Insider trading has long been one of the staples of the Commission’s enforcement program. While each of its cases is based on alleged violations of Exchange Act Section 10b, neither the statute nor the rule based on it, mention the concept.

Over the years, however, the courts have fashioned a complex body of law around the notion that company insiders cannot use material information of the company that is not public for their personal benefit because it breaches their duty to the firm and its shareholders. Stated differently, the information did not belong to them but to the company. Accordingly, the company information could only be used for its benefit. Despite the basic underpinnings of the idea and rigorous enforcement by the Commission, insiders have continued at times to abuse their privilege as corporate confidants, although most do not. The latest Commission case in in this area is SEC v. Cook, Civil Action No. 2:24-cv-00313 (March 12, 2024).

Named as defendants are: Roy Cook, an independent member of Company board of directors and its audit committee; Jeffrey Natrop, a principle of an Architect Firm; Peter Renner, also a principle of the Architect Firm; James Rudolph, a retired friend of Mr. Cook; Peter Williams, an accountant and business associate of Mr. Cook; and Peter Williams, a friend and associate of Mr. Cook.

The case revolves primarily around an offer by hedge fund Blackstone, which held a controlling interest in the general partner of the Company, to purchase all of the outstanding public shares of the Company made on August 27, 2019. Prior to the announcement of the offer, Mr. Cook, through his position as an independent director of the Company, obtained material non-public information about the offer that would be made by a Blackstone affiliate to purchase all of the outstanding public shares of Company.

Prior to the deal announcement each man told about the then potential Blackstone offer — Defendants Natrop, Renner, Rudolph and Williams – purchased shares of the company prior to the deal announcement. The purchases caused the share price to increase significantly.

Subsequently, on August 27, 2019 Blackstone announced an offer for all of the outstanding public shares of the Company priced at $19.50 per share. After three months of negotiations the parties agreed to a final offer price f $22.45. The deal was announced on December 16, 2019.

Each man tipped by Mr. Cook listed above sold his shares. Collectively the group that had been tipped by Mr. Cook had profits of $613,000. Mr. Cook purchased 20,000 shares of the Company prior to the December announcement. When the shares were sold following that announcement, he had profits of $88,000. Mr. Cook also failed to file the required forms with the Commission. The complaint alleged violations of Exchange Act Section 10(b) and, in addition, Section 16(a) as to Mr. Cook.

Each Defendant settled with the Commission, consenting to the entry of a permanent injunction based on the Section or Sections cited in the complaint as to him. Mr. Cook also agreed to disgorge his trading profits and pay a penalty of $801,742 and prejudgment interest. In addition, he agreed to the entry of an officer/director bar. Each other Defendant agreed to pay a penalty equal to the amount of their trading profits and to disgorge those profits along with prejudgment interest.

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The Commission issued its final rules on environmental issues last week. The rules are the most comprehensive set of regulations issued by the agency dealing with environmental issues. The Commission also filed two enforcement actions. One centered inadequate filings. The other was based on violations of Rule 13d.

Be careful, be safe this week.

SEC

Rules: The Commission published its final rules focused on environmental issues last week (here). An article discussing these rules is available here.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed no new civil injunctive actions and 2 new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Inadequate filings: In the Matter of Skechers U.S.A., Inc., Adm. Proc. File No. 99693 (March 7, 2024) is a proceeding which names as respondent the well-known footwear company. The Order alleges violations of Exchange Act Sections 13(a) and 14(a) and Rules 13(a)-1 and 14a-3. The order alleges that in three instances, beginning in 2019 and continuing through 2022, the company filed a Form 10-K and claimed that certain information required by Item 404 was incorporated in a forthcoming proxy statement when it fact it was not. To resolve the proceedings Respondent, after taking remedial actions to correct the issue, consented to the entry of a cease-and-desist order based on the provisions cited in the Order. In addition, Respondent will pay a penalty of $1.25 million.

Section 13d: In the Matter of HG Vora Capital Management, LLC, Adm. Proc. File No. 3-21881 (March 1, 2024). The proceedings center on the acquisition of shares in a large, publicly traded Truck Rental firm. At the end of December 2021 Vora Capital held about 5.6% of Truck Rental. The adviser filed a Schedule 13G in February 2022, disclosing its holdings. From January through mid-April 2022 the adviser purchased another 2,050,000 shares of Truck Rental. This brought the adviser’s holdings to 5,050,000 or about 9.9%. By late April the adviser altered its purpose for holding the shares from passive investor to one with the intent to change or influence control of the issuer. The change of intent was not reported, however, until May 13, 2022, about one week after the Schedule was required to be amended under the then applicable 10 day period. The filing was made the same date HG Vora provided to Truck Rental a notice to acquire all of its shares at a 20% premium to market. By delaying the filing, the advisor violated Exchange Act Section 13(f)(1) and Rule 13d-1 thereunder. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section and Rule cited. The firm also agreed to pay a penalty in the amount of $950,000.

Australia

Rules: The Australian Securities and Investment Commission, together with the Australian Prudential Regulation Authority, released final rules and additional guidance to support the financial services industry in implementing the Financial Accountability Regime on March 8, 2024 (here).

BaFin

Study: The Federal Financial Supervisory Authority published a report titled We need lasting Transparency on February 28, 2024. The study reveals that asset managers are not satisfied with ESG data and ESG ratings currently available. The report discussed the reason reliable sustainability data is important for green investments (here).

ESMA

Solicitation: The European Securities and Markets regulator is seeking new members for its Securities and Markers Stakeholder Group. They welcome candidates representing interests of all types of financial markets stakeholder (here).

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