Securities Mosaic® Blogwatch
March 22, 2019
Davis Polk Discusses CFTC’s Entry Into Anti-Corruption Enforcement
by Angela T. Burgess, James W. Haldin, Neil H. MacBride, Tatiana R. Martins and Paul J. Nathanson

On March 6, 2019, Commodity Futures Trading Commission (“CFTC”) Director of Enforcement James McDonald announced an initiative to pursue foreign corrupt practices that constitute violations of the Commodities Exchange Act (“CEA”), noting that the Enforcement Division already has open investigations involving such conduct.  The same day, the Enforcement Division issued an Advisory encouraging companies and individuals not registered, nor required to be registered, with the CFTC (“non-registrants”) who are nonetheless subject to the CFTC’s enforcement power to voluntarily disclose foreign corrupt practices by establishing a presumption of no civil monetary penalty where the disclosure is followed by full cooperation and appropriate remediation in the absence of aggravating circumstances.[1]

It remains to be seen how much impact the CFTC’s official entry into an already crowded enforcement space, along with its enhanced voluntary disclosure program, will have on scenarios where companies suspect or detect conduct that might violate both the CEA and the Foreign Corrupt Practices Act (“FCPA”).  However, it will undoubtedly add another layer of complexity to a company’s analysis of the costs and benefits of voluntarily disclosing such matters.  It may also add complexity and costs to the investigation and resolution of those matters, depending on what type of cases the CFTC pursues and how closely it adheres to its commitment not to pile onto existing investigations by the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”).

Foreign Corruption Initiative

In remarks at the American Bar Association’s National Institute on White Collar Crime,[2]  McDonald announced that foreign corrupt practices are now a CFTC enforcement priority and provided several examples of conduct that might violate the CEA and undermine domestic markets.[3]  Although the CEA does not contain corruption-specific provisions, McDonald noted that foreign corrupt  practices “might constitute fraud, manipulation, false reporting, or a number of other types of violations under the CEA, and thus be subject to enforcement actions brought by the CFTC.”  By way of example, McDonald stated that bribes might be used to secure business involving swaps or derivatives or to manipulate benchmarks or benchmark-related pricing, thereby violating provisions in the CEA.  He further noted that the CFTC already has “open investigations involving similar conduct.” [4]

Acknowledging that these scenarios might also violate the FCPA, McDonald emphasized that the CFTC would work closely with the DOJ and the SEC to “avoid duplicative investigative steps.”[5]  McDonald also stressed that the CFTC would not “pile onto” other investigations, would coordinate any penalties, and would provide “dollar-for-dollar credit” for disgorgement or restitution paid to resolve related actions.[6]

Enhanced Incentive for Corruption-Related Disclosures

In tandem with McDonald’s remarks, the Enforcement Division announced an enhanced incentive for timely and voluntary disclosure of CEA violations involving foreign corruption.[7]  Prior enforcement Advisories provided for a “substantial” reduction in civil monetary penalties where self-reporting was accompanied by full cooperation and appropriate remediation,[8] much like the FCPA Pilot Program that the DOJ implemented in April 2016.  The new Advisory, which borrows heavily from the FCPA Corporate Enforcement Program the DOJ implemented in November 2017, goes one step further by establishing a presumption that the Enforcement Division will not recommend a civil monetary penalty where non-registrants “timely and voluntarily” disclose CEA violations involving foreign corruption.  The presumption applies only if the disclosure is followed by “full cooperation and appropriate remediation,” as those terms are defined in the 2017 Advisories.  Further, the presumption applies only in the absence of “aggravating circumstances,” which include but are not limited to the involvement of executive or senior management, the pervasiveness of the misconduct, and whether the company or individual has previously engaged in similar misconduct.  Additionally, the Advisory makes clear that the Division will “still require payment of all disgorgement, forfeiture, and/or restitution resulting from the misconduct at issue.”  Both registrants and non-registrants that do not voluntarily disclose but nevertheless undertake “full cooperation and appropriate remediation” remain eligible for a “substantial” reduction in civil monetary penalty pursuant to the 2017 Advisories.

Implications and Areas to Watch

For more than a decade, one of the most consistent trends in the anti-corruption enforcement space has been the increasing multijurisdictional nature of both investigations and resolutions as a result of increased enforcement abroad.  This trend has added significant complexity and often cost to investigating, if not resolving, corruption-related matters.  The CFTC’s greater prominence in this space may result in these same impacts being felt even where the enforcement is exclusively domestic.  The CFTC’s awareness of this risk no doubt underlies its commitment to closely coordinate with the DOJ and the SEC both with respect to investigations and the monetary aspects of any resolutions.  The true test, however, will be how the CFTC exercises its discretion in this already crowded enforcement space.

Another significant question will be the type of conduct that will be subject to CFTC enforcement.  In addition to the examples included in McDonald’s remarks, such as violations of the CEA’s price manipulation provisions,[9]  other possibilities include efforts to conceal the payment of bribes by misrepresenting that funds were being invested in futures or swaps, which could potentially fall under a number of fraud-related provisions in the CEA.[10]  Additionally, as in the FCPA context, entities registered with the CFTC are subject to recordkeeping requirements, meaning that an organization might also find itself in violation of the CEA if it fails to keep accurate records to conceal bribes.[11]


[1] The CFTC’s enforcement power extends beyond registrants for certain offenses. See 7 U.S.C. §§  13(a), 13b. For example, the CFTC may enforce the prohibition against market manipulation against any individual, regardless of their registration status. Id. § 9.  As noted in the Advisory, CFTC registrants have existing reporting obligations to the CFTC that, among other things, require them to report any material noncompliance issues under the CEA.  See, e.g., 17 C.F.R. § 3.3(e)(5).


