Top 5 SEC Enforcement Developments For April 2022 – Securities & More News Here

In order to offer an outline for busy in-home counsel and
compliance professionals, we summarize beneath a few of the most
necessary SEC enforcement developments from the previous month, with
hyperlinks to major assets. This month we study:

• Whether the SEC is broadening the scope of what constitutes
  violations of whistleblower protections underneath Rule 21F-17;




• The newest on the Division of Enforcement’s EPS Initiative
  and earnings administration;




• How advisers must be coping with various information suppliers
  and knowledgeable networks;




• The SEC’s landmark Archegos motion; and




• A current motion from the Enforcement Division’s Climate and
  ESG Task Force.

1. SEC Expands Its Interpretation of Tipster Protection
Rules

On April 12, 2022, the SEC issued an order and fined David Hansen, the
ex-Chief Information Officer and co-founding father of a non-public
know-how firm (NS8, Inc.), practically $100,000 for violating Rule
21F-17 of the Securities Exchange Act of 1934. The Rule prohibits
“any motion to impede a person from speaking
instantly with the Commission workers a couple of doable securities legislation
violation.” This order suggests the SEC’s interpretation
of “action to impede” could also be increasing from prior Rule
21F-17 enforcement proceedings.

According to the Hansen order, an NS8 worker
submitted a tip to the SEC and raised considerations one month later to
Hansen that the corporate was overstating its variety of paying
clients in exterior supplies. During their dialog, the
worker threatened to disclose “his allegations” to
NS8’s clients, buyers, and different events until
the corporate addressed the inflated buyer information. Subsequently,
each the CEO and Hansen “took steps to take away the
[employee’s] entry” to the corporate’s IT programs, and
used administrative accounts to entry and monitor the
worker’s firm laptop. The order listed these as amongst
“Hansen’s Action’s to Impede” underneath Rule
21F-17.

Commissioner Hester M. Peirce launched an announcement, additionally on April 12, 2022,
dissenting from the company’s determination. Commissioner Peirce
acknowledged that the company failed to clarify exactly what Hansen did
that impeded the worker’s capability to speak with the
SEC, notably for the reason that worker had already submitted his tip
to the company. Instead, Commissioner Peirce asserted that, “At
most, [Hansen’s] actions affected the content material of what
the NS8 Employee might talk, not whether or not he might
talk.” (Emphasis added.)

Prior Rule 21F-17 enforcement actions largely centered on
doc provisions, reminiscent of confidentiality, non-disparagement, or
separation agreements that might probably impede workers from
reporting securities legal guidelines violations to the SEC. Typically, these
provisions required workers to obtain authorization from the
firm’s authorized or compliance departments earlier than an worker
might disclose info to regulators. However, the
Hansen order displays a broader and arguably extra
aggressive utility of Rule 21F-17, because it seems to scrutinize
an organization’s determination to limit an worker’s entry to
proprietary information after the worker had raised considerations concerning a
doable securities legislation violation. In conditions the place there’s a
legit concern about an worker disclosing confidential
info to non-authorities sources, corporations (and people)
ought to proceed with warning, guarantee workers have acceptable
channels to report considerations, and doc all enterprise selections
taken after an worker raises such considerations. #21F-17
#actiontoimpedecommunicationstoSEC #documentyourreasons

2. SEC Imposes the Highest Penalty to Date for Improper
Earnings Management Under Earnings per Share (EPS) Initiative

On April 18, 2022, the SEC settled with Rollins, Inc., a pest management
service firm primarily based in Atlanta, for $8 million to resolve expenses
of improper earnings administration practices. The SEC additionally fined the
firm’s then-CFO, Paul Edward Northen, $100,000 for his
alleged function within the apply in addition to for inflicting the corporate to
violate the monetary reporting, books and data, and inner
controls provisions of the Exchange Act.

