Here’s the intro from this blog by Cooley’s Cydney Posner:
The potential passage of the new tax bill is giving some finance departments conniptions, according to Bloomberg BNA, and they’re hoping that the SEC will address the problem. The SEC? Yes. While companies are happy to see the tax breaks, some companies, especially large multinational companies, are anxious about whether they will be able to accurately determine the impact of the tax changes on their financial statements in time to file their annual and quarterly reports with the SEC. The obvious concern is that, if the SEC doesn’t extend the filing deadline, companies could risk making material misstatements.
According to this article in the WSJ, the “two most time-consuming accounting tasks for CFOs will be estimating the tax liability related to offshore cash and reassessing the value of their deferred tax items.” And there could be unintended consequences, for example, a reduction in deferred tax assets could affect debt covenants, one commentator cited in the article advised. Longer term, commentators suggested, some companies could entirely reconfigure their operations to obtain the greatest tax benefit.
See this MarketWatch piece entitled “These companies will take a huge profit hit from lower tax rates”…
Transcript: “Your Upcoming Pay Ratio Disclosures”
We have posted the transcript for our recent CompensationStandards.com webcast: “Your Upcoming Pay Ratio Disclosures.” Tune in for our next pay ratio webcast on CompensationStandards.com in a few weeks, January 10th: “The Latest: Your Upcoming Pay Ratio & Proxy Disclosures.”
We have posted the transcript for our recent DealLawyers.com webcast: “M&A Stories: Practical Guidance (Enjoyably Digested).” Here are the 15 stories that were told during this program:
1. Dig Your Well Before You Are Thirsty
2. Diligence Isn’t Just About Looking for Problems, But for Opportunities Too
3. Expect the Unexpected
4. Keep Your Eye on the Ball
5. Keep Your Friends Close (And Your Enemies Closer)
6. Strategic Deals Require Creativity & Patience
7. The Speech the Director Never Delivered
8. Another Rat’s Nest
9. Don’t Attempt to Win the Championship Football Game With an All-Star Basketball Team
10. What Does Collegiality Really Mean?
11. The Board Book’s Tale: Bankers, Stick to the Numbers!
12. Preparing for Battle
13. Driving a Deal Is Not Unlike Filming a Movie
14. Assumptions Make an *%$ Out of You & Me
15. A Deal So Nice, We Did it Twice
Last week, the SEC published its latest Reg Flex Agenda – this one in the new “more realistic” style that SEC Chair Clayton has been talking about. We’ll see if this new style winds up being truly more predictive – and less aspirational – than the ones before it. The Reg Flex Agenda comes in two flavors: “Existing Proposed & Final Rule Stages” (aka “Active”) – and “Long-Term Actions.” The new style moves a number of rulemakings from “Active” to “Long-Term” status – so that seemingly would be more realistic.
The “Existing Proposed & Final Rule Stages” rulemakings include those rules that are in the proposal stage which the SEC intends to tackle – and those that it hopes to propose – over the coming year. For those proposals that are already outstanding in this category, there is a prediction as to when a final rule might occur. There’s only a few Corp Fin items with this status. For example, the SEC hopes to adopt final rules for its Reg S-X proposal by October 2018 – the same timeframe applies to changing the “smaller company” definition.
The “Long-Term Actions” rulemakings include those proposals that the SEC isn’t likely to tackle in the near term. That includes leftover Dodd-Frank rulemakings like pay-for-performance, clawbacks and hedging. It includes a lot more stuff too – such as universal proxy, disclosure effectiveness, board diversity, proxy plumbing (an “oldie” that is back on the Reg Flex Agenda) – you name it. Even conflict mineral amendments and filing fee processing. There is no set timeframe for any of these – the next action is “to be determined.” And that’s the smart way to play it because the timeline for any rulemaking is so difficult to predict. See this Cooley blog…
ISS Updates 3 Sets of Pay FAQs
Last week, ISS updated these three documents (updates noted in yellow):
In case you are wondering, the Conference Committee version of the Tax Cuts and Jobs Act, which is likely to be the final version the House and Senate vote on and then deliver to the President is identical to the final versions that previously came out of the House and Senate in that it:
– Reduces corporate tax rates [think acceleration of deductions!]
