1097 Search Results

May 23, 2019 |
With Enactment of The Pacte Statute, All French Companies Must Be Managed in Their Corporate Interest and Management Must Consider Social and Environmental Issues Deriving from Their Activities

The French Civil Code provides as a general principle that every company must have a lawful corporate purpose and be constituted in the common interest of its partners.[1]  These provisions, which are applicable to all forms of partnership or public or private corporations, have been supplemented by the so-called “Pacte Statute” on the Development and Transformation of Businesses.  Each French company must now be managed “in furtherance of its corporate interest” and “while taking into consideration the social and environmental issues arising from its activity”.[2] These changes, which affect millions of legal entities from the smallest partnership to the largest public corporation, are a direct consequence of the recommendations of the so-called  Notat-Senard Report (“l’entreprise, objet d’intérêt collectif”, available at https://www.ladocumentationfrancaise.fr/var/storage/rapports-publics/184000133.pdf).  Lawyers of Gibson Dunn’s Paris office have been heavily involved in the work having led to this Report. The Pacte Statute provides that non-compliance with these new obligations is not sanctioned by the nullity of the company.[3]  The intent is to protect companies from the most adverse consequences of a breach of what may appear as a loose obligation. The Pacte Statute enshrines for the first time in statutory law the concept of “corporate interest” which, until now, had only been set forth by case law.  The Pacte Statute, however, does not define the notion of “corporate interest” because “its practical interest rests on its great flexibility, which makes it restive to any confinement in pre-established criteria.  The elements necessary to determine whether or not a decision is contrary to the corporate interest are too closely dependent on the multifaceted and changing characteristics of the activity and environment of each company.”(Explanatory Memorandum) In the minds of the promoters of the Pacte Statute, the acknowledgement of the concept of “corporate interest” implies the endorsement at the legislative level of a fundamental goal in the management of companies, i.e. “the fact that these are not managed in the interest of particular persons, but in their self-interest and in pursuit of their own ends.” (Explanatory Memorandum) The introduction of social and environmental issues in the management of companies is the most striking innovation.  Measuring social and environmental issues in decision-making is meant to force company managers to question themselves about these issues and to “consider them carefully” (Explanatory Memorandum).  This consideration must of course be adapted to each company, including in particular depending on its size and activity. Ignoring social and environmental issues is not sanctioned by a specific regime of liability.  Any court action seeking damages for failure to take into account these matters continues to require the meeting of the standard conditions of liability (existence of a fault, a damage and a causal link between the two).  The mere finding of social or environmental damage will therefore not suffice to bring into play the liability of a company or a corporate executive if it is not established that the damage resulted from the misconstruction of such issues. Ignoring these matters, however, could be a ground for dismissal of the company executive. The Pacte Statute also provides the possibility for companies to introduce in their by-laws (statuts) the pursuit of a raison d’être (which conveys, inter alia, the notions of founding principles and core values). The by-laws “may specify a raison d’être, constituted of the principles which the company is endowed with and for the respect of which it intends to allocate means in the performance of its activity”.[4] According to the promoters of the Pacte Statute, the raison d’être “aims to bring entrepreneurs and businesses closer to their long-term environment”.  The formulation of a raison d’être is to be strategically used, providing a framework of reference for the most important decisions. Numerous alternative phrasings have been considered in the formulation of these new principles, and Gibson Dunn has been privy to most of the debates on these alternatives and their legal consequences.  They do enlighten the legislative intent behind these very significant legislative evolutions and can usefully guide the practical implementation of these new rules. Several large French multinationals already had adopted a raison d’être (like Michelin – “A Better Way Forward”[5]) and since the parliamentary discussions around the Pacte Statute, many more (like Veolia, Atos or Alstom) have publicly stated their intent to do so.    [1]   Article 1833 of the French Civil Code.    [2]   “dans son intérêt social et en prenant en considération les enjeux sociaux et environnementaux de son activité”.  Identical provisions have been introduced in the Commercial Code regarding the powers of the Board of Directors and of the Management Board [directoire] of a corporation [société anonyme],  both of which must determine the orientations of the corporation’s activity in accordance with its corporate interest and taking into consideration social and environmental issues.    [3]   Civil Code, Article 1844-10, amended Paragraph 1.    [4]   Article 1835 of the French Civil Code.  The Pacte Statute also complements the Commercial Code in this respcet.  When a raison d’être is provided for by the by-laws, the Board of Directors and the Management Board of a corporation [société anonyme] must “consider, where appropriate, the raison d’être of the company defined in compliance with Article 1835 of the Civil Code”.  Articles L 225-35, paragraph 1 and L 225-64, paragraph 1 of the French Commercial Code.    [5]   “Offrir à chacun une meilleure façon d’avancer”. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Paris office by phone (+33 1 56 43 13 00) or by email (see below): Jean-Philippe Robé – jrobe@gibsondunn.com Bertrand Delaunay – bdelaunay@gibsondunn.com Benoît Fleury – bfleury@gibsondunn.com © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 25, 2019 |
Gibson Dunn Earns 79 Top-Tier Rankings in Chambers USA 2019

In its 2019 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 79 first-tier rankings, of which 27 were firm practice group rankings and 52 were individual lawyer rankings. Overall, the firm earned 276 rankings – 80 firm practice group rankings and 196 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Real Estate National – Retail National – Securities: Regulation CA – Antitrust CA – Environment CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Media & Entertainment: Litigation NY – Technology & Outsourcing TX – Antitrust This year, 155 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael Darden, William Dawson, Patrick Dennis, Mark Director, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Daniel Kolkey, Brian Lane, Jonathan Layne, Karen Manos, Randy Mastro, Cromwell Montgomery, Daniel Mummery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Sean Royall, Eugene Scalia, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin and Debra Wong Yang.

April 11, 2019 |
President Trump Issues Two Executive Orders on Energy Infrastructure

Click for PDF On April 10, 2019, President Trump issued two long awaited executive orders (“EOs”) intended to promote the development of energy infrastructure through several regulatory reforms.  In many respects, the EOs are driven by concerns that some states are thwarting the development of much needed energy infrastructure.  Indeed, a central feature of the first EO addresses reforms seeking to expedite and remove barriers to domestic energy projects.  The second EO reforms the process for permitting international cross-border projects, including oil pipelines. EO ON DOMESTIC INFRASTRUCTURE ISSUES President Trump’s first EO takes aim at a range of regulatory issues hindering the development of energy infrastructure projects domestically, including the Clean Water Act Section 401 water quality certifications and outdated safety regulations for LNG facilities.  The EO also requires reports on a number of energy issues, including, among others, constraints for entering the energy markets of New England and economic growth in the Appalachian region. Clean Water Act Section 401 Review There has been a great deal of concern that some states are impermissibly using  delegated federal authority under Section 401 of the Clean Water Act to impede construction of natural gas pipelines.  As a result, President Trump declared that outdated federal guidance and regulations on Water Quality Certifications are causing confusion and uncertainty and hindering the development of energy infrastructure.  EO I at Sec. 3.  Accordingly, President Trump ordered the Administrator of the EPA to consult with states, tribes and the relevant executive departments and agencies to review these materials to determine whether any provisions should be clarified to reduce confusion and regulatory uncertainty.  Id. at Sec. 3(a).  This review will include existing guidance issued under President Obama, which, among other things declares that the one-year time limit for states to act on a Section 401 certification begins when the certifying agency deems an application complete—contrary to recent case law.  See, e.g., N.Y. State Dep’t of Envtl. Conserv. v. FERC, 884 F.3d 450 (2d Cir. 2018) (finding that the one-year time limit begins when the applicant submits the application). The review that EPA must conduct appears aimed at addressing recent efforts in some states to exploit the Section 401 process to hinder energy projects by focusing on the following: The need to promote timely Federal-State cooperation and collaboration, EO I at Sec. 3(a)(i); The appropriate scope of water quality reviews, id. at Sec. 3(a)(ii); Types of conditions that may be appropriate to include in a certification, id. at Sec. 3(a)(iii); Expectations for reasonable review times for various types of certification requests, id. at Sec. 3(a)(iv); and The nature and scope of information States and authorized tribes may need in order to substantively act on a certification request within a prescribed period of time, id. at Sec. 3(a)(v). New EPA Section 401 Guidance:  President Trump ordered that upon completion of the review of existing guidance and regulations, but no later than 60 days from the date of the order (June 9, 2019), the Administrator of the EPA shall issue new guidance to States and authorized tribes to supersede the Section 401 interim guidance.  Id. at Sec. 3(b). The new guidance will, at minimum, clarify the issues listed above.  