[3] The CFTC has exclusive jurisdiction over the CEA, which governs individuals and organizations involved with derivatives, futures, and swaps markets. 7 U.S.C. § 2(a)(1)(A) (2018).

[4] Prior to his CFTC appointment, McDonald served as an Assistant U.S. Attorney in the Public Corruption Unit of the U.S. Attorney’s Office for the Southern District of New York.

[5] In a panel following his speech, McDonald pointed to recent FCPA actions against the investment bank Société Générale and the hedge fund Och-Ziff Capital Management Group as examples of cases that might involve CFTC enforcement.  McDonald did not suggest that either organization had actually violated the CEA, but that both companies had been involved in commodities markets and were subjects of DOJ FCPA cases.

[6] Indeed, following McDonald’s announcement, Assistant Attorney General Brian A. Benczkowski noted that the DOJ “look[s] forward to working in parallel with the CFTC in cases involving foreign corrupt practices, as well as others.”  See



[9] See, e.g., 7 U.S.C. §§ 9(1), 9(3).

[10] See, e.g., id. § 6o.

[11] See, e.g., 17 CFR § 4.23.

This post comes to us from Davis, Polk & Wardwell LLP. It is based on the firm’s memorandum, “CFTC Is Latest Entrant to Anti-Corruption Enforcement,” dated March 11, 2019, and available here.

March 22, 2019
Insider Trading and Executive Overreach
by Kevin R. Douglas

The recent controversy over President Donald Trump’s use of his emergency authority to fund a wall on the U.S. southern border has awakened many Americans to the problem of executive overreach. Yet, what few may appreciate is that executive overreach can cause trouble in contexts far beyond immigration or border security. For example, consider U.S. securities regulation. Executive overreach was a major factor in creating confusion in the current U.S. laws against insider trading, and some reformers propose using new executive actions to correct the problem.

A recent op-ed by an SEC commissioner and a former U.S. attorney calls for making U.S. insider trading laws clearer and more coherent.[1] The authors imply that Congress is to blame for the current state of the law. But SEC officials blaming Congress for the incoherence of U.S. insider trading laws is like a drunk driver blaming a light pole for jumping into the middle of the road. The flaws in the law are better explained by the actions of 1960s SEC commissioners who were unwilling to wait for Congress to pass legislation prohibiting insider trading.

Federal prosecutions of insider trading are brought under the anti-fraud provisions of U.S. securities statutes, despite decades of state court decisions prior to 1961 that rejected insider trading as a form of fraud.[2] The history of state court decisions is important, because when federal statutes set out to punish common legal violations without redefining the violation, federal courts will generally look to state law to determine the scope of the activity in question.[3] This means that when Congress passes a law prohibiting fraud in securities transactions without redefining fraud, the state law definitions of fraud should control.

U.S. insider trading law punishes parties with special access to information for failing to disclose that information before trading. Before the 1960s, imposing liability for fraudulent nondisclosure in a business transaction required showing that the defendant intentionally withheld information that she had a duty to disclose to her counter party, and that her intent was to make the counterparty act in a specific way.[4] Because traders on stock exchanges cannot influence their counter parties’ decisions, state courts rejected the claim that insider trading was a form of fraud.[5] If you cannot make someone take an action, then you cannot be held liable for using deception to make that person act.

In its 1961 Cady, Roberts decision, without authority from Congress, the SEC originated the U.S. ban on insider trading by explicitly rejecting the state law definitions of “fraud” and “fiduciary duty.” In Cady, Roberts the SEC rejected the need to show that a defendant actually influenced the actions of his alleged victim, let alone that the defendant intended to influence the alleged victim’s trading decision.[6] In the same case, the SEC also redefined which parties had, and which parties were owed, fiduciary duties. The state law generally recognized corporate directors as having fiduciary obligations to the corporate entity itself, not to shareholders.[7] However, in the then radical Cady, Roberts opinion, the SEC asserted that under the federal antifraud provisions directors and many other insiders owe fiduciary duties of disclosure to everyone participating on securities exchanges—shareholders and non-shareholders.[8] The SEC described these dramatic changes in the scope of basic legal principles as necessary to prevent the “inherent unfairness” of allowing insiders to trade with parties who do not have access to the same information. Of course, executive-branch officials in the United States are not authorized to change the law based solely on a personal judgment about what is necessary.

The drastic interpretive choices of the SEC in Cady, Roberts make it obvious that the ambiguity in modern U.S. insider trading regulation is not a matter of happenstance or merely the result of Congress’ failure to pass clear legislation. Because we use words to define other words, the SEC’s redefinition of these basic legal concepts had follow-on effects, which led to confusion and contradictions in U.S. securities law. But to be fair to the current agency officials calling for reform, there is some validity to the concern that Congress has been lax in legislating clear insider trading rules. In the 1980s, Congress passed two bills increasing the penalties for violating the prohibition on insider trading and clarifying which civilians had standing to sue in federal court.[9] Congress chose not to define what constitutes insider trading in either bill. The failure of Congress to clearly define insider trading when it did pass insider trading legislation shows that executive overreach can be aided and abetted by legislative negligence. In the 1980s, Congress understood that targets of the ban on insider trading were facing years in prison and the confiscation of millions of dollars, and it still chose not to clarify the law.

