The SEC’s Broken Windows Program – A Success?

Broken windows entered a new chapter. Previously, the program focused on the custody rule, Rule 105 and the filing of certain forms such as Form 4 and Schedule 13D. The point is to create SEC omnipresence – the cop on the beat is making arrests for all things big and small, generating deterrance.

Now the program has brought 10 new cases centered on failing to make filings regarding certain financing and stock dilution transactions. Specifically, the new series of cases is based on failing to comply with the following disclosure obligations:

  • Form 8-K, Item 1.01 which requires the disclosure of a material definitive agreement within four days;
  • Form 8-K , Item 3.02 which requires the disclosure within four days of the sale of unregistered equity securities unless they constitute less than 5% of the number of last reported shares outstanding of the class; and
  • Form 10-Q or 10-K which requires the disclosure of the number of outstanding shares of common stock as of the latest practicable date.

The issuers involved include: APT MotoVox Group, Inc., CorWare Inc., ERF Wireless Inc., Green Automotive Company, MineralRite Corporation, Mondial Ventures Inc., Monster Arts Inc., Red Giant Entertainment Inc., Seanlemac International Ltd. and Worthington Energy Inc. Each action was initiated as a settled administrative proceeding. See, e.g., In the Matter of Worthington Energy, Inc., Adm. Proc. File No. 3-16257 (November 5, 2014)(alleging the failure to disclose the issuance of unregistered shares and the existence of the related financing agreement). The fines imposed ranged from $25,000 to $50,000 and a cease and desist order.

Broken Windows is clearly adding a significant number of enforcement cases to the SEC’s total number of actions. Whether this is effective enforcement is another question. If the theory is to create deterrence it seems questionable at best that the hedge fund manager considering insider trading or the corporate CFO who is creating cookie jar reserves is going to think twice about the SEC because the agency has a new computer program that can identify filing and other similar violations. If the idea is to bring large numbers of enforcement actions which generate headlines and keep the name of the agency in the public domain and then, perhaps, deterrence, then the program is clearly a success.

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