In our “Insider Trading Policies” Handbook, we’ve long noted that the SEC has touted its use of data analytics to identify suspicious trading patterns. A year ago, I blogged that those tools seem to be getting even more advanced. That’s a useful point to know & share if you’re on the compliance side, trying to instill fear & obedience. If you’re a bad guy, it’s not such happy news.
Yesterday, the SEC announced that it’s added a few more notches to its “data analytics” belt. Here’s more detail:
The Securities and Exchange Commission today filed insider trading charges against nine individuals in connection with three separate alleged schemes that together yielded more than $6.8 million in ill-gotten gains. Those charged include a former chief information security officer (CISO), an investment banker, and a former FBI trainee, all of whom allegedly shared confidential information with their friends, who then traded on that confidential information. Each of the three actions announced today originated from the SEC Enforcement Division’s Market Abuse Unit’s (MAU) Analysis and Detection Center, which uses data analysis tools to detect suspicious trading patterns.
The SEC also announced insider trading charges yesterday against a retired US Congressional Representative and former prosecutor who allegedly traded on MNPI he received as a consultant after leaving Congress. Insider trading: don’t do it! See our “Insider Trading Policies” Practice Area for lots of resources that can help you convince your colleagues, friends & clients to stay on the right side of the law.
In 2019, SCOTUS set the stage for expansive “scheme liability” under Exchange Act Rule 10b-5(a) & (c) in Lorenzo v. SEC. Unlike primary liability under Rule 10b-5(b), scheme liability under subsections (a) & (c) can attach to someone who didn’t “make” the misrepresentation or omission. When the 10th Circuit applied Lorenzo later that year, it put an exec on the hook for “disseminating” false & misleading statements.
In what’s good news for those involved with preparing disclosures and supporting documentation, the 2nd Circuit – which has been called the “Mother Court” of securities law in another SCOTUS decision, according to this Paul Weiss memo – recently held that an actionable claim under subsections (a) and (c) must be based on more than alleged misrepresentations & omissions alone. There must be “something extra.”
“individuals who helped draft, research, print, or wordsmith [a] statement at some point in time, but who lacked ultimate control, cannot be primarily liable.” Read alongside the Supreme Court’s Janus decision, the Rio Tinto Court explained, Lorenzo “signaled that it was not giving the SEC license to characterize every misstatement or omission as a scheme.” The Second Circuit reasoned that Janus would be undermined if scheme liability were expanded to encompass mere participation.
The Rio Tinto Court further cautioned that expanding scheme liability to reach actors other than the “makers” of misstatements would lower the bar for private plaintiffs, who face a heightened pleading standard for Rule 10b-5(b) cases under the Private Securities Litigation Reform Act that does not apply to scheme liability cases.
Similarly, limiting statements cases to subsection (b) would maintain the distinction between cases the SEC could pursue from those private plaintiffs could bring — i.e., the SEC, but not private plaintiffs, may pursue aiders and abettors of Section 10(b) violations. Embracing the “SEC’s reading of Lorenzo,” the Second Circuit explained, would be contrary to Supreme Court precedent and would undermine “Congress’ determination that this class of defendants should be pursued by the SEC and not private litigants.”
While this is encouraging news in the short term, the “something extra” that can trigger scheme liability remains undefined. The MoFo memo emphasizes that more cases are in the hopper. Corruption of the audit process or concealment of info from auditors could be examples of actions that would trigger liability under these provisions. Stay tuned to our “Securities Litigation” Practice Area for instructions on how these complex cases could affect your processes for preparing SEC filings and your guidance to clients.
When it comes to being sued for alleged misstatements or omissions, forward-looking statements can be fertile ground for plaintiffs and the SEC. This Woodruff Sawyer blog recounts a Tesla case from last year that took issue with production estimates.
As anyone who’s spent their early associate years combing through “cautionary statements” knows, there’s an art to making sure the forward-looking statements are reasonable and that cautionary language accompanies the statements and is specific enough to protect the company under the Private Securities Litigation Reform Act. Now is a good time to audit your process and ensure you’re keeping up with best practices. The blog walks through these pointers:
1. Review your forward-looking statements disclaimers often.
A company is best served to regularly review the cautionary statements included in its forward-looking statements disclaimers. This will help ensure that the cautionary statements reflect the risks and circumstances impacting the company at any given time. While a quarterly review of the forward-looking statements disclaimers is a good practice, reviewing in conjunction with ongoing public disclosures is a best practice. That is, companies should be mindful to consider updating forward-looking statements disclaimers to account for new risks related to its business, market, or other conditions (e.g., the COVID-19 pandemic, global conflict).