Id. Revised EPA Section 401 Regulations:  President Trump ordered that upon completion of the review, but no later than 120 days from the date of this order (August 8, 2019), the Administrator of the EPA shall review the Section 401 implementing regulations for consistency with the policies set forth above and publish revised rules for notice and comment.  Id. at Sec. 3(c).  Such revised rules shall be finalized no later than 13 months after the date of the order (May 10, 2020).  Id. Updated Guidance for 401 Implementing Agencies:  Following the issuance of the new Section 401 guidance, the Administrator of the EPA will lead an interagency review, in coordination with the head of each agency, such as the Federal Energy Regulatory Commission and the Army Corps of Engineers, that issues permits or licenses subject to Section 401 certification requirements, of existing regulations and guidance for consistency with the EPA guidance and rulemaking.  Id. at Sec. 3(d).  The heads of these agencies will then update their respective agency’s guidance within 90 days (i.e., no later than September 7, 2019).  Id.  Within 90 days of the EPA finalizing revised rules regarding Section 401, the heads of these agencies shall initiate a rulemaking to ensure their respective regulations are consistent with the EPA’s revised rules (i.e., no later than August 8, 2020).  Id. LNG Safety Regulations Currently, the Department of Transportation’s safety regulations for LNG facilities in 40 C.F.R. Part 193 apply uniformly to all LNG facilities regardless of size (e.g., small-scale peak shaving and large-scale import and export terminals).  Id. at Sec. 4(a).  Because the current rules were developed to regulate small facilities and new LNG export terminals are in various stages of development, President Trump ordered the Secretary of Transportation to initiate a rulemaking to update Part 193 using risk-based standards (i.e., those that impose regulatory requirements commensurate with the associated risk) to the maximum extent practicable.  Id.  The EO requires the Secretary to finalize that rulemaking no later than 13 months after the date of the order.  Id. In addition, President Trump directed that the Secretary of Transportation propose for notice and comment rulemaking, no later than 100 days from the date of the order, a rule that would allow LNG to be transported via rail in approved tank cars.  Id. at Sec. 4(b). The rule shall be finalized no later than 13 months from the date of the order. Capital Markets Because a majority of project financing is done through the United States capital markets, President Trump directed the Secretary of Labor to complete a review of the data filed with the Department of Labor by retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) to identify whether there are discernable trends with respect to such plans’ investments in the energy sector.  President Trump directed that within 180 days of the issuance of the order the Secretary of Labor shall complete the review and provide an update to the Assistant to the President for Economic Policy on any discernable trends in energy investments of such plans.  Id. at Sec. 5. The President also directed that the Secretary of Labor complete a review of existing Department of Labor guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.  Id. Rights-of-Way Renewals and Reauthorizations To address the issue of automatic sunset provisions in rights-of-way granted for energy infrastructure projects, President Trump directed the Secretaries of Commerce, Agriculture, and Interior to develop a master agreement for energy infrastructure rights-of-way renewals or reauthorizations, and within a year of the date of the order, initiate renewal or reauthorization for all expired energy rights-of-way.  Id. at Sec. 6. Reports on Barriers to National Energy Market Report on New England Constraints:  President Trump directed the Secretary of Transportation, in consultation with the Secretary of Energy, to submit a report regarding the economic and other effects caused by the inability to transport sufficient quantities of natural gas and other domestic energy resources into the States in New England and, as appropriate, other regions of the United States.  The report must be submitted within 180 of the order and assess to what extent state, local, tribal, and territorial actions have contributed to these issues.  Id. at Sec. 7(a). Report on West Coast Export Constraints:  President Trump also directed the Secretary of Energy, in consultation with the Secretary of Transportation, to submit a report regarding the economic and other effects cause by limitation on the export of coal, oil, natural gas, and other domestic energy resources through the west coast of the United States.  This report shall also be submitted within 180 days of the order and assess to what extent state, local, tribal, and territorial actions have contributed to such effects.  Id. at Sec. 7(b). Report on Intergovernmental Assistance Due to the vital role state and local governments play in supporting energy infrastructure projects, President Trump directed the heads of agencies to review existing authorities related to the transportation and development of domestically produced energy resources and report within 30 days on how those authorities can be most efficiently and effectively used to promote energy infrastructure development.  