Today, the Federal Securities Law Blog takes a look back at the last 30 days in the federal securities world in a regular feature which appears on approximately the 15th of each month. Although our prior monthly reviews have examined litigation issues, we will be expanding our review to cover other issues. The biggest news this month has been the April 5, 2012 passage of the Jumpstart Our Business Startups Act (“JOBS Act”). The JOBS Act and other matters from the last month are discussed in greater detail after the jump.
The JOBS Act.
As discussed here, President Obama signed into law JOBS Act on April 5, 2012. The Act implements measures relating to the IPO process and reporting requirements for a new category of issuer known as the “emerging growth company” (“EGC”). The Act defines an EGC as a company with annual gross revenues of less than $1 billion during its most recent fiscal year. The Act amends applicable federal securities laws to exempt EGCs from various requirements and restrictions including the requirement to publicly file an IPO registration statement (an EGC may confidentially submit its registration statement and any amendments to the SEC). The exemption under Regulation A is discussed more closely here. The Act also provide relief to EGCs with respect to disclosure requirements, including exemption from the “say on pay” provisions of the Dodd-Frank Act and the auditor attestation of internal controls required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
Shortly after passage, on two occasions (discussed here and here), the SEC’s Division of Corporate Finance issued Frequently Asked Questions to provide guidance on the implementation and application of the JOBS Act in light of the SEC’s existing rules, regulations and procedures. The topics covered by these FAQs include questions relating to the confidential submission of registration statements for review pursuant to new Securities Act Section 6(e) and the requirements for Exchange Act registration and deregistration (which is also examined in greater detail here).
One of the most discussed issues under the JOBS Act is a new way to raise money known as “crowdfunding.” As discussed here and here, the Act creates a new securities registration exemption that issuers could rely on to sell up to $1 million worth of securities to non-accredited investors as long as no individual investor invests more than: (a) $2,000 or 5% of the investor’s annual income in any 12-month period (for investors with annual income or net worth less than $100,000); or (b) 10% of the investor’s annual income or net worth up to $100,000 in any 12-month period (for investors with annual income or net worth in excess of $100,000). These “crowdfunders” would not count toward the 500 shareholders of record threshold that triggers Exchange Act registration under Section 12(g). Furthermore, for those issuers that want to continue to sell to accredited investors, the JOBS Act would require the SEC to amend Regulation D to permit general solicitation and advertising in Rule 506 offerings sold only to accredited investors (which is also discussed here).
The STOCK Act.
The JOBS Act was not the only securities-related litigation passed this month. As discussed here, on April 4, 2012 President Obama signed into law the Stop Trading on Congressional Knowledge Act of 2012 (“the STOCK Act”). The Act bans insider trading by members of Congress and their staff as well as various other executive branch and judicial branch employees. The STOCK Act also amends the Ethics in Government Act of 1978 to require a government-wide shift to electronic reporting and on-line availability of public financial disclosure information. In addition, members of Congress and covered governmental employees must report certain investment transactions within 45 days after a trade. Members of the public will be able to search this electronic database. The Act also limits members of Congress and other high level governmental officials so that they only may participate in IPOs that are available to the general public at large. In addition, the STOCK Act also requires the GAO and CRS to produce a report on the role of political intelligence firms in the financial markets.
Investor Advisory Committee.
While Congress was enacting new laws, the SEC fulfilled one of its obligations under an existing law (Section 911 of the Dodd-Frank Act) by announcing on April 9, 2012 the formation of the new Investor Advisory Committee. The new Committee (discussed here), which replaced a prior Investor Advisory Committee, was formed to “advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace.” The 21 members will “represent a wide variety of interests, including senior citizens and other individual investors, mutual funds, pension funds, and state securities regulators” and will begin working “in the near future.”
SEC Cooperation Standards.
In a Litigation Release posted on March 19, 2012 (and discussed here), the SEC provided “guidance regarding the circumstances under which individuals may receive credit as part of the SEC’s Cooperation Initiative.” The announcement focused on the acts of a un-named (and un-charged) senior executive at AXA Rosenberg, an institutional money manager that specialized in quantitative investment strategies, who cooperated with the SEC, leading to charges regarding a material error in a computer code that was used to manage client assets. The Commission focused on the four considerations identified in the January 2010 Policy Statement Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions. Specifically, the Commission considered the assistance provided by the cooperating individual; the importance of the underlying matter; the societal interest in ensuring that the cooperating individual is held accountable; and the appropriateness of cooperation credit. After considering these factors, the SEC elected not to take enforcement action against the senior executive, but noted that its evaluation “was dependent upon the unique facts and circumstances of this case,” and pointed out that it did not “create or recognize any legally enforceable rights for any person.”
In a second case, the SEC announced on March 27, 2012 that it has sued John Cinderey, a former executive vice president at United Commercial Bank for aiding and abetting securities law violations relating to falsifying books and records and misleading the bank’s auditors. As discussed here, the Commission settled with Mr. Cinderey, who agreed to be permanently enjoined from violating provisions of the federal securities laws. The settlement reflected the credit given to Mr. Cinderey “for his substantial assistance in the investigation,” along with his agreement to cooperate to assist in an ongoing related enforcement action.
The SEC and Discovery/Investigative Issues.
