When it comes to meme stock apes’ enemies list, you can probably put Citadel Securities alongside hedge fund short sellers right at the very top. Earlier this year, retail investors sued Citadel & Robinhood, alleging that they colluded to prevent a short squeeze at AMC & GameStop. That lawsuit was dismissed last month, but not before one meme stock investor – a California bartender who made hundreds of thousands of dollars on meme stocks – really managed to get under the skin of Citadel’s CEO.
This Institutional Investor article tells the story of Katherine Larsen, a meme stock investor & bartender from Oceanside, CA. Despite turning a $120K investment into more than $500K, Larsen’s experience in the meme stock game left her suspicious of Wall Street trading practices. While Larsen wasn’t a plaintiff in the lawsuit against Citadel, the article says that she became an extremely enthusiastic cheerleader, whose activities included running a digital ad in Times Square asking “Do you believe #Ken Griffin lied?” Griffin, who is Citadel’s CEO, didn’t take kindly to Larsen’s campaign:
Larsen is not a party to the lawsuit, but she has taken up its cause. She has hired firms to run digital billboards and banners lambasting Citadel and its billionaire founder in the streets — and skies — of New York and elsewhere. Griffin’s lawyers have sent dozens of cease and desist letters. Two days after running the Times Square ad, Larsen, known on Twitter as Kat Stryker or @katstryker111, tweeted out one of those letters, which targeted an advertising firm she’d used. The letter claims an “online mob” led by Larsen was “disseminating unfounded conspiracy theories and debunked narratives” about Citadel Securities.
“[Larsen] has published a series of tweets containing pictures of these ads, which contained demonstrably false and defamatory statements about Mr. Griffin — including the inflammatory and outrageous claim that he perjured himself by lying under oath,” it continues.
That comment about falsely accusing Griffin of “lying under oath” refers to written testimony that he provided to Congress last February, in which he denied that Citadel played a rule in Robinhood’s decision to limit trading in certain meme stocks. Interestingly, the letters were not sent to Larsen, but to more than 25 firms that offer mobile billboard ads.
There’s no way that a CEO looks good letting a retail investor get so far under his skin that he decides to “release the hounds.” But I wonder if Ken Griffin’s situation isn’t a preview of what may be in store for a lot of meme stock CEOs? It seems to me that the same kind of populist rage that fuels campaigns like Ms. Larsen’s can easily be turned against CEOs who don’t deliver ever higher stock prices to the retail investors that they courted so assiduously. By the way, meme stocks are crashing, so we may not have to wait too long to see if my guess is right.
Tune in tomorrow for the CompensationStandards.com webcast – “Compensation Committee Responsiveness: How to Regain High Say-on-Pay Support” – to hear Aileen Boniface of Clermont Partners, Steve Day of Calfee, Halter & Griswold, Brad Goldberg of Cooley and Tara Tays of Pay Governance break down key 2021 lessons on say-on-pay and problematic pay designs, and discuss how to bring your “A game” to shareholder engagement for the upcoming proxy season.
If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
A couple of years ago, Corp Fin initiated a policy under which some Rule 14a-8 no-action requests received an oral response only. Yesterday, Corp Fin announced that it was discontinuing that policy. Here’s an excerpt:
We have reconsidered this approach, and after review of the practice we believe that written responses will provide greater transparency and certainty to shareholder proponents and companies alike. Beginning with the publication of this announcement, we will return to our prior practice and the staff will once again respond to each shareholder proposal no-action request with a written letter, similar to those issued in prior years. Our response letters will be posted publicly on the Division’s website in a timely manner. We will no longer communicate our responses via a chart, but we expect to publish a chart upon completion of the proxy season.
The original decision to provide oral responses to some letters was prompted in part by Corp Fin’s desire to enhance the efficiency of the no-action process, but my guess is that this change in policy is likely to have the opposite effect. At the very least, it isn’t going to ease the burden on the Staff when it comes to processing no-action requests – which may well spike this year as a result of Corp Fin’s issuance of SLB 14L.
In advance of tomorrow’s open meeting at which the SEC is likely to propose rule amendments addressing, among other things, 10b5-1 plans and issuer buybacks, commissioners Peirce & Roisman issued a joint statement criticizing Chair Gensler’s rulemaking agenda. In particular, the statement says that the decision to revisit rules that were only recently adopted undermines precedent:
The Agenda makes plenty of room for rulemakings to undo rulemakings that the Commission only recently completed. These include proposals to further amend our rules on proxy solicitation and shareholder proposals; the Resource Extraction Payments Rule; the rules pertaining to the accredited investor definition and the private offering exemption integration framework; as well as our whistleblower rules. Not only are the Commission’s most recent amendments to each of these rules barely or less than a year old; none have been effective for more than a few months. As we said when we initially raised these concerns, we have not seen any new information that would warrant opening up any of these rules for further changes at this time. So, why the rush to revisit them?
