In connection with a partial settlement of alleged fraudulent activities, the SEC charged three directors of a company associated with the fraud, but who did not participate in the fraud,with failing to make Section 16 filings. Two of the directors, one of which is a former Governor of the State of New York, settled the SEC’s enforcement action without admitting or denying the charges. An administrative action was commenced against the third director.
We have written about SEC enforcement actions related to severance and confidentiality agreements that restrict reporting matters to the SEC. OSHA has also issued guidance regarding settlement agreements with whistleblowers under Section 806 of the Sarbanes-Oxley Act. According to the guidance:
“OSHA will not approve a “gag” provision that prohibits, restricts, or otherwise discourages a complainant from participating in protected activity. Protected activity includes, but is not limited to, filing a complaint with a government agency, participating in an investigation, testifying in proceedings, or otherwise providing information to the government. These constraints often arise from broad confidentiality or non-disparagement clauses, which complainants may interpret as restricting their ability to engage in protected activity. Other times, these constraints are found in specific provisions, such as the following:
Hat tip to Broc Romanek of TheCoruporateCounsel.net for pointing this out.
Perez v. Progenics Pharmaceuticals, Inc., involved a case where Plaintiff Perez drafted a memo to Progenics’ general counsel and his department head, accusing Progenics of committing fraud by publishing a false press release related to the status of clinical trials for a drug under development. Progenics fired Perez the next day in August 2008. Shortly thereafter, Perez filed a complaint with the Department of Labor claiming he was terminated in violation of the Sarbanes-Oxley Act in retaliation for whistleblowing. After the claim was litigated without resolution, Perez filed in complaint in the Southern District of New York. The trial was held in 2015, and the jury award Perez over $1.6 million.
Following trial, the Court considered Perez’ motion for reinstatement of employment at Progenics. The Court stated reinstatement was not feasible due to manifest hostility between Perez and Progenics. Instead, the Court granted Perez’ motion for reinstatement in the form of an order for “front pay” in an amount over $2.7 million. The Court did so because, among other things, it found Perez had no reasonable prospect of obtaining comparable alternative employment. The amount of the award was based on a conservative estimate of expected earnings based on Perez’ age at the time of the verdict until a reasonable retirement age.
The Court’s opinion cites only two cases when analyzing the propriety of a front pay award, neither of which involved a Sarbanes-Oxley retaliation case. Section 806 of the Sarbanes-Oxley Act does however provide that a successful litigant in a retaliation case is entitled to “all relief necessary to make the employee whole.”
Hat tip to Matt Kelly of Radical Compliance for highlighting this case. Matt has a very interesting analysis from a compliance perspective.
In the first action of its kind, the SEC has temporarily suspended the Tier 2 Regulation A+ offering of Med-X, Inc. The $15 million continuous offering of common stock was qualified by the SEC on November 3, 2015. The SEC stated it temporarily suspended the offering because Med-X has not filed its annual report on Form 1-K as required by Rule 257.
Under current CFTC rules, market participants who exceed $8 billion in gross notional swap dealing activity over a twelve-month period are required to register with the CFTC as swap dealers during the phase-in period currently in effect. This phase-in period is scheduled to end, and the threshold will fall, to $3 billion in December 2017.
In a recent speech, CFTC Chairman Timothy Massad said “Today, I am announcing that I will recommend to my fellow commissioners a one-year extension of the date on which the swap dealer de minimis threshold is scheduled to drop. This will be proposed through a Commission order. Adopting this order will give us more time to consider this critical issue. Given its importance, a delay is the sensible and responsible thing to do – and doing it now will provide much-needed certainty to market participants.”
In 2015, CFTC Commissioner J. Christopher Giancarlo said “the CFTC botched the policy analysis in 2012 when it implemented its current swap dealer registration de minimis rules.”
In a settled enforcement action, the SEC charged a private equity advisor, First Reserve Management, L.P., with conflicts of interest and other matters. First Reserve did not admit or deny the SEC’s findings.
The SEC noted First Reserve negotiated a legal fee discount from a law firm for itself for certain services based on the large volume of work the law firm performed for the funds advised by First Reserve, while the funds did not receive a discount on the same services. Because of the conflict of interest First Reserve faced as the beneficiary of the discount, First Reserve could not consent on behalf of the Funds to First Reserve’s practice of accepting the discount.
