A recent First Circuit decision raises the pleading bar for plaintiffs asserting violations of Section 11 of the Securities Act. Only would-be plaintiffs who acquired a security that is the direct subject of a prospectus and registration statement are entitled to sue under Section 11. That right to sue is limited to plaintiffs who either purchased their shares directly in the offering, or who otherwise can trace their shares back to the relevant offering. This has been referred to as the “traceability” requirement. Until now, Section 11 plaintiffs have generally sought to establish standing by pleading a simple statement to the effect that they “purchased shares of stock pursuant and/or traceable to the offering.” For companies whose stock is all traceable to a single offering, this pleading burden presents little burden, as all shares self-evidently derive from the offering. But when stock has been issued in multiple offerings, a plaintiff has to plead that his or her shares were issued under the allegedly false or misleading registration statement, and not some other registration statement.
By Sarita Malakar and Megan Gates
The Securities and Exchange Commission recently issued proposed amendments to increase the financial thresholds in the definition of a “smaller reporting company” that, if adopted, will increase the number of issuers that qualify as smaller reporting companies and thereby would benefit from the scaled disclosure requirements. The proposed amendments are intended to promote capital formation and reduce compliance costs for smaller issuers, while maintaining investor protections.
This advisory summarizes the proposed amendments issued by the SEC.
As SEC Chair Mary Jo White stated in the SEC’s announcement, “[t]he amendments to [the SEC’s] rules of practice provide parties with additional opportunities to conduct depositions and add flexibility to the timelines of [the SEC’s] administrative proceedings, while continuing to promote the fair and timely resolution of the proceedings.” For example, under amended Rule 360, orders instituting proceedings would designate the time period for preparation of the initial decision as 30, 75, or 120 days from completion of post-hearing or dispositive motions. Further, amended Rule 360 extends the length of the pre-hearing period from four months to a maximum of 10 months for cases designated as 120-day proceedings, a maximum of six months for 75-day cases, and a maximum of four months for 30-day cases.
Every year at around this time, the Mintz Levin securities lawyers are busy collaborating with our December fiscal year-end clients to prepare for the annual year-end reporting season, involving a flurry of 10-Ks, proxy statements, governance review and upkeep, and related matters. Pam Greene and I have worked together for several years now (more than we would care to admit!) on what we fondly refer to as the “year-end kickoff memo,” which you can find here. Each year, we focus on a combination of new developments, reminders of things to keep in mind, and anticipated “hot topics” from the perspective of regulators, shareholders and companies themselves. We are pleased this year to have some terrific contributions to the memo from our partner Bret Leone-Quick, who focuses on securities litigation and related governance issues. We welcome your questions on the memo and look forward to working with all of you on this important annual process.
By Chip Phinney and Geoff Friedman
As we have discussed before, the SEC’s increased use of in-house administrative proceedings in enforcement actions involving allegations of fraud has been a subject of considerable debate. Commentators have questioned the fairness of proceedings where the SEC gains an automatic home field advantage by bringing claims before its own administrative law judges (ALJs), with appeals being heard by the SEC’s own commissioners. But a determined defense can still defeat the SEC by ensuring that it plays by the rules, as demonstrated by a decision issued last week by the U.S. Court of Appeals for First Circuit in a case where Mintz Levin attorneys Jack Sylvia, Andy Nathanson, Jess Sergi, McKenzie Webster, and Geoff Friedman represented one of the petitioners.
The First Circuit vindicated two former employees of State Street Global Advisors (SSgA) who had been targeted by the SEC for alleged securities violations during the 2007 subprime mortgage crisis. Despite applying the highly deferential “substantial evidence” standard of review for agency factfinding, the First Circuit concluded that the SEC abused its discretion in holding Mintz Levin’s client, former SSgA Vice President James Hopkins, liable under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. The First Circuit also vacated the Commission’s order holding Mr. Hopkins’ co-defendant, SSgA CIO John Flannery, liable under Section 17(a)(3) of the Securities Act.
Continue Reading First Circuit Overturns SEC Commissioners’ Sanctions Order
Our Venture Capital & Emerging Companies practice group analyzed the SEC’s recently released equity crowdfunding rules (referred to by the SEC as “Regulation Crowdfunding”) in a concise and easy-to-digest article authored by Sam Effron and Kristin Gerber.
The article does a great job of highlighting some of the regulation’s shortcomings, such as the limits it places on amounts that can be raised (at both the company and investor level); the requirement that companies complete and file a new Form C; and certain ongoing reporting obligations for companies. In all, the added costs, burdens, and risks associated with complying with this regulation means that in most cases there are better alternatives (such as raises under Rule 506) for start-up companies looking to access the capital markets.
In her year and a half as Assistant Attorney General in charge of the Criminal Division, Leslie R. Caldwell has repeatedly emphasized the importance of a company having a compliance program fine-tuned to its specific risks to prevent fraud and corruption and to best position the company in the event that misconduct nonetheless occurs.
