Fake EDGAR filings are a thing. The EDGAR system requires more access codes than any of my financial accounts: there’s the CIK, CCC, password, password modification code, and passphrase. That’s five codes to access the system. And, to get the codes, you have to submit a notarized form to the SEC. So it seems surprising that anyone would be able to submit a fake EDGAR filing, but apparently it happens.
Recently, someone filed a fake Schedule TO announcing a takeover of Avon (“A Phantom Offer Sends Avon’s Shares Surging,” NY Times, May 14, 2015). In 2012, someone (probably the same someone) submitted a fake buyout offer for the Rocky Mountain Chocolate Factory. A guy named Johnny Earl Satterwhite has filed 61 highly suspicious Section 16 filings claiming, among other things, that he owns 999 billion shares of Microsoft and Exxon Mobil, which is something like more than 100 times the number of shares that actually exist in these companies (“Texan Plays April Fool’s Joke on SEC, Investors with 999 Billion Shares,” Footnoted*, June 20, 2011).
From Broc Romanek’s May 19 blog on TheCorporateCounsel.net:
This latest incident [fake Schedule TO for Avon] is a cautionary tale for investors as it’s not the first fake takeover announcement. My favorite dates back to 2001, as noted in this piece, when a fake “blank check” company calling itself “Toks Inc.” filed a Form SB-2 with the SEC announcing plans to take over General Motors, General Electric, AT&T, Hughes Electronics, AT&T Wireless, AOL Time Warner and Marriott International—roughly $2 trillion in “Toks” stock. The promoter—Ade O. Ogunjobi—didn’t give up even when the SEC issued a “Stop Order” to prevent the registration statement from going effective and suing him for selling unregistered securities, later launching a website to promote his wild ambitions and plans to then hold press conferences to announce his plans for these major US companies he was to take over!
While the idea of fake EDGAR filings may seem a little crazy and fantastical, the fraudulent filings can have serious repercussions. Avon’s stock price increased by about $1 per share (a 20% increase) after the fake Schedule TO filing, then dropped back to prior levels after the TO was revealed to be a hoax. But, according to Bloomberg, $91 million worth of Avon shares changed hands before trading was halted in Avon’s stock, four times Avon’s trading volume the prior day (“About $91 Million of Avon Stock Traded at Peak of Frenzy,” Bloomberg Business, May 14, 2015). The SEC has charged a Bulgarian, Nedko Nedev, with filing using the fake buyout offer to manipulate Avon’s stock price for his personal gain, (“S.E.C. Charges Man in Bulgaria in Fake Takeover Offer for Avon,” NY Times, June 4, 2015).
Here are my key takeaways on this:
Don’t believe everything you read on the internet, even if it is on EDGAR.
Don’t submit fake EDGAR filings for your own personal gain because it seems like it probably isn’t going to be all that hard for the SEC to catch you, even if you are in Bulgaria. Definitely don’t do it more than once.
I feel like I should have some key takeaways on how you an prevent your company from being a victim of a fake EDGAR filing, but I’ve got nothin’ on that. I would suggest not sharing your CIK, but that number is already publicly available all over EDGAR.
– Barbara
Thanks to Tami Bohm of Radian for suggesting this topic.
How many grant dates can one option have? The answer, as it turns out, is more than you might think. I was recently contacted by a reporter who was looking at the proxy disclosures for a public company and was convinced that the company was doing something dodgy with respect to a performance option granted to the CEO. The option was not reported in the SCT for the year in which it was granted, even though the company discussed the award in some detail in the CD&A, had reported the grant on a Form 4, and the option price was equal to the FMV on the date the board approved the grant. The reporter was convinced this was some clever new backdating scheme, or some way of getting around some sort of limit on the number of shares that could be granted (either the per-person limit in the plan for 162(m) purposes or the aggregate shares allocated to the plan).
Bifurcated Grant Dates
When I read through the proxy disclosures, I could see why the reporter was confused. The problem was that the option had several future performance periods and the compensation committee wasn’t planning to set the performance goals until the start of each period. The first performance period didn’t start until the following year.
Under ASC 718 the key terms of an award have to be mutually understood by both parties (company and award recipient) for the grant date to occur. I’m not sure why the standard requires this. I reviewed the “Basis for Conclusions” in FAS 123(R) and the FASB essentially said “because that’s the way we’ve always done it.” I’m paraphrasing—they didn’t actually say that, but that was the gist of it. Read it for yourself: paragraph B49 (in the original standard, the “Basis for Conclusions” wasn’t ported over to the Codification system).