In its order, the SEC discovered that within the first quarter
of 2016 and the second quarter of 2017, Northen decreased accounting
reserves with out following typically accepted accounting
ideas, which raised Rollins’ reported EPS as much as the subsequent
penny, permitting the corporate to satisfy analyst estimates. The SEC
additional claimed that Rollins’ improper discount to accounting
reserves befell in “an surroundings of insufficient inner
accounting controls” that gave important discretion to
people within the finance division, together with the CFO, to regulate
the quantity of reserves through the quarterly course of. While Rollins
had insurance policies and procedures that required supporting documentation
of any accounting entries, the SEC alleged that, over a interval of
virtually three years, Rollins’ finance personnel entered handbook
journal entries with out sufficient documentation. The Order cited
situations of Northen receiving steering from one other Rollins
government, who suggested {that a} specific reserve account might
“offset negative surprises,” and referred to “the
artwork of the shut” at quarter-finish. Northen additionally acquired
communications from the manager that referred to the “want
to maintain one thing in that cookie jar for quarters like
this.”

The Rollins order is the fourth enforcement motion
introduced in opposition to an issuer for improper earnings administration underneath
the SEC’s EPS initiative, which makes use of information analytics to uncover
potential accounting and disclosure violations attributable to earnings
administration practices. In instituting the Rollins order,
Enforcement Director Gurbir Grewal acknowledged that the SEC “will
proceed to pursue public corporations that lack sufficient accounting
controls and interact in improper earnings administration
practices.” Thus, because the SEC continues to observe and implement
correct monetary reporting, issuers ought to doc their
accounting judgments and guarantee compliance with their disclosure
controls and procedures as set forth on this MoFo Client Alert. #EPSinitiative
#Can’tkeepacookiejar #documentyourreasons

3. SEC Highlights Deficiencies in Investment Adviser MNPI
Compliance Practices

On April 26, 2022, the SEC’s Division of Examinations issued
a threat alert flagging sure notable deficiencies
that it has noticed associated to advisers’ potential misuse of
materials non-public info (“MNPI”) and flagged an
space of a current novel enforcement motion: various information.

The threat alert set forth that, if an adviser makes use of various
information (e.g., info gleaned from satellite tv for pc and drone imagery of
crop fields and retailers’ parking heaps, analyses of mixture
bank card transactions, social media and web search information,
e-mail information obtained from apps, geolocation information from shoppers’
cell telephones), the examination workers will anticipate to see written insurance policies
and procedures to handle the potential threat of receiving MNPI
by means of the suppliers of such various information. Although the SEC
didn’t cost any fund managers with violations of the securities
legal guidelines in its enforcement motion in opposition to AppAnnie and its
former CEO—in truth, the fund managers seem like the
victims of AppAnnie and its former CEO’s fraud—the examination
workers asserted that it expects advisers to memorialize due
diligence on their alt information distributors and constantly apply
onboarding procedures.

The threat alert additionally famous how examination workers noticed that advisers
both didn’t seem to have or didn’t implement sufficient
insurance policies and procedures associated to calls with knowledgeable networks
consultants, together with:

• Tracking and logging calls with knowledgeable community
  consultants;




• Reviewing detailed notes from knowledgeable community calls; and




• Reviewing related buying and selling exercise of supervised individuals in
  the securities of publicly traded corporations which can be in comparable
  industries as these mentioned throughout calls.

The statement referring to buying and selling in corporations in comparable
industries appears is evocative of expenses made within the current SEC v. Panuwat case, typically
known as the “shadow insider trading” case. In that
case, Panuwat, an worker of biopharmaceutical firm Medivation,
traded within the securities of one other biopharmaceutical firm,
Incyte, allegedly primarily based on merger info Panuwat acquired from
Medivation. Significantly, Medivation’s insider-buying and selling coverage,
which Panuwat signed, particularly prohibited its workers from
utilizing confidential info acquired at Medivation to commerce in
the securities of one other public firm, together with suppliers and
rivals. See our consumer alert on the district court docket’s
determination to disclaim Panuwat’s movement to dismiss and takeaways for
in-home counsel, together with the importance of the corporate’s
insider-buying and selling coverage in defining the breach of an obligation, which is
one of many parts of insider buying and selling. #MNPI #AltData
#ExpertNetworks