On November 2, 2015, AAG Caldwell spoke extensively on this topic at the SIFMA conference in New York. She stated that when DOJ prosecutors are considering whether to charge a corporation criminally, they “look closely at whether compliance programs are simply ‘paper programs’ or whether the institution and its culture actually support compliance. [They] look at pre-existing programs, as well as remedial measures a company took after discovering misconduct – including efforts to implement or improve a compliance program.”
On November 3, the Criminal Division added a resource for evaluating compliance programs with the hiring of Hui Chen as Compliance Counsel for the Fraud Section. AAG Caldwell addressed this addition in her remarks at the SIFMA conference, noting that DOJ wanted “the benefit of the expertise of someone with significant high-level compliance experience across a variety of industries.” (Ms. Chen reportedly was head of anti-bribery and corruption at Standard Chartered and an Assistant General Counsel at Pfizer focusing on compliance before that). In the context of making charging decisions, Compliance Counsel “will help [DOJ] assess a company’s program, as well as test the validity of its claims about its program, such as whether the program truly is thoughtfully designed and sufficiently resourced to address the company’s compliance risks, or essentially window dressing.” Additionally, Compliance Counsel “will help guide Fraud Section prosecutors when they are seeking remedial compliance measures as part of a resolution with a company.” The idea is to require an effective program without being unduly burdensome.
AAG Caldwell specifically addressed speculation in the legal community that the hiring of compliance counsel was a precursor to a compliance defense. She said it is not and that review of a company’s compliance program will remain one of the several factors considered when DOJ considers whether to charge a company.
Originally created by Congress in 1990, the EB-5 program was intended to stimulate the U.S. economy through job creation and capital investment by foreign investors. Under a pilot immigration program first enacted in 1992 and regularly reauthorized since, certain EB-5 visas also are set aside for investors in Regional Centers designated by the United States Citizenship and Immigration Services, based on proposals for promoting economic growth. Unscrupulous parties have on occasion taken advantage of interested parties and perpetrated schemes in this area on people who are understandably keen to take part in this otherwise very beneficial program.
On October 22, 2015, the U.S. Department of Justice Principal Deputy Assistant Attorney General Benjamin C. Mizer, who oversees DOJ’s Civil Division, spoke at the 16th Pharmaceutical Compliance Congress and Best Practices Forum in Washington, D.C. In addressing “current law enforcement efforts that may bear on what the future holds,” Mizer led off with the recent memo by Deputy Attorney General Sally Yates on individual accountability. Mizer’s remarks complement those by the Assistant Attorney General in charge of the Criminal Division, Leslie R. Caldwell, last month. For our previous discussions on the memo and Caldwell’s prior remarks click here and here.
Mizer emphasized a few points from the Yates memo, beginning with the one that has been most discussed: in order to qualify for cooperation credit, a corporation must identify all individuals involved in the wrongdoing and provide all relevant evidence implicating those individuals to the government. As Mizer bluntly stated, “this means no partial credit for cooperation that doesn’t include information about individuals.” He also stressed that the requirement applies to not only criminal but civil investigations, including False Claims Act investigations. Mizer called particular attention to the fact that “in order to qualify for the reduced multiples provision under the False Claims Act, the organization must voluntarily identify any culpable individuals and provide all material facts about those individuals.”
Mizer made two other points following on the Yates memo: both DOJ’s Criminal and Civil Divisions will focus on individuals from the outset of their investigations and DOJ criminal and civil attorneys “have been directed to cooperate to the fullest extent permitted by law at all stages of an investigation.” The latter is a point that Caldwell made early in her tenure overseeing the Criminal Division at the Taxpayers Against Fraud Education Fund Conference. It was at that September 2014 conference that Caldwell announced a new procedure whereby qui tam complaints would be shared by the Civil Division with the Criminal Division as soon as the cases were filed and that attorneys in the Frauds Section of the Criminal Division would immediately review them to determine whether a parallel criminal case should be brought.
The public debate about the Yates memo has centered on whether it really says anything new. In apparent recognition of this debate, Mizer said the memo was issued “to reinforce the department’s commitment” to pursuing not just corporations but the individuals who caused the misconduct to occur and that it shows the “renewed commitment” to pursuing not just corporations but the culpable individuals. Mizer may be foreshadowing that results of this Criminal/Civil Division cooperation are on the horizon.
On Monday, October 19, I’ll be moderating a panel on Strategic Considerations for Navigating a Dual-track M&A and Initial Public Offering Pathway at the Association of Corporate Counsel’s Annual Conference here in Boston. I’ll be joined on the panel by Pete Zorn, Esq., VP of Corporate Development and General Counsel of Albireo Pharma; Stan Piekos, former CFO of NEXX Systems; and Joe Ferra, Managing Director in the Healthcare Investment Banking Group at JMP Securities. If you’re attending the ACC conference, we hope you can join us that day at 4:30 for what we expect will be a great discussion. Continue Reading ACC Annual Conference Panel: Dual-Track M&A and IPO Pathways