Our bi-monthly newsletter highlights important developments related to US civil and criminal securities law.
On February 3, 2023, in the matter In re Tesla Inc. Securities Litigation, Case No. 3:18-cv-04865, a California federal jury cleared Tesla, Inc. (Tesla), and CEO Elon Musk of claims that they committed securities fraud, causing investors to suffer losses of $12 billion. The complaint alleged that the defendants violated the Securities Exchange Act when, after meeting with representatives of Saudi Arabia’s Public Investment Fund, Musk tweeted the following message to more than 22 million followers: “Am considering taking Tesla private at $420. Funding secured.” The complaint alleged that this and other related statements were false and misleading because, in fact, no concrete financing was in place at the time of Musk’s tweets.
At issue during the trial was whether Musk’s tweets were material to the plaintiffs’ investment decisions and led to their financial losses. Counsel for Tesla and Musk attributed the decline in Tesla’s stock price to an interview in which Musk explained that the demands of the company were affecting his health. Other highlights during the trial included testimony by Musk that he considered a verbal pact and a handshake with the managing director of Saudi Arabia’s Public Investment Fund to be akin to “a done deal,” and that he thought he “was doing the right thing” by attempting to keep shareholders informed, as well as testimony by former 21st Century Fox CEO James Murdoch that he was not surprised at Musk’s confidence in the handshake deal because such agreements aligned with Murdoch’s own Mideast experience.
The case serves as an example of how social media can influence public markets and can give rise to potential liability under the securities laws, and is a high-profile example of something that doesn’t happen often: securities claims being decided by a jury.
Activision Agrees to Pay $35 Million Fine to Resolve SEC Claims It Violated Whistleblower Rules and Failed to Maintain Adequate Internal Controls
On February 3, 2023, the US Securities and Exchange Commission (SEC) announced that Activision Blizzard Inc. (Activision) agreed to pay $35 million to settle charges that it violated SEC whistleblower rules by requiring former employees to notify Activision if they were contacted by an administrative agency in connection with an ongoing investigation of the company, and that it failed to adequately keep track of employee complaints of misconduct.
Specifically, the SEC claimed that Activision violated Exchange Act Rule 21F-17(a) because the company’s standard separation agreement in use between 2016 and 2021 required former employees to inform Activision immediately in the event that they were asked to provide information in connection with a report or complaint to an administrative agency such as the SEC. Activision has since amended its agreements to remove the at-issue language, and the SEC acknowledged that it was not aware of any specific instances in which former Activision employees were prevented from communicating with the SEC. Nonetheless, the SEC alleged that use of the form separation agreement may have discouraged Activision’s former employees from reporting possible securities violations, which itself was a violation of the SEC’s whistleblower rules.
Further, the SEC claimed that Activision violated Exchange Act Rule 13a-15(a) by failing to maintain sufficient controls and procedures to “collect or analyze employee complaints of workplace misconduct.” Without such controls and procedures, Activision’s management was allegedly unable to assess related risks to the company’s business — whether material or not — or whether its risk disclosures from its Forms 10-K and 10-Q from 2018 through 2021 concerning its ability to attract, retain, and motivate skilled personnel were accurate and fulsome.
While Activision neither admitted nor denied the SEC’s allegations, the multimillion-dollar penalty levied by the SEC both cautions against overly aggressive post-termination practices that may impact former employees’ freedom to speak with the SEC or other administrative agencies and makes clear the importance of maintaining sufficient internal controls and procedures that may relate to risk factor disclosures.
Not only are such controls important in terms of securities laws compliance, but, for Delaware corporations, they are also important given the Court of Chancery’s two recent decisions in In re McDonald’s Corporation Stockholder Derivative Litigation regarding the oversight duties of corporate directors and officers. For more information on the McDonald’s decisions, please see Goodwin’s Client Alerts on this topic.
Former Coinbase Employee Pleads Guilty to Wire Fraud in ‘First-Ever’ Cryptocurrency Insider Trading Lawsuit
On February 7, 2023, Ishan Wahi (Wahi), a former Coinbase product manager, pleaded guilty to two counts of wire fraud conspiracy for providing non-public information to his brother Nikhil Wahi and his brother’s friend Sameer Ramani, about when crypto assets would be listed on Coinbase’s trading platform. These tips allowed Nikhil Wahi and Ramani to purchase and sell at least 25 crypto assets for a profit in a scheme that went on for almost a year and generated upward of $1.5 million in profits. US District Judge Loretta Preska has set Wahi’s sentencing hearing for May 10, 2023, and each of the two counts carries a 20-year maximum sentence in prison.
US Attorney for the Southern District of New York Damian Williams announced Wahi’s plea and characterized the prosecution of Wahi and his co-conspirators as the first-ever insider trading case involving cryptocurrency. The indictment, however, contained only wire fraud charges as part of a deliberate tactic to avoid the question of whether crypto assets qualify as securities under federal securities laws. Indeed, at his plea hearing, Wahi stated, “while I do not believe that any of the relevant cryptocurrencies were securities, and relied on statements of Coinbase and others that these cryptocurrencies were not securities, I knew it was wrong to misappropriate and disseminate Coinbase’s property.”
As described in prior issues of the Securities Snapshot, whether crypto assets qualify as securities has been the subject of significant recent debate, and the scheme involving Wahi is also the subject of a parallel civil enforcement proceeding brought by the SEC premised on the SEC’s allegations that at least nine of the 25 crypto assets traded as part of the scheme qualified as “securities.” Goodwin is monitoring this issue closely and will continue to provide updates to this matter as they occur.
SEC Examination Division Announces Priorities for 2023
On February 7, 2023, the SEC’s Division of Examinations announced its list of priorities for 2023: to promote compliance and protect investors, and to educate regarding where the division will focus its examination efforts for the coming months. The division highlighted four “Notable New and Significant Focus Areas” for 2023.
First, the division will focus on monitoring compliance with a number of recently adopted rules, including the Marketing Rule (Advisers Act Rule 206(4)-1), the Derivatives Rule (Investment Company Act Rule 18f-4), and Investment Company Act Fair Valuation Rule 2a-5. Second, the division will scrutinize the practices of registered investment advisers to private funds, including any conflicts of interest, their calculation and allocation of fees and expenses, and compliance with applicable laws. Third, the division will examine broker-dealers and registered investment advisers for compliance with their applicable standard of conduct and how firms are managing and disclosing conflicts of interest. Finally, the division will focus on environment, social, and governance (ESG)–related advisory services and fund offerings, including whether the funds are operating as described and in investors’ best interest.
We expect these priorities to correspond with increased referrals to the Division of Enforcement. For more information on the above and other topics contained in the division’s list of priorities for 2023, please see Goodwin’s Client Alert on this topic.
Jennifer Burns Luz
Jennifer Burns LuzPartner
Angela S. BerkowitzAssociate