On March 13, 2015, the Securities and Exchange Commission (the “SEC”) announced that it charged eight officers, directors, or major shareholders for failing to update their stock ownership disclosures to reflect material changes.
The SEC charged that these individuals and entities failed to promptly file amendments to Schedule 13Ds to reflect material changes, including steps to take the companies private. In addition, some of them failed to timely file Form 4s to report their transactions in the company securities. These individuals and entities agreed to settle the charges and pay penalties ranging from $15,000 to $75,000.
A Schedule 13D is required to be filed by an individual or entity that becomes the beneficial owner of more than 5% of a public company’s stock, unless such beneficial owner is eligible to file and files a short-form statement on Schedule 13G (which is available for certain passive investors). The information required in Schedule 13D includes plans or proposals that would result in certain transactions, such as a going private transaction. In addition, if any material change occurs in the facts set forth in the Schedule 13D, the beneficial owner must promptly file an amendment disclosing that change. For example, generic disclosure that indicates the beneficial owner is reserving the right to engage in certain transactions required to be disclosed must be amended when a plan with respect to such transaction has been formulated (or even before a plan has been formulated, depending on the facts and circumstances).
Any executive officer or director of a public company or a beneficial owner of more than 10% of the public company’s stock (each, an “insider”) is required to file a Form 3 to disclose beneficial ownership of all company securities within 10 days after being an insider, or on or before the effective date of registration of the class of equity security of the company under Section 12 of the Securities Exchange Act of 1934 (i.e. the date the company becomes a public company). An insider must file a Form 4 to disclose any transactions that result in a change in beneficial ownership within two business days following the execution date of transaction, except for limited types of transactions eligible for deferred reporting. In addition, an insider is required to file a Form 5 within 45 days after the public company’s fiscal year-end to report any transactions or holdings that should have been, but were not reported on Form 3 or 4 during the public company’s most recent fiscal year and any transactions eligible for deferred reporting (unless the insider has previously reported all such transactions).
The SEC stated that “[i]nvestors are entitled to current and accurate information about the plans of large shareholders and company insiders,” and “[s]tale, generic disclosures that simply reserve the right to engage in certain corporate transactions do not suffice when there are material changes to those plans, including actions to take a company private.”
These enforcement activities seem to be continuation of the SEC’s new enforcement philosophy called “broken windows policy” where the SEC devotes a portion of its resources to identify and pursue minor violations of the securities laws.
On September 10, 2014, the SEC also announced charges against 34 individuals and companies for failure to promptly file Form 4, Schedule 13D or 13G or contributing to filing failures by insiders or failing to report insiders’ filing delinquencies. The SEC enforcement staff used quantitative data sources and ranking algorithms to identify them as repeatedly filing late. A total of 33 of these individuals and companies agreed to settle the charges and pay penalties ranging from $25,000 to $150,000. In addition, on the same date, the SEC announced fraud charges against a biotech company and its former CEO with defrauding investors by failing to report his sales of company stock. The former CEO agreed to settle the SEC’s charges by paying a $175,000 penalty and the company agreed to pay a $375,000 penalty and retain an independent consultant to conduct a review of its Section 16(a) reporting and compliance procedures (i.e. filing Forms 3, 4 and 5).