John recently blogged that emojis can create binding contracts and advised us to think long and hard before clicking “send” on that email or text with a cute little emoji. In fact, you may want to cut out emojis completely — at least in your professional life — especially if you’re a public figure. This Bryan Cave blog discusses a recent U.S. District Court decision rejecting a motion to dismiss a claim that a large investor in Bed Bath & Beyond, well-known to the meme-stock world, used a tweet with an emoji to orchestrate a pump and dump scheme.
On August 12, 2022, CNBC tweeted a negative story about the company, accompanied by a picture of a woman pushing a shopping cart at a Bed Bath store. In response, Cohen tweeted a reply: “At least her cart is full” with what was described as a “smiley moon emoji.” The court stated: “Some online communities understand the smiley moon emoji to mean ‘to the moon’ or ‘take it to the moon.’ . . . In other words, according to Plaintiff, Cohen was telling his hundreds of thousands of followers that Bed Bath’s stock was going up and that they should buy or hold.”
He then filed a close-in-time, but potentially unrelated, amendment to his Schedule 13D which indicated that it “was triggered solely due to a change in the number of outstanding Shares of the Issuer” and made no mention of any plans to sell. Two days later, he filed another amendment reporting the sale of all of his Bed Bath shares.
With respect to the emoji, the blog summarizes the court’s conclusions as follows:
– Although an emoji may be ambiguous, its meaning can be clarified “by the context in which [it] is used.”
– “Emojis may be actionable if they communicate an idea that would otherwise be actionable.”
– The plaintiff “plausibly alleged that the moon tweet relayed that Cohen was telling his hundreds of thousands of followers that Bed Bath’s stock was going up and that they should buy or hold. In the meme stock ‘subculture,’ moon emojis are associated with the phrase ‘to the moon,’ which investors use to indicate ‘that a stock will rise.’ So meme stock investors conceivably understood Cohen’s tweet to mean that Cohen was confident in Bed Bath and that he was encouraging them to act” [citations omitted].
– The tweet is actionable because “plausibly material,” rather than “mere puffery,” as evidenced by investors’ reliance in driving up the stock price. Further, “[i]nvestors may have reasonably seen Cohen as an insider sympathetic to the little guy’s cause,” by interacting with followers on Twitter, his large stake and public interactions with the company.
It’s worth noting that the plaintiffs claimed that the first 13D amendment and related Form 144 were also misleading. In response to the 13D claim, the defense pointed out that Section 13(d) has no private right of action for damages. To this the court replied, “No matter. Even if that is right, it does not follow that 10(b) claims may not be based on misleading 13D filings. Those are two separate questions.”
Here’s something that John blogged last week on DealLawyers.com:
The Activist Investor’s Michael Levin flagged a recent Institutional Investor article that claims that activist hedge funds look at the diversity of a board when identifying potential targets for their campaigns. Here’s an excerpt:
Activist hedge funds are paying attention to board diversity — and are using that information to decide on their next targets. New research shows that activist investors are more likely to succeed when boards are less united and slower to act — two characteristics that are common among diverse boards, where members come from different backgrounds and tend to bring different perspectives. The study found that hedge funds exploit differences of opinion among board members, as well as their more deliberate decision-making processes, to sway shareholder votes in their favor.
The article quotes one of the study’s authors as saying that although diversity provides many benefits, diverse boards take longer to come to a consensus than boards comprised of members of the “old boys network.” Boards and their advisors should keep this vulnerability in mind when evaluating their potential to be targeted by activist hedge funds and in their activism preparedness efforts.
On a related note, make sure to mark your calendar for our upcoming joint webcast with PracticalESG.com “Corporate DEI Programs After Students for Fair Admissions v. Harvard” on Thursday, August 31, 2023, at 2 pm Eastern. J.T. Ho, Co-head of Public Companies & ESG practice at Orrick, Ngozi Okeh, DEI Editor at PracticalESG.com, and Travis Sumter, Labor & Employment Attorney at NextRoll, will discuss the increasingly complex surroundings in which corporate DEI programs operate. If you’re not already a member with access to this webcast, sign up online for a no-risk trial or email sales@ccrcorp.com.
