by T. GormanPosted on Posted in SECActions

The Exchange Act requires that certain disclosures be made by significant shareholders and those seeking to make a tender offer. Section 13(d), for example, requires those acquiring a stake of 5% or more to make certain disclosures. Section 14(d) governs tender offers. And, Section 16(a) requires, among other things, 10% shareholders to make certain disclosures. While the Commission has brought actions under these Sections over the years, this year there may be a new focus on the provisions. Earlier this year the agency brought an action alleging that Allergan violated Section 14(d) by failing to disclose a White Knight. Now the Commission has brought two actions involving the three Sections. In the Matter of CVR Energy, Inc., Adm. Proc. File No. 3-17846 (Feb. 14, 2017); In the Matter of Jeffrey E. Eberwein, Adm. Proc. File No. 3-17847 (Feb. 14, 2017).

CVR is based on a hostile tender offer for the company, an independent refiner and marketer of transportation fuels, by an Activist Investor in early 2012. Specifically, in mid-January 2012 the Activist Investor filed a Schedule 13D disclosing beneficial ownership of over 14% of CVR’s shares. The same day the firm adopted a “poison pill” as a defensive measure. The firm also retained Outside Counsel and two Investment Banks.

By late February 2012 Activist Investor announced a tender offer for CVR. Subsequently, the company filed a Schedule 14D-9, prepared by Outside Counsel. In the filing shareholders were advised not to tender their shares into the unsolicited tender offer. Shareholders were also told that the company had retained the Investment Banks as financial advisors in connection with the response to the Offer and had agreed to pay customary compensation. In fact those arrangements had not been made, only preliminary letter agreements had been reached.

Later agreements were reached with the two Banks. Those agreements provided in part for sales fees – sometimes called success fees. Those fees are typically provided for when the bank brings a value creating transaction to shareholders such as causing the bidder to increase its price, according to the Order.

By early April Activist Investor announced that he had prevailed. Over 50% of CVR shareholders indicated a desire to tender their shares. There had been no price increase. Discussions began regarding the completion of the tender offer.

Outside counsel began calculating the fees owed to the Investment Banks. Under the terms of the agreements Outside Counsel concluded that CVR owed Investment Banks a success fee of $18 million even though Activist Investor prevailed. Yet shareholders had not been informated of an arrangement on those terms and the resulting conflict of interest – under its terms the fee was due regardless of the success of the defense. The Order alleges violations of Exchange Act Section 14(d) and Rule 14d-9.

To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Section and Rule cited in the Order. No penalty was imposed based on the cooperation of CVR.

The Jeffrey E. Eberwein proceeding centers on violations of Exchange Act Sections 13(d) and 16(a). Named as Respondents are Jeffrey Eberwein, the CEO of Respondent Lone Star Value Management LLC and portfolio manager of its managed Fund; Charles Gillman, an activist investor and employee of a family office; Boston Avenue Capital, LLC; and Heartland Advisors, Inc., a registered investment adviser. Five penny stock issuers are involved: Digirad, Inc., a medical imaging company; Aetrium (now ATRM) Holdings, Inc.), formerly a semiconductor test equipment firm; NTS, Inc., a telecommunications service provider; Analysts International Corp., a staffing firm; and Hudson Global, Inc., an HR firm.

The violations center on either making inadequate, late or no filings:

  • Aetrium:Respondents Eberwein, Gillman and Boston Avenue did not fully disclose the group’s plan regarding the firm in 2012;
  • NTS: Respondents Eberwein, Gillman and Boston Avenue did not make the required filings regarding their holdings and intent in a timely manner in 2012;
  • Digirad: Respondents Eberwein, Gillman and Boston Avenue in 2012 failed to timely file a Schedule 13 D reflecting their collaboration;
  • Heartland: Respondents Eberwein, Gillman and Boston Avenue failed to make any of the required filings in 2013; and
  • Hudson Global: Respondents Gillman and Heartland, in late 2013 did not timely file a Schedule 13D disclosing their campaign to make changes to the firm’s corporate governance; the next year Respondent Eberwein and LoneStar disclosed a separate campaign for nominating candidates for election; but no filing disclosed the fact that Respondent Gillman joined with Respondents Eberwein and LoneStar.

To resolve the proceeding Respondents Eberwein, Gillman, Boston Avenue and Heartland each consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, each will pay a penalty as follows: Respondent Eberwein, $90,000; Respondent Lone Star, $120,000; Respondent Gillman, $30,000; and Respondent Heartland, $180,000.

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by T. GormanPosted on Posted in SECActions

The Commission has brought an increasing number of enforcement actions focused on either a failure to comply with firm procedures or for inadequate procedures. In many instances the actions arise from inspections by OCIE. The SEC’s latest case in this area focus on both aspects of the compliance question – first there were no procedures; then, when installed, they were inadequate. In the Matter of Sidoti & Company, LLC, Adm. Proc. File No. 3-17843 (February 13, 2017).

Sidoti was established in 1999 as an independent research firm, focused on small and microcap public companies. Over the years the firm expanded its operations. For example, in 2004 Sidoti expanded its business by offering brokerage and investment banking services. The sales and trading operations distributed the firm’s research product and proprietary investment recommendations. Its services included block trades, Rule 144 transactions and facilitating Rule 10b-5-1 plans.

In 2014 the firm again sought to expand. Sidoti decided to raise capital through an IPO. The firm also established a hedge Fund, an Adviser and a holding company structure chaired by its founder and CEO. Trading in the Fund began in early November 2014. The Adviser continued its services until October 2015. Ultimately the firm decided not to conduct the offering.

For an eight month period beginning on November 3, 2014 Sidoti did not have any written policies and procedures regarding the misuse of material non-public information in connection with the Adviser and trading in the Fund. Dur ing the same period the CEO controlled Sidoti’s investment banking and research departments and maintained trading authority in the Fund. The firm’s written policies and procedures precluded the misuse of material non-public information by the investment banking and research departments. Those policies did not restrict the CEO from misusing material non-public information obtained from those departments when making decisions for the Fund. For example, although Sidoti maintained a Restricted List of securities that the firm and its employees could not trade, between November 3, 12014 and May 5, 2015 the Fund traded in shares on that list 126 times.

Subsequently, the firm amended is written policies and procedures to prevent the misuse of material non-public information in response to concerns raised by the staff. Although the amended procedures created some information barriers to address the roles of the CEO, they lacked an enforcement mechanism. The Order alleges violations of Exchange Act Section 15(g).

In considering the firm’s offer of settlement, the Commission considered the fact that the firm cooperated and took remedial steps which included discontinuing its advisory operations and the retention of compliance consultants.

To resolve the proceeding Respondent consented to the entry of a cease and desist order, a censure and agreed to pay a penalty of $100,000.

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