When Internal Audit Talks, Are You Listening?

When Internal Audit talks, people listen…or at least they should.

Two recent government settlements with Albemarle Corporation (Albemarle), and Clear Channel Outdoor Holdings, Inc. (CCOH), describe, among other things, the efforts of the companies’ internal audit departments in identifying internal control “red flags” that unfortunately, to the detriment of the issuers, were not acted upon in a timely and adequate manner.

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As a former internal auditor, I appreciate the challenges that sometimes arise when findings of weak or missing internal controls are pointed out to the responsible management and will be elevated within the company. It is important that the internal audit function is appropriately empowered to present their findings without undue pressure and suppression by various levels of management. The smartest audit committee members and company senior management understand the importance of a strong internal control system including an effective internal audit function, and act accordingly.

Internal audit can serve as a valuable resource for the identification of important issues that companies need to address and remediate to avoid larger problems down the road.

Does The SEC Even Need A Specific FCPA Unit?

The small percentage of FCPA enforcement actions as a total of overall SEC enforcement actions in FY2023 was not an aberration.

In FY2022, FCPA enforcement actions comprised just 1% of the SEC’s overall enforcement actions; in FY2021, FCPA enforcement actions comprised just 1% of the SEC’s overall enforcement actions; in FY2020 FCPA enforcement actions comprised just 2% of the SEC’s overall enforcement actions; in FY2019 FCPA enforcement actions comprised just 3% of the SEC’s overall enforcement actions; in FY2018 FCPA enforcement action comprised just 3% of the SEC’s overall enforcement actions; and in FY2017 FCPA enforcement actions comprised just 4% of the SEC’s overall enforcement actions.

In short, based on the SEC’s own data, FCPA enforcement actions comprise a minuscule percentage of its overall enforcement actions.

What happens in those enforcement actions is also relevant in addressing the question of whether the SEC really even needs a specific FCPA unit.

Coinbase’s SEC Fight Renews Interest in ‘Grossly’ Underused Tool

Coinbase Global Inc.’s decision to sue securities regulators over their alleged foot-dragging on the company’s request for crypto rulemaking has caught the attention of other businesses and advocacy groups.

Coinbase is asking an appeals court to order the Securities and Exchange Commission to respond to a petition for rulemaking the crypto exchange filed last year, seeking clarity on which digital assets the SEC plans to regulate. The US Court of Appeals for the Third Circuit is entertaining the request, and directed the SEC to specify when it plans to respond to the petition.

Coinbase’s case is being closely watched. A court order favoring the crypto exchange could reinvigorate interest from businesses, civil rights, and other groups in petitioning the SEC and other agencies for changes to federal rules.

Ex-Platinum Hedge Fund Manager Spared Prison by Skeptical Judge

A former Platinum Partners fund manager convicted over a scheme to rig a bond vote at an oil and gas company was spared prison by a judge who remains skeptical about the government’s case.

US District Judge Brian Cogan on Wednesday sentenced Daniel Small to probation over the objections of prosecutors, who said the ex-manager defrauded the company of $70 million and should serve six months to a year behind bars.

Cogan called Small “a rather noble character who made a criminal mistake” by cutting corners, but who didn’t commit “a serious crime to rob other people.”

WeWork’s Rescue Wasn’t Real

Anyway, a little after 5 p.m. on Friday, Nov. 3, when WeWork Inc. was sliding into bankruptcy but not quite bankrupt yet (it filed on Monday, Nov. 6), a very fun press release came out on Business Wire. A sample:

“A Proposal by Cole Capital Funds Seeks to Acquire 51% of all minority ownership shares of WeWork, Inc. for $9.00 per share in Cash

Cole Capital Funds sent the following letter to the Board of Directors of WeWork, Inc.

We believe that it is in the best interest of WeWork to support our acquisition of 51% of all the outstanding shares owned by minority shareholders at a price of $9.00 per share and provide Cole with proper representation on the company board.

We have consulted with God, legal, financial and other advisors to assist us with this transaction. We stand ready to proceed timely.”

See, when I was an M&A lawyer, I wrote a lot of press releases that were a bit like this, but in exactly none of them did I write “We have consulted with God.” Not standard in high-stakes public-company M&A. But in fantasy M&A, you can consult with whomever you want! Have fun! That’s why you’re doing it, for fun!

Fifth Circuit Declines to Review SEC’s Approval of Nasdaq’s Board Diversity Rule

On October 18, 2023, a three-judge panel for the U.S. Court of Appeals for the Fifth Circuit denied petitions to review the SEC’s approval of Nasdaq’s board diversity disclosure rule, which requires Nasdaq-listed companies to have female and minority or LGBTQ+ directors on their boards (or explain why they do not), and disclose diversity statistics of their directors.[1] With this decision, the Nasdaq rule remains in effect, and Nasdaq-listed companies subject to the rule should be prepared to comply with the initial annual reporting deadline of December 31, 2023. In declining to review the SEC’s approval of the rule, the disclosure-based framework for the rule may help guide corporate approaches to other diversity, equity and inclusion (“DEI”) policies, programs and practices.

SEC Stats Show the Agency is an Active Enforcement Cop

According to the Cornerstone Research report, there were 91 new actions filed against public companies and subsidiaries in FY 2023, representing 18% of all FY 2023 standalone actions. The 91 public company enforcement actions during the year represents a 34% increase over the 68 public company action in FY 2022 and is the highest annual number of public company enforcement actions since FY 2019 (96 actions). Interestingly, 31 of the FY 2023 actions (34% of the total) were filed in September 2023, the final month of the fiscal year (representing the highest monthly total number of public company actions in the database).

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Interestingly, 92% of the 2023 public company enforcement actions were brought as administrative actions, the highest annual percentage since FY 2019. As readers know, the U.S. Supreme Court has a case on its docket this term that will address the constitutionality of the SEC’s use of its own administrative courts to pursue enforcement actions.

According to the Cornerstone Research report, total monetary settlements in FY 2023 public company enforcement actions totaled $1.3 billion, the lowest annual amount in the last eight fiscal years, and well below the record $2.8 billion in public company settlements in FY 2022 and only 70% of the $1.9 billion in annual average total public company settlements during the period FY 2014-FY 2022.

U.S. CFTC Chief: Nothing Changed After FTX Meltdown to Empower Agency to Prevent Repeat

U.S. regulators don’t have any more authority now to head off another major crypto collapse than they did when FTX imploded and took much of the industry with it, said Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam.

“Nothing has changed, and we could be in a position where another FTX-type event happens,” Behnam said Wednesday at the Financial Markets Quality Conference 2023 at Georgetown University. However, he noted that the crypto investing enthusiasm has calmed since the months before FTX, and “the market environment is much, much different today than it was a year ago.”