Our hearts go out to all who have been impacted by Hurricane Helene. The devastation and loss of life has been heartbreaking to watch over the past five days. On the other hand, it is always uplifting to observe the response to such a terrible tragedy, as local, state and Federal resources work with individuals and private organizations to provide aid where it is needed most.
On Friday, the SEC announced that it is closely monitoring the impact of Hurricane Helene on investors and capital markets. The announcement notes:
The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storm. Entities and investment professionals affected by Hurricane Helene are encouraged to contact SEC staff with questions and concerns:
• Division of Examinations staff in the SEC’s Miami Regional Office can be reached by phone at 305-982-6300 or email at miami@sec.gov
• Division of Examinations staff in the SEC’s Atlanta Regional Office can be reached by phone at 404-842-7600 or email at atlanta@sec.gov
• Division of Corporation Finance staff can be reached by phone at 202-551-3500 or via online submission at www.sec.gov/forms/corp_fin_interpretive
• Division of Investment Management staff can be reached by phone at 202-551-6825 or email at imocc@sec.gov
• Division of Trading and Markets staff can be reached by phone at 202-551-5777 or email at tradingandmarkets@sec.gov
• Office of Municipal Securities staff can be reached by phone at 202-551-5680 or email at munis@sec.gov
Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricane are encouraged to contact the SEC’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov.
Investors should be vigilant for Hurricane Helene-related securities scams and check the background of anyone offering them an investment by using the free and simple search tool on Investor.gov. The SEC’s Division of Enforcement will vigorously prosecute those who attempt to defraud victims of the storm. The SEC is asking investors to report any suspicious solicitations at www.sec.gov/complaint/tipscomplaint.shtml.
I note that one of my proudest moments while serving at the SEC was working on the SEC’s response to Hurricane Katrina in August 2005. I fondly recall sitting in Marty Dunn’s office for hours coming up with ways in which Corp Fin could provide relief to public companies that were impacted by the storm. I can still hear Marty exclaiming “We just made this up!” as he looked at his legal pad where he had scratched out the proposed relief efforts. Our work culminated in a Commission exemptive order and Staff guidance for affected companies. That Hurricane Katrina relief effort served as model for future disasters, including the COVID-19 pandemic. It definitely felt good to help out in some way in the face of a such a historic weather-related event.
The SEC recently posted a notice & request for comment for a proposed NYSE rule change that would amend the listing standards in the NYSE Listed Company Manual to “provide additional emphasis of the existing relationship between the domestic and international listing standards as already articulated in Section 103.00.” The NYSE notes in its submission:
Notwithstanding the existence of separate listing standards for foreign private issuers, Section 103.00 of the Manual provides that foreign private issuers may list their common equity securities either under the quantitative standards for foreign private issuers set forth in Section 103.01 or the Exchange’s domestic listing criteria set forth in Section 102.01. As stated in Section 103.00, the foreign private issuer must meet all of the criteria within the standards under which it qualifies for listing, but is not required to meet the requirements of both of those sections in order for its common equity securities to qualify for listing. 4 Section 103.00 (“Foreign Private Issuers”) provides that, for purposes of the Manual, the terms “foreign private issuer” and “non-U.S. company” have the same meaning and are defined in accordance with the SEC’s definition of foreign private issuer set out in Rule 3b-4(c) of the Securities Exchange Act of 1934.
It has been the Exchange’s experience in recent years that almost all foreign private issuer applicants whose common equity securities qualify for listing on the Exchange do so by meeting the domestic listing requirements of Section 102.01. However, the Exchange has become aware that there is a certain level of confusion in the marketplace about how to understand the listing standards as they apply to foreign private issuer applicants. To provide greater clarity as to how the domestic and international listing standards relate to each other with regard to the listing of common equity securities, the Exchange proposes to adopt proposed new Section 101.01 (“Domestic and Foreign Private Issuer Quantitative Listing Standards”).
