A recent decision issued by the United States District Court for the District of Massachusetts, Harrington v. Tetraphase Pharmaceuticals, Inc., highlights the value of established trading plans in defending against securities fraud allegations. These trading plans, which are established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, are not absolute defenses, but do offer corporate directors and officers (“insiders”) a greater level of protection in the event they purchase or sell company shares during the putative class period of a subsequent securities litigation. There are, however, several factors to consider in deciding whether a 10b5-1 … Read more
On October 26, 2015, Institutional Shareholder Services Inc. (“ISS”) issued key proposed changes to its policies, inviting all interested parties to provide comment. ISS will accept comments through November 9, 2015 at 6 p.m. Eastern Time. If adopted, ISS’s proposed policy changes will take effect for meetings occurring on or after February 1, 2016.
ISS proposes three significant changes that will affect issuers subject to ISS’s U.S. proxy voting guidelines:
- Director Overboarding
ISS’s policy on director overboarding affects directors who sit on what ISS considers to be an “excessive number of boards.” Under its current policy, ISS recommends a … Read more
Effective September 28, 2015, the New York Stock Exchange (“NYSE” or “the Exchange”) amended Section 202.06 of its Listed Company Manual (the “Manual”) to:
- expand the pre-market hours during which NYSE-listed companies must notify the Exchange prior to disseminating “material news”;
- expand the timeframe and circumstances in which the NYSE has the authority to halt trading in a listed company’s security;
- provide guidance with respect to the release of material news after the close of trading on the Exchange; and
- update the methods by which companies should release material news.
Change to the NYSE’s Pre-Market Material News Policy
Previously, … Read more
On June 5, 2015, the Securities and Exchange Commission (“SEC”) entered into settled administrative cease-and-desist proceedings with Computer Sciences Corporation (“CSC”) and some of its former executives due to the company’s alleged manipulation of financial results and concealment of problems with the company’s largest contract. Among other things, CSC agreed to pay a $190 million penalty to settle the charges, and two of CSC’s former executives agreed to return a portion of their compensation to CSC pursuant to the clawback provision of the Sarbanes-Oxley Act of 2002. The SEC also charged former CSC finance executives for ignoring accounting standards … Read more
A recent Delaware Chancery Court decision confirms that, as the court held three years ago in Seinfeld v. Slager, there is no shareholder ratification defense for self-awarded director compensation granted under a stockholder-approved option or bonus plan that lacks “sufficiently defined terms” or “some meaningful limit” on director discretion.
I. GENERAL STANDARD
Director decisions are generally afforded wide latitude under the business judgment rule. The protections of the business judgment rule, however, “can only be claimed by disinterested directors.” The “directors can neither appear on both sides of a transaction nor expect to derive any personal … Read more
On April 28, 2015, the Securities and Exchange Commission (“SEC”) announced that it awarded the maximum allowable award to a whistleblower under the Dodd-Frank whistleblower program in its first case involving alleged retaliation by an employer against an employee who reported suspected misconduct to the SEC. This award of 30 percent of the amount collected by the SEC in In the Matter of Paradigm Capital Management, Inc. and Candace King Weir equaled a payment of more than $600,000 to the employee who, according to the SEC, provided “key original information that led to the successful SEC enforcement action.”
In … Read more
On February 10, 2015, the Securities and Exchange Commission (“SEC”) filed settled administrative cease-and-desist proceedings against two former chief financial officers (“CFOs”) of Saba Software, Inc. for their failure to reimburse the company for the stock-sale profits and bonuses they received in the 12 months following the filing of periodic reports necessitating restatement, as required under Section 304(a) of the Sarbanes-Oxley Act. The two respondents consented to the entry of the cease-and-desist order without admitting or denying the findings therein.
The clawback action stems from the falsification of Saba’s time records over a period of more than four years, … Read more
Many public companies continue to consider their options in responding to proxy access shareholder proposals following the Division of Corporate Finance’s unusual announcement that it will not opine on “the application of Rule 14a-8(i)(9) during the current proxy season.” But over the last few days, several companies have made notable decisions. Whole Foods Market, Inc., which had led the charge earlier this proxy season by obtaining no-action relief from the Securities and Exchange Commission (“SEC”) on the ground that it was planning to submit a conflicting management proposal to shareholders, announced on February 13 that it has decided to … Read more
On July 30, 2014, the Securities and Exchange Commission (“SEC”) charged the CEO and former CFO of QSGI, Inc., a computer equipment company, with misrepresenting to the company’s outside auditors and investors the condition of the company’s internal controls over financial reporting (“ICFR”).
The SEC alleged that CEO Marc Sherman and former CFO Edward L. Cummings were aware that QSGI was experiencing recurring inventory control problems that “resulted in the falsification of QSGI’s books and records relating to QSGI’s inventory.” In particular, the SEC stated that Sherman and Cummings knew that company personnel removed component parts from the company’s inventory … Read more
The Supreme Court recently concluded that the ERISA fiduciaries of an employee stock ownership plan (an “ESOP”) are not entitled to a presumption that they acted prudently in connection with the ESOP’s investment in employer stock. While the Court recognized several alternative defenses to ERISA “stock drop” cases, the Court’s rejection of the presumption of prudence – which had previously been adopted by a number of U.S. courts of appeals and was routinely relied upon by ESOP fiduciaries – could encourage the filing of lawsuits against public companies and their ESOP fiduciaries in the event of a decline … Read more
On June 10, 2014, the Public Company Accounting Oversight Board (“PCAOB”) adopted a new auditing standard, as well as amendments to its existing auditing standards, designed “to strengthen auditor performance requirements in three critical areas that historically have represented increased risks of material misstatement in company financial statements,” whether due to fraud or error. These critical areas are:
• Relationships and transactions between a company and its related parties;
• Significant transactions that are “outside the normal course of business for the company or that otherwise appear to be unusual due to their timing, size, or nature” (“significant unusual transactions”); … Read more
On May 6, 2014, the United States Court of Appeals for the Second Circuit held, in a case of first impression, that the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank precludes claims brought under the Securities Exchange Act of 1934 (“Exchange Act”) that arise out of foreign-issued securities purchased on foreign exchanges but cross-listed on a domestic exchange. The landmark Morrison decision found that Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder do not provide a cause of action relating to the purchase of foreign-issued securities listed and bought on foreign exchanges. In … Read more
On April 8, 2014, the Securities and Exchange Commission (“SEC”) charged CVS Caremark Corp. (“CVS”) with violating the federal securities laws by failing to accurately disclose significant financial setbacks and overstating its financial performance through improper accounting. CVS, which has neither admitted nor denied the charges, has agreed to pay $20 million to settle the case.
I. THE ALLEGATIONS
The complaint in Securities and Exchange Commission v. CVS Caremark Corp., filed in the United States District Court for the District of Rhode Island, alleges securities laws violations with regard to both of CVS’s business segments – Caremark, the company’s … Read more