Top 5 SEC Enforcement Developments for January 2022

In order to provide an overview for busy in-house counsel and compliance professionals, we summarize below some of the most important and interesting SEC enforcement developments from the past month, with links to primary resources. This month we ask:

• What remedial measures actually matter to the SEC?
• What are the driving principles animating leadership in the SEC’s Enforcement Division?
• How has the SEC fared in court, especially in the context of its more creative insider trading cases?
• What can we learn from the Elizabeth Holmes trial?

The answers to these questions and more are here in our January 2022 Top 5 list.

1) On January 28, 2022, the SEC announced a settled, no-penalty enforcement action against HeadSpin, Inc., a private technology company based in Palo Alto, CA. The SEC has long emphasized the importance of cooperation. It took the opportunity in the announcement of the settlement against the company (which followed a scienter-based action and criminal filing against Headspin’s former CEO) to highlight the company’s remediation efforts and set forth specific examples of what the SEC deemed valuable, including:

• Conducting an internal investigation;
• Setting forth a revised valuation;
• Repaying harmed investors;
• Ousting its CEO and hiring new senior management; and
• Expanding its board and adopting new processes and procedures to improve transparency and accuracy of deal reporting and associated revenues.

#remediationfactors, #privatetechcompanyremediation, #internalinvestigationpromptedbyWB?

2) On January 26, 2022, SEC Enforcement Division Director Gurbir Grewal and Deputy Director Sanjay Wadhwa described the principles and beliefs that motivate and ground their approach to enforcement at the 49^th Annual Securities Regulation Institute. Director Grewal set forth his view that:

• There has been a decline in trust in financial institutions and markets in general.
• There have been repeated lapses by market participants and gatekeepers.
• There is a perception that wrongdoers are not held accountable.
• There is a perception that there are two sets of rules: one for the powerful and one for the rest of us.

Director Grewal said he wants to restore trust through:

1. Robust enforcement;
2. Robust penalties when appropriate; and
3. Robust compliance.

These comments are consistent with remarks he made in October 2021 at SEC Speaks. Both Director Grewal and Deputy Director Wadhwa said they were not looking to second-guess good-faith efforts when it comes to disclosure. They emphasized that this is not a “Gotcha” environment.

#nosecondguessinggoodfaithefforts, #restoretrustinmarkets, #willseekadmissions

3) On January 25, 2022, U.S. District Judge Susan R. Bolton for the District of Arizona denied separate Motions to Dismiss filed by defendant Cavco Industries, Inc. and former CFO Daniel Urness. We’re surprised this case hasn’t received more attention considering it’s an insider trading case against a public company—yes, you read that right. On September 3, 2021, the SEC sued Cavco, a large public company that specializes in home manufacturing, for insider trading as well as failing to devise a system of internal accounting controls so that its securities trading would be consistent with the board’s authorization, its corporate investment policy, and its securities trading policy. Cavco’s former CFO was charged with aiding and abetting the company’s controls failures by failing to set up a system to fund the Company’s trades without informing the board or ensuring the trades complied with Cavco’s investment policy; he was also charged with lying to the company’s auditors. While Cavco’s former CEO settled to insider trading charges, Cavco and Urness are litigating and Judge Bolton denied their separate motions to dismiss and is allowing the SEC’s claims to go forward.

#insidertradingbypubliccompany, #insidertradingpolicies=internalaccountingcontrols, #issuerlitigatingagainstSEC

4) On January 14, 2022, U.S. District Judge William H. Orrick for the Northern District of California denied defendant Matthew Panuwat’s motion to dismiss the SEC’s insider trading case against him for using material non-public information (MNPI) he learned from his employer, Medivation Inc., to trade in the shares of a competitor company, Incyte Corporation. The unique facts made it a particularly good vehicle to bring what some are calling a “shadow trading” case:

• The MNPI involved a merger announcement, as opposed to an earnings announcement or something less inherently material.
• Panuwat purchased short-dated, out of the money call options (from his work computer, no less) right after receiving an email stating that Pfizer expressed overwhelming interest in acquiring Medivation.
• The language in Medivation’s insider trading policy was very helpful for the SEC, and explicitly identifies trading in the securities of “another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of [Medivation]” based in non-public information received during the course of employment as “illegal.”
• The price of Inycte increased enough to make the trader $100,000; remember, materiality is assessed with hindsight.

Judge Orrick found that the SEC had sufficiently pleaded that the information was non-public and material to Incyte and that Panuwat breached a duty to Medivation as set forth in Medivation’s insider trading policy. Judge Orrick engaged in a textual reading of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and observed that they “cast a wide net, prohibiting insider trading of ‘any security’ using ‘any manipulative or deceptive device.’” Keep an eye on this case. It remains to be seen whether the SEC’s allegations regarding materiality, duty, and scienter will hold up as the case proceeds through discovery.

#materiality, #shadowtrading, #perfectstorm?, #morecaseslikethis?

5) On January 3, 2022, after a four-month-long trial and seven days of deliberations, a unanimous 12-member jury returned a verdict of guilty against Theranos founder and CEO Elizabeth Holmes, finding her guilty of conspiracy and three counts of wire fraud for intentionally defrauding investors, but clearing her of charges that she defrauded patients by subjecting them to faulty tests. The SEC brought its case against Ms. Holmes, Theranos, and its former President Ramesh “Sunny” Balwani for raising over $700 million from investors by making false and exaggerated statements about Theranos’s technology, business, and financial performance in March 2018. The U.S. Attorney’s Office for the Northern District of California announced the criminal indictment on June 15, 2018, alleging a scheme to defraud investors and a separate scheme to defraud doctors and patients. The case, which garnered extraordinary focus and attention, spawned multiple podcasts, and drew intense media scrutiny, was referred to by some as putting Silicon Valley’s “fake-it-till-you-make-it” culture on trial. See here for lessons to be learned from the Theranos saga.

#Balwanitrialtocome, #groundsforappeal?