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CLIENT ALERT: SEC Announces Aggressive Enforcement Action Against Delinquent Schedule 13D/13G and Form 4 Filers

September 15, 2014
Michael Neidell and Spencer Feldman

On September 10, 2014, the U.S. Securities and Exchange Commission (SEC) announced charges against 28 officers, directors and significant shareholders for federal securities law violations stemming from their failure to timely file Forms 4 and Schedules 13D and 13G with the SEC.¹  In addition, six public companies were charged for contributing to filing failures by insiders or failing to disclose their insiders’ late filings in their Form 10-K or proxy statement.

The targets of these actions included well-known companies and investment firms such as Starwood Hotels & Resorts Worldwide, Inc., Brown Brothers Harriman & Co., Royal Bank of Scotland and Sankaty Advisors, LLC, an affiliate of the private equity firm Bain Capital, as well as a number of smaller publicly-traded companies and insiders of those companies.  A total of 33 of the 34 individuals and companies named in the SEC’s orders agreed to settle the charges and pay civil penalties aggregating $2.6 million (with settlement amounts ranging from $25,000 to $100,000 for individuals and $60,000 to $150,000 for public companies and investment firms).  It does not appear that the SEC provided any prior notice (including as part of its review process of a company’s periodic filings) or opportunity to cure the filing deficiencies.

The actions are said to be the latest example of the SEC’s “broken windows” enforcement strategy advocated by SEC Chair Mary Jo White, in which the SEC seeks to prosecute minor securities law infractions with the goal of preventing more serious violations and promoting greater overall compliance.

The announcement of this particular enforcement initiative marks the first time that the SEC has conducted a broad sweep to uncover beneficial ownership reporting violations and could signal the beginning of a new era of enforcement of these requirements.  The SEC made clear in its announcement that it views late reporting as an area that warrants increased focus and resources, and accordingly developed and used quantitative data sources and algorithms that have enabled it to engage in a large-scale effort to identify delinquent filers.  The SEC further emphasized that it brought these actions together “to send a clear message about the importance of these filing provisions,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Officers, directors, major shareholders, and issuers should all take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions.”

In light of the SEC’s actions and strong likelihood of repeated use of this enforcement tactic, we would encourage our investor and public company clients, as well as their officers and directors, to consult with us prior to any event or transaction, and to closely monitor developments announced by issuers (such as stock repurchases), that may give rise to a Schedule 13D/13G or Form 4 filing obligation.  Public company clients are also well-advised to review with us their internal control procedures to ensure that insider transactions in company stock are disclosed to the company and reported to the SEC on a timely basis.

For more information regarding the SEC’s recent enforcement initiative or its implications, please contact the Olshan attorney with whom you regularly work or either of the attorneys listed below.

¹A Form 4 is a report that officers, directors and 10% beneficial shareholders must file within two business days to disclose their transactions in a registered class of a company’s securities (generally, publicly traded stock).  Schedules 13D and 13G are statements that beneficial owners of more than 5% of a registered class of a company’s stock must file to report their holdings and intentions with respect to the company.  These forms are intended to keep the public informed as to insiders’ trading in stock and are integral to the SEC’s oversight of potential insider trading and stock manipulation.

This publication is issued by Olshan Frome Wolosky LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship.  To ensure compliance with requirements imposed by the IRS, we inform you that unless specifically indicated otherwise, any tax advice contained in this publication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.  In some jurisdictions, this publication may be considered attorney advertising.
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