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Bret Leone-Quick is a Member in the firm and is based in the Boston office. He has significant experience with SEC, FINRA, DOJ and Massachusetts Securities Division investigations as well as arbitrations and private civil litigation involving the state and federal securities laws. He regularly represents public and private companies, and their 449officers, directors, and employees, in securities litigation, before regulatory bodies, and in SEC investigations.

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.

As originally reported on our Privacy & Security Matters blog, Mintz Levin will sponsor a webinar on September 30 at 1:00 p.m. (ET) to address regulatory compliance and risk management aspects of cyber attacks and data breaches at financial institutions and their service providers.

This topic is especially timely in light of the OCIE’s 2015 Cybersecurity Examination Initiative, announced just this week.  For more details about the key aspects of the OCIE initiative and our upcoming webinar, please check out this excellent post on the Privacy & Security Matters blog.  To register for the webinar, click here.

Mintz Levin’s Institutional Investor Class Action Recovery practice recently launched a new blog: Class Action Recovery for Mutual Funds.  This new blog will report on various happenings in class action cases that may not be covered in other securities litigation blogs or publications, and that will be of special interest to institutional investors. With the claims process itself becoming more adversarial, the blog will follow developments in the administration of claims, including ways in which defendants may be participating in the claims process with the intent to reduce valid claims   Additionally, the blog will cover interesting developments in securities class action cases, such as noteworthy objections, motions and opt-outs, as well as new developments in non-U.S. securities actions that will be of interest to those seeking to recover in foreign jurisdictions against non-U.S. issuers.

A recent decision by Judge F. Dennis Saylor of the U.S. District Court for the District of Massachusetts, Butler v. Moore, C.A. No. 10-10207-FDS U.S. Dist. LEXIS 39416 (D. Mass. Mar. 26, 2015), offers an example of how fiduciary duties can continue to govern the conduct of participants in a closely held corporation or LLC under Massachusetts law, even where parties claim that those duties have been abrogated by contractual agreement.  The decision offers a cautionary tale reminding shareholders and members in closely held companies of the fiduciary duties they owe to one another and to the company under Massachusetts law, and of the resulting requirement that they should be scrupulously fair and forthright, and carefully observe corporate formalities, in their dealings with one another.

Butler v. Moore will take an important place in the long line of Massachusetts decisions dealing with fiduciary duties in closely held entities. It offers a comprehensive overview of fiduciary duty law and carefully applies this law to a complex set of facts. In its breadth, depth, and human interest, it is comparable to previous landmark decisions in the field such as Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501, 677 N.E.2d 159 (1997). Judge Saylor’s opinion is particularly noteworthy for:

(1) its detailed findings chronicling how the individual defendants progressively siphoned assets and opportunities from Eastern Towers through “an extensive pattern of deceit, concealment, and manipulation”;

(2) its evaluation of the relationship between Eastern Towers, Inc. and Eastern Towers, LLC, holding that the two companies should be treated as a single entity in light of the failure to observe corporate formalities and their confused intermingling of operations and assets; and

(3) its close analysis of the intersection between the principals’ fiduciary duties and the Eastern Towers, LLC operating agreement, concluding that the operating agreement did not insulate the defendants from liability.

The decision presents a clear warning to entrepreneurs and leaders of start-up businesses that, where a company is closely held, negotiations with other shareholders or members concerning corporate governance and related party transactions must be carried out with transparency, full disclosure, and good faith, consonant with the fiduciary duties incumbent upon them as shareholders, members, and/or directors of closely held companies under Massachusetts law.

Continue Reading Massachusetts Federal Court Holds That LLC Operating Agreement Does Not Shield Defendants from Liability for Breaching Their Fiduciary Duties to Closely Held Corporations

Last week, the National Association of Bond Lawyers held its 13th Annual Tax and Securities Law Institute.  Some of the panels included current and former employees of the SEC who spoke on several of the more notable recent developments with respect to enforcement actions in the Municipal Securities space:

1)  The SEC is policing negligence.  Peter Chan, a former staff member of the SEC’s Enforcement Division, acknowledged that suspicion of recklessness is no longer seen by the Staff as a prerequisite for opening an SEC investigation of an issuer – negligence is sufficient.  He noted how “people walking in a fog can cause as much harm as people conspiring to do wrong.” Chan also cited SEC Chairman White’s “broken windows” strategy in support of this practice, and said that the MCDC Initiative is a prime example. However, Chan also acknowledged that the SEC is not likely to bring a case if an issuer has followed sound disclosure policies and procedures and engaged in thoughtful deliberations, even if the SEC questions the accuracy of statements made in the Official Statement.

