Tag: SEC enforcement

Acting Director of SEC’s Corp Fin Issues Statement on Disclosure Risks Arising from De-SPAC Transactions

Posted by Adam Brenneman, Jared Gerber, and Rahul Mukhi, Cleary Gottlieb Steen & Hamilton LLP, on
Thursday, April 22, 2021
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Adam Brenneman, Jared Gerber, and Rahul Mukhi are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Brenneman, Mr. Gerber, Mr. Mukhi, Nicolas Grabar, Giovanni P. Prezioso, and Leslie N. Silverman.

Last week, John Coates, the Acting Director of the SEC’s Division of Corporation Finance (“Corp Fin”), released a statement discussing liability risks in de-SPAC transactions.

The statement focused in particular on the concern that companies may be providing overly optimistic projections in their de-SPAC disclosures, in part based on the assumption that such disclosures are protected by a statutory safe harbor for forward-looking statements (which is not available for traditional IPOs). Director Coates’s statement questions whether that assumption is correct, arguing that de-SPAC transactions may be considered IPOs for the purposes of the statute (and thus fall outside the protection offered by the statutory safe harbor). He therefore encourages SPACs to exercise caution in disclosing projections, including by not withholding unfavorable projections while disclosing more favorable projections.

The statement has received considerable media attention and is plainly part of a broader effort by the Commission staff to identify potential securities law and policy concerns with the growing SPAC market. In addition to statements by staff in the Division of Corporation Finance, the effort includes:

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When Disclosure Is The Better Part of Valor: Lessons From The AT&T Regulation FD Enforcement Action

Posted by Douglas Chia, Soundboard Governance, on
Sunday, April 18, 2021
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Douglas Chia is Founder and President of Soundboard Governance LLC and a Fellow at the Rutgers Center for Corporate Law and Governance. This post is based on his Soundboard Governance memorandum.

On March 5, 2021, the US Securities and Exchange Commission (SEC) announced that it had charged AT&T, Inc. with “repeatedly violating” Regulation Fair Disclosure (Reg FD) in 2016. In addition to charges against the company, the SEC charged three members of AT&T’s investor relations (IR) department with “aiding and abetting” the alleged Reg FD violations.

The SEC enacted Reg FD in 2000 to prohibit selective disclosure of material nonpublic information to securities analysts, investors, and others who are likely to act on the information. Since then, the SEC has made infrequent enforcement actions, with each one giving corporate lawyers and IR professionals another datapoint to guide company communications with the investor community in what remain gray areas.

The key events, based on the SEC’s March 4, 2021 complaint filed in Federal court and AT&T’s press release on the same day to dispute the SEC’s allegations, can be summarized as follows:

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Interest in SPACs is Booming…and So is the Risk of Litigation

Posted by Stephen Fraidin, Gregory P. Patti, Jr. and Jason Halper, Cadwalader, Wickersham & Taft LLP, on
Friday, April 16, 2021
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Stephen Fraidin, Gregory P. Patti, Jr. and Jason Halper are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Fraidin, Mr. Patti, Mr. Halper, Jared Stanisci, Sara Bussiere and Victor Bieger.

Following these ten steps will prepare SPAC boards, sponsors, and advisors for the likely shareholder suits and potential regulatory investigations that are increasingly becoming part of the SPAC landscape.

If 2020 was the “year of the SPAC,” 2021 may be the year of SPAC litigation. SPACs—Special Purpose Acquisition Companies—are publicly traded companies launched as vehicles to raise capital to acquire a target company. Often called blank-check companies, SPACs are companies in which shareholders buy shares without knowing which company the SPAC will target and acquire. Investors place their faith in the sponsor: the entity or management team that forms the SPAC. The SPAC generally has around twenty-four months to seek out and acquire a target, or else must liquidate and return the capital.

Hundreds of new SPACs were launched in 2020 alone. Booming M&A or other transactional activity in any sector can invite litigation driven by plaintiffs’ attorneys, and SPACs are no exception. In just the first three months of 2021, more than 40 suits targeting SPACs have been filed. The nature of these claims evidence growing sophistication, as lawyers used to challenging traditional M&A transactions begin to tailor their claims to the unique characteristics of the SPAC lifecycle. And with SPACs going mainstream—and attracting attention from outside the usual financial circles—regulators are closely examining transaction disclosures and other aspects of SPAC deals. [1]

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Statement by Acting Director Coates on SPACs, IPOs and Liability Risk under the Securities Laws

Posted by John C. Coates, U.S. Securities & Exchange Commission, on
Friday, April 9, 2021
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John Coates is Acting Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Mr. Coates, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies (or SPACs). [1] [2] Shareholder advocates—as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves [3]—are sounding alarms about the surge. Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take public. [4] With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing.