The performance goals are most certainly a key metric. So even though the option was granted for purposes of Section 409A and any other tax purposes (the general standard to establish a grant date under the tax code is merely that the corporate action necessary to effect the grant, i.e., board approval, be completed), the option did not yet have a grant date for accounting purposes.
And the SCT looks to ASC 718 for purposes of determining the value of the option that should be reported therein. Without a grant date yet for ASC 718 purposes, the option also isn’t considered granted for purposes of the SCT. Thus, the company was right to discuss the grant in the CD&A but not report it in the SCT. (The company did explain why the grant wasn’t reported in the SCT and the explanation made perfect sense to me, but I spend an excessive amount of time thinking about accounting for stock compensation. To a layperson, who presumably has other things to do with his/her time, I could see how it was confusing and suspicious).
Trifurcated Grant Dates?
The option vested based on goals other than stock price targets, so it is interesting that the company chose to report the option on a Form 4 at the time the grant was approved by the compensation committee. Where a performance award (option or RSU) is subject to performance conditions other than a stock price target, the grant date for Section 16 purposes doesn’t occur until the performance goals are met. So the company could have waited until the options vested to file the Form 4.
If you are keeping score, that’s three different grant dates for one option:
Purpose
Grant Date
1. Tax
Approval date
2. Accounting / SCT
Date goals are determined
3. Form 4
Date goals are met
If the FASB is looking for other areas to simplify ASC 718, the determination of grant date is just about at the top of my list. While they are at it, it might nice if the SEC would take another look at the Form 4 reporting requirements, because I’m pretty sure just about everyone (other than Peter Romeo and Alan Dye, of course) is confused about them (I had to look them up).
The newest edition of Peter Romeo and Alan Dye’s Section 16 Forms & Filing Handbook arrived in my mailbox last week. I thought the last edition contained a model form for every possible Section 16 reporting scenario, but no–there are 15 new forms in this version. It’s so big, I practically needed some assistance toting it upstairs to my office. Here are four things I learned from perusing the new forms.
1. Reporting Performance Awards with a Service Tail
New Model Form 135 clears up some of the confusion with respect to a performance award that is still subject to service-based vesting conditions after the performance goal has been achieved. As my readers know, performance awards in which vesting is conditioned on goals other than stock price targets aren’t reportable until the performance goes are achieved. Once the compensation committee has certified achievement of the goals, however, the award is reportable, even where it isn’t paid out immediately or is still subject to time-based vesting requirements. The award essentially becomes a standard RSU once the performance goals have been achieved. Assuming the award can only be paid out in stock, it can then be reported as the acquisition of either a derivative security or common stock, just like any other time-based RSU.
2. Voluntary Reporting of ESPP Purchases
Alan Dye doesn’t always report purchases under Section 423 ESPPs, but when he does, he uses transaction code A of J. (I couldn’t resist–it’s not often that I can invoke beer commercials in my blogs). Because purchases under an ESPP aren’t reportable, there’s no transaction code assigned to them. If you are going to voluntarily report these transactions, New Model Form 145 suggests using code A or J and including a footnote to explain the transaction. Personally, I like code A because it specifically applies to exempt acquisitions, whereas code J can apply to either exempt or nonexempt transactions.
3. Voluntary Exit Forms
I did already know that it isn’t necessary to file an exit form unless the former insider has reportable transactions that occur after his/her termination. Despite this, some companies voluntarily file exit forms for departing insiders anyway. I’d never really thought about some of the specifics related to filing a voluntary exit form when there aren’t any transactions to report on the form. New Model Form 214 provides some guidance. In addition to the obvious (check the “Exit” box and include a note in the remarks field explaining the reason for the filing), if using a Form 4, the date of the “earliest transaction” in box 3 should be the insider’s termination date (if using a Form 5, the date of the fiscal year end is reported in box 3), and the insider’s title in box 5 can either be his/her former title or you can select the “other” checkbox and specify his/her status (e.g., “former insider”).
4. Grants to Spouses of Insiders
Given how common dating is in the workplace, I bet that this situation comes up more frequently than you’d think: an insider meets someone at work, they fall in love and get married and then, unconnected to the marriage, the insider’s spouse is granted an option or an award. Because they are married, the grant has to be reported as an acquisition of an indirectly held security on a Form 4 for the insider. But because the spouse isn’t an insider, the award might not be submitted to the compensation committee/board for approval, making it a non-exempt grant unless the shares underlying the grant are held for at least six months. The 2014 Handbook includes new Model Form 91 explaining how to report the grant.
It’s probably unlikely that the shares underlying the grant would be sold within six months, but even so, my takeaway here is to consider submitting grants to spouses of insiders to the comp committee for approval. I imagine that it wouldn’t be that much extra work for the committee, it seems like it might be a good idea from a shareholder optics perspective anyway, and then the exempt status of the grant is one less thing to worry about.
