From The Sox Up

From The Sox Up

Cases. Trends. Personalities of Interest.

The SEC’s Investor Advisory Committee Ponders Change to Accredited Investor Definition

Posted in SEC

On Thursday, October 9, the Investor Advisory Committee of the Securities and Exchange Commission will meet to discuss whether to recommend a change to the definition of “accredited investor.” This definition has historically played a central role in determining whether an offering of securities qualifies for the private offering exemption established by SEC regulation. Any potential changes to this definition could affect a company’s ability to raise capital in the private markets.

The Securities Act of 1933 provides an exemption from the registration and disclosure requirements for securities offerings not involving any public offering. SEC regulations over the last 50 years have clarified the means by which companies can offer securities without triggering these registration and disclosure requirements. The vast majority of private offerings today are conducted inContinue Reading

The Supreme Court Decision in Halliburton Allows Defendants to Rebut Fraud-on-the-Market Presumption at Earlier Stages of the Case

Posted in SEC

On July 21, 2014, Gardere Partner Orin H. Lewis issued a client alert discussing the impact of the Supreme Court’s decision in Halliburton Co. v. Erica John Fund, Inc., 573 U.S. ___, slip. op. at 1 (June 23, 2014).

“Investors can recover damages in a private securities fraud action only if they prove that they relied on the defendant’s misrepresentation in deciding to buy or sell a company’s stock.” Halliburton Co. v. Erica John Fund, Inc., 573 U.S. ___, slip. op. at 1 (June 23, 2014) (“Halliburton II”).  Basic v. Levinson, 485 U.S. 224 (1988), held that investors could satisfy this requirement by invoking the presumption that the price of stock traded in an efficient market reflects all public material information—including material misstatements—and that anyone who buys or sells the stock at market price may be considered to have relied on those misstatements. Id. On June 23, 2014, the CourtContinue Reading

SEC Brings First Whistleblower Retaliation Action Against Hedge Fund Manager.

Posted in SEC, SEC Rules

On Monday of this week, the SEC charged hedge fund manager Paradigm Capital Management of Albany, New York with making improper principal trades and retaliating against the firm’s head trader who reported the alleged misconduct to the SEC.  This was the first anti-retaliation enforcement action the SEC has brought under the Dodd-Frank Whistleblower statute.  In anticipation of the proceedings, Paradigm, and its owner Candace King Weir agreed to pay $2.2 million to settle the charges without admitting or denying wrongdoing. It is unclear at this point how much, if any, of this amount will be awarded to the whistleblower.

According to the SEC’s order, Paradigm made trades between the hedge fund it manages and the broker-dealer its principal owns.  The SEC alleged that these principal transactions violated Section 206(3) of the Investment Advisers Act of 1940, which prohibits an investmentContinue Reading

Adoption of a Rule 10b5-1 Plan – To Disclose or Not to Disclose, Part 3

Posted in Proposed Rules, SEC, SEC Forms, SEC Rules

The two preceding posts in this series (1) began to address the question whether a CEO’s adoption of a Rule 10b5-1 trading Plan should be publicly disclosed by the CEO or the company, such as through a press release or a Form 8-K, before any trading begins under the Plan, and (2) described reasons for not so disclosing the adoption of a Plan , which appears to be the prevailing practice notwithstanding recommendations to disclose in a number of articles by knowledgeable securities lawyers.

So what are some of the reasons that the CEO or the company should disclose the adoption of the Plan?  Assuming (as is typical) that the Plan contemplates sales of shares by theContinue Reading

Adoption of a Rule 10b5-1 Plan – To Disclose or Not to Disclose, Part 2

Posted in SEC Forms, SEC Rules

The preceding post in this series began to address the question whether a CEO’s adoption of a Rule 10b5-1 trading Plan should be publicly disclosed by the CEO or the company, such as through a press release or a Form 8-K, before any trading begins under the Plan.  It was noted that, interestingly, a number of articles written by knowledgeable securities lawyers recommend such disclosure (though without disclosing any details of the Plan), while the prevailing practice appears to be not disclosing the adoption of a Plan.