The staff at the Securities and Exchange Commission are continuing to look carefully at filings and disclosures by SPACs and their private targets. As customary, and in keeping with the Division of Corporation Finance’s ordinary practices, staff are reviewing these filings, seeking clearer disclosure, and providing guidance to registrants and the public. They will continue to be vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions.

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SEC Brings Rare Regulation FD Enforcement Case

Posted by Craig Warkol and Charles Clark, Schulte Roth & Zabel LLP, on
Tuesday, April 6, 2021
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Craig Warkol and Charles Clark are partners at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

On March 5, 2021, the Securities and Exchange Commission charged AT&T with violating Regulation FD (“Reg FD”) for selectively disclosing material nonpublic information (“MNPI”) to research analysts. [1] The SEC has brought only a handful of Reg FD cases since its enactment in 2000, and this case may have significant implications for investment professionals.

Regulation FD prohibits issuers, or persons acting on their behalf, from disclosing MNPI to certain third parties without disclosing that same information to the general public. Reg FD was enacted, primarily, to prevent public companies from selectively providing nonpublic earnings information to securities analysts and certain shareholders. The goal of Reg FD was to level the playing field between individual and institutional investors following publicized reports of institutional investors profiting in advance of corporate earnings announcements. Final Rule: Selective Disclosure and Insider Trading, Exchange Act Rel. No. 43154, 65 Fed. Reg. 51, 721 (Aug. 15, 2000) (https://www.sec.gov/rules/final/33-7881.htm).

According to the SEC’s complaint filed against AT&T last week, AT&T had experienced an unanticipated decline in its first quarter 2016 smartphone sales. To avoid falling short of Wall Street’s consensus revenue estimate, the SEC alleged that AT&T investor relations executives made private, one-on-one phone calls to equity analysts at approximately 20 different sell-side firms during which they disclosed the disappointing sales data. The SEC contends that these calls were made in an effort to lower Wall Street’s expectations such that AT&T would avoid missing the consensus estimate for the third consecutive quarter. According to the SEC, the disclosures were material and not shared with the general public. Notably, the case was not settled at the time of its filing, indicating AT&T’s intent to defend itself against the SEC’s charges.

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Comment Letter on Rule 144 Holding Period and Form 144 Filings

Posted by Daniel J. Taylor (The Wharton School), Bradford Lynch (The Wharton School), and David Larcker (Stanford University), on
Friday, April 2, 2021
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Daniel Taylor is Associate Professor of Accounting at the Wharton School of the University of Pennsylvania; Bradford Lynch is a PhD student at The Wharton School; and David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business. This post is based on their recent comment letter to the U.S. Securities and Exchange Commission.

We applaud the Commission for putting forth the Proposed Rule 144 Holding Period and Form 144 Filings (“Proposal”) and appreciate the opportunity to comment. Our comments and analysis relate primarily to the request for comments in Sections I.C.2, II.D, and III.D of the Proposal.

The Proposal would meaningfully alter the reporting requirements surrounding the trades of corporate insiders reported on Form 144 and Form 4. Having studied the trading of corporate insiders for over a decade, written numerous academic studies on the topic, and consulted with multiple companies, counsels, and enforcement agencies, we believe that the Proposal will substantially benefit the public interest with minimal or no cost to filers.

We support the modernization of Form 144. Under the current rule, 99.3% of Form 144s are filed on paper every year (over 700,000 from 2001 to 2020). The Commission’s current practice is to retain hard copies of these paper filings for 90 days in the Commission’s Public Reading Room in Washington DC and not post them on EDGAR (see Exhibit 1 for an example of a Form 144). This arcane practice would be of little consequence if the information contained in Form 144s was of no interest to investors; on the contrary, the demand for information on these Form 144s is sufficiently high that data providers regularly visit the Reading Room to scan, digitize, and disseminate Form 144s to corporate clients. As a result, data on over 700,000 Form 144s is available from third-party data providers (e.g., The Washington Service and Thomson/Refinitiv) but not EDGAR. In effect, the Commission has created a two-tiered disclosure system that makes “public disclosure” accessible to large institutional clients, but inaccessible to individual investors. The Proposal would end this practice by mandating Form 144 be filed electronically on EDGAR.

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Revisiting the SEC Approach to Financial Penalties

Posted by Cydney Posner, Cooley LLP, on
Wednesday, March 31, 2021
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

On Tuesday [March 9, 2021], SEC Commissioner Caroline Crenshaw spoke to the Council of Institutional Investors. Her presentation, Moving Forward Together—Enforcement for Everyone, (discussed on the Forum here) concerned “the central role enforcement plays in fulfilling our mission, how investors and markets benefit, and how a decision made 15 years ago has taken us off course.” In her view, the SEC should revisit its approach to assessing financial penalties and should not be reluctant to impose appropriately tailored penalties that effectively deter misconduct, irrespective of the impact on the wrongdoer’s shareholders. Is this a sign of things to come?

