Posts by: Editorial Board

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.

READ MORE

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.

READ MORE

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.

READ MORE

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.

READ MORE

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.

READ MORE

Delaware Supreme Court Holds That Revlon Does Not Require An Active Market Check

Building

On December 19, 2014, the Supreme Court of Delaware reversed the Delaware Court of Chancery’s November decision to preliminarily enjoin for 30 days a vote by C&J Energy Services stockholders on a merger with Nabors Red Lion Limited, to allow time for C&J’s board of directors to explore alternative transactions.  The Supreme Court decision clarifies that in a sale-of-control situation, Revlon and its progeny require an effective, but not necessarily active, market check, and there is no “specific route that a board must follow” in fulfilling fiduciary duties.

READ MORE

Delaware Court Provides Guidance on Acceptable Deal Protection Mechanisms and Scope of Third Party Aiding and Abetting Liability in a Sale-of-Control Situation

Gavel and Hundred-Dollar Bill

On November 25, 2014, the Delaware Court of Chancery issued a decision in In Re Comverge, Inc. Shareholders Litigation, which: (1) dismissed claims that the Comverge board of directors conducted a flawed sales process and approved an inadequate merger price in connection with the directors’ approval of a sale of the company to H.I.G. Capital LLC; (2) permitted fiduciary duty claims against the directors to proceed based on allegations related to the deal protection mechanisms in the merger agreement, including termination fees potentially payable to HIG of up to 13% of the equity value of the transaction; and (3) dismissed a claim against HIG for aiding and abetting the board’s breach of fiduciary duty.

The case provides important guidance to directors and their advisors in discharging fiduciary duties in a situation where Revlon applies and in negotiating acceptable deal protection mechanisms. The decision also is the latest in a series of recent opinions addressing and defining the scope of third party aiding and abetting liability.

READ MORE

Delaware Court Preliminarily Enjoins Merger Due to Flawed Sales Process

On November 24, 2014, the Delaware Court of Chancery preliminarily enjoined for thirty days a vote by C&J Energy Services stockholders on a merger with Nabors Red Lion Limited, to allow time for C&J’s board of directors to explore alternative transactions. In a bench ruling in the case, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. C&J Energy Services, Inc., Vice Chancellor Noble concluded that “it is not so clear that the [C&J] board approached this transaction as a sale,” with the attendant “engagement that one would expect from a board in the sales process.” Interestingly, the Court called the issue a “very close call,” and indicated it would certify the question to the Delaware Supreme Court at the request of either of the parties (at this time it does not appear either party has made a request). The decision provides guidance regarding appropriate board decision-making in merger transactions, particularly where one merger party is assuming minority status in the combined entity yet also acquiring management and board control.

READ MORE