November 2020 Volume 7

INSIDER TRADING & DISCLOSURE UPDATE

In this Issue: Editors’ Remarks

Editors’ Remarks 01 Welcome to the Thanksgiving 2020 issue of the Insider Trading & Disclosure Case Law & Market Updates update, Debevoise‘s periodic update focusing on recent legal, compliance and BMW Settles Charges of enforcement developments in the areas of insider trading, the of Misleading Disclosures in material nonpublic information and disclosure-based matters. Rule 144A Offering Memoranda 01 SEC Enforcement Focus on In this Update, we highlight a rare SEC enforcement action arising in the Beneficial Ownership Reporting by Investment Advisors 03 context of a private securities offering against a foreign private issuer. Also SEC to Fund Managers: Take Care figuring prominently in this Update are two SEC enforcement actions that with Controls Over the Possession serve as a reminder to private equity and other investment managers about and Use of MNPI 06 the importance of vigilance relating to beneficial ownership reporting under SEC’s Division of Enforcement Reports Healthy Results for Section 13 and maintaining effective controls and procedures relating to the Fiscal Year 2020 07 possession and use of material non-public information, as well as an update U.S. Supreme Court’s Decision in Liu v. SEC may Significantly on the Supreme Court‘s decision in Liu v. SEC—which could have the effect of Limit Disgorgement in limiting the SEC‘s ability to seek disgorgement in insider trading cases—and Insider Trading Cases 10 updates on various SEC and disclosure-related developments. COVID-19 Guidance and Regulation S-K Simplification and Modernization: We hope that you find this Update useful and informative, and we look The Year in Review 13 forward to bringing you further news and analyses in future issues. Insufficient Internal Controls Result in SEC Enforcement in Connection Sincerely, with Rule 10b5-1 Plan 16 Insider Trading Reform: New The Editorial Board Administration, New Congress, Renewed Momentum? 17 United States v. Blaszczak: Case Law & Market Updates Second Circuit Opens the Door to U.S.C. Title 18 Insider Trading Prosecutions 20 BMW Settles Charges of Misleading Disclosures in

Notes 21 Rule 144A Offering Memoranda

In a rare action arising in the context of a private securities offering against a foreign issuer, in September 2020, the SEC announced settled charges against BMW AG and two domestic subsidiaries arising from allegedly misleading disclosures in connection with offerings. The settled order alleged violations of Section 17(a)(2) and 17(a)(3) of the and imposed a civil money penalty of $18 million,1 an amount that had been “reduced” due to BMW’s “substantial cooperation” with the SEC.

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BMW Settles Charges of The SEC’s allegations focused on BMW NA that the incentive programs Misleading Disclosures BMW of North America’s (“BMW encouraged “false reporting” and that in Rule 144A Offering NA’s”) reporting of its retail vehicle Memoranda BMW NA’s volume goals could not be Continued from page 1 sales volume in Rule 144A offering “achieved through retail sales to BMW memoranda, investor presentations, buyers,” to no avail. and press releases. The SEC alleged that The SEC further alleged that BMW NA’s BMW NA systematically manipulated management improperly reserved retail reporting of its U.S. retail sales volume. sales reporting between 2015 and 2019. The SEC alleged that BMW NA, with According to the settled order, BMW BMW AG’s approval, created financial NA opted not to report any excess retail incentives for dealers to designate sales in months during which dealer vehicles as “demonstrators” (i.e., vehicles sales exceeded targets. It then drew used for test drives, showrooms and on this reserve of unreported sales— other marketing purposes) or as service referred to internally as “the bank”—in loaners, then included those vehicles months during which a sales gap would in the dealers’ reported retail sales in otherwise exist between actual and order to meet monthly sales targets. In forecasted sales. During months that reality, the vehicles had not been sold, BMW NA expected slow retail sales, nor were many of the vehicles ever put BMW NA’s management actively built to use as demonstrators or as service the “banked” sales into the company’s loaners. As a result of these practices, planning assumptions. The resulting 80 percent of the demonstrator and adjustments frequently exceeded 10%, loaner designation at BMW’s American and sometimes exceeded 20%, of total dealerships were reported on the monthly retail sales. As with the vehicle last day of each month—i.e., when designations, Internal Audit cautioned it became clear that the retail sales that BMW NA’s use of the “bank” was target could not be met by authentic inappropriate, but BMW nevertheless sales and that new designations were continued the practice for an additional needed to “close the gap.” As a result five years. of this practice, demonstrator and The effect of these practices was loaner vehicles accounted for over one compounded by improper adjustments quarter of BMW NA’s reported retail to BMW NA’s retail sales reporting sales between 2015 and 2017. BMW calendar. Although BMW NA usually NA failed to change this practice— followed a calendar that was standard in and in fact increased designations of the industry, the calendar was extended demonstrators—after BMW’s Internal by multiple days in January 2015 and Audit team recommended that the January 2017 to ensure the company improper designations be discontinued. appeared to meet its retail sales targets. BMW’s dealers also repeatedly informed

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BMW Settles Charges of The disclosure case against BMW sales volumes” and included vehicles Misleading Disclosures NA arose in the context of private designated as demonstrators or service in Rule 144A Offering securities offerings from 2016 through Memoranda loaners “solely for purposes of increasing Continued from page 2 2019 in which BMW AG guaranteed reporting sales.” approximately $18 billion in bonds As SEC Enforcement Director Stephanie sold by BMW US Capital in Rule 144A Avakian observed, the BMW order offerings in the United States. The serves as a reminder that “[c]ompanies accompanying offering memoranda, accessing U.S. markets to raise capital as well as BMW’s investor presentations have an obligation to provide accurate and monthly press releases, allegedly information to investors” consistent reported inaccurate retail sales volume. with U.S. securities laws.2 The order Although BMW had disclosed that is also notable for its relatively lenient “Retail vehicle sales data . . . do not $18 million penalty, paid jointly by the correlate directly to the revenue BMW BMW entities, as well as for its non- recognizes during a given period” and scienter charges in the face of apparently that the data “includes . . . vehicles intentional conduct. The SEC has held delivered for dealer use or demonstration this matter out as exemplifying the value and service loaners,” the SEC deemed of “the significant benefits to companies the disclosures inaccurate because they for providing concrete cooperation” to “did not reflect BMW NA’s reliance the SEC’s investigative teams.3 on these practices to increase retail

SEC Enforcement Focus on Beneficial Ownership Reporting by Investment Advisors

On September 17, 2020, the U.S. Securities WCAS consented to without admitting and Exchange Commission (the “SEC”) or denying the SEC’s findings, found announced the institution of a settled that WCAS caused the WC Funds to cease and desist proceeding against violate Section 13(d)(2) and Rule 13d-2 an SEC-registered investment adviser of the Exchange Act by failing to timely (“WCAS”) to multiple private funds update its Schedule 13D to reflect (i) operating under the name Welsh, Carson, the investment intent to liquidate its Anderson & Stowe (the “WC Funds”) for reported position in a failures to satisfy reporting obligations and (ii) the subsequent sales disposing under Section 13(d) of the Securities of such position.2 The SEC’s Order Exchange Act of 1934.1 Specifically, the required WCAS to pay a civil penalty of SEC’s Cease and Desist Order, which $100,000 and to cease and desist from

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SEC Enforcement Focus future violations.3 This latest action sold shares totaling approximately 4.6% on Beneficial Ownership serves as another reminder of the need to of the outstanding shares of Hanger Reporting by Investment implement and adhere to robust controls Advisors common . On August 8, 2019, the Continued from page 3 and procedures to ensure beneficial WC Funds sold their remaining shares, ownership reporting compliance. which equaled approximately 1.9% of the outstanding shares of Hanger. On Background September 6, 2019, WCAS, on behalf of According to the SEC’s Order, in 2016, the WC Funds, filed Amendment No. 1 the WC Funds began acquiring shares to the 2016 13D Filing, which disclosed of common stock of Hanger, Inc. the disposition of all of the WC Funds’ (“Hanger”), a prosthetics company listed shares of Hanger common stock. on the New York , with the intent of taking Hanger private. In Failure to Amend Upon a July 2016, the WC Funds first reported a Material Change in Investment combined 6.7% ownership stake in Hanger Intent and Failure to Amend on a Schedule 13D filed with the SEC in Upon the Disposition of a July 2016 (the “2016 13D Filing”), with Material Amount of Securities. Item 4 (Purpose of Transaction) noting According to the SEC’s Order, WCAS that the WC Funds “may explore a possible caused the WC Funds to violate Section acquisition or restructuring” of Hanger. 13(d)(2) and Rule 13d-2 of the Exchange Shortly thereafter, WCAS discussed with Act when it failed to promptly amend the Hanger management the possibility of a description of its investment intent, as take-private transaction. Hanger, however, disclosed in Item 4 of the 2016 13D Filing. indicated that it was not interested in such The 2016 13D Filing included disclosure a transaction, and no further action was indicating that the acquisition of Hanger taken over the next three years. stock was for “investment purposes” In June 2019, WCAS engaged an external and that, based on discussions with consultant to assist with a possible sale Hanger management, the WC Funds of its position in Hanger and evaluate could “explore a possible acquisition or how and when to sell. At that same time, restructuring” of Hanger. In addition, in WCAS also contacted its broker-dealer response to Item 4(a) of Schedule 13D, about the forthcoming sale. According the 2016 13D Filing stated that WCAS did to the SEC’s Order, by no later than June not have any plan to dispose of Hanger 17, 2019, WCAS “had abandoned its securities while reserving its right to do interest in acquiring Hanger, formulated so. Section 13(d)(2) and Rule 13d-2(a) a definitive intention to liquidate the of the Exchange Act together require entirety of its Hanger holdings, and prompt amendments to a previously taken steps to liquidate its Hanger filed Schedule 13D when there are any shares.” On July 1, 2019, the WC Funds material changes or developments in

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SEC Enforcement Focus the information previously reported, SEC, WCAS “essentially outsourced the on Beneficial Ownership with “material” defined as information responsibility to comply with Section Reporting by Investment regarding matters where there is a Advisors 13(d) to outside counsel” and, in this case, Continued from page 4 substantial likelihood that a reasonable the designated WCAS employees failed to investor would attach importance in retain and notify outside legal counsel in determining whether to buy or sell the connection with the contemplated, and securities.4 Further, generic or boilerplate then completed, sale of securities. disclosure that indicates that the insider is reserving the right to engage in any of the Key Takeaways kinds of transactions enumerated in Item The SEC’s enforcement action 4(a)-(j) of Schedule 13D (including plans demonstrates the SEC’s ongoing interest related to acquisitions or disposition of in monitoring and enforcing beneficial securities) must be amended promptly ownership reporting obligations with a when a material change occurs in the particular focus on disclosure practices by facts previously reported. institutional investors and other insiders of public companies involving beneficial According to the SEC’s Order, WCAS’s ownership. In particular, the SEC investment intent, evidenced by specific Order’s focus on an insider’s evolving steps taken to liquidate its position, had intent and when preliminary activities materially changed from the disclosure constitute a “plan or proposal” serves as set forth in the 2016 13D Filing by a cautionary lesson as to the importance no later than June 17, 2019, over two of continuously evaluating existing months prior to the Amendment No. 1 Schedule 13D disclosures as to whether filing. Further, as the July 1, 2019 sale an amendment is required. exceeded four percent of Hanger’s then- outstanding shares of common stock, Similar to the Ares Management the eventual disclosure of such sale in enforcement action discussed below, Amendment No. 1 to the 2016 13D the SEC’s Order is yet another example Filing filed on September 6, 2019 was of the importance of sound compliance delinquent resulting in a violation of Rule polices and procedures. For institutional 13d-2(a) which specifies that acquisitions investors that rely on outside counsel to or dispositions of registered securities assist in their compliance with beneficial of one percent or more of the class are ownership reporting obligations, both considered “material” and trigger an internal legal and teams must be amendment obligation. cognizant of the disclosure requirements of Schedule 13D so as to engage outside The SEC’s Order also includes a counsel as early as possible when actions discussion of WCAS’s Section 13(d) that could implicate material changes are compliance procedures and the specific being contemplated. deficiencies that contributed to the cited filing delinquencies. In the words of the

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SEC to Fund Managers: Take Care with Controls Over the Possession and Use of MNPI

Background The SEC’s Determination In May 2020, Ares Management, LLC Despite the compliance policies (“Ares”) paid a $1 million penalty to Ares had in place, the SEC order settle charges brought by the Securities determined that Ares’ systems fell and Exchange Commission (“SEC”), short. Specifically, the order indicated which alleged that Ares failed to that Ares compliance staff had wide implement and enforce its policies discretion in the pre-approval process and procedures designed to prevent relating to Ares investments. The the misuse of material, nonpublic SEC order also alleged that, in the information (“MNPI”). The SEC’s order1 case of the Portfolio Company, Ares alleged that, in 2016, Ares Management compliance staff failed to make an invested several hundred million dollars assessment as to whether the Director, in a public company’s (“Portfolio who continued to engage in trading Company”) debt and equity. Due to decisions in regard to the Portfolio its investment, Ares was entitled to Company’s securities, (i) possessed appoint two directors to the Portfolio material non public information about Company’s . One of the Portfolio Company and (ii) shared the two directors also served as a senior such information internally. Due to member on the internal Ares deal these violations, the SEC charged Ares team responsible for trading decisions with willful violations of Section 204A, relating to the Portfolio Company’s Section 206(4) and Rule 206(4)-7 of the securities (the “Director”). To facilitate Investment Advisers Act. In addition to the sharing of confidential information the settlement, the SEC ordered Ares to between the Director and Ares, the cease and desist from future violations of Portfolio Company and Ares agreed to these provisions. For more information a confidentiality agreement and loan about the Ares Management settlement, agreement that outlined the terms of please see our more detailed Client the arrangement, and Ares also had a Update here. number of other written policies and procedures to address the treatment Missing Links of MNPI. During the Director’s term Although Ares ultimately paid a price on the Portfolio Company’s board, for its allegedly inadequate compliance Ares purchased shares of Portfolio procedures, there are a number of Company stock in the public market elements the SEC order fails to address during the Portfolio Company’s public and may cause uncertainty as other trading window. private equity firms consider how to

