well as the average number of class action lawsuits filed during the period 1997-2015 (also 188). The filing activity increased as the year progressed; the number of filings in the second half of 2016 was 21 greater than in the year’s first half. The filing activity in the second half of 2016 was the highest for any semiannual period between 1996 and 2016.
What’s driving the increase? Delaware’s hostility toward disclosure-only settlements is a big part of the story:
Much of the increase in 2016 filing activity is attributable to the increase in federal court merger objection filings; there were 80 federal court merger objection lawsuit filings during the year, more than four times greater than the number in 2015 (as plaintiffs’ lawyers shifted their filings from state court to federal court, as a result of Delaware state court rulings hostile to the kind of disclosure-only settlements that largely characterize the resolution of these cases). The 80 federal court merger objection lawsuit filings during 2016 was the highest number since Cornerstone Research first began separately tracking the M&A lawsuits in 2009.
The litigation exposure of US exchange-listed companies was the highest in 20 years. To put that more concretely, during 2016, approximately 1 in 25 listed companies was the subject of a “traditional” class action lawsuit – and that number doesn’t include merger objection suits!
Have a nice day, everybody. If you need me, I’ll be hiding under my desk.
As we’ve noted in several prior blogs, in recent months, the SEC’s Division of Enforcement has made a cottage industry out of going after companies with provisions in their standard severance agreements that it believes may discourage whistleblowing. In addition to these SEC actions, last year, Congress enacted legislation – the Defend Trade Secrets Act, or DTSA – protecting whistleblowers who disclose trade secrets.
This Perkins Coie memo provides some suggested language for inclusion in severance agreements to address the issues identified by the SEC & to conform to the DTSA’s requirements. Here’s an excerpt with the language:
Savings Clause for Confidentiality Provisions. The “savings clause” BlueLinx agreed to include in its severance agreements to resolve the SEC’s charges is broader in its application than Rule 21F-17 requires. We continue to recommend the shorter version:
“Nothing in this agreement is intended to or will be used in any way to limit employees’ rights to communicate with a government agency, as provided for, protected under or warranted by applicable law.”
Waiver for Severance Agreements. Severance agreements should also include waiver language designed not to violate Rule 21F-17’s prohibition on interference with SEC whistleblower activity:
“Employee agrees to waive the right to receive future monetary recovery directly from Employer, including Employer payments that result from any complaints or charges that Employee files with any governmental agency or that are filed on Employee’s behalf.”
Because this does not require an employee to waive the right to any future monetary recovery from the government in connection with any communication the employee may have with the SEC, there is no violation of Rule 21F-17.
DTSA Language. To comply with the DTSA, we suggest this language in governing the use of trade secrets:
“Employee may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding.”
Non-GAAP: Corp Fin Focused on “Equal or Greater Prominence”
This Andrews Kurth memo reviews recent Corp Fin Staff comments & enforcement activity surrounding presentation of non-GAAP information – and notes the heavy focus on Item 10(e)’s “equal or greater prominence” requirement. Here’s an excerpt discussing recent comments:
Following the issuance of the May 2016 guidance, the Staff increased its focus on the prominence requirement by issuing comments related to issuers’ failure to comply with the requirement. These comments have included, among other things, a failure to:
– Describe or characterize the most comparable GAAP measure in equally prominent terms if a characterization was provided for the non-GAAP measure (for example, “strong overall results” and “record EBIT”);
– Present the most comparable GAAP measure first in a tabular presentation, including in the required quantitative reconciliation (meaning that the reconciliation should begin with the GAAP measure instead of the non-GAAP measure);
– Present the GAAP measure first in the body of an earnings release or in its headline;
– Provide similar percentages or prior period amounts for the GAAP measure when provided for the non-GAAP measure; and
– Include the required disclosure if the issuer relies on the “unreasonable efforts” exception to exclude a quantitative reconciliation for forward looking non-GAAP measures, specifically identifying the information that was unavailable and its probable significance.
Many comments issued during the second half of 2016 were “futures” comments, but the memo says that after an apparent grace period the Staff may increasingly require amendment of prior filings.