– Does not touch 409A or deferred compensation
– Eliminates the performance-based compensation exception to Section 162(m)
– Extends the $1 million cap of Section 162(m) to certain private companies that file reports with the SEC
– Extends the $1 million cap of Section 162(m) to the company’s CFO
– Applies the “once a covered employee always a covered employee” rule to anyone who was a covered employee of the company after December 31, 2016 (even to payments made after death)
– Includes new Code Section 83(i), which allows for the deferral of taxation of certain broad-based stock awards at private companies
These changes apply to taxable years beginning after December 31, 2017, except to compensation paid pursuant to a written binding contract that was in effect on November 2, 2017, and that was not modified in any material respect on or after that date. There is still time to act!
As Cooley’s Cydney Posner blogged recently, the NYSE has proposed to amend Section 402.01 of the NYSE Listing Manual to provide that listed companies would not be required to provide hard copies of proxy materials to the NYSE, so long as they were included in an SEC filing available on Edgar.
If the proxy materials were available on Edgar but not filed under Schedule 14A (such as proxy statements of foreign private issuers), they may be more difficult for the NYSE to spot – so the company would be required to provide the NYSE with information sufficient to identify the filing not later than the date on which the proxy materials were sent or given to any security holders…
James Kim: Life as a Compensation Consultant
In this 26-minute podcast, James Kim of FW Cook discusses his exciting career, including:
1. How did you wind up getting into the compensation consultant industry?
2. What do you tell people that you do when you first meet them?
3. What are your remembrances of Bud Crystal?
4. What are the hot topics that you’re grabbling with now?
5. Are your clients preparing for the coming pay ratio rule?
6. What are the hardest parts of your job?
7. What are the best parts of your job?
8. What advice would you give to someone new in your field?
This podcast is also posted as part of my “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…
Conflict Minerals: Gold Still a Problem
Yes, the “conflict minerals” disclosure requirement still exists – for now – though there’s been a lot of ink spilled to consider whether it’s accomplishing its intended purpose. In the meantime, this depressing GAO report finds that armed groups still exert a lot of control over DRC gold mines. Here’s an excerpt from Cydney Posner’s blog:
While progress has been made recently “in reducing the presence of armed groups at tantalum, tin, and tungsten mine sites,…the widespread availability of gold in remote, difficult-to-access areas of the eastern DRC and the lack of a functioning traceability system allow armed groups to operate at gold mine sites with minimal government and international oversight. The DRC, US, and various international organizations have commenced initiatives to encourage the responsible sourcing of gold, but there are still few mines validated as conflict free, and there are few incentives for responsible sourcing.
Back in March, I blogged about a phishing scam where fraudsters sent emails claiming to be from EDGAR/SEC that had an attachment for revised 10-K filing instructions. At that time, the SEC posted a notice about the scam.
Now there is a new phishing scam – being sent from “filings@sec.gov” – about changes to Edgar filings. The SEC has posted a notice about this scam too. As the notice states, if the SEC makes changes in how filings are made on Edgar – the agency will make the announcement on its website. It won’t be sending emails to companies.
Speaking of Edgar, I’m disappointed that the SEC still hasn’t addressed what happened a few months ago when Edgar was experiencing issues that delayed offerings. The SEC Chair gave a speech about transparency right when that all went down. A functional Edgar is too important to keep us in the dark…
Kelmar Associates has been retained as the third-party auditor initiating a recent surge in multi-state examinations that has taken place in recent weeks. These unclaimed property audits of public corporations are specific in scope to securities or equity-related property. During this period of increased audit activity, audit notices on behalf of multiple states – more than 15 in some instances – were sent directly to an individual at the issuer/holder or to representatives at the relevant commercial stock transfer agent.
In either scenario, it is important to note that for the purposes of unclaimed property liability the states typically consider the individual business as the entity with the ultimate responsibility for compliance. Notwithstanding contractual provisions to the contrary, the issuer, not the transfer agent, will be susceptible to fines, penalties, and interest imposed by the states for any out of compliance property.
Restatements Hit Six-Year Low
Recently on our “Mentor Blog,” Baker McKenzie’s Dan Goelzer noted the low number of restatements in 2016 – and commented that Sarbanes-Oxley could be the reason. Here’s the intro from this WSJ article on the same topic (also see this blog by Kevin LaCroix):
The share of U.S. companies restating their results hit a six-year low in 2016, a sign that finance chiefs have strengthened their oversight of financial reporting in recent years.
