More analysis coming soon. Here’s an article.
The SEC is taking notice of private oil and gas offerings and has increased its scrutiny of these deals. They have noted the recent increase in fraud cases for these deals at the federal and state levels. Thus, the SEC has released an Investor Alert for Private Oil and Gas Offerings. And the first thing they recommend to investors approached to invest?
“Is the person recommending the investment registered? Most people offering you securities must be registered as a broker with the SEC and must be a member of the Financial Industry Regulatory Authority, or FINRA.”
The SEC cautions that being registered is not a seal of approval and that there may be conflicts of interest between the broker-dealer and the issuer.
In a general alert regarding the oil and gas industry, it is not surprising to find the SEC focused on the broker-dealer issue. Many advisors (including this writer) have been approached to sign off on an offering sales arrangement without a licensed broker-dealer with the explanation that:
- “I do this all the time and it has never been a problem.”
- “I am not acting as a broker-dealer, just a consultant who gets paid when the investment closes.”
Unfortunately for the would-be commission-eers, the SEC and state securities authorities do not share that analysis.
As the SEC said in the alert:
“If someone who is not registered solicits your investment, that person may be violating the law. One exception from broker registration is available to employees of the company offering the securities and who engage in strictly limited sales activities. If you aren’t consulting a registered broker or adviser, you should consider doing so. A registered broker or adviser that is familiar with the oil and gas industry and not connected to the offering can help you analyze the investment. Most importantly, working with a registered broker or investment adviser affords you certain legal protections.”
The SEC then illustrated benefits of using a licensed professional to assist in the investment decision:
Keep in mind that if the investment opportunity is an outright fraud, the written materials may look legitimate and every question you have about the opportunity may be answered to your satisfaction, but that doesn’t make any of it true. It is important to conduct your own independent research. One good way to do that may be to engage an investment professional specializing in oil and gas.”
It should be instructive to practitioners that in the course of a general industry investor alert, the SEC chose to highlight the risks of dealing with unlicensed broker-dealers. They are still clearly focused on this issue. Although some bad actors promote these deals, hoping to stay under the radar is a bad strategy for the promoter, issuer and investor.
Pfizer owns a bunch of shares of Class B supervoting common stock of Zoetis, which recently went public. The companies expect to convert these shares into plain vanilla shares of Class A common stock. Pfizer wants to give its shareholders the chance to own Zoetis shares through an exchange offer without forcing them to take the Zoetis shares, such as through a spin-off. To get the Zoetis shares, the shareholder would have to affirmatively participate in the exchange offer by giving up a certain number of Pfizer shares.
Regulation BTR prohibits an officer or director from certain transactions with the company’s stock during a blackout period, a period when the ability to sell to engage in transactions in an individual account plan is suspended by the company or a fiduciary of the plan. Pfizer said it looks like the exchange offer will run headlong into a blackout period. This would prevent Pfizer officers and directors from participating.
Exemptions from Reg BTR include M&A deals and divestitures, but exchange offers are not necessarily included. Pfizer thinks they should be saying that Reg BTR purpose to equalize the treatment of corporate executives and rank-and-file employees and align the interests of directors and executive officers would be served through a transaction conducted pursuant to the SEC’s tender offer rules.
The SEC agreed, noting that:
- the exchange offer is solely for the purpose of divesting Zoetis from Pfizer;
- the exchange offer is subject to, and will comply with, Exchange Act Rule 13e-4 or Regulation 14D under the Exchange Act;
- a suspension of activity in the plan participants’ accounts (as communicated by the administrators to Pfizer) is imposed by the administrators to enable them to allow participants and beneficiaries of the plans to elect to participate in the exchange offer while maintaining an accurate accounting of the account balances of such participants and beneficiaries; and
- Pfizer directors and executive officers would continue to be permitted to tender into the exchange offer during a blackout period, but would not otherwise be permitted to directly or indirectly purchase, sell or otherwise acquire or transfer Pfizer common stock during the blackout period if the shares involved were or would be acquired in connection with service or employment as a director or executive officer.
Cue dramatic music . . .
Last week, the SEC announced that companies can use social media to release key information. This had been described to me as a groundbreaking move for company disclosure. Then I read the release.
Last year, the SEC sent a Wells Notice to Reed Hastings, CEO of Netflix, stating that he violated a bunch of 34 Act statutes and regulations, including Regulation FD, for making some statements on his Facebook page about Netflix’ user metrics.