Hmm, I wonder if this decision to revisit prior rulemaking has anything to do with the fact that the SEC adopted each of the rules that the current regime proposes to reconsider by a 3-2 vote along partisan lines? That’s a reflection of how politicized the SEC rulemaking process has become over the course of the past couple of decades, and is something for which both sides bear responsibility.
In this environment, statements from commissioners calling into question one side’s agenda for failing to respect “precedent” that the other side crammed down their throats aren’t going to persuade anyone who doesn’t already agree with them.
The November-December issue of “The Corporate Counsel” newsletter is in the mail. It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment (subscribe here to be “in the know”). The issue includes articles on:
– Annual Season Items
– SEC Adopts Mandatory Use of Universal Proxy in Contested Elections
– Staff Legal Bulletin 14L: Corp Fin Lays Out the Welcome Mat for ESG-Related Shareholder Proposals
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
Liz has already blogged a couple of times (here’s the most recent) about Acting Chief Accountant Paul Munter’s statement recapping the OCA’s 2021 activities. For a blogger, this thing is one of those “gifts that keep on giving”, so I’m going to address another issue he raised – “Little r” restatements. Munter noted that Little r restatements have grown from 35% of restatements in 2005 to nearly 76% last year. Since they don’t require companies to restate prior period financials in order to correct an error, it’s easy to understand their popularity. But that rise in their use seems to have also attracted more attention from the SEC.
The ability to correct an error without a full-blown restatement depends on whether the error is material to the prior period, but Paul Munter cautioned that deciding whether an error is material is not a mechanical process. Instead, “management must judiciously evaluate the total mix of information, taking into consideration both quantitative and qualitative factors to determine whether an error is material to investors and other users.”
Shortly after this statement was issued, Corp Fin’s representatives at the annual AICPA & CIMA conference suggested that qualitative factors aside, some errors are just quantitatively too big to “Little r.” This excerpt from a Wolters Kluwer blog on the conference explains:
Corp Fin indicated that the guidance in SAB 99, Materiality, remains guidance and requires quantitative and qualitative considerations when determining if something is material to a reasonable investor. Corp Fin discussed two recent accounting error examples in which the division did not agree to the Little r treatment by the particular company. In both cases, Corp Fin asked for SAB 99 considerations and judgments to gauge how the company determined that the particular errors did require Big r restatement and withdrawal of the audit opinion. In the two examples, quantitative factors were significant (i.e., 20% change in net income, 50% change in loss on discontinued operations). However, in the company’s SAB 99 analysis it relied on qualitative factors to overcome these significant quantitative factors. Some of the qualitative factors considered by the company included that the:
– Error generally was isolated to the discontinued operations portion of the financial statements;
– Error was already now corrected since it was revised (not restated).
– The sale was complete;
– The most recent financial statements really are the ones that are most useful to investors.
Corp Fin appreciated the qualitative factors and they are things that it sees generally with SAB 99 analysis. As a result, Corp Fin did not necessarily disagree that these qualitative factors weren’t relevant. However, Corp Fin determined that these qualitative factors were not enough to overcome the magnitude of the quantitative errors.
The blog also says that Corp Fin’s representatives pointed out that a lot of the qualitative considerations raised here were based on the passage of time – in other words, a lot of water has gone under the bridge since the error, and that makes it immaterial. Not surprisingly, those type of qualitative arguments don’t carry a lot of weight with the Staff.
I think it’s fair to say that when issues surrounding Little r restatement decisions feature in both an Acting Chief Accountant’s statement on current areas of focus & in remarks by Corp Fin representatives at a prominent conference, those issues are front and center with the SEC’s accountants. So, if you’ve got a client that wants to correct an error through a Little r restatement, it’s probably a good idea to tell them that they’d better be loaded for bear – and not just in case the Staff comments on the filing. With this level of SEC attention, auditors are likely going to require a lot of persuading before they sign off on a Little r restatement.
Now may a good time for calendar year companies to do a little housekeeping in advance of the post-holiday annual reporting rush. This Bryan Cave blog says that one item that should be on your agenda is a review of your corporate bylaws. This excerpt identifies some specific areas to take a look at:
– Calling of special meetings of shareholders – Consider the list of who has authority to call special meetings. Typically it includes the CEO and a majority of the board. A state may require that persons in certain positions or a specified percentage of shareholders have the authority to call a meeting. Inclusion of a minority of the board may create risks in the case of board dissent. Some companies permit a specified percentage of shareholders, with detailed informational and procedural requirements.
– Conduct of shareholder meeting – Sometimes overlooked, particularly in legacy bylaws, detailed authorizing provisions can clarify the authority of the board or a presiding officer as well as address questions of validity in light of the silence of many corporate statutes.
– Virtual shareholder meetings – Even where clearly permissible under corporate statutes, it may be prudent to affirm the permissibility of virtual meetings in bylaws as well.