Just 671 public companies disclosed they would need to reissue or revise their financial filings last year, or 6.8% of the 9,831 companies, according to an annual study by Audit Analytics.
That’s the lowest number of restatements in fifteen years (when the requirement to report restatements on Form 8-K took effect). It’s also the lowest share since 2010, when 6.7% of companies disclosed they would need to restate financials. That year 847 out of 12,713 listed companies told investors a restatement was needed.
Yesterday, the SEC announced the appointment of Bill Duhnke as Chair and Jay Brown, Kathleen Hamm, Jim Kaiser and Duane DesParte as Board members of the PCAOB. This is the first time since the PCAOB was initially formed 15 years ago that an entire slate of Board Members was tapped at once. Pretty wild. Here’s SEC Chair Clayton’s statement.
“Financials Staleness Calculator”
A nice companion for our “Disclosure Deadlines Handbook” is this “financials staleness calculator” from Latham & Watkins and KPMG. This tool advances any date that falls on a weekend or holiday to the next business day; accommodates any fiscal year end; and can make the calculation outside of the current year…
Yesterday, the SEC announced an enforcement action against Provectus for insufficient controls surrounding the reporting & disclosure of travel and entertainment expenses submitted by its executives. The former CEO swindled millions using fake or non-existent documentation – the former CFO’s take was closer to $200k.
Here’s an excerpt from the SEC’s press release:
The SEC separately charged Dees in federal district court in Knoxville, Tennessee, alleging that, while Dees was Provectus’ CEO, he treated the company “as his personal piggy bank.” According to the complaint, Dees submitted hundreds of falsified records to Provectus to obtain $3.2 million in cash advances and reimbursements for business travel he never took. Instead, he concealed the perks and used cash advances to pay for personal expenses such as cosmetic surgery for female friends, restaurant tips, and personal travel.
As noted in this blog by Steve Quinlivan, the company itself was not hit with a penalty – perhaps due to the board’s cooperation in the investigation. Steve notes that a somewhat similar case drew a $750k penalty from a company about 30 months ago. We’ve added this case to our list of perk enforcement actions in our “Perks” Practice Area…
One of the odder things over the past 5 years or so is the difficulty of the Senate to confirm SEC Commissioner nominees. My memory might be bad, but I don’t recall any nominees having trouble being confirmed before then. But over the past few years, nominees seem to get stuck in “nominee” mode for a long time. Hester Peirce has been in limbo for years!
Anyway, this blog by Davis Polk’s Ning Chiu discusses how Senator Tammy Baldwin has placed a hold on the nominations of Robert Jackson and Hester, pending their responses to questions she raised in letters to each of them…
Farewell to the Society’s David Smith
A few weeks ago, David Smith – who served as head of the Society of Corporate Secretaries for two decades before his retirement in 2010 – passed away. As an active Society member, I got to know David pretty well – both socially and in my capacity as a national board member for the Society for two terms. The thing I remember most about David was his smile. It spread wide. And he always had one.
A kind man. A listener. He was happy to let others take the lead when meeting with the Corp Fin Staff, etc. Sounds like an easy thing to do – but it’s rare for leaders to not wield their ego. And it was his vision & drive that made the Society such a wonderful place for so long. He truly made a difference.
Here are a few more remembrances:
– Bob Lamm notes: “David Smith was a mentor, friend and leader, not only to the Society of Corporate Secretaries (as it was then known), but also to so many of its members individually. I was one of the many beneficiaries of his guidance and enthusiasm, and I am and always will be indebted to him. Over the course of my career, I learned that while it’s critical to do what you love, it’s also critical to leaven hard work with fun. David taught me those lessons, and unlike so many other teachers, he practiced what he preached; he worked hard, he was demonstrably passionate about his work, and he also made sure to have fun doing it.
David certainly made a difference in my life. It’s impossible to say what my career would have been like without him, but it’s certain that it wouldn’t have been as good as it has been. And I know that there are many others who could – and should – say the same thing.”
– Carl Hagberg notes: “Without David’s insight & early action – which was wildly unpopular at the time among the “stodgy older folks” – The “American Society of Corporate Secretaries” would be completely defunct by now…so we owe him a debt of gratitude for sure. He was a really great guy. Here’s a video from a charitable event where David was honored – David’s remarks start about the 7-minute mark.”
