by T. GormanPosted on Posted in SECActions

The termination of a corporate employee is generally a matter resolved by the parties involved. In some instances, litigation ensues. That litigation would typically involve the company and the employee. Recently, however, the SEC filed an enforcement action against a former CEO and the company. Each party settled. In the Matter of Stephen J. Easterbrook, Adm. Proc. File No. 3-21269 (January 9, 2022).

Named as Respondents in the proceeding are Stephen Easterbrook, a former board member and CEO of McDonald’s Corporate and the company.

When questions arose regarding Mr. Easterbrook’s conduct the company retained outside counsel at the direction of the Board of Directors to conduct an internal investigation, according to the Commission’s Order Instituting Proceedings. During the inquiry outside counsel interviewed Mr. Easterbrook. In that interview the CEO admitted he had violated firm policy by having a physical, personal relationship with a company employee. When asked if he had physical relationship with any other company employee Mr. Easterbrook responded that he had not.

Following the interview Mr. Easterbrook’s employment was terminated. The Board of Directors determined that he had violated company policy and demonstrated poor judgement by having a consensual relation with an employee. Specifically, the conduct violated the company Standards of Business Conduct regarding dating and fraternization.

A key question was if the termination was for cause. At the time, company agreements governing Mr. Easterbrook’s conduct, defined for cause as including a violation of the Standards of Business Conduct cited above. If the conduct violated those standards stock options and PRSUs were forfeit.

On October 29, 2019 the Board of Directors gave Mr. Easterbrook a draft Separation Agreement and General Release. He was also furnished with a copy of a letter to be disseminated and a Press Release regarding his departure from the company. In the letter Mr. Easterbrook admitted that he had a consensual relation with an employee that was characterized as a “mistake.” At the time of his departure the company issued the press release. It stated in part that Mr. Easterbrook had been “candid” with the company in connection with his departure.

The company exercised its discretion, adopting the position that Mr. Easterbrook’s termination has been “without cause.” That position permitted him to receive $47,534,341. Much of that sum was the outstanding stock options and PSUs.

The provisions regarding Mr. Easterbrook’s termination were incorporated into a Form 8-K filing made with the Commission. Those terms were also included in a proxy statement given to shareholders for approval. There was no reference in the written materials to the fact that without the exercise of discretion by the company, the options and PRSUs would not have been awarded.

Following the shareholder meeting McDonald’s received an anonymous complaint alleging that another employee of the firm had also engaged in an inappropriate personal relationship with Mr. Easterbrook. A second investigation was launched. The evidence developed substantiated the claim.

Suit was filed against the former CEO by the company. The complaint alleged a breach of fiduciary duty and fraud. The action was settled in December 2016. Under the terms of the settlement agreement Mr. Easterbrook repaid to the company the cash severance, prorated bonus, certain proceeds from the exercise of options and PRSUs and attorney fees. The company announced it would not have stated that the termination of Mr. Easterbrook had been on a “not for cause” basis had it known the truth.

The Commission’s Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 14(a).

To resolve the matter Mr. Easterbrook consented to the entry of a cease-and-desist order based on the Sections and Rules cited in the complaint. He also agreed to the entry of a director and officer and director bar for a period of five years and to the payment of disgorgement and prejudgment interest in the amount of $52,728,069, deemed satisfied by the payments made in McDonald’s Corporation v. Easterbrook, C.A. No 2020-0658 (Del. Ct. Ch). He will, in addition, pay a penalty of $400,000.

McDonald’s also settled, consenting to the entry of a cease-and-desist order based on Exchange Act Section 14(a). The company acknowledged that no penalty was imposed based on its cooperation.

Comment

Easterbrook is clearly not the typical enforcement action brought by the Commission. The termination of employees is usually a matter resolved by the firm and the employee.

At the same time, the parties involved here undoubtedly understood that the events were being played out on a much larger stage than in most situations. McDonald’s is a well know multinational company recognized around the world. Substantial amounts of shareholder money was involved. Important employee conduct issues were at stake. Key facts about the matter were included in filings with the Commission. All this helped turn what was and employment matter into an enforcement action and a blot on the reputation of a well-known company.

Finally, the filing of the action is also consistent with trends evidenced in recent enforcement actions. Those reflect aggressive enforcement reaching across the markets and using the federal securities to being a new ethics to each corner of the markets. This action should help extend that trend to the C-suite.

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by T. GormanPosted on Posted in SECActions

This was a week of confusion for some about crypto. Coinbase, a prominent crypto exchange, was fined $100 million by New York state regulators for compliance failures. The Commission filed an action involving what it called CoinDeal. That case had nothing to do with the proceedings involving Coinbase. To the contrary CoinDeal, discussed below, is an offering fraud action tied to a scheme operated by a felon. The somewhat similar names appeared to cause at least some confusion.

Be careful, be safe this week.

SEC Enforcement – Filed and settled actions

During the last week the Commission filed 3 new civil injunctive actions and 1 administrative proceeding, exclusive of 12j, default, conflicts (which are included in the tabulation of cases), tag-a-long and other similar proceedings.

Conflicts: In the Matter of Randy Robertson, Adm. Proc. File No. 3-21268 (January 5, 2023) is an action which names as respondent the BlackRock portfolio manager. Over a three-year period, beginning in 2015, BIT, a statutory trust traded on the NYSE, invested about $85 million in a lending facility to fund expenses for particular films Aviron Group LLC distributed. Respondent had a primary role with Aviron and overseeing the investments. He arranged for his daughter to meet with executives at Aviron to facilitate her career in the film industry. This constituted an undisclosed conflict in violation of Advisers Act Section 206(2). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order and agreed to pay a penalty of $250,000.