2. Pressure-test forward-looking statements.
This one may be obvious, but it’s still important to stress that there must be a reasonable basis underlying each of the forward-looking statements your company expects to make and to confirm in advance of repeating those statements. For example, if your management team is slated to provide an update on the company’s strategy and financial outlook at a company-sponsored investor day, there should be a robust internal review and confirmation of each forward-looking statement included in the slide presentation, as well as any related scripts and talking points.
3. Ensure the forward-looking statements are appropriately qualified by cautionary statements.
Forward-looking statements should be accompanied by cautionary statements tailored to your company’s circumstances. These cautionary statements should help investors understand how your forward-looking statements may differ materially from the company’s expectations. For example, if your company is a clinical-stage pharmaceutical company and you expect to make forward-looking statements regarding the timing of clinical trial results as part of an investor presentation, the disclaimer should include cautionary statements that speak to clinical trials. Certain risks that may be appropriate for your disclaimer to reference may include anticipated challenges or delays in conducting your clinical trials; difficulty obtaining scarce raw materials and supplies; resource constraints, including human capital and manufacturing capacity; and regulatory challenges.
4. The forward-looking statements disclaimer should be reviewed/managed by a cross-functional team.
Most companies delegate management of the forward-looking statements disclaimer to its legal function. As a best practice, companies should ensure that other functions (e.g., Finance, Investor Relations, Accounting) are also involved in the review and commenting process. A robust process will help to establish that the cautionary statements included in your forward-looking statements disclosure can stand up to claims that the disclaimer was not reflective of the current risks and/or circumstances that could impact your business.
5. State at the outset of events where forward-looking statements will be made that such statements will be made and where to find the associated cautionary statements.
As noted earlier, in the case that your company will be making oral forward-looking statements, ensure that a company representative orally states that the company will be making forward-looking statement and reference that cautionary language is contained in a “readily available” written document. This oral statement should be consistent across different settings. There may be a tendency to truncate the oral statement that is used during earnings calls when it comes to more informal events like a company town hall or fireside chat. That should be avoided.
6. Include forward-looking statements disclaimers in certain internal presentations and communications.
As discussed earlier, certain internal presentations may call for the inclusion of forward-looking statements disclaimers. Certain internal communications, like company-wide emails, may fall into the same category. Best practice would be to establish guidelines regarding which internal presentations and communications call for these disclaimers. These guidelines can then be shared with the functional teams that organize internal presentations and communications with the instruction that they involve Legal early in the planning process.
7. Don’t forget about your website and social media presence.
Many companies include forward-looking statements disclaimers on their websites. These disclaimers are typically linked to via a section in the footer or included in the website’s terms of use. Social media is another area where companies make forward-looking statements. If you are one of these companies, it is a good idea to identify who manages your company’s website and social media presence. Best practice would be to educate those teams as to the importance of forward-looking statements disclaimers and establish a process whereby those teams can easily collaborate with Legal to ensure compliance with securities laws.
Visit our “Forward-Looking Statements” Practice Area for more practical guidance on crafting cautionary statements – including examples and court opinions that show how disclosures can be challenged.
With the soon-to-be-effective universal proxy rules being a hot topic for anyone who advises boards or activists or who has a hand in proxy season, I wanted to highlight this recent “Deal Lawyers Download” podcast that John taped with Goodwin’s Sean Donahue about the rules. This is a follow-up to the popular DealLawyers.com webcast – “Universal Proxy: Preparing for the New Regime” – that we held earlier this year.
Topics addressed in this 19-minute podcast include:
– How will universal proxy change the dynamic of proxy contests?
– What strategic and tactical opportunities does universal proxy create for activists?
– What are some vulnerabilities that public companies may not have focused on?
– What should public companies do between now and September 1 to put themselves in the best position to deal with the universal proxy rules?
A lot of folks expect universal proxy to redefine the rules of the game – and on such a high-profile topic, you don’t want to be caught flat-footed. In addition to the webcast and podcast I already mentioned, visit the DealLawyers.com “Proxy Fights” Practice Area for more guidance. Also, stay tuned for additional members-only content on DealLawyers.com that will help you prepare to hit the ground running.
If you aren’t already a member of DealLawyers.com, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.
John’s also having a blast with these “Deal Lawyers Download” podcasts – here are all the episodes he’s taped so far. If you have something you’d like to talk about, don’t hesitate to email him at john@thecorporatecounsel.net. He’s wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game. We view these sites as a resource that the community participates in, and hearing from members is one of the best parts of any day!
Early last year, I blogged that business had emerged as a beacon of trust in stormy times. Eighteen months later, we’re stuck in disinformation quicksand – and we’ve now reached record-low average confidence across all institutions. That’s according to the latest edition of a Gallup poll that’s been measuring sentiment for over four decades. Here’s more detail on business-related institutions (ranked from highest to lowest confidence):
– Organized Labor: Unions held steady with 28% of participants having a “great deal” or “quite a lot” of confidence in organized labor both this year and last year.