Id. at Sec. 8. Report on Economic Growth in Appalachian Region President Trump directed the Secretary of Energy to submit a report describing opportunities, through the federal government or otherwise, to promote economic growth of the Appalachian region, including growth of petrochemical and other industries.  The report shall also assess diversifying the Appalachian economy and promoting workforce development.  The report is due within 180 days of the order.  Id. at Sec. 9. EO ON INTERNATIONAL CROSS-BORDER PERMITTING Citing concerns that the policies of certain executive agencies have hindered the permitting process and relations with neighboring countries, President Trump’s second EO transfers authority from the Secretary of State to the President to issue, deny or amend Presidential permits for certain international border crossing facilities, including oil pipelines.  EO II at Sec. 1.  Under the EO, such decisions shall now reside solely with the President.  Id. at Sec. 2(i).  The EO requires the State Department to complete its review of any application and to provide any opinion supporting the issuance of a permit to the President within 60 days of receipt of the application.  Id. at Sec. 2.  The EO will effectively eliminate what has, at times, been a lengthy State Department review process.  These reforms would allow the President to permit a project like the Keystone XL, which was famously denied after the type of State Department review that is being eliminated here. Subject to a few significant exceptions, the EO applies to all Presidential permits for “pipelines . . . and similar facilities for exportation or importation of all products,” “facilities for the transportation of persons or things,” “bridges,” and “motor and rail vehicle” border crossings.  EO II at Sec. 2(b).  The EO specifically excepts, however, natural gas import and export facilities, electric transmission lines, and licenses to land or operate submarine cables.  Id.; see also Executive Order 10486 at Sec. 1(1)-(2); Executive Order 10530 at Sec. 5(a). The EO requires the Secretary of State to “adopt procedures to ensure” that if taken, certain actions are “completed within 60 days of the receipt of an application for a Presidential permit.”  EO II at Sec. 2.  While not required, during that 60-period the Secretary “may” “[R]equest additional information from the applicant,” or “refer the application and pertinent information” to other agency heads, id. at Sec. 2(c)(i)-(ii); “[A]dvise the President” on whether to “request the opinion, in writing, of any heads of agencies concerning the application,” id. at Sec. 2(d).  Should the President request such opinions, the agency heads are to provide them in writing “30 days from the date of the request, unless the President otherwise specifies,” id.; and “[S]olicit such advice from State, tribal, and local government officials, and foreign governments, as the President may deem necessary,” but must “seek responses no more than 30 days from the date of a request,” id. at Sec. 2(e). If after reviewing the additional information received from the applicant, the “opinions” of other agency heads, or “advice from State, tribal, and local government officials, and foreign governments,” the Secretary considers other information necessary for the President’s evaluation, the Secretary “shall advise the President accordingly.”  Id. at Sec. 2(f).  If directed by the President, the Secretary shall request such additional information.  Id. Within 60 days of receipt of the application, and after receiving or requesting the information discussed above, if the Secretary “is of the opinion” that issuance or amendment of a permit “would” or “would not serve the foreign policy interests of the United States, the Secretary” shall provide the reasons supporting that opinion to the President in writing.  Id. at Sec. 2(g)-(h). The EO also revokes Executive Orders 13337 and 11423, which had previously granted the Secretary of State authority to grant, deny or amend Presidential permits for the covered international border-crossing facilities.  Id. at Sec. 2(k). Notably, the EO makes no provision for the Secretary of State to make public notice of or seek public comment on a proposed permit.  Nor does it make allowance for any review that may be required under the National Environmental Policy Act (“NEPA”) or any other statute.  The current State Department’s NEPA regulations provide that an environmental assessment is normally required for “actions for which the Department has lead-agency responsibility and which may significantly affect the human environment of the United States,” including the “[i]ssuance of permits for construction of international bridges and pipeline[.]”  22 C.F.R. § 161.7(c). Gibson Dunn’s Energy, Regulation and Litigation lawyers are available to assist in addressing any questions you may have regarding the developments discussed above.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or the authors: William S. Scherman – Washington, D.C. (+1 202-887-3510, wscherman@gibsondunn.com) Ruth M. Porter – Washington, D.C. (+1 202-887-3666, rporter@gibsondunn.com) Jason J. Fleischer – Washington, D.C. (+1 202-887-3737, jfleischer@gibsondunn.com) Amy E. Mersol-Barg – Washington, D.C. (+1 202-955-8529, amersolbarg@gibsondunn.com)

March 27, 2019 |
Supreme Court Holds That Securities Fraud Liability Extends Beyond “Maker” Of False Statements

