Posts by: Editorial Board

The SEC Enforcement Division 2017 Annual Report: Continued Focus on Individual Wrongdoers and Enhanced Protections for the “Main Street” Investor

Almost a year into the new administration, the U.S. Securities and Exchange Commission’s Division of Enforcement released its annual report last week, providing a recap of the SEC’s enforcement results over the past 12 months, as well as some insight into its direction for the coming year. Overall, the report suggests that the SEC will increase its focus on addressing harm to “Main Street” investors and that pursuing individuals will continue to be the rule, not the exception.

During fiscal year 2017, the SEC pursued 754 enforcement actions, 446 of which were “stand-alone” actions (as opposed to “follow-on” actions which seek to bar executives from practicing before the Commission or to deregister public companies). This represents a drop from the prior year in which the SEC pursued 784 enforcement actions, 464 of which were stand-alone actions. The bulk of the Division’s 446 stand-alone actions in FY 2017 focused on issuer advisory issues, issuer reporting, auditing and accounting, securities offerings, and insider trading—all areas that saw a relatively similar number of cases in FY 2016. Actions involving public finance abuse represented the only significant decrease in the number of cases versus the prior year. In FY 2016, the SEC brought nearly 100 public finance abuse actions compared to fewer than 20 in FY 2017. READ MORE

The SEC’s Office of Compliance Inspections and Examinations Warns Investment Advisers: “Don’t Mislead or We Will Proceed!”

On September 14, 2017, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert in which it highlighted a number of compliance issues it had identified relating to the so-called Advertising Rule (Rule 206(4)-1 of the Investment Advisers Act of 1940 (“Advisers Act”)).

The Advertising Rule imposes four specific provisions that prohibit investment advisers from making certain references, representations, and statements in advertisements that are deemed to be fraudulent, deceptive, or manipulative (Advisers Act Rule 206(4)-1(a)(1)-(a)(4)). It further prohibits advertisements that contain untrue statements of material fact, or are otherwise false or misleading (Advisers Act Rule 206(4)-1(a)(5)).

Specifically, the Advertising Rule prohibits advertising that refers to any testimonial regarding an adviser’s advice, analysis, report, or service; advertising that refers to past recommendations that were or would have been profitable to any person, with limited exceptions; advertising, representing, through graphs, charts, formulas, or other devices, that a decision to buy or sell a security can be made on the sole basis of that representation; and advertising containing any statements that any report, analysis, or service will be provided free of charge, unless it will be furnished free and without any obligation. The Advertising Rule also expressly prohibits an adviser, directly or indirectly, from publishing, circulating, or distributing any advertisement that contains any untrue statement of a material fact, or which is otherwise false or misleading. READ MORE

Going After the (Little) Bad Guys: SEC Announces More Actions Against Penny Stock Gatekeepers

The SEC last week announced that it has sanctioned several market participants in the penny stock industry, including attorneys who wrote offering documents as well as stock transfer agents, for their roles in various sham IPOs of microcap stocks.  These are the latest in a string of penny stock enforcement actions since outgoing SEC Chair Mary Jo White announced the implementation of the Commission’s “broken windows” policy in 2013. That policy targeted both large and small issuers and market participants.  The strategy has resulted in the SEC racking up its largest-ever volume of enforcement cases in fiscal year 2016.

In the first enforcement actions, the SEC alleged that a California-based securities lawyer wrote false and misleading registration statements in connection with five microcap IPOs, which were part of a scheme to transfer unrestricted shares to offshore market participants. The SEC also alleged that the CFO of American Energy Development Corp. (AEDC), one of the issuers in question, and the attorney who wrote opinion letters for the offerings made false and misleading statements.  The market participants were barred from any further penny stock activity, and the attorneys were permanently suspended from appearing and practicing before the SEC.  The SEC also suspended trading in shares of ADEC.

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The SEC is focusing its enforcement and investigation efforts on preparers and auditors of financial statements, Mary Jo White tells accountants

In a recent address, SEC Chair Mary Jo White stated that the SEC had focused its reinvigorated investigation and enforcement efforts on holding preparers and auditors accountable for their work on financial statements.  She alerted the 2015 American Institute of Certified Public Accountants (“AICPA”) National Conference to the weighty responsibilities and challenges faced by auditors and preparers, as well as audit committee members, standard setters and regulators, when endeavoring to ensure high-quality, reliable financial reporting.

