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.
According to Woodruff Sawyer’s recent report the D&O insurance market remains buyer friendly, but perhaps not quite to the extent that it has been in recent years. The report notes that D&O insurance premiums peaked in Q1 2021 at 4.7x Q1 2018 levels. In 2022, the market turned dramatically as new entrants drove pricing down, and by Q2 2024, premiums had dropped to 1.9x 2018 levels. This excerpt says that this downward trend in premiums is expected to continue in 2025, but companies may need to change carriers in order to realize additional savings:
Although we’re still in a soft D&O market, the rate of decline in premiums for both newly public and mature companies has decelerated and will likely continue to do so in 2025. Underwriter sentiment predicted the hard market in 2021; their response to whether rates will continue to go down today and moving forward should not be ignored. Over the last three years, fewer and fewer underwriters have predicted premiums would go down (40% in 2022, 30% in 2023, and 21% today).
Our own forecast is that all public companies will continue to have an option for D&O program cost savings—but more likely from new market entrants than their incumbent insurance carriers. Established carriers will work hard to keep rates at what they deem reasonable to avoid the dynamic of underpricing today only to then be forced into hard market pricing or leaving the D&O market altogether. In 2025, we’ll continue to see new carriers take more risk to build market share while established carriers will carefully defend their turf, all while keeping a watchful eye on claims trends.
There’s more good news – Woodruff Sawyer also says that most D&O buyers were able to renew policies in 2024 with flat or lower self-insured retentions, and that this trend is expected to hold for 2025 as well.
Providing appropriate oversight of the key risks that companies face is one of the board’s most important roles, and one that is made increasingly difficult by the challenges presented by artificial intelligence and other emerging technologies. This Skadden memo offers some guidance to help boards ensure that an appropriate oversight program is in place for AI-related risks.
The memo surveys the current regulatory landscape for AI and the risk management tools available to corporate boards, and offers up the following guiding principles for AI corporate governance:
– Understand the company’s AI risk profile. Boards should have a solid understanding of how AI is developed and deployed in their companies. Taking stock of a company’s risk profile can help boards identify the unique safety risks that AI tools may pose.
– Be informed about the company’s risk assessment approach. Boards should ask management whether an AI tool has been tested for safety, accuracy and fairness before deployment, and what role human oversight and human decision-making play in its use. Where the level of risk is high, boards should ask whether an AI system is the best approach, notwithstanding the benefits it may offer.
– Ensure the company has an AI governance framework. The board should ensure that the company has such a framework to manage AI risk, and then reviews it periodically to make sure it is being properly implemented and monitored, and to determine the role the board should have in this process.
– Conduct regular reviews. Given the rapid pace of technological and regulatory developments in the AI space, and the ongoing discovery of new risks from deploying AI, the board should consider implementing regular reviews of the company’s approach to AI, including whether new risks have been identified and how they are being addressed.
– Stay informed about sector-specific risks and regulations. Given how quickly the technology and its uses are evolving, boards should stay informed about sector-specific risks and regulations in their industry.
The memo points out that the specific AI-related risks that companies face, and their legal and regulatory obligations, differ across industries. Furthermore, the regulatory framework for AI is evolving rapidly and does always provide consistent approaches or guidance. Further complicating matters is the fact that the nature and extent of regulatory obligations also often depend on whether the company is the developer of an AI system or simply deploys it, and that line may be difficult to draw.
In our latest “Understanding Activism with John & J.T.” podcast, my co-host J.T. Ho and I were joined by Greg Taxin, Founder & Managing Member of Spotlight Advisors, to discuss the current environment for shareholder activism. Topics covered during this 34-minute podcast include:
– What motivates activists and how do companies know what activists are really seeking?
– How can board members most effectively participate in a company’s response to activism?
– What are the hard and soft costs involved in activism — for the company and the activist?
– How do different groups of investors respond to activism?
– What are the unique challenges presented by first-time activists?
– What are the most effective strategies for increasing retail voter turnout?
– What will be the major trends and challenges in shareholder activism over the next few years?
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
Our 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences are less than three weeks away! Liz, Dave, Meredith and I can’t wait to see you in San Francisco on October 14th and 15th, but if you want a place to sleep, you need to act fast. That’s because TODAY, Wednesday, September 25, is the last day to secure your exclusive hotel room rate at the Hilton Union Square – and you can do that by using this link.
If you haven’t registered for the Conferences, now is a great time to take care of that too. You definitely don’t want to miss out on the critical guidance that you’ll need for proxy season. Here is the agenda and speaker list. Remember that you can also sign up to attend virtually if traveling isn’t in the cards. And either way, you’ll get access to on-demand replays for a year after the Conferences. You can register by visiting our online store or by calling us at 800-737-1271.
