December 2024 One-Minute Reads

SEC’s Office of the Whistleblower annual report

On November 15, 2024, the Securities and Exchange Commission’s Office of the Whistleblower released its annual report to Congress. The Whistleblower Program report includes statistics about whistleblower tips, awards and enforcement actions over the past fiscal year – and from the program’s inception to date – along with award recipient profiles. The SEC reported that in FY 2024, it received approximately 24,980 whistleblower tips, an increase from the previous all-time high of 18,354 tips reported in FY 2023. It is worth noting, however, that more than 14,000 of the 24,980 tips were attributable to just two individuals; by comparison, almost 7,000 tips came from the same two individuals in 2023.

Ensuring that whistleblowers can freely report securities law violations to the SEC without fear of reprisal is part of the commission’s oversight mandate. In FY 2024, the SEC brought 11 enforcement actions against entities and individuals that took action to impede whistleblowers from communicating with the SEC, including by using restrictive agreements. The 2024 enforcement actions brought by the SEC in this area were more than in any prior fiscal year, and more than double those brought in FY 2023. Notably, these cases include one that resulted in an $18 million penalty – the highest penalty to date for an action of this kind. Moreover, the whistleblower tips the SEC received in FY 2024 alleged a variety of misconduct, with the most common complaint categories reported by whistleblowers being manipulation (37%), offering fraud (21%), initial coin offerings and crypto asset securities (8%), and corporate disclosures and financials (8%).

The program receives tips from all over the world. In FY 2024, the foreign countries from which the highest number of tips originated were Canada, the UK, India, Australia and Germany. Domestically, the states from which the highest number of tips originated were South Carolina, Florida, California, Texas and New York.

UPS to pay $45 million penalty for improperly valuing business unit

On November 22, 2024, the SEC announced settled charges against United Parcel Service (UPS) for materially misrepresenting its earnings. This was because the company failed to follow generally accepted accounting principles (GAAP) in valuing one of its worst-performing businesses. According to the order, UPS determined that, in 2019, UPS Freight, a business unit that transported less-than-truckload shipments, was not likely to sell for more than about $650 million. GAAP required UPS to use the price it would receive by selling Freight in calculating whether it needed to write-down the value of the goodwill it had assigned to the business unit on its balance sheet. UPS’s own analysis indicated that nearly $500 million of the goodwill it had associated with Freight was impaired. Instead of using that analysis, however, UPS relied on an outside consultant’s valuation of Freight without giving the consultant the information necessary to conduct a fair valuation of the business. Using assumptions approved by UPS, which were clearly not ones a prospective buyer of Freight would make, the consultant estimated Freight was worth about $2 billion – three times as much as UPS had determined. On that basis, UPS did not record a goodwill impairment in 2019.

The SEC’s order also alleges that, in 2020, UPS entered a nonbinding term sheet to sell Freight for $800 million with adjustments to be made later that were likely to reduce the final price. Despite its own analysis and its entry into this term sheet, UPS relied again on a consultant’s valuation of Freight in 2020 to support not impairing the business’s goodwill. UPS also did not inform the consultant of the term sheet. Had UPS properly valued Freight and impaired goodwill, its earnings and other reported items would have been materially lower in both 2019 and 2020. In addition to the civil penalty, UPS agreed to adopt training requirements for certain officers, directors and employees, and to retain an independent compliance consultant to review and make recommendations about the company’s fair value estimates and disclosure obligations. For further insight, see this November 25 PubCo post.

SEC charges Kiromic BioPharma and two former C-suite executives with misleading investors about status of FDA reviews

On December 3, 2024, the SEC filed settled charges against biotherapeutics company Kiromic BioPharma, its former CEO, Maurizio Chiriva-Internati, and its former chief financial officer, Tony Tontat. According to the SEC, Kiromic failed to disclose material information about its two cancer-fighting drug candidates before, during and after a July 2021 follow-on public offering that raised $40 million. Kiromic was not ordered to pay a civil penalty considering its self-reporting, cooperation and remediation, and Chiriva-Internati and Tontat agreed to pay civil penalties of $125,000 and $20,000, respectively, to settle the SEC’s charges. In addition, Chiriva-Internati is barred for three years from serving as an officer or director of a public company.

According to the SEC’s order against Kiromic, the public offering raised $40 million for the purpose of funding the prospective clinical trials for Kiromic’s two cancer-fighting drug candidates. However, the SEC’s order found that two weeks before the public offering, the US Food and Drug Administration (FDA) notified Kiromic that it had placed the drug candidates on clinical hold – an FDA order to delay the proposed clinical investigations. The SEC’s order also found that Kiromic did not disclose the FDA clinical holds in its SEC filings, investor roadshow calls or during due diligence calls leading up to the offering, and that Kiromic only disclosed the hypothetical risk of a clinical hold and the potential negative consequences on Kiromic’s business. Without admitting or denying the SEC’s findings, Kiromic consented to the SEC’s order, which requires Kiromic to cease and desist from committing or causing future violations of the antifraud, reporting and/or disclosure controls provisions of the federal securities laws. For further insight, see this December 4 PubCo post.