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SEC to Fund Managers: Take refine their compliance processes in the firms should consider or re-evaluate the Care with Controls Over the wake of this matter. The SEC did not (i) following: Possession and Use of MNPI file any insider trading charges against Continued from page 6 • Systematically investigate trading Ares, any employees of Ares or make approvals in situations that present a any finding that Ares engaged in insider heightened risk of access to MNPI. trading while in possession of MNPI, (ii) make a determination of what • Carefully and consistently document specific MNPI the firm possessed when the inquiries and findings that support it engaged in the problematic trading trading approvals. or (iii) address what additional steps • Confirm that policies and procedures Ares could have taken to protect against require compliance staff to conduct MNPI charges. a holistic review, taking into consideration the firm’s particular Final Thoughts circumstances prior to approving The Ares Management settlement serves transactions in restricted securities. as a cautionary reminder to private • Consider creating an internal list of the equity firms of the importance of robust typical types of MNPI an individual compliance policies to protect against may have access to when serving in the appearance of engaging in trading a board capacity in order to allow based on MNPI obtained through compliance officers to be able to engage confidentiality agreements, board in fulsome discussions with employees memberships or other arrangements. on whether they possess MNPI. To avoid the same fate, private equity

SEC’s Division of Enforcement Reports Healthy Results for Fiscal Year 2020

On November 2, 2020, the U.S. Securities of standalone enforcement actions and Exchange Commission’s Division of dropped from 526 to 405 in FY 2020, Enforcement (the “Division”) released the Division’s year over year results its 2020 Annual Report (the “Report”), were fairly comparable considering that which details the activities and results 95 of the enforcement actions from of the Division for the period October FY 2019 resulted from the SEC’s 2018 1, 2019 to September 30, 2020. The Share Class Disclosure Initiative. Of Division continued to be active in the 405 standalone actions brought in FY 2020, despite the impact of the FY 2020, the Division highlighted 62 global pandemic. Although the number actions (15%) related to issuer financial

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SEC’s Division of reporting and disclosures issues and Earlier this year, the SEC brought three Enforcement Reports Healthy 33 actions (8%) against individuals who actions against issuers that allegedly Results for Fiscal Year 2020 allegedly misappropriated or traded made materially misleading claims in Continued from page 7 unlawfully on material, nonpublic press releases related to their efforts information. As a percentage of the to manufacture and sell COVID-19- total standalone actions, both of these related products. On April 28, 2020, the figures are roughly consistent last year’s SEC brought an enforcement action results. However, it is worth noting that against a healthcare company, Praxsyn the number of insider trading cases was , and its CEO for claiming in substantially higher in both FY 2018 two press releases that it had a significant (51) and FY 2017 (41). number of N95 masks on hand and was establishing a dependable supply chain Issuer Disclosures of masks, when in fact the company’s In fiscal year 2020, the SEC brought a efforts to obtain and sell such masks number of enforcement actions against had been proving futile.1 On May 13, public companies alleging violations 2020, the SEC also charged Applied related to a wide range of disclosures, Biosciences Corporation (“Applied including disclosures related to COVID-19, Biosciences”), a biotechnology company, practices, and executive perks, with issuing two allegedly misleading among other topics. press releases that touted the company’s

Issuer eporting and Disclosure norcement ctions line of at-home COVID-19 test kits

100 without indicating that the FDA had 2 not approved or authorized the sale of 80 7 any at-home test kits.2 In connection 60 2 with its announcement of the charges

40 against Applies Biosciences, the SEC also announced charges against Turbo 20 Global Partners (“Turbo Global”), a 0 2017 2018 2019 2020 digital marketing company, and its CEO for issuing misleading press releases Coronavirus-Related Disclosures regarding its involvement in a public- Throughout the coronavirus pandemic, private to sell thermal the SEC has been actively monitoring scanning equipment that could detect public filings from issuers in “highly individuals with elevated fevers.3 impacted” industries, with a particular According to the SEC order, Turbo Global focus on identifying disclosures that did not have any agreements to sell the appear to be “significantly out of step” product, nor was it involved in any such with others in the same industry. with government entities.

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SEC’s Division of EPS Initiative practice of accelerating, or “pulling in,” Enforcement Reports Healthy sales expected for future quarters into Results for Fiscal Year 2020 As part of its focus on pursuing financial current quarters in an effort to meet Continued from page 8 fraud and issuer disclosure violations, the quarterly sales and earnings targets Division continues to focus on leveraging between November 2015 and June 2016.7 new technologies and data analytics to According to the SEC order, these identify potential violations, which led practices eroded HP’s profit margin to a new initiative that resulted in several and cannibalized the company’s sales enforcement actions during FY 2020. in certain regions – both of which, In September 2020, the Division according to the SEC, were known announced its EPS (Earnings Per Share) trends that HP failed to disclose as Initiative, which utilizes risk-based data required by Regulation S-K. Earlier in analytics to detect potential accounting the year, the SEC brought similar charges and disclosure violations that might arise against alcohol producer Diageo plc from improper earnings management (“Diageo”), alleging that Diageo failed practices.4 The Division disclosed the to disclose material trends resulting initiative at the same time it announced from its practice of shipping products to settled actions with Interface, Inc.5 and distributors in excess of demand, which Fulton Financial Corporation6 alleging enabled the company to meet internal improper accounting practices that sales targets in the face of declining allowed the companies to report quarterly market conditions.8 Notably, the SEC EPS that met or exceeded analyst did not allege accounting violations in consensus estimates. The SEC alleged these cases, but rather focused solely on that both companies failed to sufficiently the companies’ inadequate disclosures disclose the impact of the accounting relating to revenue recognition. practices at issue. These cases underscore that data analytics, which has been a Undisclosed Executive Perks focus for the Division for a number During fiscal 2020, the SEC also of years, continues to be a critical tool pursued disclosure violations related employed by the SEC to detect potential to executive perks – an area that has securities law violations involving the received significant attention from the financial reporting process. Enforcement Division in prior years. On Undisclosed Material Trends June 4, 2020, the SEC announced charges against Argo Group International The SEC brought several enforcement Holdings, Ltd., a Bermuda-based actions in fiscal year 2020 alleging that insurance company, for failing to disclose issuers failed to sufficiently disclose their in its proxy statements over $5 million accounting practices. For example, the in personal expenses and perks paid SEC charged HP Inc. (“HP”) with failing to the company’s CEO, including the to disclose the negative impact of its