SpencerStuart recently issued its “2024 S&P 500 New Director & Diversity Snapshot”, which provides information on the expertise and demographic characteristics of newly-added directors at S&P 500 companies. Here are some of the specific findings:
– S&P 500 boards continue to seek top-level executive experience and financial expertise, with CEOs and directors with financial backgrounds comprising 29% of the incoming class. Fewer P&L leaders were appointed as directors this year.
– The proportion of next-gen new directors (those aged 50 or under) has increased after a sharp drop last year. They account for 14% of the incoming class of 2024, up from 11% in 2023 but below 2022 levels (18%).
– The increase in next-gen directors may be due to growing board interest in tech expertise. Nearly a third (29%) of this year’s next-gen new directors have backgrounds in technology/telecommunications, up from 14% in 2023. In addition, the majority (89%) of next-gen directors are actively/fully employed.
– About a third (34%) of the class of 2024 are first-time directors. Directors in this group are much more likely to be actively employed (67%) than retired. They are also much more likely to be actively employed than directors who are not first-time directors (43%).
– This year, 58% of new director appointments have been filled by diverse executives, down from 67% in 2023 and 72% in 2022. However, diverse individuals still make up a significantly bigger share of new director appointments than a decade ago.
– The percentage of new directors who are women has decreased from last year: 42% of appointments, down from 46% in 2023. It is also a decrease from five years ago, when the proportion of female new directors was the same as in 2023 (46%). However, it is a significant increase from a decade ago, when the proportion of female director appointments was 30%.
The report says that the most common industry background for the S&P 500 director class of 2024 is technology and telecommunications, followed by industrials, consumer goods and services, and the financial services sector.
We’re accustomed to seeing the SEC announce the resolution of some high-profile enforcement proceedings shortly before its September 30 fiscal year end. We expect the same this year, but it’s possible that this year may be a little different that years past, as the SEC continues to sort out the implications of the SCOTUS’s Jarkesy decision for its enforcement program. This excerpt from a recent Seyfarth guest blog on “The D&O Diary” discusses how Jarkesy might affect the agency’s decisions around fraud-based enforcement actions:
Jarkesy will likely have a significant impact on the SEC’s appetite and ability to litigate securities fraud claims going forward. As Justice Gorsuch noted in his concurrence, since the Dodd-Frank Act, the SEC has won significantly more of the enforcement actions it brought in administrative proceedings than those it brought in federal courts (Jarkesy, 144 S. Ct. at 2141 (Gorsuch, J., concurring)).
While Jarkesy left a number of open questions, it unequivocally required the SEC to bring securities fraud actions seeking civil penalties in federal court rather than in administrative proceedings. Therefore, Jarkesy will likely result in the SEC being more selective in its enforcement of securities fraud, primarily bringing the more serious fraud actions. The increase in resource usage required to bring an action in federal court will likely reduce the SEC’s ability to pursue smaller fraud cases, which may incentivize it to either settle those cases or bring lesser charges involving non-fraud claims and seek equitable remedies in administrative proceedings. This trend should provide an advantage to counsel representing entities or individuals in SEC investigations and settlement negotiations.
The blog says that while these changes will improve the fairness of outcomes to defendants by subjecting the SEC to the more demanding procedural and evidentiary standards required by federal courts, they will also reduce the SEC’s ability to bring these cases and potentially embolden bad actors.
“The Mentor Blog” has been pretty much dormant for the past couple of years, but I’m excited to announce that the blog is returning to active status today and our that Contributing Editor, Meaghan Nelson, will be blogging there Tuesday through Thursday of each week. There’s a story behind this decision, so please bear with me for a moment while I share it with you.
When Broc started The Mentor Blog, it was intended to serve as a platform for advice to help readers advance their careers. Over the years, however, it drifted away from that objective, and often just served as a place for blogs that didn’t make the cut for inclusion on this blog. That’s not exactly the kind of “value add” that we thought our members were looking for in a members-only blog, so we eventually let it go dormant.
That’s when Meaghan entered the picture. The idea of possibly bringing the Mentor Blog back entered my mind the first time I saw Meaghan’s resume. I think she’s the ideal person to provide insights to help readers manage their careers. Not only is Meaghan a super-smart person who has taken the lead on updating all of our handbooks this year, she’s also enjoyed a diverse and high-achieving legal career before joining us.
Meaghan’s worn a bunch of hats – she’s been at BigLaw firms on Wall Street and in Silicon Valley, worked in-house at public companies and startups, and is now teaching law school in addition to serving on our editorial team. What’s more, she also has a young family and is dealing with the same challenges of balancing career and family that many of you are facing.
We’re really excited that Meaghan is going to be contributing her insights on the Mentor Blog, and we think you’re going to enjoy reading what she has to say. Members of TheCorporateCounsel.net should be sure to check out her first blog, which she posted this morning. Not a member? We can fix that – email sales@ccrcorp.com to sign up today and get access to The Mentor Blog – or sign up online.