Broc & John: The OTC White Paper & The Absence of Snow
We were in the midst of our strategic planning meetings in Siesta Key when Broc suddenly leapt from his chair, smashed his glass on the floor & shouted – “I can whup any man in this bar!” A group of large gentlemen in motorcycle jackets seemed eager to take Broc up on his challenge. At this point, I suggested that we head to the beach for another podcast – and that’s how this 4-minute podcast on DERA’s OTC White Paper & the Absence of Snow came to be. Anyway, that’s my story & I’m stickin’ to it.
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
This Baker Donelson memo discusses Wadler v. Bio-Rad Laboratories – a recent whistleblower retaliation case in which a jury awarded a former general counsel $8 million. This case is particularly interesting because the plaintiff was permitted to use attorney-client privileged information in support of his claims:
In a seminal trial court decision, the federal court in the Northern District of California ruled in a whistleblower retaliation case that a fired general counsel of Bio-Rad Laboratories could use as evidence otherwise privileged materials. The Sarbanes-Oxley Act’s protection of whistleblowers preempted the attorney-client privilege and provided key evidence leading to an $8 million jury verdict in plaintiff’s favor.
The former general counsel raised concerns about suspected illegal payments in violation of the Foreign Corrupt Practices Act that led to his termination. After he unsuccessfully reported to management, he went to the audit committee, whose internal investigation concluded no violation had happened.
IPOs: First Publicly Traded Benefit Corp Hits the Market
Rick Alexander at B Lab blogs that Laureate Education has just become first publicly traded “benefit corporation” – and he isn’t a shrinking violet when it comes to expressing his views on the importance of this milestone:
The most important event to take place in the financial world in 2017 has already happened. It was a simple stock offering. But one facet of that otherwise unremarkable transaction signals that the capital markets are open to a change that might just save the planet.
On January 31, Laureate Education completed an initial public offering, raising $490,000,000. Laureate was the first company to go public as a “benefit corporation,” a corporate form that did not even exist ten years ago. While 4,500 benefit corporations have now been created, each of them was privately held until last week’s IPO.
We’ve previously blogged about benefit corporations – which are organized under separate corporate statutes designed to permit boards to consider additional stakeholders alongside shareholders, & give the board discretion to determine the relative weight to place on shareholders’ and other stakeholders’ interests. The “B Corp” concept has gotten a lot of traction in recent years – 30 states now have benefit corporation statutes – and it will be interesting to see how the concept fares among public investors.
There’s one point in Rick’s blog that I want to correct – although Laureate is the first benefit corporation to go public in the US, it isn’t the first publicly traded benefit corporation. As Broc noted several years ago, that honor goes to Natura, which is Latin America’s largest cosmetics company & is publicly traded in Brazil.
Update: Cydney Posner points out that Laureate’s IPO took quite some time to cross the finish line – she first blogged about it in 2015!
Our “Q&A Forum”: The Big 9000!
In our “Q&A Forum,” we have blown by query #9000 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back, but it’s over 15 years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been well over 28,000 questions answered.
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t contain legal advice.
Last week, I blogged about problems retail investors have had with the use of company websites to distribute earnings releases. Here’s a different type of problem – technical snafus on the earnings call itself. Hey, it happens – so what should you do if it does? Sysco experienced technical problems that prevented some listeners from hearing its recent earnings webcast. Check out this 8-K filing to see how Sysco addressed that problem. Other companies have dealt with technical problems too – these recent 8-K filings by Devon Energy and Premier addressed similar situations.
The short answer in these situations seems to be to furnish an 8-K under Items 2.02 (Results of Operations & Financial Condition) and 7.01 (Reg FD Disclosure), and attach a copy of your earnings call transcript and any other relevant communications to investors about the glitch.
Sysco’s 8-K also includes upfront references to the GAAP information that’s most comparable to the non-GAAP information that it used during its conference call. Although this information is already included in the presentation slides, my guess is that the decision to put it in the body of the 8-K itself represents an effort to conform to Item 10(e) of S-K’s “equal or greater prominence” requirement – which wouldn’t have applied to the conference call, absent the decision to file the materials in response to the glitch.