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SEC’s Division of CEO’s personal use of corporate aircraft, cases brought during FY 2020 reflect Enforcement Reports Healthy helicopter trips, transportation for family the international scope of the Division’s Results for Fiscal Year 2020 members, club memberships, and tickets program and the staff’s ability to use in- Continued from page 9 and transportation to entertainment house tools to quickly identify and pursue events.9 More recently, the SEC brought potential insider trading violations, even an enforcement action against Virginia- in complex situations involving multiple based hospitality company Hilton parties. For example, the SEC brought a Worldwide Holdings Inc. for failing to series of enforcement actions during FY disclose approximately $1.7 million in 2020 arising from an alleged international travel-related perks and personal benefits insider trading scheme involving an it provided to executive officers from investment banker at a large investment 2015 through 2018.10 Similar to the bank, a New York-based trader, two cases against Interface, Inc. and Fulton former investment bankers, a London- Financial Corporation noted above, the based trader, and two traders based in Division of generated this case through Switzerland. These actions originated its use of risk-based data analytics. from the Division’s Market Unit, which monitors for suspicious Insider Trading trading patterns to target insider trading schemes. Each of these case also resulted Insider trading constituted roughly in parallel criminal charges. 8% of the SEC’s enforcement docket in fiscal 2020, compared to 6% a year Insider Trading norcement ctions ago, which was lower than historical 60 averages. As with the prior year, the SEC brought insider trading actions 50 against respondents and defendants 40

30 spanning a wide range of industries, 0

career roles, and geography. During the 20 recent SEC Speaks Conference, the SEC 10 staff emphasized that the insider trading 0 2017 2018 2019 2020

U.S. Supreme Court’s Decision in Liu v. SEC may Significantly Limit Disgorgement in Insider Trading Cases

On June 22, 2020, the U.S. Supreme Exchange Commission (the “SEC” Court addressed the question of whether or the “Commission”) enforcement courts posses the authority to order proceedings in Liu v. SEC. The disgorgement in U.S. Securities and Court found that the SEC could seek

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U.S. Supreme Court’s disgorgement, but articulated several said there could be liability for partners Decision in Liu v. SEC limitations. The Court held that a engaged in a concerted wrongdoing, may Significantly Limit “disgorgement award that does not Disgorgement in Insider therefore leaving some flexibility for Trading Cases exceed a wrongdoer’s net profits and collective liability. Third, the Court Continued from page 10 is awarded for victims is equitable articulated an exception to deducting relief permissible under § 78u(d)(5).”1 business expenses from disgorgement Although the holding itself is limited, for that are wholly not the Court telegraphed its view that the legitimate. How courts address these SEC might exceed its authority to seek open questions could significantly affect disgorgement if the SEC: (1) requires the amount of disgorgement awarded in that defendant’s gains be deposited insider trading cases. with the U.S. Treasury instead of In insider trading cases, the only returned to victims; (2) imposes joint- arguable “victims” are traders who and-several liability; or (3) declines to traded contemporaneously with the deduct legitimate business expenses insider trading.2 Yet the SEC has only from the award. This combination rarely distributed such funds given the of requiring both the deduction of difficulty of identifying counterparties legitimate business expenses and that to the illegal insider trading and the the disgorged amount go to intended impracticability of distributing de “victims” of the violation could have a minimis funds to victims, a situation substantial impact on the SEC’s ability common in cases both large (e.g., to obtain disgorgement in numerous corporate malfeasance and disgorgement types of cases, particularly insider to shareholders) and small (e.g., when, trading cases. Lower courts, the Staff at based on defendant’s demonstrated the Commission and defense attorneys inability to pay, the distribution fund are starting to interpret and apply the would not support the cost of the Liu decision, and the long-term impact distribution). If courts interpret Liu to of the decision is still developing. mean disgorgement cannot be deposited At the SEC Speaks 2020 conference in in the U.S. Treasury even when it is not October, Staff from the SEC’s Office of feasible to return the money to victims, the General Counsel pointed out three then it could be very challenging for the main areas for further refinement from Commission to collect disgorgement in the Liu decision. First, the Court left insider trading cases. open the question of whether depositing The Court stated that the SEC’s disgorgement in the U.S. Treasury practice of imposing joint-and-several is justified where it is not feasible to disgorgement liability on a wrongdoer’s return the money to victims. Second, affiliates could transform the remedy for joint-and-several liability, the Court

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U.S. Supreme Court’s into a penalty, which could impact the and prejudgment interest and instead Decision in Liu v. SEC disgorgement demanded from unrelated requested only a civil penalty that may Significantly Limit tipper-tippee arrangements.3 The Disgorgement in Insider equaled two times the defendant’s 7 Trading Cases Court’s ruling may restrict the SEC’s ill-gotten gains. Staff from the Continued from page 11 ability to pursue disgorgement from SEC’s Office of the General Counsel those who did not directly profit from presenting at the SEC Speaks 2020 misconduct and will require the SEC to conference also mentioned three recent provide clearer evidence of concerted examples of lower courts interpreting action when attempting to pursue and applying Liu: the Ninth Circuit joint-and-several disgorgement liability. remanded a disgorgement decision to The Court suggested that unrelated the district court to determine whether tipper-tippee arrangements in an the disgorgement award is consistent insider trading context fall on the “more with the guidelines articulated in Liu remote” end of that spectrum where for “the benefit of investors” and joint- individual liability may be required.4 and-several liability,8 in another case However, the Court recognized there are that is on appeal, the district court held situations that permit collective liability that Liu has no bearing on disgorgement for partners in wrongdoing “given from relief defendants;9 and another the wide spectrum of relationships district court held that a defendant must between participants and beneficiaries of identify a legitimate purpose to deduct unlawful schemes.”5 business expenses from disgorgement.10 Finally, the Court stated that in The Liu decision raises important seeking disgorgement, the SEC must questions about the limitations on the deduct legitimate expenses from the SEC’s ability to pursue disgorgement that disgorgement amount, provided the relate directly to insider trading cases. business as a whole is not a sham used in The Court has approved disgorgement pursuit of the wrongdoing.6 The Court’s award constitutes net profits, and the ruling may have significant implications award is distributed to victims, but Liu in connection with negotiating settlement leaves open the question of whether agreements with the SEC, particularly the SEC can continue to pursue a in insider trading and other types of disgorgement remedy when funds trading cases, where the SEC typically cannot be distributed to investors. It will declines to allow the defendant to be up to lower courts to interpret the deduct commissions or other legitimate Court’s guidance on “those categories expenses. The decision provides of relief that were typically available in ammunition to parties arguing for a equity” to determine the contours and broader expansion of what constitutes limits of SEC disgorgement powers. legitimate, deductible expenses. In a recent insider trading case, the SEC withdrew its request for disgorgement

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COVID-19 Guidance and Regulation S-K Simplification and Modernization: The Year in Review

SEC Guidance Related to For more information about the March COVID-19 25, 2020 guidance, please see our more detailed Debevoise In Depth here. Throughout the course of the COVID-19 pandemic, the SEC has In the same March 25, 2020 guidance, issued guidance, provided targeted recognizing that companies could temporary regulatory relief and taken also face operational delays due to other actions intended to facilitate novel issues presented by COVID-19, timely, robust and complete reporting the SEC Division of Corporation by registrants while recognizing the Finance also provided that it “would continued uncertainty regarding not object to companies reconciling COVID-19. Highlights of key COVID- a non-GAAP financial measure to 19-related guidance and statements from preliminary GAAP results that either the SEC are summarized below. For include provisional amount(s) based further information regarding the SEC’s on a reasonable estimate, or a range of full COVID-19 response and related reasonably estimable GAAP results” initiatives to date, please refer to the in instances where “a GAAP financial SEC’s website here. measure is not available at the time of the earnings release because the On March 25, 2020, in light of the measure may be impacted by COVID- evolving and uncertain effects and 19-related adjustments that may require risks of COVID-19 on registrants and additional information and analysis to their businesses, the SEC Division of complete,” subject to certain conditions. Corporation Finance of the SEC released The Division of Corporation Finance guidance related to COVID-19 to aid revisited the issue of COVID-19- registrants in their assessment and related non-GAAP adjustments in a disclosure of the impact of COVID-19 conversation between William Hinman, and emphasized the importance of Director of the Division of Corporation providing investors with forward- Finance, and Julie Bell Lindsay, Executive looking information to “allow investors Director of the Center for Audit Quality, to evaluate the current and expected posted online by the CAQ on October 1, impact of COVID-19 through the eyes 2020, during which, Director Hinman of management,” reminding companies cautioned companies against using that they can avail themselves of safe non-GAAP adjustments to add back harbors under federal securities laws to lost revenues due to COVID-19 given disclose forward-looking information.

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COVID-19 Guidance and how subjective and difficult it is to practicable,” in particular “forward- Regulation S-K Simplification evaluate lost revenues and to account for looking information regarding the and Modernization: associated expenses. The Year in Review potential future impact of COVID-19 on [issuers’] financial and operating Continued from page 13 On April 8, 2020, SEC Chairman Jay conditions.” Clayton and Director Hinman released a public statement, “The Importance The Division of Corporation Finance of Disclosure – For Investors, Markets released additional guidance on and Our Fight Against COVID-19,” June 23, 2020 related to COVID-19 highlighting the importance of regarding operations, liquidity and providing full and detailed disclosure capital resources disclosures that regarding the impact of COVID-19. companies should consider. Among Chairman Clayton and Director other considerations, the Division of Hinman urged “companies to provide Corporation Finance emphasized the as much information as is practicable importance of companies providing regarding their current financial and “robust and transparent disclosures operating status, as well as their future about how they are dealing with operational and financial planning” and short- and long-term liquidity and noted that “[g]iven the uncertainty in funding risks in the current economic our current business environment, we environment, particularly to the extent would not expect to second guess good efforts present new risks or uncertainties faith attempts to provide investors and to their business.” other market participants appropriately Looking ahead, we expect that the SEC framed forward-looking information.” will continue to focus on and encourage In a subsequent public statement, registrants to provide full, accurate “The Importance of Disclosure for Our and detailed disclosure—both current Municipal Markets,” issued on May 4, and forward-looking—regarding the 2020 regarding disclosure by issuers ongoing impact of COVID-19. The in the municipal securities markets, SEC’s Division of Enforcement and Chairman Clayton and Rebecca Olsen, the Office of Compliance Inspections Director of the Office of Municipal and Examinations has issued over 30 Securities, reiterated the Agency’s trading suspensions since the SEC’s request to issuers that they provide initial March 25, 2020 guidance due to investors with “as much information issues with the adequacy and accuracy of about their current financial and disclosures related to COVID-19. operating condition as is reasonably

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COVID-19 Guidance and Updates to Regulation S-K the prior year (as is currently required) Regulation S-K Simplification or the immediate preceding quarter. and Modernization: In Fall 2020, the SEC continued to The Year in Review produce incremental changes to simplify The amendments will become effective Continued from page 14 and modernize disclosure requirements 30 days after they are published in the in Regulation S-K as part of its Disclosure Federal Register, and registrants are Effectiveness Initiative1 and updated required to comply with the rule changes statistical disclosure requirements for beginning with the first fiscal year ending bank and savings and loan registrants in on or after the date that is 210 days after light of changes in the banking sector publication in the Federal Register. over the past 30 years. New Statistical Disclosures for Modernizing Updates to Management‘s Banking Registrants Discussion and Analysis and Financial On September 11, 2020, the SEC adopted Disclosure Requirements final rules codified in new Item 1400 of On November 19, 2020, the SEC adopted Regulation S-K to update the required final rules intended to modernize, simplify statistical disclosures for bank and and enhance certain financial disclosures savings and loan registrants, which, required by Regulation S-K, including among other things, codify certain Item 303 requirements governing MD&A disclosures required under Industry disclosure. The SEC intends the rules Guide 3, Statistical Disclosure by Bank changes to sharpen the focus on the Holding Companies (“Guide 3”) and disclosure of material information. Of eliminate other Guide 3 disclosures that particular note, the amendments will: are duplicative of requirements under SEC rules, U.S. GAAP and International • Eliminate the requirement to disclose Financial Reporting Standards. The Selected Financial Data (S-K Item 301). final rules will apply to registrants • Replace the requirement to include beginning on the first fiscal year ending separate disclosure regarding Off- on or after December 15, 2021, and balance sheet arrangements with an voluntary early compliance is permitted instruction to discuss such obligations prior to December 15, 2021. Guide 3 in the broader context of MD&A (S-K will be rescinded effective January 1, Item 303(a)(4)). 2023. For more information about these • Eliminate the requirement to include rule amendments, please see our more Tabular disclosure of contractual detailed Debevoise In Depth here. obligations (S-K Item 303(a)(5)). Disclosure Simplification and • Permitting registrants to compare Modernization their most recently completed quarter On August 26, 2020, the SEC announced to either the corresponding quarter of the adoption of rule amendments

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COVID-19 Guidance and intended to simplify and modernize principles-based disclosure framework Regulation S-K Simplification its disclosure requirements under based on materiality standards and aim and Modernization: Regulation S-K related to the description to elicit registrant-specific disclosures The Year in Review Continued from page 15 of business (Item 101), disclosure of and reduce the compliance burden for legal proceedings (Item 103) and risk registrants. For more information about factors (Item 105). The amendments these rule amendments, please see our reflect the SEC’s commitment to a more detailed Client Update here.

Insufficient Internal Controls Result in SEC Enforcement in Connection with Rule 10b5-1 Plan

On October 15, 2020, the Securities Chief Financial Officer to initiate a and Exchange Commission (“SEC”) share buyback to repurchase $250 announced a $20 million settlement million of shares over a period of resulting from a finding of insufficient several weeks pursuant to a standing internal controls at Andeavor LLC Board authorization that specifically (“Andeavor”).1 The SEC found that required that any purchases comply Andeavor violated an Exchange Act with Andeavor’s securities trading provision requiring the implementation policy. At the time of this direction, and maintenance of effective internal Andeavor’s CEO was scheduled to meet controls through its improper initiation with his counterpart at Marathon two of, and repurchase of shares pursuant to, days later to resume the confidential a Rule 10b5-1 plan while in possession discussions about Marathon’s potential of material non-public information acquisition of Andeavor at a significant (“MNPI”) and in violation of Andeavor’s premium. On February 22, Andeavor’s internal policies.2 legal department reviewed and approved a Rule 10b5-1 plan to repurchase $250 Background million of stock; a review which the In 2017, Andeavor engaged in significant SEC order described as “abbreviated discussions with Marathon Petroleum and informal.” As a result, Andeavor Corporation (“Marathon”) about, and purchased its stock on the open market began working toward, a potential between late February and late March business combination. Discussions 2018, as negotiations were ongoing were halted in the fourth quarter with Marathon, at a price of no more of 2017, but on February 21, 2018, than $103 per share. On April 30, 2018, Andeavor’s then-Chairman and Chief Andeavor publicly announced the Executive Officer directed Andeavor’s merger at a price of over $150 per share.

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Insufficient Internal Controls Enforcement Action And of the Rule 10b5-1 plan by the legal Result in SEC Enforcement department. By failing to consult with in Connection with Rule Settlement the chief executive officer, the SEC 10b5-1 Plan The SEC concluded that Andeavor’s Continued from page 16 asserted that “the company failed internal controls were deficient as they to appreciate that the probability of failed not only to ensure that the Rule Andeavor’s acquisition by Marathon was 10b5-1 plan would be approved and sufficiently high at that time as to be executed in accordance with Andeavor’s material to investors.” internal policies, but also failed to ensure that those involved in the According to the SEC’s Order, Andeavor’s approval process were aware of material conduct resulted in a violation of Section company information so as to allow 13(b)(2)(B) of the Securities Exchange Act for a proper analysis of the probability of 1934 which require a public company of an acquisition transaction with to devise and maintain effective internal Marathon. In particular, the SEC noted accounting controls. Andeavor settled that Andeavor’s chief executive officer, without admitting or denying the SEC’s a key participant in the Marathon findings and agreed to pay a civil money negotiations, was not directly consulted, penalty of $20 million. Please see our and was not required to be consulted by more detailed Debevoise Update on this Andeavor’s policies, prior to approval matter here.

Insider Trading Reform: New Administration, New Congress, Renewed Momentum?

As we reported in the December 2019 vote of 410-13, neither it nor any other issue of the Insider Trading & Disclosure recently proposed piece of legislation Update, the House of Representatives relating to insider trading has made passed the Insider Trading Prohibition any further progress towards becoming Act, H.R. 2534 (the “Insider Trading law. 1 Undaunted by this graveyard of Act”) on December 5, 2019. The legislation and in light of: (i) confusion Insider Trading Act would bring insider resulting from aspects of key holdings trading law firmly within the statutory under recent insider trading case law framework of the Securities Exchange (e.g. to what extent the personal benefit Act of 1934 (the “Exchange Act”) standard set forth in United States v. and clarify the standard for insider Newman2 remains valid); (ii) the use trading liability. While the Insider by prosecutors of non-traditional Trading Act was passed by the House statutory provisions (such as the wire of Representatives by a bi-partisan fraud statutes3) thereby avoiding having

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Insider Trading Reform: to establish certain elements of a the Report states that “wrongfulness” New Administration, traditional insider trading violation; and for this purpose be defined to include New Congress, Renewed (iii) the need to provide prosecutors with Momentum? deception and misrepresentation, as Continued from page 17 appropriate tools with which to address well as breaches of duties of trust and alleged improper trading activity by a confidence, breaches of agreements to range of market participants,4 prominent keep information confidential, theft, voices have stepped into the breach. misappropriation and embezzlement. By defining wrongfulness in this The highest profile non-legislative way, the Task Force believes that the recent effort to foment insider trading sometimes troublesome distinctions reform is the formal report (the in the requisite conduct as between “Report”) published in early 2020 by a “classical” and “misappropriation” insider task force (the “Task Force”) led by Preet trading cases would be eliminated and Bharara, former U.S. Attorney for the the culpability of a tippee (v. the tipper) Southern District of New York.5 Key would be treated separately and in a among the Task Force’s conclusions clearer way. The Report points to SEC v. is that new legislation (as opposed to, Dorozhko6 in support of its position. In e.g., regulatory rule-making) expressly Dorozhko, the Second Circuit found that setting out the elements of an insider a hacker had violated the insider trading trading offense would be the best laws because the “hack” in question vehicle for reform that simplifies, involved a misrepresentation (i.e., a clarifies, and modernizes insider trading “deceptive” device under Section 10(b) law. As stated in the Report, such new of the Exchange Act) used to gain access legislation should apply the following to material non-public information. key principles: However, under the Court’s logic, had Focus on “wrongful” use of material the insider information been obtained nonpublic information, not exclusively through a means that did not involve a on “deception” or “fraud.” Noting that deceptive device (such as by exploiting a insider trading is just as unfair and weakness in the computer coding), then harmful when information is obtained the hacker may not have violated the through wrongful means not involving insider trading laws when it traded on manipulation or deception, the Report the basis of the ex-filtrated information. recommends (consistent with the As the Report notes, under these facts, approach taken in the Insider Trading whether trading on the basis of material Act) that any new legislation decouple non-public information should be the offense of insider trading from subject to prosecution should not depend its exclusive reliance on concepts of upon how the cyber intruder seeking to “deception” and “manipulation”,” and tie on material non-public information it instead to “wrongfully” obtained or accesses a company’s servers. communicated information. Specifically, Continued on page 19

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Insider Trading Reform: Eliminate the “Personal Benefit” state for insider trading offenses as New Administration, Requirement. The Task Force advocates “aware, consciously avoided being aware, New Congress, Renewed for the elimination of any “personal Momentum? or recklessly disregarded,” without Continued from page 18 benefit“ requirement in new insider differentiating between criminal and trading legislation noting in the civil states of mind. With regard to Report that eliminating the personal “tippee” liability, the Task Force would benefit requirement would clarify the require that a tippee “know” that the application of insider trading laws and tipper obtained the communicated ensure that the way in which wrongful information wrongfully for criminal dissemination of insider information can liability and that the tippee should have be actionable is not unduly narrowed. at least recklessly disregarded that fact The Report highlights the recent for civil liability.8 confusion generated from the Newman Aim for Clarity and Simplicity. So as to decision and its progeny as evidence not replace the set of uncertainties and of the need for this type of change.7 ambiguities that persist under current Further and while other non-traditional insider trading law with another: statutory schemes will remain available to pursue insider trading cases (e.g. the • The language and structure of the wire fraud statutes), the Report notes legislation should be plain and that the elimination of the personal straightforward. benefit requirement could have the effect • Exceptions and elements subject to of making new insider trading legislation interpretation or requiring cross- as attractive to prosecutors as these other referencing to other laws should be statues, thereby keeping insider trading kept to a minimum. jurisprudence within a more traditional • Terms and elements to the extent they insider trading legal framework. are subject to interpretation, should be Clearly and Explicitly Define the State defined as clearly as possible. of Mind Requirement for Criminal and Given the bi-partisan support for Civil Insider Trading. Recognizing the many legislative insider trading reform important role for both criminal and proposals and the similarly strong and civil enforcement of insider trading supportive views among prominent laws, the Task Force would define the former prosecutors that reform is state of mind requirements clearly as required, it is not unreasonable to think “willfulness” for criminal violations and that renewed focus will be brought to “recklessness” for civil violation. This bear on these efforts with the change in clear delineation stands in contrast to administration. the provisions of the Insider Trading Act which defines the relevant mental

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United States v. Blaszczak: Second Circuit Opens the Door to U.S.C. Title 18 Insider Trading Prosecutions

As we reported in the December 2019 §§ 1343 and 1348, and the Second Circuit issue of the Insider Trading & Disclosure upheld their convictions on appeal.4 Update, the U.S. Court of Appeal for the As we have reported in prior issues of Second Circuit was set to decide on appeals the Insider Trading & Disclosure Update, brought by four defendants convicted of what constitutes a “personal benefit” for insider trading under 18 U.S.C. §§ 1343 purposes of insider trading “tippee” liability and 1348 — the Sarbanes-Oxley Act’s under the U.S. Supreme Court’s Dirks test criminal wire fraud and has been the subject of significant dispute provisions. In upholding the convictions in recent years. In 2014, the Second Circuit under §§ 1343 and 1348 in United States v. in Newman applied a heightened “personal Blaszczak, the Second Circuit opened the benefit” test requiring “at least a potential door to expanded insider trading liability gain of a pecuniary or similarly valuable without requiring prosecutors to prove the nature.”5 In 2016, the U.S. Supreme Court “personal benefit” element under the anti- in Salman narrowed Newman’s reach in fraud provisions of Section 10(b) and Rule holding that a personal benefit may be 10b-5 to successfully prosecute criminal inferred from the gift of confidential insider trading violations.1 information to a relative.6 The decision Prosecutors in Blaszczak alleged that in Blaszczak adds a new dimension to between 2009 and 2014 a government this already complex puzzle, discarding employee provided material non- the “personal benefit” test entirely for public information about Medicare purposes of §§ 1343 and 1348. In its place, reimbursement rates to a political the Second Circuit in Blaszczak relied upon intelligence consultant.2 The consultant “the embezzlement theory of fraud” in allegedly tipped two analysts at a hedge which a breach of duty is “inherent” and fund advisory firm that paid him as a requires no further proof that a defendant consultant who, in turn, allegedly used the has received a personal benefit in order to nonpublic information to recommend that establish a breach of duty. the firm trade in the of four health The degree of separation between care companies, resulting in more than misappropriation or embezzlement, on the $3.9 million in illicit profits. At trial, the one hand, and a breach of duty involving judge instructed the jury that a conviction the receipt of a personal benefit, on the under Section 10(b) of the Exchange Act other hand, will likely be the subject of required a breach of a duty for personal future dispute. For now, the door has been gain, but declined to give a similar propped open for prosecutors to utilize §§ instruction for the counts under Title 1343 and 1348 to assert criminal insider 18.3 The jury subsequently acquitted the trading violations even where a Rule 10b-5 defendants of insider trading under Section prosecution may not be successful. 10(b) but convicted the defendants under www.debevoise.com Insider Trading & Disclosure Update 21 November 2020 | Volume 7

Notes

BMW Settles Charges of Misleading Disclosures in Rule 144A Offering Memoranda

1. In the Matter of Bayerische Motoren Werke Aktiengesellschaft, 3. Id. et al., Rel. No. 33-10850 (Sept. 24, ,2020), https://www.sec.gov/litigation/admin/2020/33-10850.pdf. 2. Press Release, SEC Charges BMW for Disclosing Inaccurate and Misleading Retail Sales Information to Bond Investors, Secs. & Exchange Comm’n (Sept. 24, 2020), https://www.sec.gov/news/ press-release/2020-223.

SEC Enforcement Focus on Beneficial Ownership Reporting by Investment Advisors

1. In the Matter of WCAS Management Corp, Exchange Act 3. See id. Rel. No. 89914 (Sept. 17, 2020), https://sec.gov/litigation/ 4. 15 U.S.C. § 77m; 17 C.F.R. 240.13d-2(a). admin/2020/34-89914.pdf. 2. 15 U.S.C. § 78m

SEC to Fund Managers: Take Care with Controls Over the Possession and Use of MNPI

1. In the Matter of Ares Management LLC: Order Instituting a Cease-and-Desist Order, Release No. 5510 (May 26, 2020), Administrative and Cease-and-Desist Proceedings, Pursuant https://www.sec.gov/litigation/admin/2020/ia-5510.pdf. to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and

SEC’s Division of Enforcement Reports Healthy Results for Fiscal Year 2020

1. See Litigation Release, SEC Charges Company and CEO for 6. In the Matter of Fulton Financial Corporation, Exchange Act Covid-19 Scam (April 28, 2020), https://www.sec.gov/litigation/ Rel. No. 90017 (Sept. 28, 2020), https://www.sec.gov/litigation/ complaints/2020/comp24807.pdf. admin/2020/34-90017.pdf. 2. See Litigation Release, SEC Charges Company for Misleading 7. See In the Matter of HP Inc., Exchange Act Release No. Covid-19 Claims (May 14, 2020), https://www.sec.gov/litigation/ 90060 (Sept. 30, 2020), https://www.sec.gov/litigation/ litreleases/2020/lr24819.htm. admin/2020/33-10868.pdf. 3. See Litigation Release, SEC Charges Penny Stock Company and 8. See In the Matter of Diageo plc, Exchange Act Release No. Its CEO for Misleading Covid-19 Claims (May 14, 2020), 88234 (Feb. 19, 2020), https://www.sec.gov/litigation/ https://www.sec.gov/litigation/litreleases/2020/lr24820.htm. admin/2020/33-10756.pdf. 4. Press Release, SEC Charges Companies, Former Executives 9. See In the Matter of Argo Group International Holdings Ltd., as Part of Risk-Based Initiative (Sept. 28, 2020), Exchange Act Release No. 89009 (June 4, 2020), https://www.sec.gov/news/press-release/2020-226. https://www.sec.gov/litigation/admin/2020/34-89009.pdf. 5. In the Matter of Interface Inc. et al., Exchange Act Rel. No. 10. See In the Matter of Hilton Worldwide Holdings Inc., Exchange 90018 (Sept. 28, 2020), https://www.sec.gov/litigation/ Act Release No. 90052 (Sept. 30, 2020), https://www.sec.gov/ admin/2020/33-10854.pdf. litigation/admin/2020/34-90052.pdf.

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U.S. Supreme Court’s Decision in Liu v. SEC may Significantly Limit Disgorgement in Insider Trading Cases

1. Liu v. SEC, 140 S. Ct. 1936, at 1936 (2020). 5. See id. 2. See, e.g., SEC Press Rel. 2019-257 (Dec. 9, 2019) (Former U.S. 6. See id. at 1950. Representative Christopher Collins and two others agreed to 7. See SEC v. Govender, 2020 WL 5758997, at 2, 4 (S.D.N.Y. disgorge avoided losses of $634,299); In the Matter of Tai-Cheng Sept. 28, 2020). Yang, Exchange Act Rel. No. 85525 (April 5, 2019) (Yang agreed to disgorge $27,761.55). 8. See SEC v. Janus Spectrum LLC, 811 Fed. Appx. 432, at 434 (9th Cir. July 1, 2020). 3. See Liu, 140 S. Ct. at 1949. 9. See SEC v. SFRC, 2020 WL 4569844, at 3 (N.D. C.A. Aug. 7, 2020). 4. See id. 10. See SEC v. Mizrahi, 2020 WL 6114913, at 3 (C.D.C.A. Oct. 5, 2020).

COVID-19 Guidance and Regulation S-K Simplification and Modernization: The Year in Review

1. In 2013, the SEC staff launched the Disclosure Effectiveness requirements, (ii) the location of disclosed information and (iii) the Initiative with a goal of improving the disclosure regime for improved utilization of technology in required disclosures. Since investors and registrants. At that time, the staff published a study then, the SEC has taken a number of incremental steps to update that recommended the SEC re-evaluate: (i) the current disclosure and simplify disclosure requirements.

Insufficient Internal Controls Result in SEC Enforcement in Connection with Rule 10b5-1 Plan

1. In the Matter of Andeavor LLC, Exchange Act Rel. No. 90208 (Oct. 2. See id. 15, 2020), https://sec.gov/litigation/admin/2020/34-90208.pdf.

Insider Trading Reform: New Administration, New Congress, Renewed Momentum?

1. E.g., The Ban Insider Trading Act of 2015 (H.R. 1173); The Stop 5. Mr. Bharara has previously joined other prominent voices in the Illegal Insider Trading Act (S. 702); and Promoting Transparent securities community to advocate for insider trading reform. Standards for Corporate Insiders Act (H.R. 624). The House See, e.g., on October 9, 2018, Mr. Bharara and SEC Commissioner of Representatives also passed, by a vote of 384 to 7, the 8-K Robert J. Jackson Jr. co-authored an Op-Ed piece in The New Trading Gap Act (H.R. 4335). York Times titled “The laws around insider trading are outdated and unclear. They don’t even define “insider trading.” We have a 2. United States v. Newman, 773 F.3d 438 (2d Cir. 2014). way to fix that.“ 3. As was the case in United States v. Blaszczak. 6. SEC v. Dorozhko, 574 F.3d 42 (2d Cir. 2009). 4. E.g., four U.S. senators were accused in March of using insider 7. H.R. 1173 and S. 702 as proposed would similarly eliminate the information about the coronavirus pandemic to profit in the personal benefit requirement. stock market. Concern has grown that the Stop Trading on Congressional Knowledge Act, passed in 2012, is insufficient to 8. The Insider Trading Act does not explicitly address “tippee“ ensure that members of Congress do not inappropriately profit liability. from their access to material information.

United States v. Blaszczak: Second Circuit Opens the Door to U.S.C. Title 18 Insider Trading Prosecutions

1. See United States v. Blaszczak, No. 18-2811 (2d Cir. 2019). 3. See id at 13, 14. 2. Press Release, Dep’t of Justice, Four Defendants Sentenced 4. See id. Following Convictions At Trial For Stealing Confidential 5. 773 F.3d 438 (2d Cir. 2014). Government Information And Using It To Engage In Illegal Trading (Sept 13, 2018), https://www.justice.gov/usao-sdny/pr/four- 6. 137 S. Ct. 420 (2016). defendants-sentenced-following-convictions-trial-stealing- confidential-government.

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Insider Trading & Disclosure Update

Insider Trading & Disclosure Editorial Board Capital Markets Practice Group Mark Johnson - Hong Kong Partner/Counsel Arian M. June - D.C. Update is a publication of Matthew E. Kaplan Robert B. Kaplan - D.C. Debevoise & Plimpton LLP Co-Editor-In-Chief All lawyers based in New York, Kristin D. Kiehn New York except where noted Jonathan R. Tuttle Antoine F. Kirry - Paris 919 Third Avenue Co-Editor-In-Chief Katherine Ashton - London Andrew M. Levine New York, New York 10022 E. Raman Bet-Mansour - London Robin Lööf - London +1 212 909 6000 Ada Fernandez Johnson Pierre Clermontel - Paris Anna Moody - D.C. www.debevoise.com Executive Editor Natalia A. Drebezgina - Moscow Maeve O’Connor Washington, D.C. Morgan J. Hayes Morgan J. Hayes David A. O’Neil - D.C. 801 Pennsylvania Avenue N.W. Managing Editor Eric T. Juergens Winston M. Paes Washington, D.C. 20004 Steven J. Slutzky Matthew E. Kaplan Thomas Schürrle - Frankfurt +1 202 383 8000 Member Alan Kartashkin - Moscow Philip Rohlik - Shanghai Vera Losonci - London Julie M. Riewe - D.C. London Mark D. Flinn Peter J. Loughran David Sarratt +44 20 7786 9000 Member Nicholas P. Pellicani Karolos Seeger - London Paris Laura E. O’Neill Paul M. Rodel Shannon Rose Selden +33 1 40 73 12 12 Member Joshua M. Samit Jane Shvets - London James C. Scoville - London Frankfurt Jonathan R. Tuttle - D.C. Benjamin R. Pedersen Steven J. Slutzky Mary Jo White +49 69 2097 5000 Member White Collar & Regulatory Bruce E. Yannett Luxembourg Jonathan DeMars Defense/Whistleblower +352 27 33 54 00 All content © 2020 Debevoise & Plimpton Member Investigations and Litigation LLP. All rights reserved. The articles Moscow Practice Group Partner/Counsel appearing in this publication provide Jonathan C. Miu summary information only and are not +7 495 956 3858 Member All lawyers based in New York, intended as legal advice. Readers should seek specific legal advice before taking Hong Kong Mica Michelle Rollock except where noted any action with respect to the matters +852 2160 9800 Member discussed herein. Any discussion of U.S. James B. Amler federal tax law contained in these articles Shanghai Kara Brockmeyer - D.C. was not intended or written to be used, Contributors and it cannot be used by any taxpayer, +86 21 5047 1800 Helen V. Cantwell for the purpose of avoiding penalties that Kara Brockmeyer Andrew J. Ceresney may be imposed on the taxpayer under To k y o U.S. federal tax law. +81 3 4570 6680 Andrew J. Ceresney Charu A. Chandrasekhar Eric T. Juergens Jennifer R. Cowan Arian M. June Courtney M. Dankworth Robert B. Kaplan Luke Dembosky - D.C. Peter J. Loughran Eric R. Dinallo Julie M. Riewe Mark W. Friedman Paul M. Rodel John Gleeson Mary Jo White Lord (Peter) Goldsmith QC, Jason P. Auman London & Hong Kong - PC Yean Do Mark P. Goodman Devon Klein Erich O. Grosz Nicholas P. Pellicani Erol Gulay Joshua M. Samit Mary Beth Hogan Abraham J. Williamson Gareth Hughes - Hong Kong Ada Fernandez Johnson - D.C.

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