As proposed, Section 101.01 would read as follows:
“101.01 Domestic and Foreign Private Issuer Quantitative Listing Standards Section 102.01 (“Minimum Numerical Standards—Domestic Companies—Equity Listings”) sets forth the minimum quantitative standards for the listing of common equity securities of domestic companies. In addition, the Exchange also lists applicants that are foreign private issuers (as defined in Section 103.00 (“Foreign Private Issuers”)) under Section 102.01 where such applicants are qualified for listing thereunder. However, if a foreign private issuer applicant does not meet all of the requirements for the listing of common equity securities applicable to domestic issuers under Section 102.01, the Exchange will determine whether such foreign private issuer qualifies for listing under the quantitative standards for common equity securities set forth in Section 103.01 (“Minimum Numerical Standards Non-U.S. Companies Equity Listings”). It is important to note that a foreign private issuer applicant must meet all of the requirements for common equity securities of either Section 102.01 or Section 103.01 in their 4 entirety but is not required to meet the requirements of both of Section 102.01 and Section 103.01 in order to qualify for listing. Foreign private issuers that list under either Section 102.01 or Section 103.01 will be subject to Section 103.00 and all of the subsections thereunder (except that foreign private issuers that list under Section 102.01 are not required to comply with Section 103.01), including Sections 103.02 (“Securities Exchange Act of 1934”), 103.03 (“Sponsorship by an Exchange Member Firm”) and 103.04 (“Sponsored American Depository Receipts or Shares (‘ADRs’)”). All listed foreign private issuers must also comply with the applicable corporate governance requirements set forth in Section 303A hereof.”
The NYSE also proposes to amend Section 103.00 to include a cross-reference to proposed Section 101.01, to make certain non-substantive changes and to revise the language of Section 103.00 to conform to proposed Section 101.01. The NYSE notes that the proposed amendments would not make any substantive change to the initial listing standards, rather these changes are just emphasizing of the existing relationship between the domestic and international listing standards as specified in Section 103.00 of the listing standards.
In case you missed it in the avalanche of news last week, Congress actually did its job and passed a continuing resolution on September 25 to keep the Federal government open through mid-December. As this White House statement notes, this measure gives Congress additional time to hopefully pass full-year funding bills by the end of the year.
I was busy dusting off my government shutdown blogs early last week, in anticipation that no bipartisan solution could possibly be reached prior to the end of the government’s fiscal year. I was pleasantly surprised to see our lawmakers in action, kicking the can down the road for two and a half months. I can only imagine what sort of dystopian political nightmare we will be struggling though in mid-December, given all of the post-election uncertainty that hangs in the air. It is certainly possible that I might be dusting off those government shutdown blogs again before this year is out!
I must admit that I am not the world’s biggest Green Day fan, but this time of year I can’t help but sing to myself the outstanding Green Day ballad “Wake Me Up When September Ends.” The lyrics are particularly poignant for me this year, because my father passed away about a month and a half ago, and the song was written by Green Day frontman Billie Joe Armstrong to recount the death of his father in September 1982 and his life in grief after that. The end of Summer and the beginning of Autumn are usually my favorite time of year, but it definitely hits different this year, just as in the Green Day ballad.
The start of the SEC’s new fiscal year tomorrow means there are a few reminders that I should mention. As John noted back in August, the SEC issued a fee rate advisory for the fiscal 2025, indicating that filing fees were increasing for the third straight year. For fiscal 2025, the SEC indicated that the fees for transactional filings will increase from $147.60 per million dollars to $153.10 per million dollars, effective tomorrow. As John pointed out, that represents a 3.7% increase over fiscal 2024, but it is much less than the 34% fee increase that we experienced in fiscal 2024 and the 19% increase for fiscal 2023. If you are filing a Securities Act registration statement tomorrow, be sure to update the wiring instructions that you send to the client and the filing fee exhibit to calculate the filing fee using the new rate. If you do not have sufficient funds when the filing is submitted via EDGAR, the filing will be suspended until the correct amount of filing fees are paid.
Further, as Liz noted earlier this month, accelerated Schedule 13G reporting deadlines go into effect today, and these new deadlines will affect all categories of investors that use Schedule 13G to report their greater-than-5% beneficial ownership in public company securities.
I would have included a link to “Wake Me Up When September Ends” as I usually do in the normal course, but, as this article from Rolling Stone notes, thousands of music videos were removed from YouTube this weekend after the publishing rights organization SESAC failed to reach an agreement with YouTube. A representative of YouTube indicates in the article that they are continuing to negotiate with SESAC and hope to reach a new deal soon. As a result, you will have to pull the song up yourself on Spotify or wherever else you get your music these days!
Turning the calendar page over to October brings it home for me that our 2024 Proxy Disclosure and the 21st Annual Executive Compensation Conferences in San Francisco are just two short weeks away! If you have been on the fence about attending, I encourage you to sign up today to take in all of the critical topics that will be addressed by our outstanding speakers. Remember that there is also a virtual option if you are not up for making the trip to San Francisco. I look forward to seeing you there!