Luckily, grants to any person(s) the insider is having an affair with probably aren’t considered to be indirectly owned by the insider (unless it’s some sort of weird Woody Allen-type situation) and, thus, aren’t reportable. Moreover, when the insider divorces, Model Form 74 (which is not new) explains that any transfers of securities pursuant to the divorce settlement generally aren’t reportable.
Form 4 filings can be complex. Ideally, your company has a process in place that is designed to mitigate the risk of erroneous data ending up on a Form 4. However, if an error is discovered, it may be necessary to amend the original filing with a footnote explaining the reason for the amendment. When filing an amended Form 4, there is no need to restate the original Form 4 in its entirety. Rather, the amended Form 4 can include only the line items that are being updated. Additionally, there is no need to amend inaccurate Form 4 filings resulting from the original error that took place between the original erroneous filing and the amendment. Upon discovery of a filing error, the company will need to determine if it is something that must be disclosed in the proxy statement per the requirements of Item 405 (which requires disclosure of late reports and known failures to file required reports).
This week, I’d like to address a few common errors. Obviously, this blog entry shouldn’t be taken as advice. Only your legal counsel (or the SEC) can confirm the appropriate action that you should take when it comes to specific erroneous data in a Form 4 filing. If you subscribe to Section16.net or the Romeo and Dye Section 16 Treatise and Reporting Guide, you can find additional common errors in form filings along with fantastic guidance on correct reporting and best practices.
Duplicate Grant
If a grant is inadvertently reported twice, removing the duplicate can be done by filing an amended Form 4 with the correct details of the grant along with a footnote clarifying that the grant was originally reported twice. There is no need to show a “disposition” of the erroneous duplicate.
Incorrect Grant Type
If a Form 4 is filed with an incorrect title of derivative security listed in Column 1 of Table II, the correction can be made by filing an amended Form 4 with the correct grant type in Column 1 and a footnote to explain the discrepancy. This is not the same as an amendment to an existing grant, which is considered the disposition of the original grant and acquisition of a new grant. In the case of an incorrect ISO/NQ split, as long as all the other details on the grants (grant date, exercise price, etc.) are the same, then both the ISO portion of the grant and the NQ portion of the grant can be reported on the same line and a correction to share allocation between the two may not require an amendment.
Incorrect Securities Beneficially Owned
If there was an error in the number of shares reported in Column 5 of Table I or Column 9 of Table II, the amended filing is pretty straight forward as long as the total holdings are not incorrect because of an error in or omission of an actual transaction. An amendment with the correct holdings can be filed with a footnote explaining the correction. Likewise, if holdings are incorrectly reported as directly or indirectly held, the same amendment filing would apply. Even if the issue is simply that direct holdings are reported as indirect (or vice versa), it may be best to file an amended Form 4 to show both line items with the correct number of shares. It’s also important to note that the number of shares reported in Column 9 of Table II should only reflect the total of the same class as the derivative security being reported on that line, not the total number of all derivative securities held by the filer.
Immaterial Details
Some errors may not require an amended Form 4 at all because they are not material enough to warrant an amendment. Of course, you’ll want to work closely with your legal counsel to determine the most appropriate course of action in each case. Examples of some details that most likely would not require an amended filing are using the incorrect title, including an incorrect mailing address, failing to disclose that a transaction took place under a Rule 10b5-1 Plan, or accidentally putting the wrong vesting schedule in a footnote.
Section 16 Updates
At the beginning of each year, Alan Dye partners with the NASPP to provide our members with valuable Section 16 updates. NASPP members can access our archive recordings of Section 16 update webcasts in the NASPP Webcast Archive.
Ask the Experts
Speaking of fantastic NASPP programs, mark your calendar for June 29th at 4:00 EST. We will be airing our Latest “Ask the Experts” webcast, Estimating, Applying and Reconciling Forfeiture Rates! If you have a specific issue you would like to have our experts address, it’s not too late to submit your question to the panel.
February isn’t just time to be thinking about your sweetheart, it’s also the deadline for Form 5 filings for many companies. If your company year-end is December 31st, then the Form 5 filing deadline for 2010 is Tuesday, February 16 (Feb 14, the 45th day after December 31, is a Sunday and Feb 15 is a federal holiday).
While it is true that the responsibility for reporting ownership and transactions falls squarely on the Section 16 insiders themselves, it is in the best interest of the company to manage the SEC filings on behalf of the Section 16 insiders. This blog is written with the assumptions that your company is managing the SEC filings for your insiders and that you have a December 31st year-end.
