The NASPP Blog

June 30, 2009

Ignore the Romeo & Dye Model Forms At Your Own Risk

An article in the March 2009 issue of Section 16 Updates (and in Alan Dye’s blog) recently caught my eye; I’ve been meaning to blog about it for some time now. The article discusses enforcement proceedings against the former associate general counsel of Enron for an incorrect Section 16 filing.

The Gory Details

The gist of the story is that Enron’s associate general counsel chose to allow Ken Lay (CEO of Enron at the time) to report Form 4 reportable transactions on Form 5. The associate general counsel made this decision in spite of a memo from one of Enron’s paralegals recommending reporting the transactions on Form 4. The memo even included a copy of a model form from Romeo & Dye’s Forms & Filing Handbook illustrating how the transactions should be reported. Incorrectly reported transactions are a violation of Section 16; the SEC’s complaint alleged that the associate general counsel, by allowing the incorrect filings, had aided and abetted Lay’s violations.

The Penalties

As a result of the SEC’s complaint, the associate general counsel was ordered to pay disgorgement of $1, a civil penalty of $25,000, and was barred from practicing before the Commission for two years. (If you are wondering why the SEC bothered with the $1 disgorgement, Alan Dye tells me that it triggers the applicability of the Fair Fund provisions of Sarbanes-Oxley, which then allows any civil penalty imposed later to be added to the disgorged amount and ultimately distributed to defrauded investors.)

The Lesson

The article caught my eye because I don’t generally expect folks preparing Section 16 filings on behalf of company insiders to be subject to penalties for incorrect filings. I’ve always assumed that, because the filings are ultimately the responsibility of the insider, any penalties would be applied to the insider. This is, after all, a service you are performing for your insiders on a voluntary basis; the company isn’t legally required to assist with Section 16 filings. I guess it’s true that no good deed goes unpunished.

This case is certainly the exception, rather than the rule; according to the article in Section 16 Updates, the SEC does normally target the insiders, rather than those preparing the filings. And this is a very high profile case where the incorrect filings proved to be self-serving, enabling Lay to avoid reporting the transactions until after Enron’s stock had collapsed. But even so, it doesn’t hurt to take a few steps to protect yourself:

  • Have your general counsel review any forms before they are filed with the SEC, so that you aren’t solely responsible for deciding how transactions will be reported. If advance review isn’t possible due to time constraints, a post-filing review is better than no review at all.
  • Know the rules and have resources available (such as Romeo & Dye’s Section 16 Forms & Filing Handbook) that you can use to research how transactions should be reported. Do not agree to prepare and submit Section 16 filings without the proper training and resources.
  • If you encounter a transaction for which you aren’t sure of the proper reporting procedures, ask your general counsel or your legal advisors for assistance.
  • If you are asked to report a transaction in a manner that you don’t believe is correct, write a memo to your manager or to the company’s general counsel explaining how you believe the transaction should be reported.

New Model Forms & Filing Handbook Now Available
While we’re on the topic, the 2009 edition of Romeo & Dye’s Forms & Filing Handbook is at the printers, and, if you subscribe to the Section 16 Service, shipping soon to your mailbox. This is an essential resource for anyone who prepares Section 16 filings; don’t submit another form without it!

NASPP Conference Session of the Week
This week’s session is Good Data Gone Bad: Ten Tests to Diagnose Lurking Problems in Stock Plan Data. Even in the most nurturing environments, good data can go bad. This session will explore what makes data go bad, how to spot the early warning signs, and how to get your data back on the “straight and narrow.” The panelists will offer ten tests that can be run on your data to identify errors and explain how to fix any problems you find.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara