False or Misleading Statements About a Company or Investment

The SEC is consistently taking enforcement actions against companies whose public filings or communications have misled or deprived investors of material information. Investors need full, fair, and accurate disclosures to make informed decisions about investments. Disclosure fraud will likely be a top enforcement priority after the COVID-19 pandemic. Inaccurate or misleading disclosures about the impact of the pandemic on a company’s revenue or operations can give rise to an enforcement action.

SEC Enforcement Actions Based on Deficient Internal Controls

There are many examples of SEC enforcement actions based on inadequate disclosures. These include actions for accounting violations, deceptive non-GAAP financial measures, inadequate internal controls, investment fraud, and foreign bribery or FCPA violations. Even Warren Buffett has recently warned that non-GAAP numbers have been used to artificially boost earnings.

  • For example, in December 2015, two JP Morgan wealth management subsidiaries agreed to pay $267 million to settle charges that they failed to disclose conflicts of interest to clients. According to the SEC order, the investment advisory business and the bank invested clients in the firm’s own proprietary investment products without properly disclosing this preference. Morgan Stanley was fined $50 million for similar inadequate disclosures in 2003.
  • On February 14, 2017, the SEC fined groups of investors that failed to properly disclose ownership information during a series of campaigns to influence or exert control over microcap companies. In each of these campaigns, the groups collectively owned more than five percent of the companies’ outstanding common stock, yet the required ownership filings to disclose that information to the investing public were either incomplete, untimely, or altogether absent. The investors agreed to penalties ranging from $30,000 to $180,000.
  • On May 11, 2017, the SEC announced that the former CEO of MDC Partners, Miles S. Nadal, has agreed to pay $5.5 million to settle charges that his perks were not properly disclosed to shareholders. In public companies, all perks, benefits, and other forms of compensation paid to CEOs and highly compensated executive officers must be disclosed. According to the SEC’s order, Nadal obtained nearly $11 million in perks beyond his disclosed benefits and $500,000 annual allowance. This included Nadal’s personal use of private airplanes, charitable donations in his name, yacht and sports car expenses, cosmetic surgery, and a wide range of other perks. Earlier in 2017, MDC Partners agreed to settle this disclosure failure for $1.5 million.

“Original Information” Based on Independent Analysis

Whistleblowers must submit “original information” to be eligible for an award. This information may be derived from the whistleblower’s independent knowledge or independent analysis. Inadequate disclosure violations present an opportunity for individuals with in-depth market knowledge and experience to provide the SEC with information that may provide the springboard for an investigation.

For example, Regulation G and Item 10(e) of Regulation S-K govern the presentation of companies’ non-GAAP financial measures. These regulations require, among other things, that companies using a non-GAAP measure in their filings include:

  • A presentation of the most directly comparable GAAP financial measure, with that presentation having equal or greater prominence than the disclosed non-GAAP measure; and
  • A reconciliation showing the differences between the non-GAAP measure and the most directly comparable financial measure calculated in accordance with GAAP.

Accordingly, if an investor notices that either requirement is amiss from a company’s filings, he or she may submit a tip to the SEC and be eligible for an award. In early 2016, the SEC issued a $700,000 award to a whistleblower for his or her detailed analysis that led to a successful SEC enforcement action.