Pro-Golfer Phil Mickelson Pays $1M to SEC to Settle Civil Insider Trading Claims, But Escapes Criminal Charges in Light of Newman

On Thursday, May 19, 2016, the U.S. Attorney’s Office for the Southern District of New York announced the arrest of renowned sports bettor William “Billy” T. Walters on an alleged years-long insider trading scheme conducted with his friend and business partner, Thomas C. Davis.  According to the indictment, from 2008 to 2014, Mr. Walters executed a series of profitable stock trades in Dean Foods and Darden Restaurants based on inside information repeatedly and systematically provided to him by Mr. Davis.  The U.S. Attorney’s Office alleges that these trades netted Mr. Walters over $40 million and charged him with conspiracy, securities fraud, and wire fraud.

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Taking Action That Affects The Shareholder Vote? Expect the “Gimlet Eye”

On May 19, 2016, the Delaware Chancery Court preliminarily enjoined the directors of Cogentix Medical from reducing the size of the company’s board because, under the facts presented, there was a reasonable probability that the board reduction plan was implemented to defeat insurgent candidates in a contested director election.  Pell v. Kill, C.A. No. 12251-VCL (Del. Ch. May 19, 2016).  The decision is a reminder that board actions that affect the shareholder vote—particularly decisions that make it more difficult for stockholders to elect directors not supported by management—will be subject to enhanced judicial scrutiny by Delaware courts on the lookout with a “gimlet eye” for conduct having a preclusive or coercive effect on the stockholder vote.

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Supreme Court Issues Two Decisions That Limit Access to Federal Courts

On May 16, 2016, the United States Supreme Court handed down two decisions that may, in practice, limit the ability to access federal district courts.  In Spokeo, Inc. v. Robins, No. 13-1339, 578 U.S. ___ (2016), the Supreme Court rejected the Ninth Circuit’s conclusion that statutory violations are per se sufficient to confer Article III standing, and, in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, No. 14-1132, 578 U.S. ___ (2016), the Court concluded that jurisdiction under Section 27 of the Securities and Exchange Act (Exchange Act) is limited to suits brought under the Exchange Act and state law claims that turn on the plaintiff’s ability to prove the violation of a federal duty.

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Here’s a Tip: “Substantial and Important Contributions” to Pre-Existing SEC Investigations Can Pay Off For Whistleblowers

In a move evidencing the SEC’s continued commitment to its whistleblower program, the Commission announced on Friday that it has awarded a whistleblower over $3.5 million for providing information that did not lead to a new investigation, but rather only served to bolster an ongoing investigation.  This decision came after the SEC’s Claims Review Staff preliminarily determined that the SEC should deny the whistleblower claim because the information provided by the individual did not appear to “cause Enforcement staff to open the investigation or to inquire into different conduct, nor . . . to have significantly contributed to the success” of the action.  But after reviewing the whistleblower’s written response for reconsideration, in addition to factual information from staff in the Division of Enforcement, the Commission changed course, determining that the information indeed “significantly contributed” to the success of the SEC’s action, and approving the award.

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Delaware Supreme Court Reaffirms KKR, But Sounds Cautionary Note to Gatekeepers

On May 6, 2016, the Delaware Supreme Court affirmed the Delaware Chancery Court’s ruling that Zale Corporation’s sale to Signet Jewelers withstood scrutiny under the business judgment rule because the transaction was approved by a fully-informed, uncoerced vote of the disinterested stockholders, and that an aiding and abetting breach of fiduciary duty claim against Zale’s financial advisor failed as a matter of law where the plaintiff failed to establish that the Zale board had acted with gross negligence.  In so holding, the Court reaffirmed its holding in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), that in cases in which Revlon would otherwise apply, approval of the transaction by a fully-informed, uncoerced majority of disinterested stockholders invokes the deferential business judgment rule standard of review.  While the Court also affirmed the Chancery Court’s dismissal of the aiding and abetting claim against Zale’s financial advisor, it called the Chancery Court’s reasoning for the dismissal into doubt and sounded a cautionary note to gatekeepers that they are not insulated from liability merely because they are alleged to have aided and abetted a non-exculpated breach of fiduciary duty by their director clients.

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FINRA Issues Largest Fine Regarding Variable Annuities Contracts

On May 3, 2016, the Financial Industry Regulatory Authority announced that MetLife Securities, Inc. agreed to pay $25 million to settle allegations that the company misled its customers in tens of thousands of variable annuity replacement applications.  The sanction represents FINRA’s largest fine related to variable annuities.