– Banks: Banks garnered confidence from 27% of participants – down from 33% last year. Republicans have lost more confidence in banks than the other party groups have.
– Big Tech: 26% of participants have confidence in large technology companies. This is also a low point, but Gallup has only measured confidence in this category for the past 3 years.
– Newspapers: Newspapers dropped by 5 points, to 16%.
– Big Business: Only 14% of survey participants have a “great deal” or “quite a lot” of confidence in “big business” – down from 18% last year. This is the lowest level since at least 1979.
– TV News: Televised news also dropped by 5 points, to 11%.
The poll doesn’t analyze what’s driving the decline in confidence for each specific institution. For big business, sentiment is lowest among Democrats and Independents (both at 13%), whereas confidence among Republicans is hovering at 19% (just 1 point lower than last year). And although “big business” is bottoming out, 68% of Americans have a lot of confidence in “small business” – more than any other institution. It sure would be nice if we could bottle up that confidence and sprinkle it everywhere else.
What gives? Why is confidence in “big business” dropping while “small business” continues to win friends & influence people? Please participate in this anonymous poll to share your thoughts:
Late yesterday afternoon, the SEC posted a Sunshine Act Notice for an open meeting of the Commissioners to be held next Wednesday, July 13th. Here’s what’s on the agenda:
1. The Commission will consider whether to adopt amendments to the proxy rules governing proxy voting advice.
2. The Commission will consider whether to propose amendments to update certain substantive bases for exclusion of shareholder proposals under the Commission’s shareholder proposal rule (Rule 14a-8).
Businesses need to be on high alert for state-sponsored business spying originating from China, according to a warning issued yesterday by the FBI and Britain’s MI5. The WSJ reported on the details – here’s an excerpt:
In a rare joint appearance on Wednesday at the headquarters of MI5, Christopher Wray, director of the Federal Bureau of Investigation, and Ken McCallum, director-general of MI5, urged executives not to underestimate the scale and sophistication of Beijing’s campaign.
“The Chinese government is set on stealing your technology — whatever it is that makes your industry tick — and using it to undercut your business and dominate your market,” Mr. Wray told the audience of business people. “They’re set on using every tool at their disposal to do it.”
The intelligence & security chiefs said the spying is aimed in large part at stealing tech companies’ intellectual property. The article also reports that the FBI is currently opening a new counterintelligence investigation into China roughly every 12 hours – and MI5 is running seven times as many investigations into suspicious Chinese activity now as it was in 2018.
Make sure your risk management system and cyber protections are up-to-date, consider your business relationships with China-based companies, and think about risk factor disclosure if you could be at risk and haven’t already described the threat and possible implications to your business.
Here’s an informative Twitter thread from an apparent “Main Street Investor” about how to read Form 10-Ks. Approaches to Form 10-K analysis can vary by type of investor – but the disclosure sections mentioned here are also important to larger institutional investors and asset managers (and they also tend to draw comments during Staff disclosure reviews).
Don’t let the digs at “legal filler” get you down – there’s insight that we lowly lawyers can glean from what many investors are looking at:
1. Business Section – the part that tells the company’s story
2. Risk Factors – especially company & industry-specific
3. MD&A – the whole thing
4. Notes to Financials – John pointed out that even though lawyers aren’t accountants, it’s worth focusing on accounting policies in the notes to financials – and asking questions if they appear to differ from peers’
While the Form 10-K process can sometimes suffer from “too many cooks in the kitchen,” anyone who’s working on it should know which parts draw the most eyeballs and make sure to read those through. Those are also the parts of your peers’ Form 10-Ks that you should keep tabs on.
If anything crazy jumps out (based on your understanding of your company’s situation or in comparison to what peers are saying), you can ask about it. You also want to make sure that the portions of the document that you’re directly involved with are consistent with the “main parts” of the document.
I’d also like to think that securities lawyers play a pretty big role with many of these sections, since SEC rules drive the disclosures – as well as Staff disclosure reviews & enforcement actions. Check out the January-February 2018 issue of The Corporate Counsel newsletter for a very practical nuts & bolts approach on drafting risk factors. Our handbooks are also filled with essential info – including on business disclosures and the MD&A.
Here’s something Ngozi blogged yesterday on PracticalESG.com: At the end of June, the Supreme Court, powered by its 6-3 conservative majority, issued its expected opinion in Dobbs v. Jackson. That opinion overturned Roe v. Wade – reversing the decades-long interpretation that the US Constitution provides a right to choose abortion without excessive government restriction.
