by T. GormanPosted on Posted in SECActions

The Commission has long encouraged firms and their executives to furnish forward looking information to investors and the markets. The MD&A section of company filings, for example, focuses in part on putting the investor in the seat of the executive with forward information. The Dodd-Frank Wall Street Reform Act contains a safe harbor for certain projections. These provisions recognize the fact that executives routinely use projections when managing the firm. When furnishing projections to investors, however, it is critical that they have a sound basis. When that basis is lacking, or the foundation facts suggest the projection is materially inaccurate, it can result in violation of the federal securities laws as in In the Matter of Ribbon Communications, Inc., Adm. Proc. File No. 83791 (August 7, 2018).

Ribbon Communications, formed in October 2017, is a holding company for the combination of GENBRAND LLC and Sonus Networks, Inc. The firm’s shares are traded on NASDAQ. Sonus provides products and services for Cloud communications. Respondent Mark Greenquist was the CFO of Sonus. Respondent Michael Swade was the senior vice president of sales, Americas at Sonus.

The Order centers on a revenue estimate for Q1 2015 made on January 8, 2015 and reiterated on February 18, 2015. On January 8, Sonus issued a press release quoting Mr. Greenquist as stating that he was “comfortable” with the consensus analysts revenue estimate for the first quarter of $74 million. The statement reaffirmed guidance given in December 2014.

At the time the estimate was given, the CFO was aware of information which undermined the projection. First, to achieve it revenue guidance for Q4 2014 Sonus “pulled forward” deals initially projected to close in 2015. Over 38% of the product revenue for the last quarter of 2014 was from deals that had been projected to close in 2015 but were “pulled forward” into the end of the year. By doing this Mr. Greenquist recognized that the firm was creating a risk that it would not have sufficient deals closing in the first quarter of 2015 to meet its revenue projection – that is, by “pulling forward” deals to meet one revenue target it would undercut the ability of the firm to meet the next target.

Second, and equally problematic, was the low backlog of deals. The backlog for the first quarter of 2015 was much lower than it had been for similar periods in earlier years. By November 2014 Sonus’ Vice President of Global Operations drafted a plan to achieve the Q1 2015 revenue target. The plan called for increasing the back log in the first quarter of 2015 significantly by “overdriving” bookings in the last quarter of 2014. This would permit the revenue to be recognized in the first quarter of 2015. Not only did the plan fail, the backlog for Q1 2015 decreased. Absent the planned increase from “overdriving” bookings, revenue for Q1 2015 would more reasonably be projected at $66 million rather than the announced $74 million.

Finally, the sale force forecasts did not support the first quarter 2015 projection. Generally the firm used a tracking tool to follow potential sales opportunities. The sales force populated the tool. Historically the firm relied on the revenue the sales force classified as “committed pipeline” meaning it will be booked, rather than that in two other classifications for transactions that were less sure to close. In early January there was a gap between those deals booked and those needed to make the projected revenue target. Mr. Greenquist chose not to rely on the data in the tracking tool. He was, nonetheless, concerned over the data and the ability of the firm to meet guidance. Concluding that he was “in a box,” the executive reaffirmed the guidance of $74 million despite the contrary data.

Prior to the February 18th statement on Q1 2015 guidance Sonus held its Global Sales Conference. During the Conference Mr. Swade directed that the team building exercise be canceled. Rather, the sale force was directed to figure out how the gap for committed pipeline deals to those needed to make guidance would be closed. Internal e-mails confirm that the sales force was instructed to improperly reclassify enough deals for the first quarter to close the gap. Millions of dollars worth of deals were reclassified. On February 18, 2015 during the firm’s fourth quarter and full year 2014 financial results conference call Mr. Greenquist provided Sonus’ formal guidance for Q1 2015, reaffirming the $74 million projection.

By March 24, 2015 the firm was forced to issue a press release correcting guidance in the wake of sale force updates to the revenue number. Guidance was revised down to a range of $47 to $50 million. The share price dropped over 33%. Ultimately the firm reported revenue of $50.1 million for the first quarter.

The Order alleges violations of Securities Act section 17(a)(2) and Exchange Act section 13(a). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Ribbon agreed to pay a penalty of $1.9 million while Mr. Greenquist will pay $30,000 and Mr. Swade $40,000.

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by T. GormanPosted on Posted in SECActions

The attorney-client privilege serves the long, well-established goals of encouraging full and frank disclosure between an attorney and client, thereby promoting the public interest as the Supreme Court held in UpJohn v. U.S., 449 U.S. 383 (1981). Equally clear is the fact that the privilege can hinder the fact finding process. In Government investigations there can be a tension between those two principles for a firm seeking to cooperate with the inquiry. The bridge between the divide may an agreement under which the firm discloses certain otherwise privileged material to the Government in return for an agreement that furnishing the information does not constitute a waiver. Such an agreement was at the core of a dispute between Walmart and the Government in an on-going FCPA inquiry. U.S. v. Under Seal 1, No. 17-4183 (4th Cir. Decided June 27, 2018).

The firm and the Government entered into an agreement under which the former general counsel of a company subsidiary could be interviewed by investigators. The agreement had three key provisions: First: In providing the information the company and its directors “do not intend to waive the protection of the attorney work product doctrine, attorney-client privilege, or any other privilege.” Second: The Government “will maintain the confidentiality of any Protected Information provided . . and will not disclose such information to any third party except to the extent . . [it determines] that disclosure would be in furtherance of . . . [the Government’s] discharge of its duties and responsibilities or is otherwise required by law.” Third: The Government will not assert that the disclosure gives it “additional grounds to subpoena other privileged materials . . .”

The Government interviewed the former general counsel who did in fact disclose privileged information. Later the Government issued a grand jury subpoena for testimony to the former general counsel. The firm objected. The district court ruled in favor of the Government.

This case turns on the question of whether the agreement between the Government and the company preserved the firm’s attorney-client privilege and work-product doctrine, according to the Circuit Court. The Court held that it does.

The question here is one of interpreting the contract. Decisions regarding the manner in which the privileges are interpreted are inapposite. Here, the First Clause “plainly conveys X Corp.’s intent not to waive any privilege.” While the Government claims that this clause has no effect on it because the Second Clause waived the firm’s privileges as to it, this reading of the two passages is incorrect. This is because the “Government’s reading fails to account for the difference between the topic of the First Clause – privilege – and that of the Second Clause – confidentiality.” Privilege is the right to refuse to disclose information in response to a judicial inquiry. Confidentiality, on the other hand involves preventing others from making extrajudicial disclosures. “Thus, in the Second Clause, the parties agreed that the Government would not share the Protected Information with third parties outside judicial proceedings except in furtherance of its duties,” the Court found. Accordingly, the Second Clause qualifies only the “Government’s promise to keep the information confidential.” While voluntary disclosure of privileged information can constitute a waiver, the First Clause here prevents that result.

The Court also rejected the Government’s claim that the Third Clause presumed a waiver. To the contrary “the Agreement maintains the status quo regarding X Corp.’s privileges. It nullifies the effect of both . . . [the general counsel’s] initial disclosure of privileged information and the Government’s later disclosure of the same information on X Corp.’s ability to assert privilege against the Government.” Accordingly, the firm can assert privilege as if the information had never been disclosed.

Finally, construing the agreement to preserve the privileges serves an important policy consideration. “Cooperation between private entities and the Government furthers the truth-fining process. . . Declining to hold the Government to the terms of an agreement it struck would discourage private entities from cooperation with the Government in the future,” the Court concluded. The decision of the district court was vacated and the case remanded.

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