Click for PDF Decided March 27, 2019 Lorenzo v. SEC, No. 17-1077 Today, the Supreme Court held 6-2 that an individual who knowingly disseminates false statements, even if the individual did not “make” the statements under SEC Rule 10b-5(b), can be held liable under other subdivisions of Rule 10b-5 and related securities laws. Background: Francis Lorenzo sent emails to prospective investors containing false statements about the sale of securities.  He sent the emails at the direction of his boss, who wrote their content.  Under Janus Capital v. First Derivative Traders, 564 U.S. 135 (2011), Lorenzo could not be held liable for making false statements under Rule 10b-5(b) because he was not the “maker” of the statements—his boss retained “ultimate authority” over their content.  Id. at 142.  The SEC nonetheless charged Lorenzo with violating other parts of Rule 10b-5 and related statutes.  For example, the SEC alleged that Lorenzo had “employ[ed] any device, scheme, or artifice to defraud” under Rule 10b-5(a), and also had “engage[d] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” under Rule 10b-5(c).  The D.C. Circuit rejected Lorenzo’s contention that, because he was not the “maker” of the misstatements, he could not be held liable under Rule 10b-5(a) and (c) and related statutes. Issue:  Whether someone who is not a “maker” of a misstatement under Rule 10b-5(b) can nevertheless be held liable for dissemination of misstatements under other subsections of Rule 10b-5 and related securities laws. Court’s Holding:  Yes.  The prohibitions of fraudulent schemes and fraudulent practices in Rule 10b-5(a) and (c), as well as related prohibitions in securities laws, are broad enough to encompass the knowing dissemination of false or misleading statements directly to investors with the intent to defraud, even if the person who disseminates them did not “make” them under Rule 10b-5(b). “[W]e conclude that . . . dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5 . . . even if the disseminator did not ‘make’ the statements and consequently falls outside subsection (b) of the Rule.” Justice Breyer, writing for the majority What It Means: The Court read the language of Rule 10b-5 broadly, relying on dictionary definitions to hold that an individual need not “make” false statements in order to be liable for “employ[ing]” a scheme to defraud under Rule 10b-5(a) or for “engag[ing]” in an act that operates as a fraud under Rule 10b-5(c) based on the individual’s knowing dissemination of false statements with intent to deceive. The Court declined to read the subdivisions of Rule 10b-5 as mutually exclusive, reasoning that their prohibitions involve “considerable overlap” to ensure coverage for multiple forms of fraud. The Court suggested some limits to its broad reading of Rule 10b-5, observing that “liability would typically be inappropriate” for individuals “tangentially involved” in disseminating false statements, such as “a mailroom clerk.” The Court reaffirmed its precedent holding that private suits are not permitted against secondary violators of Section 10(b), 15 U.S.C. § 78j(b).  For example, private plaintiffs cannot sue defendants for undisclosed actions that investors could not have relied upon.  Therefore, the Court’s ruling should be limited to claims involving the dissemination of false information directly to investors. The Court did not address what intent (scienter) is required to establish violations of Rule 10b-5 and related securities laws, as Lorenzo did not challenge the D.C. Circuit’s holding that he had the requisite scienter.  The Court also reaffirmed that the SEC, “unlike private parties, need not show reliance in its enforcement actions.” The decision may result in the SEC and private plaintiffs increasingly relying on provisions other than Rule 10b-5(b) when alleging violations of the securities laws. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Related Practice: Securities Litigation Brian M. Lutz +1 415.393.8379 blutz@gibsondunn.com Robert F. Serio +1 212.351.3917 rserio@gibsondunn.com Meryl L. Young +1 949.451.4229 myoung@gibsondunn.com

March 26, 2019 |
SEC Continues to Modernize and Simplify Disclosure Requirements

Click for PDF On March 20, 2019, the Securities and Exchange Commission (the “SEC”) voted to adopt amendments (available here) to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies (the “Final Rules”).[1]  The amendments, which, among other things, will change the content of Management’s Discussion and Analysis (“MD&A”) and change the process for redacting confidential information in certain exhibits, are “intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information.”  The Final Rules are largely consistent with the proposed amendments outlined in the SEC’s October 11, 2017 proposing release, available here (the “Proposed Rules”), with a few exceptions.  For additional information on the Proposed Rules, please see our client alert dated October 13, 2017 (available here). In connection with the adoption of the Final Rules, SEC Chairman Jay Clayton stated, “[t]he amendments adopted today demonstrate our focus on modernizing our disclosure system to meet the expectations of today’s investors while eliminating unnecessary costs and burdens.” The Final Rules are also consistent with other efforts by the SEC to simplify disclosure requirements, such as certain changes to Regulation S-K adopted by the SEC effective November 5, 2018.  For additional information on the impact of these changes, please see our client alert dated August 27, 2018 (available here). The amendments relating to the redaction of confidential information in certain exhibits will become effective upon publication in the Federal Register.  