Yesterday, the SEC announced a settled enforcement proceeding against DraftKings arising out of the use of its CEO’s social media accounts to disseminate material non-public information. This excerpt from the SEC’s press release announcing the proceeding lays out the factual background of the case:
The order finds that, on July 27, 2023, at 5:52 p.m., DraftKings’ public relations firm published a post on the personal X account of the DraftKings CEO. The post, according to the order, stated that the company continued to see “really strong growth” in states where it was already operating. DraftKings’ public relations firm posted a similar statement that same day on the CEO’s LinkedIn account. At the time of the posts, DraftKings had not yet disclosed its second quarter 2023 financial results, nor had it otherwise publicly disclosed certain information contained in the posts.
Shortly after the public relations firm published the posts, it removed both posts at the request of DraftKings. According to the order, even though Regulation FD required DraftKings to promptly disclose the information to all investors after it was selectively disclosed to some, DraftKings did not disclose the information to the public until seven days later when it announced its financial earnings for the second quarter of 2023.
The SEC’s cease and desist order says that publication of these social media posts violated the company’s social media and Reg FD policies, which prohibited the use of social networks to disseminate MNPI and barred the company’s authorized spokespersons from discussing financial or operational results or guidance during the pre-earnings release “quiet period” specified in its Reg FD policy.
In addition to consenting, on a neither admit nor deny basis, to an order to cease and desist from future violations of Section 13(a) of the Exchange Act and Regulation FD thereunder, the company agreed to pay a $200,000 civil penalty and comply with certain undertakings, including Reg FD training for employees who have corporate communications responsibilities.
Earlier this month, a divided SEC approved the PCAOB’s new audit quality control standard, QC 1000 – A Firm’s System of Quality Control. Over on The Audit Blog, Dan Goelzer has a recent post that says public companies are going to feel the impact of the new standard.
On the plus side, he suggests that audit quality may improve, and that audit committees may have more visibility into audit deficiencies and audit firm quality controls. Unfortunately, those benefits may be accompanied by some fairly significant costs, including higher audit fees and, as this excerpt explains, an increase in “CYA” behavior by auditors:
Auditing requires the exercise of judgment, and the line between permissible judgments that in hindsight appear flawed and auditing standard violations is not always clear. QC 1000 seems to assume that an audit deficiency identified by the PCAOB’s inspectors is evidence of a potential QC lapse. In turn, a QC breakdown potentially raises questions about whether the individuals responsible for the operation of the system properly performed their responsibilities.
As a result, firm leadership will have strong new personal incentives to avoid inspection deficiency findings. This could of course be viewed as one the benefits of QC 1000. But it could also create a dynamic under which auditing becomes more focused on the mechanics of compliance and documentation at the expense of a big-picture understanding of the company’s financial reporting risks and the exercise of judgment concerning how best to address those risks in the audit.
The blog also echoes concerns expressed by Commissioner Peirce that the compliance costs associated with the new standard may drive some audit firms out of the public company market, thus providing smaller public companies with fewer audit firms to choose from.
Last week, the SEC announced that it had obtained a judgment against one of the defendants in an insider trading case. But this isn’t just any insider trading case, because this one may involve the silliest piece of MNPI ever to result in illicit profits. Here’s an excerpt from the SEC’s litigation release on developments in SEC v. Watson:
On September 20, 2024, the Securities and Exchange Commission obtained a final judgment against defendant Oliver-Barret Lindsay, a Canadian citizen, whom the SEC previously charged with insider trading in advance of an announcement by Long Blockchain Company (formerly known as Long Island Iced Tea Co.) that it was going to “pivot” from its existing beverage business to blockchain technology, which caused the company’s stock price to soar.
The SEC’s complaint was filed on July 9, 2021, in federal district court in the Southern District of New York. The complaint alleged that Lindsay’s co-defendant Eric Watson, a Long Blockchain insider who had signed a confidentiality agreement not to disclose the company’s business plans, tipped Lindsay about Long Blockchain’s unannounced plans to pivot to blockchain technology. The complaint further alleged that Lindsay then tipped his friend and co-defendant, Gannon Giguiere, who purchased 35,000 shares of Long Blockchain stock within hours of receiving confidential information about Long Blockchain from Lindsay. According to the complaint, the company’s stock price skyrocketed after a press release was issued announcing its shift to blockchain technology. The complaint further alleged that within two hours of the announcement, Giguiere sold his shares for over $160,000 in illicit profits.
The SEC’s complaint provides more details. Apparently, the company announced that it was “shifting its primary corporate focus towards the exploration of and investment in opportunities that leverage the benefits of blockchain technology” compared to “the ready-to-drink segment of the beverage industry,” as well as changing its name to “Long Blockchain Corp.” in place of “Long Island Iced Tea Corp.”