Crenshaw observes that, generally, SEC Commissioners of all stripes believe in a strong enforcement program but differ on the effect of corporate penalties in achieving the SEC’s goals. Crenshaw believes that the SEC has overemphasized “factors beyond the actual misconduct when imposing corporate penalties—including whether the corporation’s shareholders benefited from the misconduct, or whether they will be harmed by the assessment of a penalty.” Not only is this approach “fundamentally flawed,” but, more importantly, it allows companies to profit from their own fraud and handcuffs the SEC, inhibiting it from crafting “tailored penalties that more effectively deter misconduct” and that create financial incentives to follow the rules and invest in compliance. In Crenshaw’s view, “enforcement best advances our agency’s goals when it concentrates the costs of harm with the person or entity who committed the violation. For these reasons, ensuring that the violator pays the price is key to a successful enforcement regime and to promoting fair and efficient markets more broadly.”

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SEC’s Regulation FD Action Highlights Risks Associated with Private Calls to Analysts

Posted by Caitlyn Campbell, McDermott Will & Emery LLP, on
Sunday, March 28, 2021
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Caitlyn Campbell is partner at McDermott Will & Emery LLP. This post is based on her McDermott Will & Emery memorandum.

On Friday, March 5, 2021, the US Securities and Exchange Commission (SEC) announced a rare litigated action against a large public company and three of its investor relations employees for alleged violations of Regulation FD (Fair Disclosure).

Overview of Regulation FD

In 2000, the SEC adopted Regulation FD to address issuers’ selective disclosure of material nonpublic information and to promote the full and fair disclosure of information. The rule provides that when an issuer, or a person acting on its behalf, discloses material, nonpublic information to certain entities or individuals (in general, securities market professionals and shareholders who may trade on the basis of the information), the issuer must also publicly disclose that information. In its release announcing the new rule, the SEC expressed its concern that “many issuers [were] disclosing important nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors or both, before making full disclosure of the same information to the general public.” The SEC noted that this practice leads to a loss of investor confidence in the integrity of the markets because investors perceive that certain market participants have an unfair advantage.

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Measuring Accounting Fraud and Irregularities Using Public and Private Enforcement

Posted by Christopher G. Yust (Texas A&M University), on
Thursday, March 18, 2021
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Christopher G. Yust is assistant professor of accounting at Texas A&M University Mays Business School. This post is based on a recent paper forthcoming in The Accounting Review authored by Mr. Yust, Dain Donelson, Antonis Kartapanis, and John McInnis.

Corporate accounting fraud has a significant negative impact on the economy and investors, so academic research on factors that make accounting fraud more or less likely to occur has substantial real-world and public policy implications. However, conducting such research is difficult because researchers cannot observe the incidence of fraud for most firms, corporate admissions of fraud are rare, and trials proving fraud are almost nonexistent. Thus, researchers are forced to rely on proxies for fraud to conduct empirical analysis. Our recent paper examines the use of both public and private accounting enforcement with appropriate screening to proxy for accounting fraud and demonstrates how this combined proxy improves research inferences.

The current dominant proxy for accounting fraud in research is public enforcement through the Securities and Exchange Commission (SEC). In contrast, relatively few papers, particularly in the accounting literature, use private enforcement via securities class actions (SCAs). However, we argue that the use of only public or private enforcement excludes credible fraud firm observations as the SEC lacks a sufficient budget to pursue all possible fraud and private litigants lack the incentive to pursue such cases if their expected costs exceed expected recoveries. Critically, the use of either enforcement regime does not only reduce statistical power but can also bias regression estimates.

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SEC Brings Regulation FD Enforcement Action

Posted by John F. Savarese and Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Wednesday, March 10, 2021
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John F. Savarese and Wayne M. Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

On Friday, the SEC brought an enforcement action charging a public company and three of its investor relations personnel with violations of Regulation FD, alleging that the company’s IR personnel had fed non-public information to sell-side research analysts in order to bring their consensus revenue views more into line with the company’s own internal estimates. The defendants are all contesting the charges, and the case will be litigated in federal court. While some commentators may see this as an instance of the SEC pushing the Regulation FD envelope, our view is this: if the SEC is ultimately able to substantiate its allegations at trial, the case will fall within what is generally understood to be the proper scope of Regulation FD. We explain below the reasons for this view.

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