Earnings Calls: The Trump Factor
This WSJ article notes that there’s a new “elephant in the room” during corporate earnings calls – the President of the United States:
Of the 242 companies in the S&P 500 index that held conference calls or other investor events in January, half mentioned Mr. Trump directly or indirectly, according to a Wall Street Journal analysis of transcripts.
When CEOs or analysts discussed Mr. Trump on conference calls, indirect references were more common. Mr. Trump’s name was used about a third of the times that participants mentioned him or his administration. Half the time, participants simply invoked the “new administration.”
The article says that most references to the new president were full of praise, and criticism was muted. That shouldn’t come as a surprise – after all, as this article points out, nobody wants their company to be on the receiving end of one of POTUS’s tweetstorms.
By the way, if your company does find itself in the cross-hairs of the leader of the free world’s Twitter account, don’t despair – this Cleary memo provides advice on how to deal with the situation.
Delaware: Decision on Supermajority Bylaw May Have Broad Implications
I recently blogged about the Delaware Chancery Court’s decision in Frechter v. Zier – where it invalidated a bylaw requiring a supermajority stockholder vote to remove a director. This K&L Gates memo says that the Court’s decision may have an impact on other bylaws purporting to require a supermajority vote for shareholder action:
This decision also has broader implications for any bylaw provision requiring supermajority stockholder votes to take action for which the DGCL provides a specific voting threshold. Post-Frechter, some examples of potentially problematic bylaw provisions include bylaws providing for a supermajority stockholder vote for the approval of mergers, significant asset sales and dissolutions, all of which explicitly require a simple majority vote of a corporation’s stockholders under the DGCL. Corporations should consider moving any such supermajority voting requirements from bylaws to the certificate of incorporation.
However, the memo notes that bylaw provisions requiring a supermajority vote to amend the bylaws themselves are likely still valid following Frechter.
Update: This Weil blog points out that an earlier Delaware bench ruling suggests that similar provisions in the certificate of incorporation may also be unenforceable.
Mike Piwowar may only be “Acting” SEC Chair – but he’s never going to be accused of just keeping the seat warm for Jay Clayton. This WSJ article reports that Piwowar has revoked subpoena authority from about 20 senior Enforcement staffers. That action leaves the Director as the sole member of the Division of Enforcement with the authority to approve a formal order of investigation & issue subpoenas.
Traditionally, the Staff had to obtain the full SEC’s sign-off on a formal order before issuing subpoenas. Former Chair Mary Shapiro gave the Staff temporary subpoena power in 2009, in the wake of the Bernie Madoff fiasco – & the SEC adopted a rule making that authority permanent a year later. Interestingly, because that rule was deemed to relate solely to internal agency procedures, the SEC adopted it without notice & an opportunity to publicly comment.
Acting Chair Piwowar has long been a critic of both the delegation of this authority to the Staff & the manner by which the SEC accomplished it. Here’s an excerpt from his 2013 remarks to the LA County Bar:
Finally, the delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act. The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should. Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.
This action – which ironically occurred without a public announcement – is consistent with Piwowar’s longstanding concerns that the Staff has had too much power & too little oversight when it comes to investigations.
Conflict Minerals Case: Is a Final Judgment Looming?
This blog from Steve Quinlivan reports that a final judgment from a DC federal district court in the long-running challenge to the SEC’s conflict minerals rule may be on the horizon. Judge Jackson has ordered the parties in National Association of Manufacturers, et al, v. SEC to file a joint status report by March 10, 2017 “indicating whether any further proceedings are necessary, and whether the Court should enter an order of final judgment to effectuate the Circuit’s decision.”
As Broc blogged at the time, the DC Circuit previously rejected the SEC’s appeal of an earlier ruling holding that the rule’s requirement to disclose whether products were “not found to be DRC conflict free” violated the 1st Amendment.
Acting SEC Chair Mike Piwowar recently announced that Corp Fin’s 2014 guidance for compliance with the conflicts minerals rule was also under scrutiny by the agency.
