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SEC Announces Enforcement Actions Arising Out Of Corporate Governance Disputes
02/21/2017On February 14, 2017, the Securities and Exchange Commission (“SEC”) instituted settled administrative proceedings in two different matters where the SEC alleged disclosure violations in connection with battles for corporate control. CVR Energy (“CVR”), a Texas-based oil refinery company, agreed to settle claims that it failed to adequately disclose the material terms of its fee arrangements during an attempted hostile takeover, In the Matter of CVR Energy, Inc., Admin. Proc. No. 3-17846 (Feb. 14, 2017), and a group of investors agreed to settle claims that they failed to adequately disclose their ownership stakes during a series of campaigns to influence and exert control over microcap companies. In the Matter of Jeffrey E. Eberwein, et al., Admin. Proc. No. 3-17847 (Feb. 14, 2017). CVR was not assessed a penalty (which the SEC attributed to the company’s extensive cooperation with the SEC investigation) while the respondents in Eberwein agreed to pay $420,000. Neither party agreed to admit the allegations.
In CVR Energy, the SEC alleged that CVR failed to disclose adequately the material terms of its fee arrangements with two investment banks in connection with financial advisory services the banks provided to CVR during an attempted hostile takeover offer of CVR by activist investor Carl Icahn. CVR paid the banks approximately $36 million in “success” fees for its work in resisting a takeover, even though Icahn ultimately did take control of CVR and was able to do so without raising his initial bid. According to the SEC, the specific financial terms of the banks’ retention should have been disclosed given the expansive definition of success contained in the agreement. Instead, CVR stated that the terms of the banks’ retention were “customary,” when in fact it was not customary for the banks to receive a success fee in the given situation. Accordingly, the SEC alleged that CVR’s failure to disclose the specific terms of the agreements left shareholders unaware of potential conflicts of interest.
In Eberwein, the SEC alleged that investors Jeffrey E. Eberwein and Charles M. Gillman collaborated with mutual fund adviser Heartland Advisors in an effort to influence corporate control of five separate companies, including Aetrium, Inc., NTS, Inc., Digirad, Inc., Analysts International Corp., and Hudson Global Inc. According to the SEC, Eberwein and Gillman were longtime friends and financial professionals who sometimes acted together to pursue shareholder activism through various investment funds. The SEC alleged that the groups Eberwein and Gillman led collectively violated the beneficial ownership reporting requirements under the Exchange Act by failing to adequately disclose the extent and purpose of their beneficial stock ownership in various companies they were attempting to control. Specifically, the SEC alleged that in each campaign the groups collectively owned more than five percent and, at times, more than ten percent, of the company’s outstanding stock, but the disclosure filings were either incomplete, untimely, or absent because they did not reflect that there was in fact a collaborating group whose ownership interests needed to be reported collectively. In numerous instances the SEC also alleged that, while beneficial ownership interests were disclosed, the groups failed to disclose their intention to influence corporate control.
Taken together, these cases demonstrate the critical importance of the investing public receiving information during battles for corporate control – which can often be fast-paced and thus leave little time for the preparation of disclosures. In addition, the actions highlight the value of cooperation. The SEC declined to pursue a penalty against CVR due to its “remedial acts and extensive cooperating with the investigation” but pursued an aggregate civil penalty of $420,000 against Eberwein, Gillman and the funds through which they invested. The Eberwein Order cites no cooperation by any individual or entity, in sharp contrast with the CVR settlement.