In its wake, the Dobbs opinion has provoked heated debates and protests across the nation. This is just the beginning of the reaction to this ruling – and companies are grappling with how to respond. Many of you have already initiated conversations internally – dozens of companies have even proceeded with public statements (some more measured than others). Here are some thoughts as you start and continue your response plan:
– Know and understand your employees. Employees have become a major driver on “social” issues. Employee power may diminish slightly if the labor market softens, but the pandemic, generational differences and social media have culminated in a sea change that is unlikely to completely reverse. Boards, executives, HR leaders, DEI departments, ESG and PR staff, and legal counsel need to be attuned to the employee/contractor population and sentiment so that they can meet the expectations of these important stakeholders and be positioned to respond to rapidly changing civil rights frameworks (even beyond abortion). While tracking employee surveys and data on workforce locations and demographics seems like basic blocking & tackling, it is essential to have this information at your fingertips – and be prepared to take a deeper dive.
– Understand that this particular ruling – and other substantive due process rights that may be on the chopping block per Justice Thomas’s concurring opinion – may have a disproportionate impact on underrepresented and marginalized employees. Plan ahead for what you can do to support these employees and consider the impact that corporate responses (or non-responses) may have on your overall DEI results. Consider proactively checking in with affected groups. See our member checklist on employee resource groups.
– Keep tabs on evolving laws and litigation. With 26 states either certain or likely to ban abortion, companies that may be looking to change their benefits policies and plans first need to assess the legal landscape and the political winds in each state where employees are located. We expect to see a cascade of newly active state laws rolling out in the coming weeks, so this will need to be an ongoing analysis – with appropriate staff and advisors involved. Companies that provide travel reimbursement or other accommodations to employees in states where abortion rights are curtailed may face penalties or lawsuits from abortion-restricted states and groups. Get your benefits broker – and your legal counsel – on speed dial.
– Carefully consider reactive public statements. Your employees and business partners may expect a show of solidarity – and it may bolster engagement and retention for some – but we have also seen (over & over) that performative statements end up being of little value. Outspoken companies may attract unwanted attention that detracts from their mission and behind-the-scenes support for healthcare. It is possible for companies to provide access to healthcare and affirm support for employees without taking an “activist” approach on a complicated and sensitive issue. While the right to choose is supported by over 60% of Americans, there are plenty who feel strongly the other way. It comes down to knowing your stakeholders and determining whether this is an issue that is core to the company’s business. Examples of public statements to-date are included in this NYT article.
– Carefully consider political and trade association contributions. Contributions to politicians, trade associations and other advocacy organizations are already receiving major scrutiny – and that’s only going to increase. Emily blogged recently on TheCorporateCounsel.net that two lobbying-related shareholder proposals received majority support at recent meetings. Many trackers now exist that monitor the alignment of corporate political donations with stated values – with several companies already in the news for donations to anti-abortion politicians, and shareholder proponents also picking up the mantle with a new iteration of “values misalignment” shareholder proposals. Gone are the days when a board could simply confirm that the company’s donations were striking a roughly even split between Republican and Democratic organizations. Now, management may need stricter directives to ensure that each donation aligns with overall values – and the board may need to dig deeper to ensure it’s informed of any potentially controversial activities.
– Prepare for increasing requests for civil rights audits. Over the past year, civil rights audits transformed from a nascent practice to a mainstream expectation. I blogged about some specific instances this spring. And as Lawrence blogged when the draft Dobbs opinion was leaked, without a consistent federal foundation on abortion or other civil rights, we face a system where civil rights differ based on what state you’re in. It’s not a stretch to imagine that investors will push companies to analyze how their decisions on where to locate corporate facilities or undertake significant projects affect the rights of employees and other community members. For practical guidance on how to consider and use these audits, check out our recent event on “Understanding & Using Civil Rights Audits” – which featured Eric Holder, Jr., Laura Murphy, Megan Cacace, Aaron Lewis and Tejal Patel – and our related checklist with key takeaways.
– Incorporate civil rights into long-term decision-making. While it may be difficult to uproot an established location in response to a particular event, the trend of disparate rights is just beginning. It is a factor to consider as part of longer-term decisions – e.g., where to establish facilities, where to conduct large events or projects, etc. Because this is a nuanced and continuously evolving topic, there won’t be a black & white answer. But the company needs to be able to demonstrate that it considered and understands the impact of its decisions – and be prepared to justify how the outcome aligns with corporate values. If a significant amount of money is involved or a significant number of people will be affected – or if it runs up against a major corporate value – this may rise to a board-level conversation.
We’re posting the deluge of memos on this topic in our “Diversity: Well-Being” Subject Area page on PracticalESG.com – with guidance to navigate benefits plans, state laws, and additional fallout. If you aren’t already a member with access to these resources, sign up online, email sales@ccrcorp.com, or call 1-800-737-1271. Our “100-Day Promise” makes this a “no-risk” situation: during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