Offering fraud: SEC v. Chandran, Civil Acton No. 2:33-cv-10017 (E.D.Mich. Filed January 4, 2023) names as defendants: Neil Chandran, a felon who ran a fraudulent scheme and his assistants: Garry Davidson, Michael Glaspie, Linda Knott, Amy Mossel, AEO Publishing, Inc., Baner Co-op and Bannersgo, LLC. The two year scheme, which began in 2018, centers on selling interests in what was advertised as a unique blockchain technology that promised very high returns. Mr. Changran created the deal. The other Defendants contributed by selling interests in the deal is centered on a sham transaction. They also adding their personal wrinkle to the fraudulent sales pitch about the worthless interests being marketed. Defendant Glaspie, for example, stressed the huge payouts while Defendant Knot created payout scales for potential investors. The scheme, known as CoinDeal, raised about $45 million. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(c) and 15(a). The case is pending. See Lit. Rel. No. 25608 (January 5, 2023).

Sham tender offer: SEC v. Ten Cate, Civil Action No. 1:22-cv-02787 (S.D.N.Y.) is a previously filed action which named as defendants Michael Peter Ten Cate and his firm. The complaint alleged Defendants conducted a fake tender offer for an aircraft company. Defendant Ten Cate resolved the action, consenting to the entry of a final judgment based on Exchange Act Sections 10(b) and 14(e). He also agreed to pay a penalty of $500,000. The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action. See Lit. Rel. No. 25604 (January 3, 2023).

Misappropriation: SEC v. Morenthau, Civil Action No. 23 Civ. 00022 (S.D.N.Y. January 3, 2023) names as defendant Cooper Morenthau, the CFO of SPAC African Gold Acquisition Corp. The complaint details a two-part scheme centered on misappropriating client funds. In the first part of the scheme Defendant Morenthau misappropriated about $1.2 million from African Gold. To conceal his misconduct, Defendant falsified the bank records, concealing his withdrawals. Those records were then sent to the accountants and auditors. Mr. Morgenthau did not believe that the records would be challenged. They were not. Defendant used the $1.2 million to trade mene stocks – those with a large retail online investor following. Much of the money was lost trading; the balance was spent. To cover the losses Defendant Morganthau launched a new scheme. He raised money by soliciting investors to help launch another series of SPACs — Strategic Metals Acquisition Corp. I and II. Over a period of about 1 year, beginning in July 2021, $4.7 million was raised. Some of the money was put into African Gold by Defendant to conceal his earlier misdeeds. Almost immediately after the auditors confirmed they year-end balance of the firm, Defendant began withdrawing money from African Gold’s bank account. Those funds were used to trade crypto asset securities. By mid-2022 Defendant was out of cash. African Gold vendors refused to perform work for the company. Mr. Morgenthau was terminated in late August 2022. The fraud could no longer be concealed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Southern District of New York announced the filing of parallel criminal charges. See Lit. Rel. No. 25605 (January 4, 2023).

Offering fraud: SEC v. Liberty, Civil Action No. 2:18 -cv-00139 (D. Maine) is a previously filed action which named as defendants Paul Hess and Michael Liberty. The complaint alleges that Defendants conducted an offering fraud in which investors were solicited to purchase shares of shell companies owned by Mr. Liberty that supposedly held interests in a fintech known as Moxido, LLC. In reality, the shell companies did not own any such interest. The Court entered a final judgment against Mr. Hess precluding future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and 15(a). In addition, Defendant was ordered to pay disgorgement of $2,362,116, prejudgment interest of $434,671 and a penalty of $160,000. See Lit. Rel. No. 25607 (January 4, 2023).

Offering fraud: SEC v. Coggeshall, Civil Action No. 2:19-cv-05667 (D. Ariz.) is a previously filed action which named as defendant Conrad Coggestall. The complaint alleged that Defendant raised about $700,000 in an offering fraud in which investors were fraudulently induced to invest in a firm named Business Owners: Tax Relief. The firm was represented to be a successful M&A firm – it was not. The Court entered a final judgment by consent, precluding future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also requires the payment of disgorgement in the amount of $592,546, prejudgment interest of $100,299,73 and a penalty of $385,536. The prejudgment interest and disgorgement are deemed satisfied by the entry of a default judgment against Defendant and his firm in a proceeding by the Arizona Corporation Commission in a related matter in October 2020. See Lit. Rel. No. 25603 (December 27, 2022).

Offering fraud: SEC v. Reven, LLC, Civil Action No. 1:22-cv-03181 (D. Colo. Filed December 9, 2022) is an action which names as defendants: Reven Holdings, Inc., Reven Pharmaceuticals, Inc., Brian Denomme, Peter Lange and Michael Volk. Each of the individual Defendants is a Reven co-founder. Beginning in early 2019, and continuing until the present, Defendants have solicited funds from investors to purchase shares of Reven Pharmaceuticals. Approximately $44 million has been raised. Much of the money was misappropriated. Defendants also made a series of false statements. Those included claims about their compensation and that audited financial statements would soon be available. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 20(a) and Section 65411 of the National Defense Authorization Act of 2021,. The case is pending. See Lit. Rel. No. 25609 (January 6, 2023).

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