xavGE
xavGE
xavGE
You also want an ePaper? Increase the reach of your titles
YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.
Managing risk<br />
certain actions. Government agencies,<br />
such as the SEC, may also bring civil<br />
actions to force the defendant to give<br />
up illegally obtained profits or pay<br />
monetary penalties or to compel or<br />
stop certain actions.<br />
• Administrative—Government agencies<br />
bring administrative proceedings before<br />
administrative judges, who follow the<br />
rules promulgated by the applicable<br />
agency. For certain violations of the<br />
federal securities laws, the SEC may<br />
bring administrative proceedings to<br />
impose civil penalties or an order<br />
to bring immediate halt to allegedly<br />
improper conduct.<br />
• Criminal—Only the U.S. Department<br />
of Justice can institute federal criminal<br />
proceedings. Defendants who are<br />
convicted in criminal proceedings face<br />
substantial fines and, in the case of<br />
individuals, terms of imprisonment.<br />
None of these mechanisms is exclusive and<br />
a party may be forced to defend against<br />
more than one type of proceeding.<br />
Liability for corporate disclosures: The<br />
securities laws do not impose a general<br />
duty to disclose material information<br />
about the company. Rather, such disclosure<br />
is required only when there is a legal duty<br />
to do so. This duty arises in connection<br />
with the purchase and sale of securities,<br />
whether in registered or private offerings<br />
or in secondary market trading. The<br />
company and its directors and officers<br />
can be liable for material misstatements<br />
and omissions in public disclosures. This<br />
liability risk is mitigated by conducting<br />
appropriate due diligence prior to the IPO<br />
and establishing robust internal reporting<br />
and disclosure controls and procedures<br />
in connection with ongoing reporting<br />
obligations.<br />
Liability relating to insider trading:<br />
Insider trading liability arises under Rule<br />
10b-5 when a party trades the company’s<br />
securities (or “tips” others to do so) while<br />
aware of material nonpublic information.<br />
The number of insider trading enforcement<br />
actions by the SEC has increased steadily<br />
over the last five years, and it is expected<br />
that this aggressive enforcement trend will<br />
continue. To reduce the risk that trading<br />
by those parties in its securities may be<br />
claimed to violate the prohibition against<br />
insider trading, the company should<br />
observe the following guidelines:<br />
• Only trade during “window periods”<br />
tied to the release of the company’s<br />
interim and annual earnings reports<br />
and other material information and the<br />
public filing of such information with<br />
the SEC and the relevant securities<br />
exchange.<br />
• Develop and promote a written<br />
policy and code of ethics with clear<br />
guidelines prohibiting insider trading<br />
and addressing general standards of<br />
conduct, protection of confidential<br />
information and whistleblowing.<br />
• Develop robust compliance programs.<br />
• Conduct periodic training on<br />
contemporary regulations,<br />
requirements and developments for all<br />
employees, including directors, officers<br />
and other management.<br />
Meanwhile, directors, officers and<br />
employees should observe the following<br />
guidelines:<br />
• Do not trade when aware that a<br />
material event or trend is developing<br />
or will occur but is not yet ripe for<br />
disclosure.<br />
• Do not selectively disclose material<br />
nonpublic information to others.<br />
• Trade only in “window periods”<br />
in compliance with any internal<br />
procedures, after all important<br />
corporate developments have been<br />
disclosed to the market.<br />
• Trade pursuant to a Rule 10b5-1 plan<br />
(see Section 6.3).<br />
Sarbanes-Oxley provisions: The<br />
Sarbanes-Oxley Act enhanced the SEC’s<br />
enforcement powers, expanded areas<br />
of personal exposure for directors and<br />
executive officers and created new criminal<br />
provisions. These provisions include:<br />
• giving the SEC the authority to freeze<br />
possible “extraordinary payments”<br />
to directors, officers, agents and<br />
employees during the course of an<br />
investigation involving “possible”<br />
violations of the federal securities laws;<br />
• mandating forfeiture of certain CEO<br />
and CFO bonuses and profits in<br />
connection with restatements;<br />
• giving the SEC the authority to seek<br />
equitable relief for the benefit of<br />
investors, which it has invoked to seek<br />
disgorgement of all compensation<br />
received after alleged occurrence of<br />
fraud, not just bonuses and incentive<br />
compensation;<br />
• giving the SEC the authority to bar<br />
persons from serving as directors or<br />
officers of public companies in cease<br />
and desist proceedings; and<br />
• creating civil and criminal penalties<br />
for false certifications by officers of<br />
periodic reports.<br />
Corporate compliance programs: A<br />
corporate compliance program is a written<br />
and operational commitment to companywide<br />
compliance with all applicable laws. A<br />
compliance program protects the company<br />
and management in three major ways:<br />
• It reduces the chance that employees<br />
will engage in criminal misconduct.<br />
• If employees do break the law, it can<br />
help mitigate the consequences for<br />
the company. The U.S. Department<br />
of Justice, the SEC and many other<br />
agencies are more lenient on companies<br />
with effective compliance programs<br />
when making charging decisions and<br />
assessing penalties.<br />
• It establishes behavioral and<br />
professional expectations for<br />
employees, allowing the company<br />
to set standards in advance and<br />
facilitating termination of employees<br />
for misconduct when rules are not<br />
followed.<br />
8.2 Class action and derivative lawsuits<br />
Marsh<br />
Imagine the shock if the newly public<br />
company were to be served with a federal<br />
securities class action lawsuit within three<br />
days following the IPO. This happened to a<br />
significant new issuer in 2012. In fact, most<br />
securities claims are filed within three<br />
years of an IPO and there is a significantly<br />
higher probability that a securities class<br />
action will arise if an IPO is involved. As<br />
such, when managing risk in a newly public<br />
company, it is critical to understand the<br />
primary civil liability exposures faced by<br />
directors and officers.<br />
Direct class actions: The primary exposure<br />
for directors and officers of U.S.-listed<br />
companies continues to come from federal<br />
NYSE IPO Guide<br />
85