The effectiveness of risk management programs generally, as well as legal/regulatory compliance, cyber security risk, and the company’s controls around risks, topped the list of issues that survey participants view as posing the greatest challenges to their companies. It’s hardly surprising that risk is top of mind for audit committees—and very likely, the full board—given the volatility, uncertainty, and rapid pace of change in the business and risk environment. More than 40 percent of audit committee members think their risk management program and processes “require substantial work,” and a similar percentage say that it is increasingly difficult to oversee those major risks.
“Tone at the top,” corporate culture & short-termism also feature prominently in audit committee concerns.
Spanking brand new. By popular demand, this comprehensive “Form S-3 Handbook” covers the entire terrain, from “baby shelfs” to “automatic shelfs” and everything in between. This one is a real gem – 108 pages of practical guidance – and it’s posted in our “Form S-3” Practice Area.
T+2 Settlement Adopted – But Firm Commitments Stay Put
Bryan Pitko notes that the SEC approved the Nasdaq & NYSE’s proposal to move from a three-day (T+3) to a two-day (T+2) settlement cycle for securities transactions. However, despite earlier concerns, it looks like firm commitment underwritings may continue to follow a T+4 settlement cycle. Here’s an excerpt from the blog:
The SEC’s adopting release does not, however, address the shortening of the T+4 settlement standard currently in place for certain firm commitment offerings under the exemption in Rule 15c6-1(c), as previously discussed in our prior posting (available here). It appears that, for now, despite contemplating such a change and soliciting for comment in the proposing release, the SEC and SROs are content to retain T+4 settlement for firm commitment offerings.
You Can Go Home Again (If You’re Mary Jo White)
The NYT Dealbook reports that Mary Jo White has decided to return to Debevoise & Plimpton, the firm she left when President Obama appointed her to serve as the SEC Chair. She joins former SEC Enforcement Director Andrew Ceresney, who also returned to Debevoise when he left the agency at the end of last year.
MarketWatch’s reporters have been reading your earnings releases – and this article says they’re not impressed. It surveys a number of major companies’ releases, concluding that they’re generally a “confusing mess.”
However, the article saves its most pointed criticism for the practice of using releases simply to point readers to corporate website pages for earnings information:
MarketWatch has written before about the delay caused when companies make investors, and the reporters who serve them, search for earnings on a website, which almost invariably crashes under the strain of so many attempting to access it at the same time. The worst offender, in our view, is the video-streaming giant Netflix. This season, Netflix shares had moved almost 10% by the time most news services had started reporting the numbers, suggesting a clear advantage for institutional investors with machine-readable trading services that can scrape websites for relevant information at high speed. Retail investors are losing out.
My guess is that this practice is intended to provide shareholders with access to a more robust earnings presentation than what could be provided within the confines of a press release – but it looks like it’s giving retail investors the short end of the stick, and needs to be rethought.
Update: One of our members pointed out to me that for microcap companies, the costs associated with using news services for extensive earnings releases are often a factor – and that issuing a brief release directing investors to the website for more information is much more cost-effective for them. I think that’s a point worth acknowledging.
Enforcement: SEC Targets Control Contest Disclosures
Yesterday, the SEC’s Division of Enforcement announced two new actions involving disclosure violations that took place in the heat of takeover & activist battles. Disclosure in this arena seems to be an area of emphasis for the SEC – it recently sanctioned Allergan for failing to disclose merger negotiations with third parties while it was the subject of a tender offer from Valeant.
The first proceeding involves allegedly inadequate disclosures about “success fees” payable by CVR Energy to two investment banks that it retained to help fight off a tender offer. The second targets failures by individuals and investment funds to comply with beneficial ownership reporting obligations under Section 13(d) and 16(a) of the Exchange Act in connection with their joint efforts in several activist campaigns.
It’s interesting to note that disclosure of banker success fees was addressed in one of the new tender offer CDIs (159.02) issued in late 2016. Last month, I flagged a Cooley blog that said market practice on success fee disclosure would need to change as a result of the new CDI. The SEC’s press release notes that CVR’s cooperation and remedial actions resulted in a decision not to impose any monetary sanctions on it – but I suspect the fact that the company’s disclosures may have been consistent with market practice might have played a role in it as well.