Fixing the incoherence in regulation of insider trading requires keeping in mind that the problem began with executive overreach. This is important because the current self-appointed task force for reform takes for granted that the SEC itself has the authority to create new rules explicitly banning insider trading, which would mean no longer twisting the anti-fraud statutes beyond recognition. If the SEC did not have the authority to create rules prohibiting insider trading in 1961, and Congress failed to define the violation in the 1980s, then it is doubtful that the SEC now has the authority to create rules banning insider trading. If nothing else, the controversy over President Trump’s emergency declaration could help voters and law makers to recognize that the question of executive overreach stretches far beyond the funding of a southern border wall.


[1] Preet Bharara and Robert J. Jackson Jr., Insider Trading Laws Haven’t Kept Up with the Crooks,, Published October 9, 2018. Accessed January 30, 2019.

[2] Bainbridge, Insider Trading Law and Policy, pages 11-17.

[3] See Chiarella v. United States, 445 U.S. 222, 233, 100 S. Ct. 1108, 1117, 63 L. Ed. 2d 348 (1980) (“Formulation of such a broad duty, which departs radically from the established doctrine that duty arises from a specific relationship between two parties, see n. 9, supra, should not be undertaken absent some explicit evidence of congressional intent.”) Also see Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 436 (7th Cir. 1987) (In describing how the scope of fiduciary duties to disclose under Rule 10b-5 would be determined, Judge Easterbrook states that “[t]he obligation to break silence is itself based on state law…and so may be redefined to the extent state law permits.”) (Quotation marks omitted.) Also see United States v. Craft, 535 U.S. 274, 278, 122 S. Ct. 1414, 1420, 152 L. Ed. 2d 437 (2002) (“[W]e look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer’s state-delineated rights qualify as ‘property’ or ‘rights to property’ within the compass of the federal tax lien legislation.”) (Citations and quotation marks omitted.)

[4] Restatement (Second) of Torts § 551.

[5] Goodwin v. Agassiz, 186 N.E. 659, 661–62, 283 Mass. 358, 363–65 (Mass. 1933) (“Every element of actual fraud or misdoing by the defendants is negatived by the findings. Fraud cannot be presumed; it must be proved…The stock of the Cliff Mining Company was bought and sold on the stock exchange. The identity of buyers and seller of the stock in question in fact was not known to the parties and perhaps could not readily have been ascertained. The defendants caused the shares to be bought through brokers on the stock exchange. They said nothing to anybody as to the reasons actuating them. The plaintiff was no novice. He was a member of the Boston stock exchange and had kept a record of sales of Cliff Mining Company stock. He acted upon his own judgment in selling his stock. He made no inquiries of the defendants or of other officers of the company. The result is that the plaintiff cannot prevail.”) Also see Bainbridge, Insider Trading Law and Policy, pages 13-17.

[6] In the Matter of Cady, Roberts & Co., 1961 WL 60638 at *5, 40 S.E.C. 907 (Nov. 8, 1961) (“Respondents further assert that they made no express representations and did not in any way manipulate the market, and urge that in a transaction on an exchange there is no further duty such as may be required in a ‘face-to-face’ transaction. We reject this suggestion. It would be anomalous indeed if the protection afforded by the antifraud provisions were withdrawn from transactions effected on exchanges, primary markets for securities transactions.”)

[7] Bainbridge, Insider Trading Law and Policy, pages 11-13.

[8] In the Matter of Cady, Roberts & Co., 1961 WL 60638 at *5, 40 S.E.C. 907 (Nov. 8, 1961) (“There is no valid reason why persons who purchase stock from an officer, director or other person having the responsibilities of an ‘insider’ should not have the same protection afforded by disclosure of special information as persons who sell stock to them. Whatever distinctions may have existed at common law based on the view that an officer or director may stand in a fiduciary relationship to existing stockholders from whom he purchases but not to members of the public to whom he sells, it is clearly not appropriate to introduce these into the broader anti-fraud concepts embodied in the securities acts.”)

[9] Bainbridge, Insider Trading Law and Policy, page 30.

This post comes to us from Kevin R. Douglas, a visiting assistant professor at George Mason University’s Antonin Scalia Law School.

March 22, 2019
Activist CEOs Speak Out—Is There a Way to Do it Better?
by Cydney Posner, Cooley

It feels like CEOs are stepping into it—the political fray, that is—all the time these days. And recently, there has been a lot of pressure on CEOs to voice their views on political, environmental and social issues. According to the Global Chair of Reputation at Edelman, the expectation that CEOs will be leaders of change is very high. Last year, Edelman’s Trust Barometer showed those expectations at a record high of 65 percent; “[t]his year, the call to action appears to be yet more urgent—a rise by 11 points in the public’s expectation that CEOs will speak up and lead change. Today, some 76 percent of respondents believe CEOs need to step up.” Similarly, in this year’s annual letter to CEOs, BlackRock CEO Laurence Fink focused on the responsibility of corporations to step into the breach created by political dysfunction: “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others.” In the absence of action from government, he counsels CEOs, “the world needs your leadership.” (See this PubCo post.) To be sure, a number of CEOs have jumped in to meet this challenge. But this study, The Double-Edged Sword of CEO Activism, suggests that, notwithstanding the public perception of widespread CEO activism, the incidence of CEO activism is actually relatively low. And public reaction seems to vary depending on the topic, but can, in some cases, lead to consumer backlash. Is there a better way to handle it? The authors of this article think so.