– Notice of shareholder meetings – Although eproxies have been common for some time, consider whether notice provisions may need to be better aligned to the company’s practices.
– Advance notice provisions – If not updated recently, consider reviewing informational and procedural requirements for currency and to ensure they aren’t “overtly unreasonable.” If applicable, similarly review any special meeting or written consent provisions for consistency of informational requirements and, to the extent applicable, procedural requirements.
The memo also points out that companies should also review their shareholder approval thresholds in order to ensure compliance with state law and the consistency of corresponding proxy disclosures. The NYSE’s recent clarification of how it interprets the “votes cast” on a particular proposal provide yet another reason to take a look at this provision of your bylaws.
This Deloitte report addresses several topics that many businesses will find very relevant in the current environment – the financial reporting implications of inflation, supply chain disruptions and labor shortages. Here’s an excerpt addressing some of the accounting concerns associated with supply chain issues:
For many companies, such disruption is significantly increasing the costs associated with moving goods through the supply chain. If the higher costs are included in inventory, companies should consider whether these costs drive up the cost of the inventory in such a way that adjustments based on the expected net realizable value of the inventory are warranted. This determination is likely to vary by industry and by company given (1) the use of different types of materials, (2) diversity in suppliers, and (3) a company’s ability to transfer cost increases to its customers through higher selling prices.
While the goods are making their way through the disrupted supply chain, companies should consider the point in time at which the buyer actually assumes ownership of the goods to ensure appropriate reporting of raw materials, finished goods, and supplies on their balance sheets. Companies that may have had only immaterial amounts of goods in transit because of historically short transit times may find it necessary to implement more robust accounting processes and internal controls to appropriately capture their inventories (some of which may be physically held by third parties). Likewise, companies should ensure that suitable cutoff procedures result in revenue recognition in the appropriate period.
In addition, companies struggling to obtain certain products that are inputs to finished goods, such as microchips, may consider adjusting their manufacturing processes to use different inputs or manufacture the products differently. Companies should consider whether the need to use alternate raw materials or processes affects the warranties offered and the accounting for those warranties.
Issues like these are worth keeping in mind as companies prepare their financial statements, but their potential implications should also be considered in preparing the MD&A and Risk Factors sections of upcoming SEC filings.
I blogged earlier this week about current focus areas for the SEC’s Office of the Chief Accountant. One of those focus areas is revenue recognition – and on the same day that Paul Munter published that year-end statement, the Enforcement Division also announced that it had charged a former NYSE-listed company and three former execs (the CFO, CAO, and Controller) with violations of the antifraud, reporting, books and records, and internal accounting control provisions of the federal securities laws. The company (which is now PE-owned) agreed to a $2 million civil penalty and a permanent injunction. The individuals are facing injunctions, disgorgement with interest, civil penalties and D&O bars.
The violations stemmed from an alleged revenue manipulation scheme and misreporting of key metrics, including adjusted EBITDA. Here’s one of the opening paragraphs in the complaint (also see this Cooley blog):
The scheme entailed entering a series of revenue adjustments to make it appear that ARA had beat, met, or come close to meeting various predetermined financial metrics, when in fact its financial performance was materially worse. Wilcox, Boucher, and Smith intentionally, recklessly, and negligently engaged in acts, practices, and courses of conduct related to those revenue adjustments that caused ARA to overstate its revenue, net income, and other financial metrics throughout this period.
Basically, according to the SEC, the defendants determined what revenue they wanted the company to have for a month or a quarter. Then, they had staff members make topside adjustments to revenue at various corporate clinic locations, until they met the predetermined number. This was at odds with the fact that the company’s internal controls called for any adjustments to be made based on actual patient payment details. The defendants allegedly applied various manipulations to arrive at their predetermined numbers, including use of a “contractual adjustments spreadsheet” as a “cookie jar” to find topside revenue when they needed it.
I don’t want to get too into the weeds because revenue recognition is complicated and I’m not an accountant, but it seems pretty obvious that it’s a no-no to decide what you want your revenue to be and then make adjustments to arrive at that figure. As I blogged just a few months ago in regards to an EPS enforcement action, the SEC really does frown upon earnings management, and it’s pretty likely that they’ll spot it.
In other news, the SEC also announced a $5 million whistleblower award this week, so there continues to be a pretty big incentive for folks who pick up on fraud to go to the Commission…
We’ve seen some notable numbers and stories around whistleblowers this year, including the multi-million dollar award that the SEC announced this week. While Frances Haugen and Tyler Shultz/Erika Cheung are currently top of mind, there was a time – 20 years ago! – when the world was abuzz about Sherron Watkins, who raised concerns internally at Enron and later testified before Congress about those warnings.
A recent Bloomberg article checks in on where the major Enron players are today, and reports that Watkins now teaches business ethics. Here’s a Houston news outlet with a couple of short video interviews in which Sherron shares what the company’s collapse looked like from the inside – and how it still feels like yesterday to her.