Public companies and their advisors can be excused for enjoying the predicament of the targets of the second enforcement action – they’ve long complained about activists playing fast and loose with beneficial ownership disclosure requirements, and undoubtedly are relishing their comeuppance in this instance.
Speaking of disclosure requirements, there’s now one less – the SEC’s resource extraction rules are no more. This Davis Polk memo has the details.
Transcript: Privilege Issues in M&A
We have posted the transcript for the recent DealLawyers.com webcast: “Privilege Issues in M&A.”
Last month, the SEC settled no fewer than seven enforcement proceedings involving alleged GAAP violations. Drinker Biddle’s Steve Stroup reviews the results of these proceedings – and draws some conclusions about trends & priorities in accounting enforcement actions. Here’s an excerpt on the SEC’s increasing reliance on non-fraud based allegations:
The SEC has pursued fraud-based claims in accounting matters with less regularity in recent years and, in turn, has increased its reliance on the less-imposing strict-liability provisions under Section 13 and negligence-based antifraud provisions under Section 17. January was no exception. None of the accounting settlements during the month included alleged fraudulent conduct, even though, in several instances, the tenor of the settlement language arguably signaled a more culpable state of mind than the violations required.
Until recently, fraud-based allegations were routinely raised in these proceedings. The ensuing legal battle often focused on whether the SEC could establish the scienter required under Rule 10b-5. Under the current enforcement landscape, the absence of non-fraud claims takes the scienter issue off the table, and often incentivizes cooperation and settlement.
Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles & Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Tom Johnson of Abernathy MacGregor, Renee Soto of Sotocomm and Damien Park of Hedge Fund Solutions identify who the activists are – and what makes them tick.
Broc & John: Beach Podcasting is Now a Thing. . .
Because no sacrifice is too great for our members, Broc & I recently held an intensive, multi-day strategic planning retreat at TheCorporateCounsel.net’s winter headquarters in Siesta Key. We took a break when the saloon made us clear out our tab – and headed down to the beach to record this 5-minute podcast on the appointment of a deal lawyer as SEC Chair & “Weekend at Bernie’s.”
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
Cooley’s Cydney Posner blogs about a number of reported changes relating to corporate governance & executive compensation that have been incorporated into the latest version of the “Financial Choice Act” – Rep. Jeb Hensarling’s bill to consign Dodd-Frank to the ash heap of history. Changes to the bill include new provisions that would:
– Modernize shareholder proposal & resubmission thresholds for inflation
– Raise SOX 404(b) internal control audit threshold from $250 million to $500 million
– Prohibit SEC from promulgating a rule to require the use of “universal proxies”
– Modernize Section 12(g) registration requirements for smaller companies, including increasing the revenue/shareholder thresholds, indexing the revenue test for inflation and eliminating annual verification of accredited investor status
– Increase Rule 701 cap from $10 million to $20 million with an inflation adjustment trigger
– Expand provisions of Title I of the JOBS Act to apply more broadly by allowing all companies, not just emerging growth companies, to “test the waters” & file IPO registration statements with the SEC on a confidential basis
– Increase Reg A+ ceiling from $50 million to $75 million annually with an inflation adjustment trigger
So does any of this have a prayer of getting through the Senate without Republicans eliminating the filibuster? Maybe. It’s been suggested that some aspects of the bill might be passed under “reconciliation,” which requires only a majority vote & can be used for legislation that changes spending, revenues or the debt limit.
By the way, kudos to Bass Berry’s Jay Knight who – in this blog – tracked down the memo from Jeb Hensarling that started all the speculation about “Financial Choice Act 2.0.”
FASB: 2016 in Review
This BDO report reviews FASB’s work in 2016 – which was a very busy year. Here’s the intro:
During 2016 the Financial Accounting Standards Board (FASB) completed several major, long-term projects, and also issued guidance to resolve related practice issues. The FASB and the International Accounting Standards Board (IASB) focused on implementation issues related to the new revenue recognition standard, which resulted in several clarifying amendments during the year. Both boards also issued their respective lease standards, and the FASB finalized guidance on the classification, measurement and impairment of financial instruments.