What is CEO activism? As discussed in the study, definitions can vary. For example, are CEO statements that are “defensive” in response to attacks or pressures on the company “activism”? What about “statements on social or environmental matters that are phrased as personal preferences or expressions of opinion without advocating that corporations or society take action”?

In their study, the authors looked at “all public statements in national media and corporate transcripts made by the current CEOs of all companies listed in the S&P 1500 Index.” From that collection of content the authors excluded “advocacy statements related to corporate matters, including statements about corporate tax rates, federal and state regulations, and political issues with widespread economic implications, such as the fiscal cliff, the debt ceiling, budget sequestration, NAFTA, and tariffs. These statements are common across a large number of CEOs in response to questions about policy impacts on their business.” However, the authors included as part of the study those statements that clearly represented the CEO’s personal belief as well as statements that were not so clear and may have reflected either a personal belief or a corporate position, such as statements that were considered “commercially beneficial” because they “align with the company’s core line of business and appear potentially beneficial in terms of customer or employee retention, or addressing external critics.” (One of the examples given in this context was a statement by the CEO of a soft drink manufacturer advocating plastic collection and recycling.) The rationale for including these statements was that it was not really possible to determine whether the statement was a “proactive” one that reflected the CEO’s personal belief or a “defensive” one that the CEO felt compelled to take because of external pressures. Also included were statements touting company awards or high scores on ESG indices. These statements were then divided into five categories: “the environment, diversity and inclusion, immigration and human rights, other social issues, and politics.”

With regard to activist statements in the national media by CEOs of S&P 500 companies, the authors found that 28% made “public statements about social, environmental, or political issues either personally or on behalf of the company,” while only 10% made statements that were clearly personal. For the S&P 1500, the percentages fell precipitously. With respect to CEOs of S&P 1500 companies, only 12% made these types of statements and only 4% were clearly personal. The authors found that about half of the activist CEOs advocated diversity, the most frequently promoted topic, followed by the environment (41%), immigration (23%), other social issues (19%) and political issues (17%). On social media, such as Twitter, the authors found that the level of CEO activism was only “modestly” higher. The authors attribute the impression that there is “widespread CEO activism” to “a few vocal outliers,” CEOs of large companies who attract a lot media attention. Otherwise, they found that most of the activist CEOs expressed activist views on only one or two topics.

The study also considered how the public responded to CEO activism, finding that, while conceptually, the majority of the public supports CEO activism, the public is quite divided when it comes to particular issues. (What a surprise….) In a survey of 3,544 persons, almost 2/3 had a favorable view of CEOs of large companies using “their position and potential influence to advocate on behalf of social, environmental, or political issues they care about personally, while one-third (35 percent) do not.” The issues viewed most favorably in this context were environmental issues (78%), renewable energy (68%), sustainability and climate change (each 65%). Some social issues also received high favorability responses, such as healthcare (69%), income inequality (66%), poverty (65%), and taxes (58%). Issues regarding diversity and social equality were more mixed, and “[c]ontentious social issues—such as gun control and abortion—and politics and religion garner the least favorable reactions. Of these issues, CEOs speaking up about gun control is the only one with a net-favorable position (45 percent favorable versus 35 percent unfavorable).”

In terms of the commercial impact resulting from CEO activism, the authors found that the public was more likely to react negatively—or at least remember doing so—as a result of disagreement with a particular CEO activist position by refusing to purchase or reducing the level of purchase of the company’s product (35%) than to react positively when they agreed with the CEO by buying more (20%). The authors concluded that “CEO activism is a double-edged sword: CEOs who take public positions might build loyalty with employees, customers, or constituents, but these same positions can inadvertently alienate important segments of those populations.”

To the extent that CEOs are considering taking stands on contentious social, political or environmental issues, are there effective ways for CEOs to consider when and how to take a stand? In this article from the WSJ, two business school professors give us their views, based on interviews and research, on the right way and wrong way for CEOs to express activist views, especially given the risk that companies can, in some cases, face backlash from consumers and others.

The authors identify three instances when, in their view, it makes the most sense for a CEO to weigh in on a controversial issue:

  • First, when the CEO’s employees provide a “nudge” to the CEO to speak out on the issue. However, the authors caution, the CEO should be sure to assess the level of employee support and opposition, given that some positions may alienate some groups of employees and potentially “undermine organizational culture.” Especially recently, there have been notable instances when employee pressure has received substantial public attention and had a significant impact on corporate decisions.



According to the most current Edelman Trust Barometer, there is a significant “trust advantage” for employers: “71 percent of employees believe it’s critically important for ‘my CEO’ to respond to challenging times. More than three-quarters (76 percent) of the general population concur—they say they want CEOs to take the lead on change instead of waiting for government to impose it.”)