4. SEC Charges Archegos Executives with Market
Manipulation

On April 27, 2022, the SEC filed a criticism within the Southern District of
New York in opposition to Archegos Capital Management, LP, in addition to
people Sung Kook (Bill) Hwang, Patrick Halligan, William
Tomita, and Scott Becker, alleging fraud and manipulation of inventory
costs utilizing complete return swaps. Additionally, the U.S.
Attorney’s Office for the SDNY introduced felony expenses in opposition to the 4
people, two of whom (Tomita and Becker) have pled responsible and
are cooperating with the federal government. In a separate motion, the CFTC additionally filed comparable expenses. 

According to the SEC’s criticism, from March 2020 till
March 2021, Hwang bought on margin billions of {dollars} of complete
return swaps, which allowed him to tackle massive fairness positions
in corporations by posting restricted funds up entrance. The SEC alleged
that Hwang often entered into sure of those swaps with out
any financial objective apart from to artificially and dramatically
increase the costs of assorted corporations’ securities, which
induced buyers to buy these securities at inflated
costs.

The criticism additional alleges that Archegos purposely misled
many counterparties about its publicity, liquidity, and
focus in order that it might enhance its buying and selling capability and
proceed to buy swaps for its most concentrated positions,
thereby driving up the worth of these shares. When these
concentrated positions skilled value declines in March 2021,
the SEC alleged that Archegos couldn’t meet its important margin
calls, and its subsequent default and collapse resulted in billions
in credit score losses for Archegos’ counterparties. The SEC is
in search of to acquire injunctive reduction, disgorgement, and civil
penalties, in addition to to bar the person defendants from serving
as officers or administrators of a public firm.

In its press launch, Chairman Gensler inspired
prime brokers and different buyers to pay shut consideration to the
dangers related to counterparty relationships and highlighted
the SEC’s ongoing work to replace the safety-primarily based swaps
market. #$36Bhouseofcards #marketmanipulation #TotalReturnSwaps

5. SEC Files First ESG Enforcement Action After Formation
of Climate and ESG Task Force

On April 28, 2022, the SEC filed a criticism within the Eastern District of
New York in opposition to Vale S.A., a Brazilian mining firm whose
American Depositary Shares commerce on the NYSE, alleging the corporate
made false and deceptive claims concerning the security of its dams prior
to the collapse of its Brumadinho dam, which brought about 270 deaths and
allegedly led to a lack of greater than $4 billion in Vale’s
market cap.

Specifically, the SEC alleged that Vale manipulated a number of dam
security audits, obtained fraudulent stability certificates, and
usually misled native governments, communities, and buyers
concerning the dam’s stability by means of its ESG disclosures, regardless of
understanding the dam didn’t meet internationally acknowledged security
requirements. For instance, Vale claimed on its 2017 Sustainability
Report that “100% of the audited constructions have been licensed to
be in secure situation…by the accountable auditors,” however the
SEC alleged that Vale hid stories made by the corporate’s
security auditors and engineers, who decided that the dam was at
threat of rupturing resulting from inner strains from extreme
rainfall.

The criticism in opposition to Vale expenses scienter-primarily based violations of
the federal securities legal guidelines and is being litigated by the corporate.
The criticism doesn’t cost people. In asserting the
expenses, the SEC’s press launch highlighted the mandate of the
SEC’s Climate and ESG Task Force to determine materials gaps or
misstatements in issuers’ ESG disclosures, “just like the false
and deceptive claims made by Vale.”
#StatementsInSustainabilityReports #ESGdisclosureenforcement
#ENFandESG

Dan Baskerville, a Law Clerk in our New York workplace,
contributed to the writing of this alert

Because of the generality of this replace, the knowledge
offered herein might not be relevant in all conditions and will
not be acted upon with out particular authorized recommendation primarily based on specific
conditions.

© Morrison & Foerster LLP. All rights reserved

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