The charges also related to the allocation of expenses to funds without effective disclosure or receiving consent. The charges related to allocation of the following expenses:
Earlier today, the U.S. House of Representatives passed the Accelerating Access to Capital Act aimed at facilitating the formation of capital for U.S. small businesses. The measure is a package of three bills: H.R. 4850 – the Micro Offering Safe Harbor Act, H.R. 4852 – the Private Placement Improvement Act, and its namesake, H.R. 2357 – the Accelerating Access to Capital Act.
We previously reported on the Micro Offering Safe Harbor Act and Private Placement Improvement Act.
The only change to the Micro Offering Safe Harbor Act since our post in March was the addition of “bad actor” disqualifiers to the proposed exemption. Notably, securities sold pursuant to a “micro offering” would be exempt from state blue sky regulation. View the revised text of the bill by clicking here.
There were no changes to the Private Placement Improvement Act as reported out of the House earlier today.
The Accelerating Access to Capital Act seeks to broaden the eligibility requirements of Form S-3 – the streamlined registration statement form. Specifically, the bill would require the SEC to amend certain of the transaction eligibility categories. First, General Instruction I.B.1 of Form S-3 would be amended to allow any issuer with at least one class of common equity securities listed and registered on a national securities exchange to use the short-form. Currently, only issuers with an aggregate market value of common equity held by non-affiliates of $75 million or more are eligible to use Form S-3 pursuant to I.B.1. Second, General Instruction I.B.6(c) to Form S-3 would be removed. This transactional eligibility requirement applies to offerings for cash that (a) represent less than one-third of the aggregate market value of the common equity held by non-affiliates of the registrant, (b) are not conducted by a shell company nor any registrant that has been a shell within the last twelve months, and (c) the registrant has at least one class of common equity securities listed and registered on a national securities exchange.
These two changes, taken together, have the potential to meaningfully expand the use of Form S-3 in public offerings of securities. To read the text of the Accelerating Access to Capital Act, click here.
ABOUT STINSON LEONARD STREET
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 100 largest firms in the U.S., Stinson Leonard Street has offices in 13 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, Kan.; Omaha, Neb.; and Bismarck, N.D.
Drew Kuettel is a member of the firm’s corporate finance group. Drew works in the firm’s Minneapolis office and can be reached at andrew.kuettel@stinson.com or 612.335.1743.
The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.
The Minnesota Department of Commerce recently conducted a series of routine exams of investment adviser firms registered in Minnesota to analyze their compliance with certain regulations applicable to investment advisers. Common deficiencies noted during the exams are as follows:
In case you missed it, here is what the Consumer Financial Protection Bureau (CFPB) was up to over the last month:
Enforcement Actions and Litigation
Enforcement Action Against First National Bank of Omaha
On August 25, 2016, the CFPB announced an enforcement action against First National Bank of Omaha (FNBO) for alleged illegal practices concerning credit card add-on products. Specifically, the CFPB found that FNBO:
The CFPB and FNBO entered into a consent order to resolve the enforcement action. As part of the consent order, FNBO must:
Enforcement Action Against Wells Fargo Bank
On August 22, 2016, the CFPB announced an enforcement action against Wells Fargo Bank (Wells Fargo) for alleged illegal private student loan servicing practices, including failing to provide payment information to consumers, charging consumers illegal fees, and failing to update inaccurate credit report information. Specifically, the CFPB found that Wells Fargo:
The CFPB and Wells Fargo entered into a consent order to resolve the enforcement action. As part of the consent order, Wells Fargo must:
Summary Judgment Win Against CashCall, Inc.
On August 31, 2016, the United States District Court for the Central District of California entered an order granting partial summary judgment in favor of the CFPB in CFPB v. CashCall, Inc., et al., Case No. CV 15-7522-JFW (RAOx). The underlying action was initiated by the CFPB alleging unfair, deceptive, acts, and practices (UDAAP) related to a “rent-a-bank” scheme. The CFPB argued that CashCall and Martin Webb (Webb), a member of the Cheyenne River Sioux Tribe (CRST), agreed to organize a lending system whereby CashCall could purchase loans originated by Western Sky Financial (Western Sky), an entity formed by Webb and authorized to do business by CRST, in order to circumvent state usury laws, under the guise that the loans were subject to the “tribal law system.”