– Steve Norman notes: “There’s a photo in the Society’s archives of a national conference held sometime in the early 1950s at the Greenbrier – there were 48 attendees: 47 men and 1 woman. David came to the Society in the early ’90s from a retail background, which undoubtedly helped him reorient the Society to better serve its customers. He led the Society in increasing its relevance & usefulness to the members through changes in personnel, up-to-date policies and also made the place a much more national organization by strengthening the role of the chapters that existed in nearly all regions of the country. We all hope to leave our organizations in better shape than we found them. David gets high marks for doing that.”
– Doug Chia notes: “David Smith was an important figure in the corporate governance community when I first was exposed to the growing field. During his 19-year tenure at the helm of the Society for Corporate Governance (formerly the American Society of Corporate Secretaries and then the Society of Corporate Secretaries & Governance Professionals), David guided its members though dramatic changes in the demographic makeup of the corporate secretarial profession and the legal and regulatory landscape through which corporate secretaries had to navigate. David saw the profession facing unprecedented challenges that required corporate secretaries to enhance their skills and raise their profiles, and he advocated for the corporate secretary to be seen as the corporation’s “chief governance officer” separate from the chief legal officer or general counsel.
David was at his core a kind man. Family was very important to him. He encouraged all Society members to bring their families to the annual National Conference, and many did year after year (including me). This created a special culture that distinguished the Society from other professional associations and instilled loyalty among its members. David was an approachable person who enjoyed cultivating relationships, making him a natural convener and connector of people. He deftly bridged a generation of corporate secretaries predominantly comprised of white males to succeeding generations of corporate secretaries and governance professionals that were increasingly younger and more diverse. To David, the Society was a place for those new to the profession to immediately feel welcome.
For me personally, David was one of a small number of people who meaningfully altered the trajectory of my career. He gave me opportunities that had I not gotten, things might have turned out much differently for me. I’d say that David was really the one who plucked me from relative obscurity and gave me a seat at the table with those at the highest level of the corporate governance profession. David continued to show an interest in me and my career and became the kind of valued sponsor and advocate all of us hope to have, but many never find. I traveled to Scarsdale, New York this past Friday to pay my respects to David, as did others from multiple generations of Society members and staff. I will never forget the important role he played in my career.”
– Jim Reda notes: “David was a good friend and really upgraded the society during his tenure. Back then, the Society was known for the best conferences that provided the best & most friendly atmosphere. We always felt like we were with friends when attending. The content was top notch as well. David and his family led the way making sure there were no strangers in attendence.”
Even More on “Farewell to Corp Fin Giant, Bill Morley”
Recently, I blogged a few times that Bill Morley passed away (here’s Bill’s obit). Here’s a remembrance from Mauri Osheroff, who worked directly with Bill for most of his tenure:
Like so many other people he worked with, I have very fond recollections of Bill. I owe my career success to Bill. When he was Chief Counsel, he selected me as Deputy Chief Counsel. I joked that this was not an example of the old boys’ network; in fact, I didn’t share his interests (cars and sports, especially University of Maryland sports) at all, so we really didn’t have much in common besides securities law! Nevertheless we got on well. He was always well-informed, practical, and cheerful.
He supported my efforts to learn and to train others. He was a great role model. He was one of the most respected authorities on securities regulation, and was constantly called on by staff members and outsiders alike, but he didn’t let the pressure get to him. I always thought that Bill had a good work/life balance, and when he left the office, he was able to stop thinking about work and focus on his family, friends, and leisure activities. He seemed to really enjoy his retirement, and I wish he had been able to do so for many more years.
Recently, I blogged the rumor that SEC Chair Clayton would tap Senate staffer Bill Duhnke as the next PCAOB Chair. According to this WSJ article, that not only appears true – but Chair Clayton also plans to name several other PCAOB Board Members too. Here’s an excerpt from the article:
SEC Chairman Jay Clayton has picked several members including Mr. Duhnke to join the PCAOB, according to people familiar with the matter. Mr. Clayton and the SEC’s two other commissioners are likely to vote on the nominees in the next several weeks, the people said. The names of the other nominees couldn’t be learned.
