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Quarterly Securities Enforcement Briefing

October 2013
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Divided SEC Proposes Rule to Require More CEO Pay Disclosure
By Jean M. Flannery

On Sept. 18, three out of five Securities and Exchange Commission (“SEC”) commissioners voted to propose a rule that public companies disclose the pay gap between chief executive and median worker compensation. At the moment, SEC regulations require that publicly-listed companies disclose the compensation of their chief executives but not of their employees. The proposed rule would require two additional disclosures: First, the median compensation for all employees excluding the chief executive, and second, the ratio between that figure and the chief executive’s annual compensation.

According to SEC Chair May Jo White, the 2010 Dodd-Frank Act required this rule, and the proposal “provide[s] companies significant flexibility in complying.” But Commissioner Michael S. Piwowar, who voted against the proposal, argued that the pay ratio disclosure rule has nothing to do with the SEC’s core mission, would harm investors, and has as its sole objective public shaming of CEOs.

The proposal will have a 60-day public comment period. The SEC must vote on the proposal after that period before the rule goes into effect.

SEC Obtains First Admissions of Wrongdoing Under New Settlement Policy
By Jeffrey B. Coopersmith

In our July 2013 edition of this briefing, we reported that in mid-June 2013, SEC Chair Mary Jo White announced a change in the SEC’s settlement policy in enforcement cases. Chair White said at that time that, although “neither admit nor deny settlements” would remain the norm, defendants will now be required to admit wrongdoing in “certain cases where heightened accountability or acceptance of responsibility through the defendants’ admission of misconduct may be appropriate, even it if does not allow [the SEC] to achieve a prompt resolution.”

It has not taken long with the SEC to implement this new policy. The first example was a settlement with New York-based hedge fund adviser Philip A. Falcone and his advisory firm Harbinger Capital Partners. Mr. Falcone admitted as part of the settlement that he had improperly borrowed about $113 million from the fund without telling investors, at a time when he had barred investors from making redemptions. He also admitted that he had favored certain larger investors in connection with redemptions, and that he had tried to manipulate bond markers. As we previously reported, requiring such admissions from a settling defendant is a significant policy departure for the SEC.

The novel settlement in Mr. Falcone’s case set the stage for the latest example of the SEC’s new policy in action, its settlement with JPMorgan Chase & Co. arising out of the so-called “London whale” matter. This matter involved over $6 billion in trading losses amassed by a trader in JPMorgan’s London branch, Bruno Iksil, the “London whale.” In the wake of these trading losses, the SEC accused JPMorgan of “misstating financial results and lacking effective internal controls to detect and prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses.” In the settlement, JPMorgan agreed to pay $920 million in penalties to various regulators, including a $200 million penalty to the SEC. JPMorgan also admitted to facts supporting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and SEC Rules 13a-11, 13a-13, and 13a-15.

Although the JPMorgan settlement is the largest example to date of the new SEC settlement policy, the admissions may be less damaging to JPMorgan than it would appear, in that violations of these statutes and rules are not ones that allow for private rights of action. Nevertheless, the rollout of the new settlement policy is in keeping with Chair White’s announcement of tougher enforcement by the SEC in a speech she gave on Sept. 26, 2013 entitled “Deploying the Full Enforcement Arsenal.” Her comments also alluded to additional enforcement tools that the SEC will continue to use, such as barring individuals from serving on boards or requiring compliance policy improvements. In addition, she indicated that the SEC would focus more on individuals before “working out to the entity,” meaning that the SEC intends to bring more individuals into enforcement cases.

Circuit Court Sets High Bar for Whistleblower Plaintiffs
By Jean M. Flannery

A 5th Circuit panel ruled unanimously that a G.E. Energy executive did not qualify as a Dodd-Frank whistleblower because he did not provide any information to the Securities and Exchange Commission (“SEC”) (opinion available here).

The relevant statute (15 U.S.C. § 78u-6) defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the [SEC] . . .” The statute also provides that no employer may retaliate against a “whistleblower” who (1) provides information to the SEC under the statute, (2) assists the SEC in a related investigation, or (3) makes certain protected or required disclosures.

In Khaled Asadi v. G.E. Energy (USA), LLC, Mr. Asadi had reported a potential Foreign Corrupt Practices Act issue to his supervisor at GE Energy. GE Energy fired him a year later. Mr. Asadi argued that while he did not meet the statutory definition of “whistleblower” because he had reported nothing to the SEC, he fit under the third category of protected activity: making certain protected or required disclosures.  

The 5th Circuit acknowledged that Mr. Asadi had “some case law” as well as the SEC regulation in his corner. But the court held that a plain reading of the statute dictates that only one category of whistleblower exists: individuals who provide information relating to a securities law violation to the SEC. The court explained that the third category of protected activity did not add to the definition of “whistleblower,” but rather clarified that an individual who reports misconduct to the SEC but is fired for an internal report is protected. In other words, had Mr. Asadi reported his suspicions to the SEC but been fired because of and by supervisors who only knew about his internal report, he would qualify as a “whistleblower.” The court also pointed out that Mr. Asadi’s construction of the Dodd-Frank whistleblower provisions would render the Sarbanes-Oxley anti-retaliation provisions moot.

Several federal district courts have read the definition more broadly than the 5th Circuit. Asadi therefore tees up potential U.S. Supreme Court review.

SEC Questions Retailers on Adequacy of Online Sales Disclosures
By Jean M. Flannery

The SEC has asked a number of large retailers – including Target Corp. and Wal-Mart Stores Inc.—to provide additional information about the amount of goods purchased on the Internet in their periodic filings. While online sales have grown across the retail industry, total sales still often dwarf goods sold online for many retailers.

Retailers often struggle with how to present this information to investors increasingly focused on online prowess. Target, for example, recently stated that its digital sales had grown by double-digit percentages. In response to questions from the SEC, Target acknowledged in June that “digital sales represented an immaterial amount of total sales.” The SEC posed similar questions to several other retailers, expressing concern that retailers might be exaggerating online sales by touting high percentage growth rates in online sales rather than the quantity of such sales. Companies with both an online and brick-and-mortar sales presence should take note of this development.

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