In mid-July, I blogged about the SDNY’s long-awaited order in SEC v. Ripple Labs, (SDNY 7/23), suggesting that the decision may not be the massive victory for crypto that some were calling it and lamenting that the Ripple decision was just one development in the crypto saga — certainly not bringing the regulatory clarity some had hoped. The latest crypto decision, also from the SDNY — SEC v. Terraform Labs, (SDNY 8/23) — supports these points. This Mayer Brown alert describes the decision:
Judge Jed Rakoff ruled this week in favor of the SEC on a motion to dismiss, finding the SEC’s amended complaint adequately pled that the crypto assets sold by Terraform Labs and its founder and Chief Executive Officer Do Keyong Kwon qualify as “investment contracts” under the Howey precedent. While this decision represents only a preliminary review of the issues and accepts the SEC’s allegations as true (for purposes of the motion), it provides useful commentary as well as some counterpoints to the Ripple analysis […]
Judge Rakoff appeared to agree with Judge Torres that digital assets do not constitute securities unless their offering, sale or use were tied to an economic benefit being conveyed upon the purchaser. However, Judge Rakoff also stated that a crypto asset that is not a security at one point in time may, as its circumstances and those of its related protocol(s) change, become an investment contract—i.e., a security—that is subject to SEC regulation.
The part of the decision certain to attract the most attention is Judge Rakoff’s explicit rejection of the approach used by Judge Torres in the recent Ripple ruling, which drew a distinction between digital assets based on the manner in which they were sold (primary issuance to institutional investors vs. secondary transactions involving retail investors). In doing so, Judge Rakoff stated that the Howey precedent does not differentiate among purchasers, because the manner in which digital assets are purchased would not change a purchaser’s reasonable belief in the promise of future profits. In the Terraform case, the SEC alleged that the defendants actively encouraged both retail and institutional investors to buy crypto assets while touting their ability to maximize returns on investors’ tokens.
Recent decisions appear to agree that:
– tokens, themselves, are not securities;
– some token sales are securities offerings, particularly those made directly from the issuer to a purchaser.
Recent decisions appear to disagree on whether or in what circumstances token sales are securities transactions in a secondary market;
The SEC sought leave to appeal the Ripple case, which may provide more substantial guidance next year.
Consider this for upcoming board and committee discussions — especially since cybersecurity disclosures are already bound to be on your agenda. Last week, the Department of Homeland Security announced the release of a report summarizing findings by the Cyber Safety Review Board regarding certain cyber incidents in 2021 and 2022 involving a particular threat actor group that impacted dozens of well-resourced organizations. The CSRB engaged nearly 40 organizations and individuals to discuss these incidents, including threat intelligence firms, incident response firms, targeted organizations, law enforcement, individual researchers and subject matter experts.
This post on the Jackson Lewis Workplace Privacy, Data Management & Security Report blog summarizes key highlights, specifically:
– The multi-factor authentication (MFA) widely used today is insufficient; one-time passcodes and push notifications sent via SMS can be intercepted, making application or token-based MFA methods preferred
– Employees can be compromised with monetary incentives and have handed over access credentials, approved upstream MFA requests, conducted SIM swaps, and otherwise assisted attackers in gaining access to an organization’s systems
– Threat actors also leverage third-party service providers to target downstream customers through secure file transfer services
Yikes! Some of these findings were surprising (to me) and — at least for some companies — may be worthy of board time and attention, including a discussion about how management is addressing these risks. To that end, here’s a further excerpt from the blog:
The Board outlines several recommendations, some are more likely to be within an organization’s power to mitigate risk than others. The recommendations fall into four main categories
– strengthening identity and access management (IAM); – mitigating telecommunications and reseller vulnerabilities; – building resiliency across multi-party systems with a focus on business process outsourcers (BPOs); and
– addressing law enforcement challenges and juvenile cybercrime.
As noted above, one of the strongest suggestions for enhancing IAM is moving away from passwords. The Board encourages increased use of Fast IDentity Online (FIDO)2-compliant, hardware backed solutions. In short, FIDO authentication would permit users to sign in with passkeys, usually a biometric or security key. Of course, biometrics raise other compliance risks, but the Board observes this technology avoids the vulnerability and suboptimal practices that have developed around passwords.
Another recommendation is to develop and test cyber incident response plans. As we have discussed on this blog several times (e.g., here and here), no system of safeguards is perfect. So, as an organization works to prevent an attack, it also must plan to respond should one be successful.
I also want to note that the title of this blog isn’t just clickbait. The opening message of the report references the 1983 movie WarGames and identifies parallels with modern-day real life, including that “teenagers are compromising well-defended organizations using a creative application of many techniques.”
Over on The Advisors’ Blog on CompensationStandards.com, I recently blogged about a settlement agreement in a compensation-related derivative suit that really is one for the books. The litigation challenged the reasonableness of Tesla’s director compensation, and the settlement includes the clawback & forfeiture of compensation valued at $735 million. The blog post describes the mechanics of the clawback terms and discusses what this means for the director defendants.
In a follow-up blog, Liz gave more detail on the “corporate governance reforms” also contemplated by the settlement, including a “director say-on-pay” vote, which — although not a widespread practice — Liz explains, isn’t necessarily a new thing.