SEC charges former CEO with insider trading in advance of negative earnings announcement

On December 11, 2024, the SEC announced insider trading charges against Ken Peterman, the former CEO, president and chair of the board of Comtech Telecommunications, in connection with his sale of Comtech shares on the basis of material nonpublic information about Comtech’s forthcoming negative quarterly earnings results. According to the complaint, Peterman allegedly received a confidential presentation detailing Comtech’s impending negative quarterly earnings results on March 4, 2024. He was allegedly informed that he was being terminated for cause eight days later, on March 12, 2024. The SEC’s complaint alleges that a few hours after he was terminated, and while subject to two different trading blackouts, Peterman placed an order to sell Comtech stock. On March 18, 2024, Comtech reported its negative quarterly earnings, which caused its stock price to drop more than 25%. The complaint alleges that Peterman avoided losses of about $12,445 by trading in advance of Comtech’s negative earnings announcement. Peterman allegedly directed his financial advisor to sell additional Comtech stock he held in a joint account, but the financial advisor was unable to complete the sale because of a trading blackout. Had the sale been completed, Peterman allegedly would have avoided additional losses of about $110,000. In a parallel action, the US Attorney’s Office for the Eastern District of New York announced criminal charges against Peterman.

Fifth Circuit vacates Nasdaq’s board diversity listing standards

On December 11, 2024, the US Court of Appeals for the Fifth Circuit vacated the SEC’s 2021 approval of Nasdaq’s board diversity listing standards. The appeals court, which heard the case en banc, ruled 9 – 8 against the SEC and Nasdaq in a legal challenge brought by the Alliance for Fair Board Recruitment and the National Center for Public Policy Research. In an email to its listed companies, Nasdaq stated, “We respect the Court’s decision and do not intend to seek further review. As a result, companies will no longer be required to follow Nasdaq’s board diversity disclosure rules.” For insight on the court opinion, see this December 16 PubCo post, and for the impact on companies, see this post from The Governance Beat.

SEC approves further amendments to Nasdaq’s reverse stock split notice requirements

On November 21, 2024, the SEC posted an order contemplating further changes to Nasdaq’s reverse stock split notice requirements, after approving the new listing standards in November 2023 (see this November 2023 PubCo post for further information on the listing standards).

The order notes that Nasdaq is now proposing to amend the deadline for a company to notify Nasdaq of a reverse stock split from five business days to 10 calendar days to conform to the requirements of SEC Rule 10b-17 of the Exchange Act. Under Rule 10b-17(a)(2) and (b) of the Exchange Act, issuers are required to provide notice to the Financial Industry Regulatory Authority no later than 10 calendar days before the date of record to participate in a stock split or reverse stock split, unless the impacted security is traded on a national securities exchange with a substantially comparable requirement to those set forth in Rule 10b-17(b)(1).

Currently, Rule 5250(e)(7) and IM-5250-3 require a company conducting a reverse stock split to notify Nasdaq about certain details of the reverse stock split by submitting a complete Company Event Notification Form and a draft of the disclosure required by Rule 5250(b)(4) at least five business days (no later than 12:00 pm ET) before the anticipated market effective date, including all the information required by Rule 10b-17 applicable to reverse stock splits. However, it has come to Nasdaq’s attention that the current rule may not be considered substantially comparable to the 10-calendar-day prior notice required in Rule 10b-17 of the Exchange Act. Accordingly, Nasdaq is proposing to amend the deadline for a company to notify Nasdaq of a reverse stock split from no later than 12:00 pm ET five business days before to 10 calendar days prior to the anticipated market effective date of the reverse stock split to ensure that Rule 5250(e)(7) and IM-5250-3 are substantially comparable to Rule 10b-17. Nasdaq is not amending the requirement to provide public disclosure under Rule 5250(b)(4) at least two business days (no later than 12:00 pm ET) before the anticipated market effective date. Nasdaq still believes that this time frame provides sufficient notice to the public about reverse stock splits. Although the rule became effective immediately to allow sufficient time for market participants to adjust to the new time frame, the proposed rule change will become operative on January 30, 2025. For further insight, see this November 26 PubCo post and this blog post from TheCorporateCounsel.net.

California to give companies an extra year before fully enforcing new climate reporting rules

The California Air Resources Board, the regulator charged with developing and enforcing new regulations requiring large companies to disclose their value chain emissions and report on climate-related financial risks, announced in this enforcement memo that it will ease emissions reporting requirements and not pursue enforcement action in the first year of reporting, in order to give companies more time to prepare to comply with the new rules. Applying to companies that do business in California, SB 253 (the Climate Corporate Data Accountability Act) effectively introduces climate reporting obligations for most large businesses in the US. The new law requires companies with revenues greater than $1 billion that do business in California to report annually on their emissions from all scopes – including direct emissions (Scope 1), emissions from purchase and use of electricity (Scope 2) and indirect emissions, including those associated with supply chains, business travel, employee commuting, procurement, waste and water usage (Scope 3). Companies will be required to begin reporting on Scopes 1 and 2 emissions in 2026, covering the previous fiscal year, and on broader value chain Scope 3 emissions in 2027. See this December 2024 ESG Today article.

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