The near-wholesale replacement of the audit watchdog’s board follows a period during which SEC officials sometimes publicly chastised the PCAOB for the slow pace of its rule making. Mr. Doty, a former SEC general counsel who took over the PCAOB in 2011, pushed rules that forced auditors to disclose more about what they do.
Interestingly, when I ran my blog about the rumor, I ran a poll about whether our community believes that the PCAOB Chair needs extensive auditing experience – the poll results are: 41% believe deep experience would be a good thing; 34% believe a lack of experience would be a good thing; and 15% say it could go either way…
Revenue Recognition: 21 Corp Fin Comments
Recently, as noted in this memo, FEI found a total of 21 Corp Fin comment letters that asked about revenue recognition practices and found these trends:
1. Early adopters have been asked to clarify considerations made for operationalizing different aspects of the standard
2. The SEC began requesting more robust SAB 74 disclosures for periods ending December 31, 2016
3. Several companies have disclosed incorrect effective dates for ASC 606 in their SAB 74 disclosures
The Trump administration on Wednesday abandoned its defense of the Securities and Exchange Commission’s in-house judicial system, siding with opponents who say the hiring process for the SEC’s judges is unconstitutional. In a brief filed with the U.S. Supreme Court, lawyers for the Justice Department wrote they now consider the SEC’s administrative law judges to be officers like other presidential appointees, instead of employees who are picked through a human-resources process. That means the way the SEC hires the judges may violate a constitutional clause that safeguards separation-of-powers principles.
The Justice Department’s brief didn’t explicitly describe the judges’ appointments as unconstitutional, but said the selection process for the in-house judge at issue in the case “did not conform” to a constitutional requirement. Mark Perry, a partner at Gibson, Dunn & Crutcher LLP who represented the challengers, said the Supreme Court’s involvement is still needed to resolve a disagreement between lower courts over the judges’ status. The Supreme Court would have to appoint an outside party to argue the case since the Justice Department has turned its back on defending it, the brief says. “We are one step closer to victory,” Mr. Perry said Wednesday.
The SEC didn’t sign the Justice Department’s brief. The regulator likely felt it couldn’t join the position because SEC commissioners have previously issued opinions in contested cases stating that judges are employees, not officers, said Andrew Vollmer, a professor at the University of Virginia School of Law and a former deputy general counsel of the SEC. An SEC spokesman declined to comment.
SEC Ratifies ALJ Appointments: Are Prior Decisions at Risk?
In response to the Trump administration’s action, the SEC announced that it had ratified its prior appointments of its current ALJs in order to resolve “any concerns that administrative proceedings presided over by its ALJs violate the Appointments Clause.”
The SEC’s decision to ratify these prior appointments raises an important issue – are cases that were previously decided at risk of being invalidated? Check out this tidbit from a K&L Gates memo about the D.C. Circuit case challenging the ALJ system that’s currently before the Supreme Court:
Despite a question from the bench, the parties did not discuss potential remedies to the possible Appointments Clause violation in detail. Should the D.C. Circuit rule in favor of Petitioners, the SEC Commissioners could ameliorate the issue simply by reappointing the Commission’s five ALJs directly. Because the SEC may risk invalidating other adjudicated findings of liability by acknowledging that its ALJs are unconstitutionally appointed, the SEC may instead choose to stay all administrative proceedings in which a respondent has the option to seek review in the D.C. Circuit while it appeals the case to the Supreme Court.
Interestingly, as part of its order ratifying the ALJ appointments, the SEC lifted a stay on administrative proceedings subject to the jurisdiction of the 10th Circuit that it had put in place in response to a decision in that circuit holding that they were unconstitutionally appointed. So, it looks like the SEC is all-in on the ratification approach.
When you think about it, the administration’s action left the SEC with no other choice – but it looks like there’s really big can of worms that could be opened depending on how the Supreme Court ultimately resolves the issue.
Late last month, the DOJ announced a revised FCPA corporate enforcement policy. The policy – which builds upon the DOJ’s pilot program that we’ve previously blogged about – is intended to provide further enhancements for cooperation. This Simpson Thacher memo reviews the key elements of the new policy (we’ve posted oodles of memos in our “FCPA” Practice Area). Here’s the intro:
On November 29, 2017, Deputy Attorney General Rod J. Rosenstein announced a revised U.S. Department of Justice Foreign Corrupt Practices Act Corporate Enforcement Policy, designed to further incentivize companies to self-report potential FCPA violations. Building on the framework announced in a DOJ pilot program last year, the new policy offers companies that voluntarily self-disclose, fully cooperate, and timely and appropriately remediate substantial cooperation credit—including the presumption of a declination from DOJ criminal prosecution (absent certain aggravating circumstances).