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Judge Berman Deflates SEC’s ALJ Appointment Process

United States District Court Judge Richard M. Berman of the Southern District of New York has been making headlines in recent weeks as he presides over the highly publicized case between the National Football League (“NFL”) and National Football League Players Association (“NFLPA”) regarding the suspension of New England Patriots star quarterback Tom Brady over his alleged role in “Deflategate.”  Taking a page from the Patriot’s playbook, Judge Berman recently deflated the United States Securities and Exchange Commission (“SEC”) and its controversial administrative court forum.

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Flawed Valuation Leads Delaware Court to Award Damages to Option Holders

On July 28, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it criticized in particularly strong terms the analysis performed by a financial firm that was retained to value companies that were being sold to a third party or spun off to stockholders (the “valuation firm”).  See Fox v. CDX Holdings Inc., C.A. No. 8031-VCL (Del Ch. July 28, 2015).  CDX is just the latest decision in which the Chancery Court has awarded damages and/or ordered injunctive relief based in part on a financial firm’s failure to discharge its role appropriately.  Calling the valuation firm’s work “a new low,” Vice Chancellor Laster’s opinion is another chapter in this cautionary tale that lays bare how financial firms can be exposed not only to potential monetary liability but, as importantly, significant reputational harm from flawed sell side work on M&A transactions.

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Don’t touch that remote (tippee)? Salman reflects Ninth Circuit’s view on Newman

In United States v. Salman, the Ninth Circuit recently held that a remote tippee could be liable for insider trading in the absence of any “personal benefit” to the insider/tipper where the insider had a close personal relationship with the tippee. This opinion is significant in that it appears at first glance to conflict with the Second Circuit’s decision last year in United States v. Newman, in which the court overturned the conviction of two remote tippees on the grounds that the government failed to establish first, that the insider who disclosed confidential information in that case did so in exchange for a personal benefit, and second, that the remote tippees were aware that the information had come from insiders. READ MORE

SEC Rolls Out First Wave of MCDC Settlements with Underwriters

Last Thursday, the SEC announced it reached settlement agreements with 36 municipal securities underwriting firms pursuant to its Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.  These settlements mark the first enforcement actions against underwriters of municipal securities under the MCDC Initiative. READ MORE

Who Wants to be a Millionaire? Compliance Officer Whistles His Way to a Million Dollar Pay Day

Whistle

Last week the SEC announced an award of between $1.4 to $1.6 million to a whistleblower who provided information that assisted the SEC in an enforcement action. The enforcement action against the whistleblower’s company resulting in monetary sanctions exceeding $1 million.  This marks the second award to a whistleblower with an internal audit or compliance function at a company.  The first was back in August 2014, when the SEC awarded a whistleblower in internal auditing/compliance with over $300,000.  Here, as with the prior award, the officer had a reasonable basis for believing that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors.  In both cases, responsible management was made aware of the potential harm that could occur, yet failed to take steps to prevent it.

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Striking the Balance: Mary Jo White Says the SEC’s Process for “Well-Known Seasoned Issuer” Waivers Is Fair, But Signals a Renewed Focus on Targeting Individual Wrongdoing

In a speech last Thursday, SEC Chair Mary Jo White publicly addressed the issue of whether the SEC has been too lax in granting waivers to large corporations that are subject to certain restrictions under the Well-Known Seasoned Issuer (“WKSI”) regulations or the so-called “Bad Actor Rule.”

The SEC classifies certain large widely followed issuers as WKSIs under Rule 405 of the Securities Act of 1933.  Issuers with WKSI status benefit from greater flexibility in registration and investor communications.  Most notably, registration statements filed by WKSIs become effective immediately and automatically upon filing.  Certain categories of “ineligible issuers”—including those convicted of certain crimes and those determined to have violated the anti-fraud provisions of the securities laws—are precluded from qualifying for WKSI status.  The SEC, however, can (and does) grant waivers to ineligible issuers upon a showing of good cause.

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