2)  Exploration of Allen Park and control person liability.  During one of the panels, Mark Zehner, Deputy Chief of the Enforcement Division’s Municipal Securities and Public Pension Division Unit, spoke at some length about the Allen Park, Michigan case in which the SEC, for the first time, charged a municipal official (the mayor of the city) as a “controlling person” under Section 20(a) of the Exchange Act.  Mr. Zehner noted that the SEC has a lot of experience with control person liability, and has brought more than one thousand such cases in the private sector. From his presentation, it appeared as if one of the reasons why the SEC chose to assert a Section 20(a) claim in the Allen Park case was the somewhat more flexible standard for proving control person liability that exists in the Sixth Circuit.  Mr. Zehner noted that the SEC has a lot of ways to hold someone liable (e.g., aiding and abetting) without having to resort to Section 20(a) liability and that there is a good faith exception to control person liability written right into the statute. Reading between the lines, it appears as if the SEC believed they had proof that Allen Park’s mayor was complicit in the alleged fraud and they had an opportunity to use control person liability in a way that would make headlines and create a deterrent for other municipal officials around the country.

3)  Update on the MCDC initiative.  LeeAnn Gaunt, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit, spoke at some length about the MCDC Initiative. She did not disclose the number of reports the SEC received, but from her comments it appears as if the SEC received a substantial number of them.  She explained that the Staff is dealing with the broker-dealer submissions first, but are cross-checking to see if issuers reported the same transactions. Settlement orders will be released in batches so as not to stigmatize individual broker-dealers. The orders will identify two or three types of material failures but will not identify issuers or transactions. The broker-dealers will be given two weeks to sign the papers and return them. Ms. Gaunt did not commit to a timetable as to when this would occur, but implied that there would likely be several waves of orders during this calendar year. Every party that self-reported will receive a response from the SEC at some point. Issuers who were reported by broker-dealers but did not self-report will not necessarily hear from the SEC.

Our friends over at Floyd Advisory recently released their Summary of Accounting and Auditing Enforcement Releases for the Year Ended December 31, 2014.

Some of the more notable highlights from the report include:

  • In the SEC fiscal year ended September 30, 2014, enforcement actions by the SEC reached an all-time high of 755 compared to the same period in prior years.
  • The 166 enforcement actions against Broker-Dealers in this timeframe constitute an all-time high and represents an increase of 25% from the previous peak in 2012.
  • Actions involving Issuer Reporting and Disclosure issues for this timeframe increased 45% compared with the same period from 2013, and constitutes the first rise in these types of actions since 2007.
  • In actions involving financial reporting issues:
    • 23 involved alleged balance sheet manipulation;
    • 20 involved alleged intentional misstatements of expenses;
    • 19 involved alleged improper revenue recognition;
    • 7 involved alleged manipulation of reserves; and
    • 1 involved alleged options backdating.
  • The SEC entered into 12 settlements involving an admission of wrongdoing by the settling party during the SEC’s fiscal year ending September 30, 2014. There have been two additional such settlements in in Q4 of 2014.
  • Actions involving auditors more than doubled in 2014 compared to 2013 and are at the highest level in 5 years.

Anyone interested in an analysis of the SEC’s enforcement activities in 2014 (and, most likely, a preview of what is to come in 2015), should be sure to read the entire report.

Please join us at 12:30 p.m. on March 10, 2015 for a webinar titled, “Preparing for and Addressing Activist Shareholders: A Case Study from the Valeant/Pershing Square Bid for Allergan.”  My colleague Joel Papernik and I will be discussing a topic that rose to prominence for many public companies in 2014 and that shows no signs of abating in 2015.  Joel will begin the presentation with an overview of the existing landscape of shareholder activism, and then will launch into a discussion of the general defensive measures companies are taking even before being targeted by an activist shareholder.  During the second half of the presentation, I will use the highly-publicized tender offer that Valeant and Pershing Square made to Allergan as a case study for exploring how the federal securities laws can be implicated in a proxy contest and tender offer.  We are presenting this webinar in conjunction with the Northeast Chapter of the Association of Corporate Counsel.  We hope you can tune in!