In addition to reviewing last year’s guidance & previewing coming attractions, the report includes a helpful appendix showing the effective dates of recently issued accounting standards.
Transcript: “Conflict Minerals -Tackling Your Next Form SD”
We have posted the transcript for our recent webcast: “Conflict Minerals: Tackling Your Next Form SD.”
Over on “The Accounting Onion,” Tom Sellers blogs that Wells Fargo could be the next major MD&A enforcement case for the SEC. He notes that Wells Fargo’s former CEO told Congress that the board was aware of the bank’s unauthorized account issues in 2014. Tom focuses on MD&A’s “known trends” requirement, & says that the bank ran afoul of it here:
Companies often produce lengthy MD&A disclosures from core requirements that boil down to two criteria:
– As of the time of filing, what management knows.
– Whether a transaction, event or uncertainty that management does know about had, or is reasonably likely to have, a material effect on profitability, liquidity or capital resources.
As indicated by the following from Francine McKenna’s article, the first criteria would have been met more than a year ago:
“Stumpf testified management and the board was informed of the issues in 2014. The Los Angeles City Attorney filed a lawsuit against the bank in 2015 after Los Angeles Times first published reports of the problems in 2013.” [italics supplied]
Even so, no disclosure was made in an SEC filing through the second quarter of 2016. And just in case you are wondering, the MD&A rules do not permit a company to omit required MD&A disclosures out of concern for their effect on future litigation, creating a competitive disadvantage, or resulting in a self-fulfilling prophesy.
Tom goes on to suggest that while the financial impact of the $185 million settlement itself may not have been material to Wells Fargo, the collateral damage to the bank’s reputation & business was much larger – and should have been taken into account in management’s materiality assessment.
I admit that when I first read this, I was a little skeptical about the argument – hey, I’m a petite bourgeois corporate tool, so I have my biases. Wells Fargo’s flat-footed response suggests that management viewed this situation primarily as a regulatory matter, and assessed its downside by reference to what the expected settlement with the CFPB and other regulators would be. Should they have anticipated the firestorm that followed, and factored that into the materiality assessment?
My first inclination was to say no – that kind of speculation is beyond what’s required by MD&A. I still think that’s the case in most situations. But the more I thought about it, the more troubled I became by the bank’s failure of imagination. Two million unauthorized accounts? More than 5,000 employees terminated because of this mess? Under those circumstances, was it reasonable for Wells Fargo to think that a $185 million settlement with regulators would be the end of it?
There’s still at least one aspect of the case that makes me think this isn’t really a slam dunk – we’re talking about management’s subjective opinion about the downside risk, & that means Virginia Bankshares may come into play. Wells Fargo could argue that while management’s opinion about the downside may have been wrong, it’s only actionable if management didn’t really believe it. Fait v. Regions Financial is the leading case when it comes to the applicability of Virginia Bankshares to accounting & financial judgments – and Omnicare doesn’t seem to have put much of a dent in it.
Data Breaches at Yahoo! – Another Potential SEC Poster-Child?
According to a recent WSJ report, the SEC is investigating the timing of Yahoo!’s disclosure of its highly-publicized data breaches. Kevin LaCroix of the “D&O Diary” speculates that Yahoo! may find itself as the poster-child for the SEC’s cybersecurity disclosure guidelines:
The question the agency likely will be examining is whether Yahoo’s apparent delays in reporting the breaches ran afoul of the requirements specified in the 2011 guidelines that “material information regarding cybersecurity risks and cyber incidents is required to be disclosed when necessary in order to make other required disclosures, in light of the circumstances under which they are made, not misleading.”
As the WSJ article notes, if the SEC were to bring a case against Yahoo, it could “make clearer to other companies what type of disclosures it views as potentially violating the law in this area.” An SEC case against Yahoo “could help clarify rules over timing because the guidance doesn’t lay out detailed requirements.”
Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.