We often compare the Staff’s approach to non-GAAP financial measures to a swinging pendulum — over the years there have been times when the Staff is more accommodating to companies when they present non-GAAP financial measures in their SEC filings and other communications, but then there are times when the Staff expresses significant concern with the presentation of non-GAAP financial measures through the comment process, enforcement actions and Staff guidance. Today, the pendulum has definitely swung toward the latter end of that spectrum, with a fresh round of more rigid interpretive updates and a new enforcement action being brought against a company for misleading non-GAAP financial measures and inadequate disclosure controls.
Our panelists also shared what the Staff hopes companies will do following new or updated guidance — that is, read it and take a fresh look at their disclosures to make any necessary tweaks. With that in mind, the Staff may provide a window for companies to self-correct following new guidance and then issue comment letters with clean-up comments. Since we’re over six months from the December 2022 CDI updates, this MyLogIQ survey of non-GAAP comment letters from January 2022 to May 2023 caught my eye. The survey focused on topics that were both frequently the subject of a comment letter and addressed in the CDI updates and found that:
– Equal or greater prominence was the top non-GAAP issue triggering a comment letter
– The top three comment letter issues were all addressed in the December 2022 CDI updates — the next two being recurring expenses and individually tailored measures
The survey also provides examples of comments on each topic addressed in the updated CDIs. In multiple sample questions on recurring expenses, the SEC took issue with “pre-opening costs.” Here’s one of the sample comments:
We note the following in regards to your presentation and reconciliation of your Non-GAAP measures adjusted EBITDA and adjusted net income:Your reconciliation excludes “Pre-opening costs” which appears to be a normal, recurring cash operating expense. Please tell us your consideration of Question 100.01 of the staff’s Compliance and Disclosure Interpretation on Non-GAAP Financial Measures, or revise accordingly.
Liz got me thinking about earnings calls with her blog last week on how the Corp Fin Staff uses earnings call transcripts in the disclosure review process. This recent Q4 blog recommends earnings call post-mortems and preparations for the subsequent quarter. With so much attention focused on earnings calls — not just from investors but from regulators — it may make sense to integrate some of these steps into your quarterly process, and they’re a “must” for executives who are new participants on earnings calls:
Following an earnings call, you must assess the performance of your senior leadership team. To do this, review the webcast or call recording, identifying any challenging questions or topics. Encourage each team member to share their thoughts on their performance and areas for improvement. Gathering their valuable insights. You can pinpoint where the team can grow and enhance its effectiveness.
To prepare your team for future earnings events, develop a plan focusing on their needs. This plan may include additional training sessions to address knowledge gaps, Q&A exercises to build confidence, or providing more detailed briefing materials. Additionally, consider seeking support from investor relations consultants or communications experts who can help fine-tune your team’s messaging and presentation skills.
You’ll cultivate a strong and confident group of leaders by consistently evaluating your senior leadership team’s preparedness and taking steps to improve their performance. With this foundation, your team will be well-equipped to tackle the demands and challenges of post earnings events, approaching them with poise and expertise that will impress shareholders and analysts alike.
Liz’s blog also mentioned showing your “value-add” in the earnings release process. If you’re outside counsel, you can still take the opportunity post-earnings to improve your value-add in future quarters by listening to the Q&A and brushing up on how the company, analysts and investors view the company’s business and financial results. And better yet, referring back to the transcript when reviewing the next quarter’s 10-Q, earnings release and call script can help you identify themes and the types of inconsistencies the SEC is looking out for.
The latest issue of The Corporate Executive has been sent to the printer. It’s also available online to members of TheCorporateCounsel.net who subscribe to the electronic format – a now very popular and convenient option. Email sales@ccrcorp.com to subscribe to this essential resource! This issue includes:
– NYSE and Nasdaq Finalize Clawback Listing Requirements
– Our Model Clawback Policy
– The DOJ Focuses on Clawbacks
Speaking of clawbacks, don’t forget that we will also have a panel devoted to this topic at our rapidly approaching “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which will be held virtually September 20th to 22nd. Here’s the full agenda. If you haven’t already registered, sign up today on our membership center or by emailing sales@ccrcorp.com – or by calling 1-800-737-1271.
The practical & insightful guidance that you’ll get at the Conferences will be key to helping you put the finishing touches on your policy, consider implementation mechanics, and prepare for all the issues that proxy season and SEC rulemaking are going to throw our way. What’s more, Conference attendees will have continued access to the video archives & transcripts for a year following the event – so you can continue to refer back to this essential guidance as you navigate year-end and proxy season. CLE credit is also available for the live event as well as the on-demand replays!