 

 

On January 13, 2015, the SEC’s Office of Compliance Inspections and Examinations issued its Examination Priorities for 2015.  Among the various priorities, these four issues stood out:

  1. New Faces.  OCIE specifically singled out transfer agents and proxy advisory services — two types of entities not normally targeted for scrutiny — as a focus with respect to a few issues.  OCIE will be expanding its previous initiative on cybersecurity to now include transfer agents, and will also now actively review whether transfer agents are playing a role in microcap stock fraud.  Proxy advisory services are in the spotlight with respect to how they make recommendations on voting and how they disclose and mitigate potential conflicts of interest, which has been an issue discussed in the media lately.
  2. Time to Sweat the Small Stuff.  OCIE will continue to scrutinize broker-dealers for any signs of involvement in microcap fraud, including pump-and-dump schemes and other market manipulation.
  3. Big Data, Big Brother?  In 2014, we saw some of the initial fruits of the SEC’s use of algorithms and data analyses to identify potential securities law violations, as previously reported by this blog here.  OCIE confirmed its commitment to using these types of tools, and specifically stated that it would employ data analyses to identify manipulative trading, inadequate branch office supervision, and anti-money laundering compliance.
  4. Show me the money!  OCIE will focus on fees charged by investment advisers, especially advisers that employ multiple different fee structures.  OCIE will also continue to scrutinize allocation of fees and expenses among private equity funds.  Finally, OCIE will focus on anti-money laundering compliance with a particular emphasis on broker-dealers that have customers from “higher-risk jurisdictions.”

 

We are pleased to announce that we are joining forces with our colleagues in Mintz Levin’s Securities & Capital Markets Practice to provide more comprehensive coverage of all aspects of the federal and state securities laws and regulation, Delaware corporate law, and related topics. While continuing to blog about developments in securities and shareholder litigation and SEC enforcement, we will be adding more posts discussing public company reporting, disclosure, and compliance; capital market trends and best practices; and corporate governance matters, among other topics. To lead this expansion, veteran securities lawyers Megan Gates and Brian Keane are joining us as co-editors.

Reflecting these changes, we will also be changing the name of this blog from “Securities Litigation and Compliance Matters” to “Securities Matters.”  Visitors to the old site, www.securitieslitigationmatters.com, will be automatically redirected to the new site, www.securitiesmatters.com. If you are a subscriber to www.securitieslitigationmatters.com, your subscription will automatically transfer over to www.securitiesmatters.com, so you do not need to make any changes.

Though our new name is shorter, our coverage will be broader. Our goal is to become a convenient, one-stop source of timely analysis and advice concerning new developments in securities and corporate law for public and private companies, directors and officers, and financial service providers.

 

On November 10, 2014, the SEC announced a settlement with Eureeca Capital SPC, which is a crowdinvesting portal incorporated in the Cayman Islands.  Eureeca’s website seeks to match foreign-based issuers with investors interested in making equity investments.  The website provides information about various issuers and their offerings.  This information was accessible to U.S. residents, despite the fact that the securities offered through the site were not registered with the SEC.  In alleging that Eureeca violated Section 5 of the Securities Act by offering unregistered securities for sale, the SEC noted that Eureeca took no steps to comply with the exemption from registration found in Rule 506(c).  Specifically, the SEC alleged that Eureeca took insufficient steps to confirm that the U.S. investors were accredited investors.  The SEC also alleged that Eureeca was acting as an unregistered broker-dealer by, among other things, (i) encouraging investments in the offerings on its site, (ii) completing the final legal requirements for the transaction (i.e. accommodating the swap of funds for equity), and (iii) receiving a percentage of the funds from all fully funded offerings as a fee.

The Eureeca settlement demonstrates that the SEC is closely scrutinizing crowdinvesting sites to see if they are acting as broker-dealers, and highlights how it is may be increasingly difficult to divorce the benefits gained from promoting Rule 506(c) offerings from the burdens of having to register as a broker-dealer.  Andrew Stephenson from CrowdCheck, a provider of due diligence and disclosure services for online alternative investments, explains that crowdinvesting sites that are not registered as broker-dealers are likely relying on the SEC’s October 25, 1996 No Action Letter to Angel Capital Electronic Network (“ACE-NET”).  In that No-Action Letter, the SEC’s Division of Market Regulation stated that it would not recommend enforcement action against ACE-NET for failing to register as a broker-dealer so long as ACE-NET met six separate criteria that it claimed it would meet.  One of these criteria was that ACE-NET would not “provide advice about the merits of particular opportunities or ventures.”  Mr. Stephenson describes how complying with this criterion could potentially cause the most difficulty for current crowdinvesting sites.  This could be especially true if potential investors increasingly seek out crowdinvesting sites that provide more information about an offering than simply listing information provided by an issuer.   Furthermore, given the vagaries of what constitutes “providing advice,” the SEC still has considerable discretion in instituting proceedings against crowdinvesting sites it believes has crossed this indeterminate line.