The Changing Securities Law Landscape for Private Entities: Practitioners Beware
| Jurisdiction | United States,Federal |
| Citation | Vol. 44 No. 1 Pg. 29 |
| Pages | 29 |
| Publication year | 2015 |
Articles Business Law
The Changing Securities Law Landscape for Private Entities: Practitioners Beware
By Robert W. Walter.
Business Law articles are sponsored by the CBA Business Law Section to apprise members of current substantive law. Articles focus on business law topics for the Colorado practitioner, including antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, and securities law.
Coordinating Editors
David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs—(719) 475-0097, dpsteig@sparkswillson.com; Curt Todd, Denver (bankruptcy)—(303) 955-1184, ctodd@templelaw.comcastbiz.net
About the Author
I Robert W. Walter practices securities law in Greenwood Village and is of counsel to I Richardson & Patel, LLP, Los Angeles, California-rww200@comcast.net. He also I produces and instructs securities, business law, ethics, and accounting continuing I education courses throughout the United States for the American Institute of I Certified Public Accountants, and internationally for IASeminars, London, England. A I version of this article appeared in the November 2014 issue of Washington Lawyer.
This article discusses how the securities law landscape for private companies is changing as a result of the U.S. Supreme Court's recent decision in Lawson v. FMR LLC and the Securities and Exchange Commission's continuing litigation against Stiefel Laboratories and its former CEO.
Lawyers who represent closely held corporations, limited liability companies, and non-public partnerships know that these entities' executives and owners are often confused about the extent to which the securities laws apply to their businesses. Executives and owners of closely held entities sometimes have a general understanding of federal and state exemptions, but this frequently represents the limits of their familiarity with securities laws. When discussing their entities' private status, executives and owners extol the virtues of managing to long-term objectives, being immune from quarterly earnings pressures, and avoiding compliance headaches associated with securities laws and regulations. These conversations typically devolve into expressions of relief that their businesses are not subject to regulation by the Securities and Exchange Commission (SEC) and are not subject to the Sarbanes-Oxley Act of 2002 (SOX).[1]
Practitioners representing private entities recognize the fallacy of the latter statement. The SEC regulates securities, the markets, and all market participants, not just public companies. Document retention requirements, expanded criminal penalties, and limitations on liabilities dischargeable in bankruptcy are among the SOX provisions that apply to private entities. The anti-fraud provisions of the securities laws apply to all types of entities that offer or sell securities, as more fully explored below, and there are a broad spectrum of securities laws, rules, and regulations that apply to capital market transactions engaged in by private entities.[2] Not surprisingly, many executives and owners of private companies are blissfully ignorant of these subtleties.
Recent developments—for example, the U.S. Supreme Court's March 2014 decision in Lawson v. FMR LLC[3] and the SEC's ongoing litigation against Stiefel Laboratories and its former CEO[4] —serve as notice that potential liability of private entities under the securities laws is expanding and as a reminder that the SEC exercises enforcement jurisdiction over private entities. Practitioners advising private entities should be aware of how these dual developments can impact their clients, and should counsel private entity clients to fashion appropriate policy and operational responses to new and existing areas of securities law exposure.
Background to Lawson:
The SOX Anti-Retaliatory Statutory Scheme
When initially adopted in 2002, the whistleblower provisions of SOX were believed—and were construed by the courts—to be limited to public companies. This was unsurprising, given the title of § 806 Of SOX: "PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES WHO PROVIDE EVIDENCE OF FRAUD." However, as discussed below, the trend in administrative actions and legislation has been to broaden the anti-retaliatory protections of § 806 to public company affiliates and their employees.
Section 806 amended 18 USC § 73 to add § 1514A,[5] which provides in principal part:
WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES-No company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 ("Exchange Act"), or that is required to file reports under Section 15(d) of the Exchange Act, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment. . . . (Emphasis added.)
The anti-retaliatory language of § 1514A applies to the employee's provision of information or assistance in investigating "any conduct which the employee reasonably believes"[6] violates enumerated laws. These violations include but are not limited to securities fraud, mail fraud, wire fraud, violation of any SEC rule or regulation, or any federal law relating to fraud against shareholders.[7] The whistleblower protections apply when the information or assistance is provided by the employee to, or the investigation is conducted by, a federal agency, Congress, the employee's supervisor, or a person working for the employer who possesses "authority to investigate, discover, or terminate misconduct. . . ."[8]
It must be emphasized that § 1514A does not require the whistleblower to have actual knowledge-much less proof—of a violation encompassed within § 1514A. Rather, the whistleblower must have only a reasonable belief of a violation of applicable law.[9] That belief is generally evaluated by federal courts using both a subjective and objective standard. Objective reasonableness "is evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee."[10]
Importantly, § 1514A states that the burden of proof in retaliation cases is governed by 49 USC § 42121.[11] That section specifies that the plaintiff is required to make out a prima facie case of retaliatory discrimination, at which point the burden shifts to the employer, which must prove by clear and convincing evidence that it would have taken the same adverse employment action against the plaintiff in the absence of his or her protected activity.[12]
The four elements of a prima facie case of retaliatory discrimination are set forth in 29 CFR§ 1980.104(b)(l)(i) to (iv). They are:
(i) "[t]he employee engaged in a protected activity or conduct";
(ii) "[t]he named person knew or suspected, actually or constructively, that the employee engaged in the protected activity";
(iii) "[t]he employee suffered an unfavorable personnel action"; and
(iv) "[t]he circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action."[13]
Once retaliatory discrimination is proven, the remedies available to whistleblowers under § 1514A are extensive and, for employers, potentially extremely expensive. Section 1514A(c) provides whistleblowers "all relief necessary to make the employee whole," including reinstatement with undiminished seniority, back pay with interest, and litigation expenses (including reasonable attorney and expert witness fees).[14]
The whistleblower protections of § 1514A are administered by the Department of Labor (DOL), through the Occupational Safety and Health Administration (OSHA). After exercising appeal rights to an administrative law judge and the Administrative Review Board (ARB), a claimant may file an action in federal district court if the ARB has not issued a final decision within 180 days of the filing of the complaint.[15]
Although not at issue in Lawson, anti-retaliatory protections must be considered in the context of 2010 amendments to SOX § 806. Many employers successfully prevailed in retaliation discrimination suits filed before 2010 by noting that employees were not employed by public companies, but were employed by subsidiaries of public companies. According to one analysis, employers prevailed in approximately 66% of the 1,400 retaliation discrimination cases filed with OSHA by April 15, 2009, and complaints comprising another 13% of the filed total were voluntarily withdrawn.[16]
The success of such arguments led directly to the enactment of § 929A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,[17] which expanded retaliation protection to employees of "any subsidiary or affiliate whose financial information is included in the consolidated financial statements" of a public company.[18] Thus, employees of wholly owned subsidiaries, controlled majority-owned subsidiaries, and consolidated equity method investees fall under the umbrella of SOX anti-retaliatory protection. The Dodd-Frank amendment also extended anti-retaliatory protections to employees of nationally recognized statistical rating organizations.[19]
Lawson Facts and Lower Court Holdings
In Lawson, the plaintiffs were former employees of private entities that provided direct and indirect investment advisory and other services to the Fidelity family of mutual funds. Jackie Lawson was employed as a senior director of finance by Fidelity Brokerage Services LLC, and Jonathan Zang was employed as a portfolio manager at Fidelity Management & Research Co...
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