  • Second, when the public statement won’t be viewed as hypocritical (in light of company practices) or a “cheap publicity stunt” (because of the strong connection to the CEO’s personal values and the company’s corporate values).
  • Third, when the issue is still hotly debated and the CEO’s voice can make a difference; remaining silent and waiting for a “safe” time to speak out can be interpreted as “an endorsement of the status quo.”

To make activist statements most effective, the authors recommend the following:

  • Plan ahead for the possibility that the CEO could be asked to express his or her view on a controversial topic by assembling a “team of employees, board members and even outside experts to map out how [the CEO] will—or won’t—respond to the next big political firestorm” and “war game” various scenarios.



The authors of the study discussed above also raise a number of issues regarding board involvement in CEO activism: “How well do boards understand the advocacy positions of their CEO? How well do they understand the advocacy positions adopted by their company (such as through Twitter)? Are they involved in decisions to take public stances on controversial issues, or do they leave these decisions to the discretion of the CEO? Should boards be more engaged in these decisions, particularly when a public stance has the potential to impact positively or negatively the commercial performance of the organization?” The extent of any board involvement will likely vary from company to company and may well depend on a number of factors, such as the circumstances and nature of the CEO’s statement and the likelihood of impact on the company itself.

  • Part of that planning should include anticipating the possibility of backlash from customers or employees, such as consumer boycotts or employee protests and walkouts. To that end, “[f]iguring out whether opponents or proponents will have a bigger impact on the issue at hand—and on your company’s reputation—is typically more art than science today. More detailed data on customers’ and employees’ beliefs and values would be needed to better predict responses to CEO activism.” CEOs should identify and monitor key performance indicators to continue to assess the impact of the statement.
  • Work with the corporate communications team, who can provide informative data and strategic advice, especially if the CEO lets the team know which issues are of most importance.
March 22, 2019
New Developments in Shareholders’ Gender Pay Gap Proposals
by Ruby Tewani, Ryan Resch, Willis Towers Watson

Investors’ growing interest in the median gender pay gap (i.e., the wage difference between the median male employee and the median female employee) is the latest expression of a more granular approach to environmental, social and governance (ESG) investing. They are not only more focused on granularity, building on an initial call for public companies to disclose their gender pay gap, but are also casting a wider net to include more industries and companies. This trend continues in 2019. Arjuna Capital has once again issued shareholder proposals. What’s different from prior years is that the firm has asked 12 large, publicly-traded financial services and technology companies to disclose the median gender pay gap.

This is an interesting new development in gender pay-related shareholder proposals, as it specifically focuses on demographic representation. Previous shareholder proposals asked for information on the wage gap between male and female workers with directly comparable jobs, factoring in function, job level, geography and more (generally referred to as equal pay for work of equal value). Arjuna’s latest filings ask for the median wage gap, which is a statistically unadjusted figure. Simply put, a gap indicates that male employees as a group are occupying higher-paying positions than female employees, which does not allow female employees’ pay levels to trend upward. The gap is especially troublesome if there is a fair representation of female workers across the company, but not at the higher levels.


These proposals indicate ESG investors are interested in a new level of detail. The 2019 proposals follow reports from a few of the target companies that their pay equity reviews showed little to no wage gap between men and women performing comparable jobs. This failed to satisfy Arjuna. Citi, the sole company that to date has responded to the investor’s 2019 proposal with specific information, announced in a recent blog post that its analysis shows a material median wage gap.

Shareholders are raising these broader inclusion and diversity issues as part of their ongoing dialogue with issuers and as part of their voting policies. Gender diversity is increasingly cited as a key interest. In 2018, companies in financial services and technology continued to remain the primary targeted industries. However, shareholder proposals were also filed at some insurance and retail companies, suggesting ESG investors are taking a broader approach. It’s reasonable to assume that they will target other companies in the same or different industries. It’s also possible that the responses will establish a new standard for how inclusion and diversity is made part of compensation and talent programs.

We anticipate the combined forces of legislation such as U.K. gender pay reporting rules and stakeholders’ higher expectations will accelerate companies’ overall pay transparency and gender pay reporting. This more granular reporting is pressuring companies to increase the number of female employees at senior management and board levels and ensure males and females in similar roles have pay equality. By increasing female representation in higher paid jobs, companies can meaningfully reduce gender pay gaps. It’s really a broader talent development issue rather than simply a pay issue.

Compensation committees are proactively preparing for shareholder discussions by taking a more expansive view of inclusion and diversity matters, including gender pay and the fairness of their compensation and talent programs. While the boards of U.S. public companies have a fiduciary responsibility to address shareholder value creation, there is an emerging debate about what to consider. Do they need to also consider the interests of other stakeholders (i.e., serve a social purpose) as part of their oversight responsibilities? This typically includes a focus on sustainable human capital management that supports long-term value creation and risk mitigation. Negative press can cause significant reputational risk and damage a company’s brand. Forward-thinking companies will want to develop a plan that delivers a clear message that all employees are valued and treated fairly and then act on it.

March 22, 2019
This Week In Securities Litigation (Week ending March 22, 2019)
by Tom Gorman

The SEC – Musk disputed continued this week. In the latest round, the Commission escalated the claims, alleging that Mr. Musk never complied with the Court’s order requiring that material communications about the auto maker be approved before dissemination. These papers significantly alter the nature of the dispute which began with the look of a personal squabble. Mr. Musk has requested leave to file additional papers.