I hate to add to the things that keep you up at night, but so it goes. In a recent post on The10b-5 Daily, Lyle Roberts recently warned us of the risk inherent in using a common phrase when describing pending legal matters — “without merit.” In City of Fort Lauderdale Police and Firefighters’ Retirement Sys. v. Pegasystems, Inc. (D. Mass. 7/23), Pegasystems used this phrase in its public disclosure to describe a claim that it willfully misappropriated trade secrets. When the company was ultimately required to pay $2 billion in connection with the litigation, the stock price dropped and a shareholder filed a securities class action lawsuit. The district court denied the motion to dismiss as to two of the defendants.
As to the opinion that the trade secrets litigation was “without merit,” the court found that the statement did not “fairly align” with the CEO’s “awareness of, involvement in, and direction of Pega’s espionage campaign.” Moreover, “a reasonable investor could justifiably have understood [the CEO’s] message that [the] claims were ‘without merit’ as a denial of the facts underlying [the] claims – as opposed to a mere statement that Pega had legal defenses against those claims.”
Over on the D&O Diary, Kevin LaCroix added more color on the case. Here’s an excerpt from his blog regarding disclosure alternatives to saying “without merit” when it may not be appropriate to use that phrase:
This conclusion does not mean, as Judge Young put it, that companies must “confess to wrongdoing.” Companies may, Judge Young said, “legitimately oppose a claim against it.” Companies may state, without being misleading, that they intend to “oppose” the allegations. Companies may also say, for example, that the company believes it has “substantial defenses” against a claim if it reasonably believes that to be true. An issuer may not, Judge Young said, make misleading substantive declarations regarding its beliefes about the merits of the litigation.
Earlier this year, Tulane law prof Ann Lipton blogged about an SDNY opinion that declined to impose liability for statements by the pre-merger target, about the pre-merger target when neither of the plaintiffs purchased shares of the pre-merger target. Ann notes that this decision was the natural result of Menora Mivtachim Insurance Ltd. v. Frutarom Industries Ltd., (2d. Cir.; 9/22), which John blogged about on DealLawyers.com.
In her latest post, Ann addresses a May opinion regarding Section 10(b) claims in In re Mylan NV Sec. Litig., (W.D. Pa. 5/23). Unlike Frutarom and related cases, this decision didn’t involve statements about one company that impacted trading in a different company, but the district court nonetheless held that the statements on the defendant’s general public-facing website were not made “in connection with” the purchase or sale of a security. Ann quotes the decision to show the court’s reasoning:
After careful consideration, the Court concludes that the statements from Mylan’s website are not the type of statements upon which a reasonable investor would rely. To start, the alleged misstatements appeared on Mylan’s general website, not its investor-relations page. While certainly not dispositive, this fact suggests that investors visiting Mylan’s website would view the information contained on the separate investor-relations page to have more value to them, since it was specifically targeted to them. The information on the other pages within Mylan’s website drives this point. These other pages included things like descriptions of products, general statements about safety and quality, and narratives regarding the company’s history.
But this is not how public companies and their securities lawyers operate! We worry about antifraud liability for general website statements, product launch announcements, and even statements made in a Code of Conduct — and for good reason. More from Ann:
[I]n In re Carter-Wallace Sec. Litig., 150 F.3d 153 (2d Cir. 1998), the Second Circuit held that even product advertisements in medical journals might be relied upon by investors, and since then, courts have generally accepted that all public statements by a company, no matter where they appear, were fair game for fraud on the market cases.
The SEC has specifically warned companies that their general websites might be relied upon by investors as sources of information. See Commission Guidance on the Use of Company Websites, 73 Fed. Reg. 45862 (Aug. 7, 2008) (“companies should be mindful that they ‘are responsible for the accuracy of their statements that reasonably can be expected to reach investors or the securities markets regardless of the medium through which the statements are made, including the Internet.’ Accordingly, a company should keep in mind the applicability of the antifraud provisions of the federal securities laws, including Exchange Act Section 10(b) and Rule 10b-5, to the content of its Web site.”).
In fact, the “without merit” case I also blogged about today involved actionable statements in a Code of Conduct. Here’s Kevin LaCroix’s reminder:
Securities class action plaintiff’s counsel routinely scour corporate expressions of purpose, of conduct, or of ethics, to try to find statements that are contrary to subsequent corporate conduct, in order to try to support allegations that the statements misled investors. Court’s often reject these kinds of allegations on the grounds that the statements are expressions of aspiration rather than concrete commitments of corporate conduct. However, in this case, Judge Young rejected the defendants’ arguments that the Code of Conduct statements were merely aspirational; the statement he found stated with specificity the conduct the company foreswore, while engaging in precisely the foresworn conduct.
So we will keep on keeping on — worrying about antifraud liability everywhere and flagging absolute statements in public policy documents.