That announcement was apparently enough to send the stock price skyrocketing by nearly 400% and to increase its trading volume by 1,000%. Seriously? C’mon, the idea that a microcap soft drink company could suddenly become 400% more valuable because it issues a press release announcing a pivot to “opportunities that leverage the blockchain” seems like it could only come from the mind of an underpants gnome.
Nevertheless, a lot of people seem to have bought into it, which makes complete sense if you proceed under the assumption that everyone in the market is as dumb as a bag of hammers. Unfortunately, cases like this one demonstrate that P.T. Barnum’s supposed statement that “there’s a sucker born every minute” frequently explains how markets work a lot better than the Efficient Market Hypothesis does.
Yesterday, the SEC announced settled enforcement proceedings against 23 entities and individuals arising out of late beneficial ownership reports (and yes, there are some very big names here). Two public companies were also charged for contributing to their insiders’ violations and failing to disclose the delinquent filings as required. Here’s an excerpt from the SEC’s press release announcing the proceedings:
The charges announced today stem from SEC enforcement initiatives focused on Schedules 13D and 13G reports and Forms 3, 4, and 5 that certain corporate insiders are required to file. Schedules 13D and 13G provide information about the holdings and intentions of investors who beneficially own more than five percent of any registered voting class of public company stock. Forms 3, 4, and 5 are reports used to provide information about public company stock transactions by corporate officers, directors, or certain investors who beneficially own more than 10 percent of the stock. These reporting requirements apply irrespective of whether the trades were profitable and regardless of a person’s reasons for the transactions. SEC staff used data analytics to identify the charged individuals and entities as filing required reports late.
Each of the parties consented, on a neither admit nor deny basis, to an order to cease and desist from future violations and to pay civil penalties. Those penalties ranged from $10,000 to $200,000 for the individuals involved in the proceedings and from $40,000 to $750,000 for the entities involved. The two public companies targeted by the SEC each paid a civil penalty of $200,000.
Earlier this year, Corp Fin Director Erik Gerding announced that compliance with beneficial ownership reporting requirements was one of the priorities for this year’s disclosure review program, and we’ve blogged about Staff comments targeting the timeliness of beneficial ownership filings. We’ve also seen at least one high-profile 13D enforcement proceeding prior to those announced yesterday. With that background, the SEC’s decision to conduct an enforcement sweep probably shouldn’t come as a surprise to anyone.
While we’re on the topic of potential consequences for violating Section 16 of the Exchange Act, did you ever wonder what would happen if somebody tried to dodge paying over short swing profits under Section 16(b)? Would you believe handcuffs? Here’s something Alan Dye recently posted on his Section16.net blog:
This is my fifth blog about Avalon Holdings v. Gentile, a long-running and bitterly fought action filed by David Lopez and Miriam Tauber against a Bahamian broker-dealer (MintBroker) and its sole owner (Guy Gentile, a resident of Puerto Rico) based on their high-frequency trading in the securities of two microcap companies, Avalon Holdings and New Concept Energy. Earlier this year, the district judge found the defendant’s liable to each company for short-swing profits of $6 million plus pre-judgment interest, currently amounting to a total of $16 million. In my blog about that decision, I noted that “recovering the amount of the judgment may not be easy, given that the Bahamian Securities Commission has forced MintBroker into liquidation proceedings.”
That prediction is proving to be true. The plaintiffs subpoenaed the defendants to produce records and provide testimony regarding their assets, but the defendants didn’t respond and didn’t show up for a hearing on the motion. The defendants’ counsel appeared, though, and told the judge that he hadn’t heard from Gentile since May and had no information regarding how to effect service on Gentile. After post-hearing attempts to serve Gentile did not elicit a response, the plaintiffs renewed their motion to compel and also submitted an application for a bench warrant for Gentile’s civil arrest for contempt of court.
Last week the judge granted the motion, in language that makes startlingly clear the consequences of failing to comply with a court’s order. The judge directed the U.S Marshals Service to effect service on Gentile in any U.S. district in which he may be found, and ordered that:
– the U.S. Marshall “will be permitted to use the minimum degree of non-deadly force necessary to arrest and detain Gentile and bring him before this Court, and will be permitted to enter any premises of Gentile’s if he is reasonably believed to be inside and if requested access to such premises is withheld” and
– “Gentile shall be incarcerated until he responds to Avalon’s post-judgment subpoenas or until further Order of this Court.”
Gentile may decide it’s not worth stepping foot in the U.S. ever again, but there is a big fee at stake for Lopez and Tauber, so I suspect collection efforts will continue.