Enforcement actions filed by the Commission this week centered on offering fraud cases. One is based on a fraud by a CPA that ran for years. Another offering fraud was run by an oil and gas firm that lured investors with claims about assets that had been lost in a court action. Another was conducted by on-line registered Pastor, not long out of prison, at the Church of the Healthy Self. Finally, an action was brought against an investment adviser who worked both sides of a transaction, arranged a sham transaction and secured a profit for himself.


Proposals: The Commission approved Offering Reforms for Business Development Companies and Registered Closed-End Funds (March 20, 2019). The proposals implement certain provisions of the Economic Growth, Regulatory Relief and Consumer Protection Act. They build on approaches currently in use and are designed to improve access to capital for BDCs (here).

Rules: The agency adopted Rules to Implement FAST Act Mandate to Modernize and Simplify Disclosure. The amendments will increase flexibility in the discussion of historical matters in MD&A and allow firms to redact confidential information without making a confidential treatment request (March 20, 2019)(here).

Remarks: Commissioner Elad L. Roisman delivered the Keynote Remarks at the ICI Mutual Funds and Investment Management Conference, San Diego, California (March 18, 2019). His remarks focused on the proxy process (here).

Remarks: Dalia Blass, Director of Investment Management, delivered remarks at the ICI Mutual Funds and Investment Conference, San Diego, California (March 18, 2019). Her remarks focused on the agenda for the coming year which will build on recent rule makings such as those involving ETFs and proxy advisors (here).

Remarks: William Hinman, Director of Corporation Finance, delivered remarks titled “Applying a Principles-Based Approach to Disclosing Complex, Uncertain and Evolving Risks” at the 18th Annual Institute on Securities Regulation in Europe, London, England (March 15, 2019). His remarks focused on applying disclosure requirements to situations such as Brexit, environmental issues and cyber-security by, in part, keying on the risks to the enterprise (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 4 civil injunctive actions and 2 administrative proceedings this week, exclusive of 12j and tag-along actions.

Offering fraud: SEC v. Pedersen, Civil Action No. 19-cv-2069 (C.D.CA. Filed March 20, 2019) names as a defendant Carol Ann Pedersen, a California licensed CPA since 1977. Since at least 1991 Defendant has solicited clients for her investment funds. One fund supposedly purchased fixed-rate securities. The other claimed to put investor cash into instruments that had a high rate of return. Overall about $29.3 million was raised from 25 investors. In fact, Ms. Pedersen was operating a Ponzi scheme. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. The U.S. Attorney’s Office for the Central District of California filed parallel criminal charges. See Lit. Rel. No. 24430 (March 20, 2019).

Offering fraud: SEC v. Crawford, Civil Action No. 19-cv-1022 (S.D. Ohio Filed March 19, 2019). The oil and gas scheme was conducted by Defendant Timothy Crawford and his firm, Cardinal Group, Inc., also a defendant. Mr. Crawford served as the CEO of Cardinal Energy until 2012 when he resigned to become a consultant. The firm’s shares were listed on OTC Markets Group, Inc. In 2017 Cardinal lost control of two oil and gas leases that represented 87% of the firm’s revenue in a lawsuit. That action was filed in March 2017. In June of that year the Court entered a default judgment against the company. The month after the judgment was entered Cardinal filed reports with the Commission. Those filings represented that the firm still had the two leases lost in the Court action. Mr. Crawford signed the filings. Defendants subsequently raised about $1 million from investors in a private offering of Cardinal stock. Investors were not told that the Commission filings were false. They were also not told that the two leases had been lost. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(d) and 14(c) and Securities Act Section 17(a)(2). The case is pending. See Lit. Rel. No. 24427 (March 19, 2019).

Conflicts/sham transaction: In the Matter of Talimen, LLC, Adm. Proc. File No. 3-19108 (March 15, 2019). Talimen is a Commission registered investment adviser. Its CEO, and a member of the investment committee, is Grant Gardner Rogers, named as a Respondent in a related proceeding cited below. Over a three year period, beginning in 2012, Talimen served as the collateral manager and investment adviser to several collateralized debt obligations or CDOs. The assets held by the CDOs included participations in a $57.2 million first mortgage on a Chicago hotel. The participations entitled the CDOs to a stream of income from the mortgagees. By early 2014, however, the mortgage loan was in default. In June 2014 Talimco created a Fund and became its adviser. The Fund focused on real estate investments. By the end of the year the Fund had acquired all but one of those interests, valued at about $10 million. In April 2015 the Fund sought to acquire the final participation related to the Chicago hotel. The Fund was acting on the advice of Talimco. At the same time Talimco was advising the collateral manager. In compliance with the CDO operating documents, Talimco advised the Fund to bid 50% of the face value. The adviser also arranged for four market makers to bid in the auction. The market makers were reluctant to become involved in the auction but agreed. The Fund prevailed in the auction, not the market makers. Ultimately, in December 2015 Talimco caused the Fund to sell the mortgage loan participations for $43.5 million to the highest bidder at an auction. Each participation had been acquired at 50% of face value. The Fund realized a profit of about $14.9 million. Mr. Rogers personally realized profits of about $14,000 on the sale of the approximately $10 million participation. Talimco also received about $74,000 in management and performance fees attributable to the purchase of the approximately $10 million mortgage loan participation from the CDO by the Fund. The CDO that sold the last loan participation was unable to repay all of its debts, including about $410,000 in principal owed to CDO noteholders.