Confirm List of Reporting Persons
Take a moment to review who your filing persons are. Once you have your list together, confirm it with your legal department and have your board of directors formally approve the list.
Verify Current Holdings
Although you should be verifying all equity securities held by your Section 16 insiders every time you file a Form 3 or Form 4, take time at the end of the year to do a final reconciliation. Remember that their holdings include not only the shares held in their name, but may also include securities owned by immediate family members or by business entities in which the Section 16 insider has a controlling interest. If you discover any inconsistencies, confirm that the discrepancy isn’t the result of a transaction that should have been reported on a Form 4 or that was reported incorrectly.
Review 2009 Transactions and Filings
Review all known transactions for your Section 16 insiders and confirm that they were correctly reported. Be sure to include insiders who left the company in 2009 in your transaction audit. Verify the transactions in your stock plan administration database against the brokerage records to ensure that the details are all correct. In addition, review any Rule 10b5-1 trading plans to check for transactions that may have been overlooked. Some transactions, such as gifts/inheritances or “small acquisitions”, are not required to be reported on a Form 4. In conducting your review, be sure to include these types of transactions. In addition, be sure to check your Form 4 filing dates for any delinquent filings that will need to be disclosed in your proxy and Form 10-K.
Include each insider’s individual transaction list as an attachment to his or her D&O questionnaire. That way, your insiders will be able to focus their attention on any missed transactions. If any transaction that was required to be reported on a Form 4 was overlooked, you will need to include it on the Form 5.
“No Filing Due” Statements
Where Form 5 reportable transactions were not voluntarily reported early on a Form 4, you will need to include them on the insider’s Form 5. Obtain “No Filings Due” statements for insiders that don’t have any transactions to report on Form 5. Like the transaction list, the “no filing due” statement can be included as an attachment to the D&O questionnaire. Don’t forget about anyone who ceased to be a Section 16 insider during 2009! If you didn’t get a representation from the individual when they ceased to be a Section 16 insider, then you will need to get a “no filing due” statement at year-end.
Administrative
There are also a couple administrative points to focus on at the end of your fiscal year.
First, make sure that your own EDGAR password has been renewed (for more on this, check out Barbara’s March 10 entry from last year).
Finally, review the power of attorney for each of your Section 16 insiders and confirm that all are filed with the SEC and are still effective. Pay special attention to who is named as appointee in the power of attorney, if the agreement includes reference to the EDGAR filing system, and to confirm that the agreement indemnifies the company and/or appointees.
A new Section 16 insider (officer, director, or 10% shareholder) must file a Form 3 within 10 calendar days to report all equity securities of the company that he or she beneficially owns. But, what must be done when that person terminates their insider status?
Form 4 and Form 5
Both Form 4 and Form 5 have a box that, when checked, indicates that the filer is no longer subject to Section 16 at the time of filing. Although this “exit box” should be checked for all required post-termination filings, the SEC does not actually require the insider to report his or her change in status. However, if the insider feels that it is important to make a public declaration that he or she is no longer subject to Section 16, the SEC will accept a blank Form 4 or Form 5 with the exit box checked.
Post-Termination Transactions
It is important to be sure that the transaction is actually post-termination. If the termination triggers a transaction (like an acceleration of vesting for restricted stock), then the transaction may be deemed to have occured pre-termination. Only officers and directors are subject to the post-termination filing requirements of Rule 16a-2(b). So, if a 10% shareholder ceases to hold 10% of the outstanding shares, then no further filing is required. Officers and directors may need to report certain transactions for up to six months from the termination of their insider status.
In order for a post-termination transaction to be reportable, it must be subject to Section 16(b) and take place within six months of a pre-termination opposite-way transaction that is also subject to Section 16(b). If the officer or director did not engage in any non-exempt transactions in the six months leading up to his or her termination, then post-termination transactions will not need to be reported on an Form 4 or Form 5. This does mean, however, that if the post-termination transaction is reportable, it is also potentially subject to short-swing profit recovery. Two post-termination transactions should not be matched against each other.
Delinquent Filings
Of course, if there are any reportable transactions prior to the termination date that the insider failed to report, the obligation to report the missed transactions still stands after termination. If the insider did not engage in any transactions in the six months leading up to his or her termination, the company should obtain a statement from the insider upon termination that all reportable transactions have been reported. Otherwise, the company should obtain a “no filing due” certification from the former insider at the end of the fiscal year to ensure that no Form 5 is required.
8-K
When directors, and certain officers of the company, leave their position, the company is required to report their departure by filing a Form 8-K under Item 5.02.