In addition to the SEC’s enforcement action against 28 officers and directors—which was the subject of our previous Public Company Alert—the SEC recently charged a Massachusetts-based biotech company and its former CEO with defrauding investors by failing to report the CEO’s sales of company stock. Until this month, the SEC staff had not pursued violations of Section 16(a) with much vigor. Instead, the SEC had limited its Section 16(a) enforcement actions to cases in which the insider also engaged in other, more serious violations of the federal securities laws. In these recent cases, the insiders’ misdeeds were limited to violations of Section 16(a)’s reporting requirements, albeit frequently.
Section 16(a) of the Securities Exchange Act of 1934 and the rules promulgated thereunder require officers and directors of public companies and any greater than 10% beneficial owners, to file reports of securities holdings and transactions, including changes, on Form 4. According to Congress, Section 16(a) was motivated by a belief that “the most potent weapon against the abuse of inside information is full and prompt publicity” and by a desire “to give investors an idea of the purchases and sales by insiders which may in turn indicate their private opinion as to prospects of the company.”
The Issuer and the Insider
Advanced Cell Technology, Inc. is a Delaware corporation with its common stock registered as a class with the SEC under Section 12(g) of the Exchange Act and is quoted on the OTC Bulletin Board under the symbol “ACTC.” An SEC investigation found that after Gary H. Rabin became CEO, CFO, and chairman of Advanced Cell, he repeatedly failed to timely file reports with the SEC as required by Section 16(a) reflecting his holdings and transactions in Advanced Cell stock. From February 2010 to the end of June 2012, Rabin failed to make a single timely filing of his Section 16(a) required reports. During this period, Rabin late filed Forms 4 covering 11 transactions.
According to the SEC, from February 2011 through January 2013, Rabin failed to file any Section 16(a) reports regarding his sales of Advanced Cell stock on 27 separate trading days. Indeed, even as Rabin was filing some untimely Forms 4, those Forms 4 did not disclose all of his sales of Advanced Cell stock. The SEC determined that these undisclosed sales included, in aggregate, the sale of 12,115,963 shares of Advanced Cell stock for proceeds of $1,508,506. These sales constituted 66.9% of Rabin’s holdings in Advanced Cell stock according to the SEC. It wasn’t until May 2013 that Rabin eventually reported his 27 sales of $1.5 million worth of Advanced Cell stock.
The SEC charged that Advanced Cell and Rabin violated the anti-fraud provisions of the securities laws by failing to file reports of these transactions and holdings in a timely and accurate manner. Moreover, Rabin signed and Advanced Cell filed annual reports and proxy statements during this period that were false and misleading due to Rabin’s missing Section 16(a) reports.
The SEC Strikes
According to the SEC, there was a substantial likelihood that the disclosure of Rabin’s sales of Advanced Cell stock would have been viewed by a reasonable investor as significantly altering the total mix of available information about the value of Advance Cell stock. Among other things, a reasonable investor may find indicative Rabin’s position as CEO, the frequency with which he was selling Advanced Cell stock, and the number of shares and gross proceeds from his sales, particularly in relation to his holdings. Subsequently, Advanced Cell’s annual reports and proxy statements during that period were inaccurate because they failed to report that Rabin was not complying with his obligation to disclose his substantial sales of Advanced Cell stock. Notwithstanding Rabin’s Section 16(a) noncompliance, Advanced Cell’s fiscal year 2011 Form 10-K, filed on March 1, 2012, falsely stated:
[T]he Company believes that during its fiscal year ended December 31, 2011, all Reporting Persons timely complied with all applicable filing requirements, except that Form 3s were not timely filed for [three new directors] and have since been filed.
Rabin also signed preliminary and definitive proxy statements filed by Advanced Cell in March 2012, which contained false and misleading statements identical to the above statement made in the 2011 Form 10-K.
Advanced Cell made similar misstatements in its fiscal year 2012 Form 10-K, filed on March 7, 2013. That Form stated that during the fiscal year ended December 31, 2012, “Gary Rabin, our Chairman and Chief Executive Officer, filed Forms 4 late with respect to four transactions,” but failed to disclose that Rabin had never reported selling Advanced Cell stock on fourteen other trading days in 2012.
In its cease and desist order, the SEC found that Rabin was negligent in: (1) signing and certifying Advanced Cell’s fiscal year 2011 Form 10-K and fiscal year 2012 Form 10-K, and in signing its 2012 Proxy Statement because he failed to act with reasonable care in ensuring that these filings included all material information necessary to make the filings not misleading with regard to whether he had complied with Section 16(a); and (2) failing to act with reasonable care to ensure that he timely file required reports pursuant to Section 16(a) of the Exchange Act. As a result, Rabin violated Section 17(a)(2) of the Securities Act, which prohibits obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, in the offer or sale of securities.
The SEC ordered Rabin to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Sections 13(a), 14(a), and 16(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 14a-9, and 16a-3 thereunder.
Rabin, who lives in Santa Monica and left the company earlier this year, agreed to settle the SEC’s charges by paying a $175,000 penalty. Advanced Cell agreed to pay a $375,000 penalty and retain an independent consultant to conduct a review of its Section 16(a) reporting and compliance procedures.
The SEC also required Advanced Cell to have each of its Section 16(a) reporting persons complete at least two hours of training regarding the reporting requirements of Section 16(a) during the calendar years ending December 31, 2014, December 31, 2015, and December 31, 2016, and to have each such person certify in writing that he or she has completed the training no later than thirty days following the end of the applicable calendar year. Finally, within forty-five days following the end of the applicable calendar year, Advanced Cell is required report to the SEC staff whether all of its Section 16(a) reporting persons have completed the required training, and if not, why not.
What To Do
Public companies, along with their officers and directors and significant shareholders, should take immediate steps to minimize their potential enforcement exposure by making certain that the company is aware of all of their (and their family members') stock holdings, promptly informing the company of any transactions or other changes in such holdings (including by their brokers and under Rule 10b5-1 trading plans), and reviewing draft beneficial ownership reports that are prepared and filed on their behalf.
This latest SEC enforcement action combined with the earlier-announced beneficial ownership reporting enforcement action are clearly intended as a warning for public companies and their officers, directors and significant beneficial owners that the SEC intends to enforce even the more technical, non-fraud provisions of the federal securities laws that had not previously been on the SEC's radar screen.
So get those Form 4s filed on time, or else.