As described here, on March 26, 2012, Judge Jed Rakoff issued an Opinion and Order in the two related cases against Rajat Gupta, granting in part a Motion to Compel and ordering the SEC to turn over to the U.S. Attorney’s Office materials relating to 44 witnesses (who were interviewed by the SEC and prosecutors jointly during the investigations of Mr. Gupta). He further ordered the prosecutors to review those memoranda and promptly turn over to the defense any material under Brady v. Maryland, 373 U.S. 83 (1963) (material exculpatory evidence to the defense – including evidence that could allow the defense to impeach the credibility of a prosecution witness). In what has become a familiar pattern for him, Judge Rakoff questioned the policy of the SEC and DOJ – this time it was the policy to not produce such material involving joint investigations. Judge Rakoff stated: “That separate government agencies having overlapping jurisdiction will cooperate in the factual investigation of the same alleged misconduct makes perfect sense but that they can then disclaim such cooperation to avoid their respective discovery obligations makes no sense at all.” He further ruled that “where the Government and another agency decide to investigate the facts of a case together – such as in these 44 witness interviews – the Government has an obligation to review the documents” under Brady. The ruling identifies another possible method (albeit a limited one) for a party seeking discovery from the SEC’s investigative file.
In matter related to an investigation, the SEC filed a subpoena enforcement action in federal court in California against Wells Fargo & Company on Friday, March 23, 2012. The Commission is investigating Wells Fargo’s sale of nearly $60 billion in residential mortgage-backed securities (“RMBS”) to investors. The proceeding is unusual in that, while the Commission was still attempting to obtain information from Wells Fargo which it sought in investigative subpoenas, it sent Wells Fargo a “Wells Notice,” stating that the Commission staff was “considering recommending” an enforcement action against the bank. When the SEC continued to press Wells Fargo for responses to the subpoenas, the company responded that it no longer thought a response was necessary while the Wells Process was ongoing. As a result, the Commission filed the subpoena enforcement action (discussed here), arguing that the issuance of a Wells Notice did not forgive Wells Fargo from responding to the subpoenas.
On Tuesday, March 27, 2012, the Government filed a motion in the FCPA Sting Case to dismiss the charges against Jonathan M. Spiller, Haim Geri, and Daniel Alvirez, the three defendants who had previously pled guilty to conspiracy charges in the case and were awaiting sentencing, as discussed here. In doing so, the Government cited the two earlier mistrials in the case, as well as the acquittal of three defendants, and other rulings. This unusual event occurred after the Court had dismissed the same conspiracy charge against other defendants in the case and the Government dropped all other charges against the other defendants. As a result, the Sting Case, which was announced in January 2010 and charged twenty-two defendants with conspiring to violate the FCPA, violating the FCPA and conspiring to launder money, based on dealings with an informant and an undercover FBI agent posing as the Minister of Defense of Gabon in what Assistant Attorney General Lanny A. Breuer called a “turning point” in FCPA prosecutions, will end with zero convictions.
In a Brief filed on April 2, 2012 and discussed here, the Government argued that the statements by defendants in a criminal FCPA case that were given to their employer during an internal investigation should not be suppressed because the employer’s “actions were not the result of any pressure or influence from the government sufficient to convert the Company’s lawyers to state actors,” and because defendants could not “show that their statements were involuntary.” The Government was addressing a Motion to Suppress filed on March 5, 2012 in the Carson case in which defendants argued that because Control Components, Inc. (“CCI”) had collaborated with DOJ during the investigation, it was a Government agent whom improperly compelled statements from the defendants during an internal investigation in violation of their Fifth Amendment rights. The Court has scheduled a hearing on the Motion for May 14, 2012.
Action Involving a Private Company’s Shares.
On March 14, 2012, the SEC announced that it had filed a complaint in federal court in San Francisco and an Administrative Proceeding relating to private investment funds which were established to acquire the shares of Facebook and other Silicon Valley firms which were privately-held. The Commission’s charges included allegations that investors were misled and the funds and their managers pocketed undisclosed fees and commissions. According to the Commission, the fund managers raised more than $70 million from investors. The Commission also brought an Administrative Proceeding against an online service that matched buyers and sellers of pre-IPO stock, charging the entity with engaging in securities transactions without registering as a broker-dealer. The cases, discussed here, appear to be the first of their kind relating to the purchase of shares in the pre-IPO market.
On Monday, April 2, 2012, the SEC announced that it has filed suit in federal court in Austin, Texas against the former CEO and the former CFO of ArthroCare Corporation to recover bonus compensation and stock sale profits they received during an accounting fraud at the company. As the SEC pointed out in their press release, the two men “are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements during 2006, 2007, and the first quarter of 2008.” The case, discussed here, reflects one of the powerful weapons the Commission has at its disposal. The Director of Enforcement, Robert Khuzami, said “[c]lawback of incentive compensation and stock sale profits as authorized under the Sarbanes-Oxley Act is yet another reason for CEOs and CFOs to be vigilant in preventing misconduct and requiring that companies comply with financial reporting obligations.”
Supreme Court Decision Rejects Argument Regarding Tolling of § 16(b) Claims.
On March 26, 2012, the U.S. Supreme Court ruled that the two-year time limit for bringing an action under § 16(b) of the Securities Exchange Act of 1934 is not tolled until after the filing of a § 16(a) disclosure statement. The case involves the right of an issuer (or, in this case, a shareholder bringing a derivative suit) to recover short swing profits obtained by a beneficial owner, director, or officer by reason of his relationship to the issuer under Exchange Act 16(b). Under §16(b), a corporation (or shareholder) may bring an action against corporate insiders who realize profits from the purchase and sale of the corporation’s securities within any 6-month period. The Act provides that such suits must be brought within “two years after the date such profit was realized.” The Ninth Circuit ruled that the statute is tolled until there has been adequate disclosure of the trade (when the defendant files a Section 16(a) disclosure statement). As described here, the Supreme Court rejected that analysis, stating that Congress could have easily addressed that concern by having the statute of limitations began running after the filing of a § 16(a) statement, but did not do so.