The CFPB moved for partial summary judgment arguing that CashCall and not Western Sky was the true lender. In finding in favor of the CFPB, the court found that CashCall was the true lender, in part, because it was CashCall’s money that was at risk (because CashCall fronted the first two months’ worth of loans and agreed to purchase all of the loans originated by Western Sky). Further, the court further concluded that because CashCall was the true lender, there was no reasonable basis for the parties’ CRST choice of law (largely because CRST is in South Dakota, but neither CashCall, a California-based business, nor the borrowers, who primarily applied for the loans online from other states, had ties to CRST). As such, the loans were subject to the laws of the states where the borrowers were located and subject to those states’ usury laws, which further supported the CFPB’s underlying UDAAP claims (i.e., that CashCall attempted to enforce and collect on loans that were in violation of state usury laws and, thus, unenforceable).
The court’s ruling is significant, in part, because it potentially creates a precedent for the CFPB to take future action against lenders and servicers that obtain loans from originators and try to enforce those loans that are in violation of state law. Further, while Congress prohibited the CFPB under the Dodd-Frank Act from setting interest rate caps, this case may provide the CFPB with an avenue to turn certain violations of state law (i.e., usury laws) into UDAAP violations.
Miscellaneous Announcements and Action
Proposed Updates to Know Before You Owe Rule
On July 29, 2016, the CFPB proposed updates to its Know Before You Owe mortgage disclosure rule. The proposed amendments are intended to formalize guidance in the rule and to provide greater clarity and certainty. The proposed changes include (1) providing tolerances for the “total of payments calculation” so that it does not make specific use of the finance charge; (2) promoting housing assistance lending by clarifying that recording fees and transfer taxes may be charged in connection with those transactions without losing eligibility for the partial exemption and exclude recording fees and transfer taxes from the exemption’s limits on costs; (3) extending the rule’s coverage to include all cooperative units; and (4) requiring creditors to provide certain mortgage disclosures to consumers.
Proposal to Expand Consumer Complaint Feedback
On August 1, 2016, the CFPB published a request for information in the Federal Register, seeking information on a proposed addition to the current consumer complaint intake form. The new field would include a survey requesting feedback from consumers related to the company’s response to their complaint. The consumers will be able to opt-in to provide the feedback publicly. The new survey field will replace the existing dispute field that permits consumers to indicate their satisfaction with the company’s response to their complaint.
Guiding Principles for Foreclosure Prevention
On August 2, 2016, the CFPB outlined consumer protection principles “to guide mortgage servicers, investors, government housing agencies, and policymakers as they develop new foreclosure relief solutions.” During the financial crisis, the Department of Treasury created the temporary Home Affordable Modification Program to provide relief to consumers at risk of foreclosure. That program is set to expire in January 2017. The CFPB announcement set forth guiding principles designed to continue assisting consumers facing foreclosure. The principles, which can be found here, promote (1) accessibility of information about loss mitigation options; (2) affordability in repayment plans; and (3) transparency in the information decisions servicers make.
Report Outlining Consumer Student Loan Servicing Complaint
On August 18, 2016, the CFPB Student Loan Ombudsman released a report “finding consumers complain of servicing problems that make it difficult to get lower student loan payments tied to their income.” The report indicates that consumers complained about prolonged processing delays and wrongful rejections by their student loan servicers. In response to those complaints, the CFPB released a “Fix it Form” designed for servicers to use to help improve the level of service they provide.
New Advisory Board and Council Members
On August 19, 2016, the CFPB announced the appointment of new consumer experts, from outside of the government, to the Consumer Advisory Board, Community Bank Advisory Council, Credit Union Advisory Council, and Academic Research Council. Those four advisory bodies provide advice to the CFPB leadership related to consumer financial issues and emerging market trends. To view a full list of the new appointees, click here.
ABOUT STINSON LEONARD STREET
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 100 largest firms in the U.S., Stinson Leonard Street has 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.
Zane Gilmer is a member of the firm’s litigation practice group. His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce. Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.
The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.
The SEC has again published its annual report to Congress regarding how the SEC has used Form PF data. The section on enforcement and investigation describes the use of the data in SEC examinations. The SEC staff: