On September 10, the SEC announced enforcement actions against 28 individuals and investment companies for failing to promptly report their holdings of and transactions in public company stock. The SEC also brought charges against six publicly traded companies for contributing to the filing failures of their insiders, or failing to report their insiders’ delinquencies. As explained by the SEC in its press release, this enforcement initiative is intended to focus on two types of ownership reports (Form 4 and Schedule 13D or 13G) that give investors the opportunity to evaluate whether company insider transactions could be indicative of a company’s future prospects, and the SEC will continue to “vigorously police” these sorts of violations. The SEC has settled with 33 of these 34 individuals and companies, for a total of $2.6 million in financial penalties.
Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) requires certain officers, directors, and major shareholders of publicly traded companies to report their transactions in company stock on a Form 4 no later than two business days afterwards. Schedule 13D and 13G reports, under which certain beneficial owners report holdings or intentions with respect to the company, are required to be filed no later than 10 days after the acquisition of a company’s stock by a person or group that, after the acquisition, is the beneficial owner of more than 5 percent of the class of stock. The SEC charged 28 individuals and investment companies with failing to timely file Form 4s and/or Schedule 13D or 13G. The SEC focused its attention on insiders who had repeatedly filed late. In some instances, the filings were delayed by months or years. As noted by the SEC, inadvertence is not a defense to filing violations. The settlements with insiders ranged from $25,000 to $100,000 for individuals, and $60,000 to $120,000 for investment companies.
The SEC also brought enforcement actions against six public companies for contributing to the delinquency of their insiders, and for failing to disclose the delinquent filings on their Form 10-K or definitive proxy statement. Item 405 of Regulation S-K requires a public company to disclose the number of late reports on Form 3, 4 or 5 by each insider during the most recently concluded fiscal year. The settlements with these public companies ranged from $75,000 to $150,000.
On the same day, the SEC announced that it had filed fraud charges against a biotech company and its CEO for defrauding investors by failing to report the CEO’s sales of $1.5 million worth of company stock over a two-year period. The SEC again noted that the failure to report these transactions denied investors important and timely information about how an insider views the company’s prospects, and rendered the company’s annual reports and proxy statements false and misleading as a result. The CEO agreed to pay a $175,000 penalty, and the company agreed to pay a $375,000 penalty and to retain an independent consultant to conduct a review of the company’s Section 16 reporting and compliance procedures.