The Order alleges violations of Advisers Act Section 206(2). In resolving the matter, the adviser agreed to cooperate fully with the Commission. The adviser consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. Talimco will also pay disgorgement of $74,000, prejudgment interest of $8,758.80 and a penalty of $325,000. See also In the Matter of Grant Gardner Rogers, Adm. Proc. File No. 3-19107 (March 15, 2019)(COO of adviser settled action based on the same facts, consenting to the entry of a cease and desist order based on Advisers Act Section 206(2), a 12 month suspension from the securities business and the payment of a $65,000 penalty).

Deceptive scheme: SEC v. Volkswagen Aktiengesellschaft (C.D. Cal. Filed March 15, 2019) names as defendants the firm, CEO Martin Winterkorn and VW Credit, Inc. In 2005 VW made a strategic decision to launch a large promotion of diesel vehicles in the United States. The German manufacture claimed to be developing “clean diesel,” a product that would meet the demands for environmentally-friendly vehicles. Other manufactures such as Toyota and GM chose a different path – hybrids. Two years later Mr. Winterkorn became CEO and Chairman of the Board of Management. VW’s recently installed leader launched a new initiative – Strategy 2018. The plan called for VW to be the largest, most profitable and most environmentally friendly car maker in the world by 2018. An important cog in the plan was the sale of diesel cars in the U.S. Over the next several years VW’s U.S. sales numbers increased. By 2012, for example, 100,000 vehicles were being sold in the United States. World-wide sales were climbing. By 2015 VW passed both GM and Toyota in global sales. The company became the largest carmaker in the world, a key goal of CEO Winterkorn’s initiative. That initiative was fueled, at least in part, by the U.S. capital markets. Millions of dollars in securities were sold in offerings to finance the expansion of the company to the top. For example, between May 2014 and June 2015 the company conducted three separate bond offerings, raising over $8 billion from U.S. investors. The vehicle and the securities sales, according to the SEC’s complaint, were based on “clean diesel.” In fact, it did not exist. Rather, a “defeat device” existed which made it appear that the autos met emission standards when being tested. While the CEO participated in a meeting with engineers where the device was discussed and senior company officials warned the scheme could damage the firm, it went forward and became the predicate for the car sales and the funds raised in the U.S. capital markets. Eventually the fraud was exposed, largely through university researchers who defeated the defeat device. By March 10, 2017, VW was compelled to plead guilty to three criminal felony counts in U.S. District Court. A $2.8 billion billon criminal penalty was imposed on the firm. Penalties were also paid to the EPA and various states. U.S. investors have not, however, been repaid the billions of dollars they spent to further the false tale of “clean diesel.” The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 17(a)(2) and (3). The case is in litigation.

Offering fraud: SEC v. Whitney, Civil Action No. 8:19-cv-499 (C.D. Cal. Filed March 13, 2019). A scheme targeting Vietnamese investors was operated in part by Defendant Kent Whitney, a former commodity broker then recently released from prison on wire fraud charges who had become an on-line minister. Minister Whitney became pastor of The Church for the Healthy Self, a/k/a/ Defendant CHS Trust which was related to CHS Asset Management Inc., another defendant. Defendant David Parrish, a friend of Pastor Whitney, also became a pastor at the Church for the Healthy self. The two Pastors, along with the Church and its related entity, used presentations, radio and television advertisements and YouTube videos, to solicit investors for their investment fund. Specifically, potential investors were told there would be at least 12% annual returns that were tax deductible, guaranteed and FDIC and SIPIC insured. Potential investors were assured that the investment was safe and growing tax free. The fund was supposedly managed by Wall Street Investors, audited by KPMG and a well-run company. Indeed, part of the returns were donated to charity. The claims, which generated over $25 million in investments from investor savings and retirement accounts, were false. The majority of the investor cash was misappropriated by Defendants. This scheme is on-going today. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court granted the Commission’s request for a freeze order. See Lit. Rel. No. 24426 (March 18, 2019).

Criminal cases

Offering fraud: U.S. v. Montoya, No. 1:18-cr-10225 (D. Mass.) is an action in which former hedge fund manager Raymond Montoya was sentenced to serve 175 months in prison followed by three years of supervised release. Mr. Montoya pleaded guilty to three counts of wire fraud, five counts of mail fraud and two counts of conducting an unlawful monetary transaction. Between 2009 and 2017 Mr. Montoya operated a pooled fund called Strategic Opportunity Fund, LLC. When soliciting investors that included friends and family, he touted the success of the fund. In fact, the fund was losing money. As new investor funds came in Defendant diverted much of the money to other uses.

Cyber-security/insider trading: U.S. v. Korchensky, No. 15-cr-381 (E.D.N.Y.). Defendant Vitaly Korchevsky was sentenced to serve 60 months in prison and ordered to pay $14.4 million in forfeiture and a fine of $250,000. He was convicted by a jury after a four week trial of conspiracy to commit wire fraud, conspiracy to commit securities fraud and computer intrusion, conspiracy to commit money laundering and two counts of securities fraud. The charges are based on a scheme in which the Defendant, along with another, hacked into three newswire services and stole press releases containing inside information. That information was used to trade securities. The trades netted the defendants about $30 million in illegal trading profits.

