SEC Charges Multiple Delinquent Form 4 Filers

September 17, 2014

While the SEC has not pursued violations of the Section 16(a) reporting obligation with much vigor in the past, that all ended with the recent announcement of charges against 28 officers, directors, or major shareholders for violating the federal securities laws that require insiders to promptly report information about their holdings and transactions in company stock. The SEC also charged six public companies for contributing to the filing failures by insiders or for failing to report their insiders’ filing delinquencies as required, and against 10 investment firms for failing to report their beneficial ownership, or changes in their beneficial ownership, of public company stock holdings.

The charges all stem from a long-rumored SEC enforcement initiative focusing on two types of ownership reports—Form 4 and Schedules 13D and 13G[1]—that are intended to provide investors the opportunity to evaluate whether the holdings and transactions of company insiders could be indicative of the company’s future prospects. In the past, the SEC generally limited its specific ownership enforcement actions to cases in which the insider also engaged in other, more serious violations of the federal securities laws.

The SEC enforcement staff reportedly used quantitative data analytics and ranking algorithms to identify these insiders as repeatedly filing late. Some of the filings were delayed by weeks, months, or even years. In announcing the charges, Andrew M. Calamari, Director of the SEC’s New York Regional Office, stated rather bluntly, “The reporting requirements in the federal securities laws are not mere suggestions, they are legal obligations that must be obeyed. Those who fail to do so run the risk of facing an SEC enforcement action.”

The Persons, Companies and Institutions

The SEC’s cease and desist orders named 13 individuals who were officers or directors of public companies, five individuals who were beneficial owners of publicly-traded companies, 10 investment firms that reported beneficial ownership of publicly-traded companies and six publicly-traded companies for contributing to filing failures by their insiders or failing to report their insiders’ filing delinquencies as required. The common theme among all of these enforcement actions is the failure to report changes in a person or an institution’s beneficial ownership of public company stock. In some cases, these were very significant changes in ownership by the founding persons and senior executives.

The SEC now seems intent upon policing how and when insiders or institutions report their ownership interests and changes in that interest. The SEC stated flatly, “These proceedings arise out of violations of the beneficial ownership reporting requirements of the federal securities laws.” This initiative appears consistent with the SEC’s recent strategy of aggressively pursuing all types of federal securities violations, large and small, which SEC Chair Mary Jo White has likened to the so-called “broken windows” strategy of reducing serious crime by not tolerating even the smallest infractions.

A review of the 34 litigation releases reveals several interesting trends and traits, as well as the egregious nature of some of the violations, including:

  • An individual timely filed his Schedule 13D after acquiring more than 5% of the class of securities and his Form 3 initial statement of beneficial ownership after exceeding 10% ownership of the class, but then failed to update either filing over the next three years.
  • An investment management company failed to file any Form 4 reports over a seven year period with respect to a private investment fund controlled by it.
  • An individual was not only missing six Form 4 filings, but had not updated his Schedule 13G filing since it was first submitted in 1984, which resulted in him filing 30 amendments to his Schedule 13G once contacted by the SEC staff.
  • A foreign national failed to file—on time or at all—reports of his sales of more than $1 million of his company’s stock. Despite the company’s stock having been delisted by the NYSE last year and its SEC registration revoked by the SEC earlier this year, the Division of Enforcement will litigate the charges against this person (the only one charged who did not settle), in an administrative proceeding before an administrative law judge within 60 days.
  • An individual and 10% owner failed to report about 100 transactions in his company stock over a one-year period from 2010 to 2011.
  • Two public companies reported in three and four consecutive annual reports, respectively, that all Section 16(a) reports required to be filed had been timely filed, when in fact very few had been filed over the respective periods.
  • A prominent investment bank filed its initial Schedules 13G on two public companies, but then failed to update either for two years. Also, as a 10% beneficial owner of each such public company, the investment bank timely filed one initial statement of beneficial ownership on Form 3, never filed the other Form 3, and then failed to update its ownership filings for either company until contacted by the SEC staff.
  • In several proceedings, the SEC cited multiple sales made pursuant to Rule 10b5-1 plans as not being timely reported on Forms 4 by the individuals, all of whom worked at the same company.
  • An individual failed to file any Schedules 13D or amendments disclosing his greater than 5% beneficial ownership interests in four public companies, including one that he held for over 12 years. He also failed to file Form 4 reports covering his greater than 10% interest in three of the four companies.
  • A registered investment adviser and broker-dealer filed his initial statements of beneficial ownership for two public companies on Schedules 13G in 2007 and 2008, respectively. He then failed to report or disclose the 175 trades in the subject securities until contacted by the SEC enforcement staff in 2012. Further, after crossing the 20% ownership threshold in each, the individual continued making purchases while prohibited from doing so under the SEC’s rules (until he switched to a Schedule 13D), claiming that this was the result of the failure of his outside counsel to correctly advise him. When asked by the SEC enforcement staff, he was unable to offer adequate evidence of his reliance on outside counsel.
  • One public company failed to make the required Item 405 disclosure of delinquent filers in its 2011 annual report, misstating that “Based solely on a review of Forms 3, 4, and 5 and amendments thereto furnished to us, we know of no failure in Section 16(a) beneficial ownership reporting compliance except that through inadvertence certain directors or executives filed late.”[2]
  • Many individuals charged by the SEC placed the blame for not filing or for filing late on their own company or on another person such as their broker or investment adviser. Reminding each such individual that Section 16 places the responsibility to report changes in securities ownership on the insiders, the SEC concludes in each such case that, “Respondent took inadequate and ineffective steps to monitor whether his broker was providing timely notice to [the company] and whether timely and accurate filings were made on his behalf by [the company].”
  • Several of the public companies had voluntarily agreed with their insiders to perform certain tasks in connection with the filing of Section 16(a) reports on their behalf, including the preparation and filing of all such reports. The SEC charged that, on multiple occasions, these companies acted negligently in the performance of such tasks and were a cause of the respective insiders failing to file their Section 16(a) reports on a timely basis.

A Whole New World

In adopting Section 16(a) reporting, Congress reported that it was motivated by a belief that “the most potent weapon against the abuse of inside information is full and prompt publicity” and by a desire “to give investors an idea of the purchases and sales by insiders which may in turn indicate their private opinion as to prospects of the company.” It’s unlikely that the SEC’s new and improved focus on beneficial ownership reporting will go away any time soon.

Public companies, along with their officers and directors and significant shareholders, should take immediate steps to minimize their potential enforcement exposure by making certain that the company is aware of all of their (and their family members') stock holdings, promptly informing the company of any transactions or other changes in such holdings (including by their brokers and under Rule 10b5-1 trading plans), and reviewing draft beneficial ownership reports that are prepared and filed on their behalf. Institutional investors and publicly-traded companies should review their policies and procedures to ensure that they are reasonably designed to facilitate compliance with the beneficial ownership reporting requirements.

These combined SEC enforcement actions are clearly intended as a warning for public companies and their officers, directors and significant beneficial owners that the SEC intends to enforce even the more technical, non-fraud provisions of the federal securities laws that had not previously been on the SEC's radar screen. Indeed, with the aid of electronic filing, computer analytics and mathematical algorithms, the SEC’s Division of Enforcement has all the tools it needs to find any (and maybe every) late or missing beneficial ownership report.

For more information about these SEC charges and compliance with reporting requirements, please contact the author of this alert, Robert B. Murphy (202-906-8721 or or D. Richard McDonald, who leads Dykema’s public company practice group (248-203-0859 or, or any of the attorneys listed to the left.

[1] Form 4 is a report that corporate officers, directors, and certain beneficial owners of more than 10 percent of a registered class of a company’s stock must use to report their transactions in the company stock within two business days. Transactions required to be reported on Form 4 include purchases and sales of securities, exercises and conversions of derivative securities, and grants or awards of securities from the company. Schedules 13D and 13G are reports that beneficial owners of more than 5 percent of a registered class of a company’s stock must use to report holdings or intentions with respect to the company, including changes in such holdings or intentions.

[2] In every cease and desist proceeding, the SEC emphasized that there is no state of mind requirement for violations of Sections 16(a) and 13(g) and the rules thereunder: “The failure to timely file a required report, even if inadvertent, constitutes a violation.”

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