Companies will still be required to pay all disgorgement, forfeiture, and/or restitution resulting from any misconduct at issue. The policy has been added to the U.S. Attorneys’ Manual, which guides prosecutors on when and how to exercise discretion in reaching charging decisions.
The policy has no impact on other U.S. or foreign enforcement authorities, including the SEC.
This blog from Bass Berry’s Jay Knight flags a “sleeper issue” arising out of the lower corporate rates in the tax bill recently passed by the Senate & House – and if you’ve got deferred tax assets on your balance sheet, it just might cause you a few sleepless nights. Here’s the skinny:
At a high level, deferred tax assets are reported as assets on the balance sheet and represent the decrease in taxes expected to be paid in the future because of net operating loss (NOL) and tax credit carryforwards and because of future reversals of temporary differences in the bases of assets and liabilities as measured by enacted tax laws and their bases as reported in the financial statements. NOL and tax credit carryforwards result in reductions to future tax liabilities, and many of these attributes can expire if not utilized within certain periods. If a company believes it is more likely than not that some portion or all of the deferred tax asset will not be realized, a valuation allowance must be recognized.
By “recognized,” of course, Jay means “run through your income statement.” He highlights some disclosure from a major financial institution about the income statement impact of the UK’s rollback of corporate rates in 2013 – and suggests flagging this issue to your audit committee and reviewing your disclosures.
Do You Need an 8-K for the “Deferred Tax Assets” Sleeper?
Another thing to keep in mind is the possibility of tripping an 8-K requirement. For instance, if your deferred tax asset is impaired, you may need to consider whether an Item 2.06 Form 8-K is required. See this one, for example…
Release of “After-Hours” Info: SEC Approves NYSE Rule
On Monday, the SEC approved an NYSE rule limiting listed companies’ ability to issue material news releases shortly after the close of the market. Here’s an excerpt from this Ning Chiu blog summarizing the new rule:
A listed company must not issue material news after the NYSE closes trading until the earlier of (a) publication of the company’s official closing price on the Exchange or (b) five minutes after the Exchange’s official closing time. The NYSE amended its initial rule filing to make clear that the one exception to this revised requirement would be to permit companies to still publicly disclose material information following a nonintentional disclosure, if needed to comply with Regulation FD.
Trading on the Exchange ends at the Exchange’s official closing time of 4pm Eastern, or 1pm Eastern on certain days. The designated market maker, after close, facilitates the close of trading in an auction. Because there is trading of company securities on other exchanges and non-exchange venues even after the Exchange closes, there can be a significant price difference if a company issues news immediately after 4pm Eastern but before the closing auction on the Exchange is completed, leading to investor confusion.
In approving the rule change, the SEC noted that the price difference could increase market disruption and reduce investor confidence in trading on the Exchange, given that orders cannot be cancelled or modified to take into account the material news though the Exchange closing price may not yet have been established by the closing auction process. At the same time, however, the Commission recognizes that Section 202.05 of the Listed Company Manual requires a company to release quickly any news or information that might be expected to materially affect the market for its securities.
SCOTUS: Can State Courts Still Hear ’33 Act Claims?
Last week, the Supreme Court heard oral arguments in Cyan, Inc. v. Beaver County, which raises the issue of whether SLUSA strips state courts of jurisdiction over Securities Act claims. This recent blog from Lyle Roberts at “The 10b-5 Daily” reviews the arguments. Here’s an excerpt summarizing the legal background:
Congress passed the Private Securities Litigation Reform Act (PSLRA) to protect corporate defendants from meritless securities class actions. The PSLRA, however, only applied to federal cases. To evade the PSLRA’s impact, plaintiffs began filing securities class actions in state court, usually based on state law causes of action.
Congress passed SLUSA to close this loophole. Due to unclear drafting, however, there has been confusion in the lower courts over whether SLUSA also makes federal court the sole venue for class actions alleging Securities Act claims (which historically enjoyed concurrent jurisdiction in state or federal court).