Offering fraud: U.S. v. Booy, No. 1:16-cr-00839 (N.D. Ill. Sentencing March 18, 2019). Defendant Richard Booy, the founder of Principal Financial Strategies LLC and Safe Financial Strategies Inc., was sentenced to serve 60 months in prison after pleading guilty to one count of wire fraud. Over a four year period, beginning in 2012, Mr. Booy lured 15 investors to entrust him and his firms with over $1.4 million. Investors were told that the investment was riskless. Many of those who entrusted their funds to Mr. Booy believing his firm was affiliated with Principal Financial Group, which it was not. In fact, Mr. Booy continued soliciting investors even after that company obtained an injunction against him.

Offering fraud: U.S. v. Pollak, No. 3L18-cr-00200 (D. Conn. Plea March 18, 2019). Defendant Leonid Pollak operated a business in Norwalk, Connecticut that conducted trade shows across the U.S. In mid-2013 he convinced an investor to help finance a new business venture that would conduct similar expositions in the Ukraine. He then misappropriated the investor funds for other purposes. He pleaded guilty to one count of wire fraud. Sentencing is scheduled for June 10, 2019.

Hong Kong

Frozen assets/manipulation: The Securities and Futures Commission issued notices to nine brokerage firms freezing certain assets. Specifically, the notices stated that although the firms were not under investigation they could not dispose of the assets – cash and/or securities – in certain client accounts. The assets were suspected of being tied to market manipulation activity.

Compliance: The SFC imposed a penalty of HK $10 million on BOCI Securities Ltd. for internal systems failures tied to its investment product selling practices. Specifically, the firm’s policies and procedures failed to prevent improper practices that included failing to assess client risk tolerance and strategy, ensure clients had sufficient net worth for certain product, conduct appropriate product due diligence prior to a recommendation and implement and maintain effective controls and systems to supervise the sale and distribution of investment products to clients in compliance with the applicable regulations.

March 22, 2019
Shareholder Approval: SEC Approves NYSE “Price Requirement” Amendments
by Liz Dunshee

On Wednesday, the SEC approved changes to the price requirements that companies must meet to qualify for exceptions under the NYSE’s shareholder approval rules. Broc blogged about the proposal last fall – noting that it would make NYSE rules more similar to previously-approved Nasdaq updates. Maybe that’s why the SEC received zero comments in five months. Among other things, the amendments:

– Change the definition of “market value,” for purposes of determining whether exceptions to the shareholder approval requirements under NYSE Sections 312.03(b) and (c) are met, by proposing to use the lower of the official closing price or five-day average closing price and, as a result, also remove the prohibition on an average price over a period of time being used as a measure of market value for purposes of Section 312.03

– Eliminate the requirement for shareholder approval under Sections 312.03(b) and (c) at a price that is less than book value but at least as great as market value

Shareholder Engagement: Tips for Director Involvement

In this 10-page memo, DLA Piper suggests ways to use your proxy statement as a shareholder engagement tool – as well as best practices for disclosing your shareholder engagement efforts. It notes that this type of disclosure is becoming a lot more common. That’s not too surprising since according to this “Director-Shareholder Engagement Guidebook” from Kingsdale Advisors, the vast majority of large companies are now involving directors in regular shareholder engagement – and of course they want to get credit for that.

The Guidebook highlights the benefits of involving directors in engagement efforts and responds to some common objections. And whether your directors already have relationships with shareholders or you’re still evaluating the pros & cons of a direct dialogue, it provides some tips to get the most “bang for your buck.” Here’s an excerpt:

Director-level engagement has to be convenient, otherwise boards and shareholders aren’t going to keep up with the expectations that have been set. Engaging shareholders does not necessarily mean traveling and sitting down for an hour or two. Ideally boards engage face-to-face annually, perhaps on the back of board meetings or institutional investor days, but follow-up may occur over the phone or in video-conferencing.

One of the most convenient set ups we have seen (for directors) is to invite shareholders in the day after a board meeting, when the directors are already prepared and gathered for a series of back-to-back meetings. We recommend invitations to shareholders for director-level meetings come from the corporate secretary, not the IRO. This will signal shareholder engagement is a board-level priority and the meeting will not cover the same topics that may have been previously covered with management.

Engagement should take place well before proxy season, not simply because there is time, but because you will have plenty of runway to address any governance issues that come up.

Transcript: “Earnouts – Nuts & Bolts”

We have posted the transcript for the recent webcast: “Earnouts – Nuts & Bolts.”

Liz Dunshee

March 22, 2019
Delaware Appraisal Cases Decline
by Francis Pileggi
View today's posts

3/22/2019 posts

CLS Blue Sky Blog: Davis Polk Discusses CFTC’s Entry Into Anti-Corruption Enforcement
CLS Blue Sky Blog: Insider Trading and Executive Overreach
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Activist CEOs Speak Out—Is There a Way to Do it Better?
The Harvard Law School Forum on Corporate Governance and Financial Regulation: New Developments in Shareholders’ Gender Pay Gap Proposals
SEC Actions Blog: This Week In Securities Litigation (Week ending March 22, 2019) Blog: Shareholder Approval: SEC Approves NYSE “Price Requirement” Amendments
Delaware Corporate & Commercial Litigation Blog: Delaware Appraisal Cases Decline

Blog posts are subject to copyrights held by the authors and are republished here with permission. Views expressed are those of the authors alone. Infringement Notification.