Variable annuities (“VAs”) are highly complex and highly regulated insurance contracts that guarantee their holders—typically retirees—a minimum payment at the end of an accumulation stage.  When a consumer seeks to replace one VA for another, her broker must complete an Annuity Replacement and Transfer Disclosure (ARTD) setting forth the comparative cost and guarantee information about existing and proposed annuity contracts.  In New York, brokers must also complete a “Regulation 60 Disclosure,” which contains a hypothetical illustration of death benefits and surrender values for existing and proposed contracts under various hypothetical market growth rates.

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Regulation S-K Concept Release: Will the SEC Reform the Norm for Corporate Disclosures?

On April 13, 2016, the SEC published a concept release discussing and seeking public comment on modernizing certain business and financial disclosures required by Regulation S-K, which lays out reporting requirements for various public company SEC filings.   The release focuses on whether the disclosure requirements – many of which have seen little change in decades – continue to elicit the information that investors need for investment and voting decisions, and whether any of the relevant rules have become outdated or unnecessary.  It also seeks input on how registrants can most effectively present material information, including how the Commission can assist with improving the readability and navigability of SEC filings.  As SEC Chair Mary Jo White explained in an April 13, 2016 statement regarding the release, “[w]e want to make sure that [the Commission’s disclosure] rules are facilitating both timely, material disclosure by companies and shareholders’ access to that information.  And we want to make sure that our requirements are as efficient as they can be.”

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For Theranos, Life is Not All Rainbows and Unicorns: Government Conducting Criminal and Civil Investigations of Blood-Testing Company Theranos

In a memorandum released on April 18, 2016, the private blood-testing company Theranos – once valued at over $9 billion – announced that it is under investigation by the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Attorney’s Office for the Northern District of California, among other government agencies.  The memorandum did not disclose the focus of the government investigations.  Theranos’ announcement about the investigations comes on the heels of a series of October 2015 Wall Street Journal (“WSJ”) articles critical of the accuracy of the company’s blood-testing methods.  The government investigations into Theranos are not surprising, particularly in light of recent remarks by SEC Chair Mary Jo White (“White”) at a March 31, 2016 address at Stanford University’s Rock Center for Corporate Governance, where White revealed the SEC’s focus on Silicon Valley’s privately held unicorns – private start-up companies with valuations exceeding $1 billion.

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Eighth Circuit Breathes Life Into Halliburton’s Price Impact Defense

The first Circuit Court of Appeals decision applying the Supreme Court’s landmark 2014 decision in Halliburton Co. v. Erica P. John Fund Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), favored the defendants, finding as a matter of law that Best Buy Co. and its executives successfully rebutted the presumption of reliance set forth in Basic v. Levinson, 485 U.S. 224 (1988) at the class certification stage through evidence of a lack of price impact from their alleged misstatements.  See IBEW Local 98 Pension Fund et al. v. Best Buy Co., Inc. et al., Case No. 14-3178 (8th Cir. Apr. 12, 2016).  By reversing the district court and holding that a class could not be certified, the Eighth Circuit showed that Halliburton II provides defendants with a meaningful opportunity to challenge the fraud on the market presumption.  The plaintiffs’ bar, however, will be eager to highlight Best Buy’s unique pattern in trying to limit the impact of the decision beyond this case.  Whether other federal courts follow the Eighth Circuit’s lead and deny class certification motions based on Halliburton II in greater numbers, and outside the Best Buy fact pattern, remains to be seen.

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Recent SEC Enforcement Actions and Public Commentary Demonstrate the Commission’s Continued Focus on Internal Control Failures

We have previously written about how, over the past few years, the SEC and other regulatory agencies have devoted substantial resources to investigations regarding allegations that public companies have inadequate internal controls and/or a system for reporting those controls.  See herehere and here.  That effort shows no signs of waning.  As recently as March 23, 2016, the SEC announced a settlement with a multi-national company due in part to the internal controls failures at two foreign subsidiaries.  On March 10, 2016, the SEC announced a settlement of claims against Magnum Hunter Resources Corporation in connection with alleged internal control failures.  And, on February 17, 2016, the SEC announced a settlement of claims against a biopesticide company, Marrone Bio Innovations, based on the company having reported misstated financial results caused in part by internal control failures.[1]

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