The SEC accepted the fact that it is a grey area about whether or how to use social media to release material nonpublic information. The SEC continued to say that you could do it without violating a bunch of laws and regs if you don’t restrict access and if you tell people where to look for it.
So, has the SEC finally discovered the Inter-tubes and embraced the future?
No. This is the same analysis they have been providing for years. As they said in their release about the use of company websites in 2008 [Ed.: I can’t believe it has been that long.]:
“Through the years, we have taken a number of steps to encourage the dissemination of information electronically via the Internet, as we believe that widespread access to company information is a key component of our integrated disclosure scheme, the efficient functioning of the markets, and investor protection.”
When doing the analysis of website posting for Reg FD purposes, the SEC has said that:
“Thus, in evaluating whether information is public for purposes of our guidance, companies must consider whether and when: (1) a company web site is a recognized channel of distribution, (2) posting of information on a company web site disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information.” [Ed.: Emphasis added.]
In other words, there is nothing new here. Would the market expect to see financial or performance metrics on a Facebook page? Is registration or subscription required? Are you effectively making a public or limited release of the information?
I interpret the new SEC release to be as much of a warning as it was “permission.” Money quote:
“Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.”
The Supreme Court issued a couple of securities litigation opinions today. A snapshot:
Held: Proof of materiality is not a prerequisite to certification of a securities-fraud class action seeking money damages for alleged violations of Securities Exchange Act of 1934 Section 10(b) and Rule 10b–5.
A quick reminder: Elements of an implied Section 10(b) cause of action for securities fraud are:
- a material misrepresentation or omission by the defendant;
- a connection between the misrepresentation or omission and the purchase or sale of a security;
- reliance upon the misrepresentation or omission;
- economic loss; and
- loss causation.
Basic v. Levinson, an important case in the securities law area, provided, among other things, that fraud-on-the-market can establish the reliance element.
In addition, to certify a class, a plaintiff must also establish that the questions of law or fact common to class members predominate over any questions affecting only individual members. They are fighting for the group, so to speak.
Considering whether to certify a class in a securities fraud case, the court looked at whether proof of materiality is needed to ensure that the common questions of law or fact predominate over individual questions as the litigation progresses. The court said ‘no’ because:
- materiality is judged according to an objective standard, it can be proved through evidence common to the class; and
- a failure of proof on the common question of materiality would not result in individual questions predominating. Instead, it would end the case, for materiality is an essential element of a securities-fraud claim.
The second point was a focus of the dissenting justices, which said that the failure to establish materiality retrospectively confirms that:
- fraud on the market was never established;
- questions regarding the element of reliance were not common; and
- therefore, certification was never proper.
Therefore, the dissent said that the plaintiffs should not be excused at certification that questions of reliance are common merely because they might lose later on the merits element of materiality. Because a securities-fraud plaintiff invoking fraud-on-the-market to satisfy the certification rules should be required to prove each element of the theory at certification in order to demonstrate that questions of reliance are common to the class. However, they lost.
The Investment Advisers Act makes it illegal for investment advisers to defraud their clients and authorizes the SEC to bring enforcement actions against fraudsters. To do this, the SEC must file suit “within five years from the date when the claim first accrued.”
So, what does that time limit mean?
In this case, the SEC sought civil penalties in 2008 for fraud allegedly committed from 1999 until 2002. The SEC argued that the statute of limitations did not begin to run until the SEC discovered or reasonably could have discovered the fraud.
Held: The five-year clock in begins to tick when the fraud occurs, not when it is discovered.
The SEC argued that because of the fraud aspect, a plaintiff may not know it has been injured so the statute of limitations should begin at discovery.
The court said that it has never applied the discovery rule where the plaintiff is not a defrauded victim seeking compensation, but is instead the government bringing an enforcement action for civil penalties. The government is a different kind of plaintiff whose purpose, in the case of the SEC, is to root out fraud. The discovery rule helps to ensure that the injured get compensation, but civil penalties go beyond compensation, are intended to punish and label defendants wrongdoers.
In addition, deciding when the government knew or reasonably should have known of a fraud would also present particular challenges for the courts, such as determining who the relevant actor is in assessing government knowledge, whether and how to consider agency priorities and resource constraints in deciding when the government reasonably should have known of a fraud, and so on.
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