This newsletter provides a snapshot of the principal US and selected global governance and securities law developments during the second quarter of 2014 that may be of interest to Latin American corporations and financial institutions.
SEC Staff Issues Statement On Effect Of Court Decision On Conflict Minerals Rule
On 29 April 2014, the SEC Division of Corporation Finance issued a statement on the effect of a recent decision by the US Court of Appeals for the District of Columbia Circuit (the "Court") on the SEC's reporting requirements regarding conflict minerals originating in the DRC and adjoining countries (the "Conflict Minerals Rule").
The Court had concluded that Section 13(p)(1) of the Securities Exchange Act of 1934 (the "Exchange Act"), adopted pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), and the Conflict Minerals Rule "violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have 'not been found to be 'DRC conflict free'.'"
The statement issued by the Division of Corporation Finance on 29 April 2014 provided the following guidance:
- The 2 June 2014 deadline for issuers to file any reports required under the Conflict Minerals Rule remained in effect;
- The Form SD and any related Conflict Minerals Report should comply with and address those portions of the Conflict Minerals Rule that the Court upheld;
- Companies that are not required to file a Conflict Minerals Report should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook; and
- Companies that are required to file a Conflict Minerals Report should include a description of the due diligence that the company undertook. If, after exercising due diligence, the company determines that any of its products have not been found to be "DRC conflict free" or if the company is unable to determine whether or not a product qualifies as "DRC conflict free," the company does not need to identify the products as "DRC conflict undeterminable" or "not found to be 'DRC conflict free,'" but should disclose, for those products, the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.
No company is required to describe its products as "DRC conflict free," having "not been found to be 'DRC conflict free'," or "DRC conflict undeterminable." If a company voluntarily elects to describe any of its products as "DRC conflict free" in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit as required by the rule. Pending further action, such a report will not be required unless a company voluntarily elects to describe a product as "DRC conflict free" in its Conflict Minerals Report.
Our related client publication is available at:
Halliburton Corporation, Et Al., v. Erica P. John Fund, Inc.: Supreme Court Upholds Fraud-On-The-Market Presumption But Allows "Price Impact" Rebuttals At Class Certification Stage
On 23 June 2014, the US Supreme Court reached a long-awaited decision in Halliburton Corporation v. Erica P. John Fund. The Court affirmed the continued validity of the fraud-on-the-market presumption that allows plaintiffs to plead reliance in the class action context, but gave defendants a new way to rebut that presumption at the class certification stage.
Rule 23 of the Federal Rules of Civil Procedure requires plaintiffs seeking to certify a case for class action treatment to show, among other things, that common questions of law or fact predominate across the class over questions affecting potential class members individually. In Basic v. Levinson (1988), the Supreme Court rejected the argument that each purported class member in a securities class action brought under Section 10(b) of the Exchange Act must prove that he or she relied individually on the defendant's alleged misrepresentations or omissions when purchasing the security. That standard would have made securities claims unsuitable for class treatment because of the individualised nature of questions of reliance. The Court in Basic held instead, based on the economic theory known as the efficient-capital-markets hypothesis―which provides that prices of shares traded on well-developed markets reflect material, publicly available information―that plaintiffs can be presumed to have relied on material public misrepresentations when making their stock trades.
In Halliburton, the Court refused to overrule Basic, thereby affirming the validity of the presumption of reliance, because "[e]ven the foremost critics of the efficient-capital-markets hypothesis acknowledge that public information generally affects stock prices." The Court also ruled that the Basic presumption is consistent with the rule that plaintiffs must prove the requirements for class certification because plaintiffs must still prove the prerequisites (other than materiality) for applying the presumption. The Court declined to hold that plaintiffs must prove at the class certification stage that the alleged misstatements impacted the price of the stock―one of the main premises underlying the Basic presumption. But the Court ruled that defendants may present evidence to show a lack of "price impact" at the class certification stage—something that the lower court held could not be done until after a class is certified and the merits are being considered.
While Halliburton had the potential to upend securities fraud class actions by calling the Basic presumption into doubt, the Court largely left the prior legal landscape intact. But the Court's allowance for defendants to offer evidence of the lack of price impact at the class certification stage provides defendants with a new way to defeat securities class actions at this early stage, before feeling pressured to settle because of the size of potential damages after a class has been certified. Only time will tell whether this change in the landscape will have a significant impact on the outcome of securities class actions.
Further information on Halliburton is available at:
A related report, based on a multi-firm effort that we led before the case was decided, on the possible impact of the case is available at:
In The Matter Of Paradigm Capital Management, SEC File No. 3-15930: SEC Reaches Settlement In First Whistleblower Anti-Retaliation Claim Under The Dodd-Frank Act
On 16 June 2014, the SEC announced the settlement of a case concerning workplace retaliation against a whistleblower and the underlying allegations that the whistleblower reported. This is the first action to be brought under the whistleblower anti-retaliation provision of the securities regulatory scheme enacted through the Dodd-Frank Act in response to the recent financial crisis.
This action arose out of a whistleblower's report to the SEC that a hedge fund adviser and its owner engaged in improperly disclosed principal transactions. The whistleblower, who was the fund's head trader, reported these activities in late March 2012. Starting in July 2012, after the whistleblower revealed to the hedge fund owner that he reported the principal transactions to the SEC, the whistleblower was subjected to several adverse employment actions, including being demoted from head trader, tasked with investigating the conduct he complained of, and generally being marginalised at work. All of these actions culminated in the whistleblower resigning from his job in August 2012.
The settlement with the SEC states that the company violated the anti-retaliation provision of the Exchange Act by taking adverse employment actions against the whistleblower because of his report to the SEC. In addition, the settlement lists violations related to the underlying conduct at issue. In order to settle the charges, the company and owner agreed to pay $2.2 million and the company agreed to hire an independent compliance consultant.
This action highlights the SEC's new whistleblower enforcement power under the Dodd-Frank Act. The chief of the SEC's whistleblower office explained in a press release that "[f]or whistleblowers to come forward, they must feel assured that they're protected from retaliation . . . We will continue to exercise our anti-retaliation authority . . . where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation." This matter suggests that in addition to other types of whistleblower-related enforcement actions, the SEC is ready to pursue retaliation claims when adverse employment actions are taken against whistleblowers. Companies should consult counsel on how to avoid taking actions vis-a-vis known or suspected whistleblowers that might be perceived or portrayed as retaliatory.
To view the rest of this newsletter, please click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