The parties have put forward three competing interpretations of SLUSA. The petitioners say that SLUSA divests state courts of jurisdiction, the respondents say that it doesn’t – and the Solicitor General says that you can file in state court, but that cases can be removed to federal court.
We’ve previously blogged about the growing popularity among plaintiffs of state courts as a forum for Securities Act litigation – and about some of the steps that public companies have taken in response.
Whatever their underlying merits, coin offerings have quickly attracted their fair share of fraudsters – and the bad guys’ propensity for ICO scams hasn’t been lost on the SEC. In an October speech, Enforcement Co-Director Stephanie Avakian said that concerns about abuses in this area were one of the factors that led the SEC to create a new “Cyber Unit” in the Division of Enforcement:
As folks likely know, the Commission recently issued a Report of Investigation cautioning that offers and sales of digital assets by “virtual” organizations – often referred to as “Initial Coin Offerings” or “Token Sales” – are subject to the requirements of the federal securities laws, which can include the registration of securities offerings.
Blockchain technology presents many interesting issues and can of course present legitimate opportunities for raising capital. But, like many legitimate ways of raising capital, the popular appeal of virtual currency and blockchain technology can be an attractive vehicle for fraudulent conduct. We think that creating a permanent structure for the consideration of these issues within the Cyber Unit will ensure continued focus on protecting both investors and market integrity in this space.
Earlier this week, the Cyber Unit made its first big splash with the announcement that it had obtained an emergency asset freeze to stop what it called “a fast moving fast-moving Initial Coin Offering (ICO) fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.”
The alleged scam involves a recidivist securities law violator and his company, and the SEC’s complaint alleges that the defendants marketed and sold securities called “PlexCoin” – claiming that investments in PlexCoin would yield a 1,354% profit in less than 29 days.
The announcement notes that this represents the first action filed by SEC’s new Cyber Unit – and the extent of the ICO fraud problem strongly suggests that it won’t be the last. We’re posting memos in our “ICOs” Practice Area.
ICOs: Offerings Continue to Boom – But Class Actions Start to Bloom
The potential fraud issues associated with coin offerings haven’t just attracted the attention of the SEC. While these offerings continue to attract a high-level of investor interest, this “D&O Diary” blog points out that they’re also becoming an attractive target for securities class actions. Here’s the intro:
According to the latest update on the CoinSchedule website, there have been a total of 228 initial coin offerings so far this year through mid-October, raising a total of over $3.6 billion. At least five of this year’s ICOs have raised over $100 million. This burgeoning activity notwithstanding, ICOs are at the center of controversy.
Among other things, China and South Korea have banned ICOs. The SEC has already shown its willingness to pursue enforcement actions against ICO sponsors, as discussed further here. And now a high-profile statement by one of the country’s leading securities regulation experts suggests even greater scrutiny may lie ahead. In the meantime, as discussed below, ICO and cryptocurrency-related litigation appears to be proliferating.
The blog goes on to provide details on several recent class action lawsuits involving coin offerings.
Whistleblowers: Supreme Court Hears Argument on Internal Whistleblower Issue
Last week, the Supreme Court heard oral arguments in Somers v. Digital Realty Trust – which gives the Court an opportunity to resolve a split between the circuits concerning whether Dodd-Frank’s whistleblower protections extend to individuals who report wrongdoing internally, but don’t reach out to the SEC. This recent blog from Cydney Posner reviews the case and the issue before the court. Here’s an excerpt:
In this case, the 9th Circuit had refused to dismiss Somers’ whistleblower claim brought under Dodd-Frank’s anti-retaliation provision, even though he had failed to report the violation to the SEC. As you may recall, Dodd-Frank added Section 21F to the Exchange Act, establishing new incentives and protections for whistleblowers, including monetary awards for reporting information, confidentiality provisions and employment retaliation protections.
The statute defines “whistleblower” as a person who reports potential violations of the securities laws to the SEC; however, in promulgating rules under the statute, the SEC distinguished the whistleblower anti-retaliation provisions from the award provisions, applying a broader definition in the context of anti-retaliation that would not require reporting to the SEC.
The 2nd Circuit agrees with the 9th Circuit’s approach – but the 5th Circuit has held that in order to qualify for protection, a whistleblower must report the wrongdoing to the SEC.
