Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC has instituted administrative proceedings against a registrant and others alleging that two individuals with prior law violations secretly controlled the operational and management decisions of the registrant while calling themselves outside “consultants.”  According to the SEC this arrangement enabled the two consultants to be de facto officers of the registrant and personally profit from the company without disclosing their past brushes with the law to investors.  While the registrant was led during the time period in question by two people with the CEO title,  management decisions made by the two consultants resulted in no revenues or viable business operations for the company.  The SEC alleges the CEOs each deferred to the consultants in derogation of their responsibilities.

While we can’t predict the outcome here, according to this case the SEC has brought such charges in the past and lost.  According to the case, the defendant was found not to be a de facto executive officer because:

  • Testimony indicated the defendant did not and could not make policy for the registrant.
  • While the defendant had substantial influence over the registrant’s acquisition program, he did not have final policy-making authority over the program.
  • The defendant did not have authority to sign contracts.
  • Supervising authority over a few persons is not necessarily indicative of policy making authority.
  • High pay is indicative of being a valued employee and not necessarily evidence of being an executive officer.


Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.