So what are some of the reasons that the CEO and the company might give for not disclosing?  Assuming (as is typical) that the Plan contemplates sales of shares by the CEO, I believe they include the following:

Why disclose if there is no requirement to disclose?  The CEO’s potential tradingContinue Reading

Adoption of a Rule 10b5-1 Plan – To Disclose or Not to Disclose, Part 1

Posted in SEC Forms, SEC Rules

The CEO of a publicly held company determines to enter into a personal Rule 10b5-1 trading plan (“Plan”).  Among other questions that arise in this circumstance is the question for this series of posts (the “Question”):  Should the CEO or the Company disclose, through a separate public announcement, the adoption of the Plan before any trading begins under the Plan?  Although it is easy to respond that no such disclosure is required by Rule 10b5-1, that does not necessarily answer the question.

In a number of articles, written since the beginning of 2013, that generally address Plans and their use and related practices (“Articles”),[1] knowledgeable lawyers at various top-tier securities-law firms have almost uniformly recommended disclosure, by a press release or the filing of a Form 8-K, of the adoption of a Plan.  Yet surveys and other anecdotal evidence suggest that such disclosure of an executive’s adoption of aContinue Reading

Shareholder Internal Insider-Trading Policies

Posted in SEC, SEC Rules, Shareholders

Certain organizations that hold or invest in publicly traded securities may gain material nonpublic information regarding an issuer of those securities by virtue of the terms of the investment in the issuer, such as through a contractual right to receive certain information or to designate a director of the issuer, or by virtue of a business relationship with the issuer, such as providing services to the issuer.  Such an organization (an “insider-shareholder”) is justifiably concerned with the risk of improper trading of the securities it owns while in possession of material nonpublic information regarding the issuer of those securities, and the insider-shareholder may address that risk by adhering to the issuer’s insider-trading policy or adopting a Rule 10b5-1 plan for trading in the securities.  The insider-shareholder should also be concerned, however, about the risk of improper personal trading of securities of the issuer by, or resulting from the individual actionsContinue Reading

Designating Officers for Exchange Act Purposes

Posted in SEC

Annual “housekeeping” activities of public companies at this time of year include, or should include, designating “officers” for purposes of filing reports under Section 16 of the Securities Exchange Act of 1934, as amended, and “executive officers” for purposes of disclosures in the Form 10-K and the proxy statement filed with the Securities and Exchange Commission under the Exchange Act.  The board of directors of a public company designates the officers and executive officers.  Although the board’s determination typically does not involve a great deal of uncertainty or complexity, the board may have judgments to make.

The definitions of “officer” in SEC Rule 16a-1(f) under the Exchange Act and of “executive officer” in SEC Rule 3b-7 under the Exchange Act– which are substantially similar, though not identical – provide the standards for the board’s determination.  Although the definitions primarily refer to or use titles to describe the persons whoContinue Reading

Limited Availability of Rule 144 for Resales by Shareholders of Former Shell Companies

Posted in Mergers & Acquisitions, SEC

Persons seriously considering, on an informed basis, going public through a reverse merger with a public shell company likely understand that the transaction will not create liquidity for shareholders of the public company within at least a year after the merger.  What those persons may not appreciate, however, is the restriction on shareholder liquidity that will continue for years after the merger.

Frequently, the public company in a reverse merger is or was a “shell company,” as defined in Rule 144(i)(1) and Rule 405 under the Securities Act of 1933, as amended .  The shares held by the public company’s shareholders after the merger may be publicly resold only in accordance with a resale registration statement filed with the Securities and Exchange Commission – which is unusual – or under Rule 144, the principal exemption from registration for resales of securities under the Securities ActContinue Reading

Supreme Court Clarifies That Whistleblower Protection for Public Company Employees Also Protects Employees of Contractors and Subcontractors of Public Companies

Posted in Public Disclosure

“To safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation, Congress enacted the Sarbanes-Oxley Act of 2002.” Lawson v. FMR LLC, 571 U.S. __, slip op. at 1 (March 4, 2014).  Among other things, a provision of the Act, 18 U.S.C. § 1514A, provides protection for whistleblowers from retaliation.  For over a decade, the Department of Labor, the agency with initial responsibility for whistleblower claims, has interpreted Section 1514A as protecting employees of public company contractors.  On Feb. 3, 2012, the First Circuit disagreed holding that Section 1514A only protects public company employees. On March 4, 2014, the United States Supreme Court in a divided decision, confirmed that Section 1514A’s protection does, indeed, extend to employees of public company contractors.  However, the Court’s decision exposes a variety of ambiguities in the text of Section 1514A that likely will serve as fodderContinue Reading

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