The remainder of the amendments will become effective 30 days after they are published in the Federal Register, except that the requirements to tag data on the cover pages of certain filings are subject to a three-year phase-in.  Based on the principle the SEC staff recently set forth in Question 105.09 of the Exchange Act Forms C&DIs (available here), which applied to the above-referenced set of simplification amendments, the Final Rules will apply to all filings made after the applicable effective date discussed above, unless otherwise noted by the SEC staff.  As of the date of this publication, the Final Rules have not been published in the Federal Register.  Given the expected timing of publication, it is likely that the Final Rules related to the redaction of confidential information in certain exhibits will apply to the first quarter Form 10-Q for calendar-year filers, but it is less clear whether the other changes set forth in the Final Rules will apply to the first quarter Form 10-Q. I.     Summary of Amendments Adopted A.     Management’s Discussion and Analysis (MD&A) – Item 303 of Regulation S-K The Final Rules adopt the amendments relating to Item 303 in substantially the form set forth in the Proposed Rules.  Under these amendments, registrants that provide financial statements covering three years in their filings are not required to include in MD&A a discussion of the earliest year if: (i) such discussion was already included in any other of the registrant’s prior filings that required compliance with Item 303; and (ii) registrants identify the location in the prior filing where the omitted discussion can be found.  For example, if a registrant files its 2019 Form 10-K with financial statements for fiscal years 2017, 2018, and 2019, the registrant can omit from its MD&A the discussion comparing its operating results and financial condition for fiscal years 2017 to 2018, and instead only compare its operating results and financial condition for fiscal years 2018 and 2019 and refer the reader to the MD&A in the 2018 Form 10-K where the 2017 to 2018 comparative discussion may be found. The Item 303 amendments include two modifications from the Proposed Rules.  First, registrants can rely on any prior filing that required compliance with Item 303 (e.g., Form 10-K, Form S-1, Form S-4, Form 10), rather than only the prior fiscal year’s Form 10-K.  Second, the Final Rules did not adopt the language specifically requiring that all omitted information not be material to understanding the registrant’s financial condition because the SEC recognized that such a requirement is superfluous.  The SEC did not intend to modify or alter the overarching materiality analysis management undertakes with respect to MD&A and noted, “[t]his is not to suggest, however, that materiality is not relevant to management’s judgement about what disclosure is provided in MD&A.” Additionally, these amendments eliminate the portion of Instruction 1 to Item 303(a) indicating that five-year selected financial data may be necessary where trend information is relevant because, as the SEC notes, disclosure requirements for liquidity, capital resources, and results of operations already require trend disclosure.  The SEC does not anticipate that elimination of such language will discourage trend disclosure or otherwise reduce disclosure of material information. B.     Exhibits – Item 601 of Regulation S-K Omission of Information from Material Contracts Without Confidential Treatment Request.  Under the amendments adopted under the Final Rules, which are substantially similar to the Proposed Rules amendments, registrants can omit confidential information from material contracts filed pursuant to Item 601(b)(10)—without requesting confidential treatment from the SEC—where this information is both (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed.[2]  Registrants will still be required to: (i) mark the exhibit index to indicate that portions of the material contract have been omitted; (ii) include a prominent statement on the first page of the redacted material contract indicating certain information has been omitted; and (iii) indicate with brackets where this information has been omitted within the material contract. Similarly, Item 601(b)(2) was amended to allow registrants to redact immaterial provisions or terms from agreements filed under this item. Although registrants are no longer required to file confidential treatment requests with respect to exhibits filed pursuant to Item 601(b)(10) and Item 601(b)(2), they are still responsible for ensuring all material information is disclosed and limiting redactions to those portions necessary to prevent competitive harm.  The SEC staff will continue to selectively review registrants’ filings and assess whether registrants have satisfied their disclosure responsibility with respect to these redactions.  Upon request, registrants are required to provide supplemental materials similar to those currently required in confidential treatment requests.  Registrants can request confidential treatment pursuant to Rule 83 for these supplemental materials.  If the supplemental materials do not support the redactions, the SEC staff may instruct registrants to file an amendment disclosing some, or all, of the previously redacted information. Omission of Schedules and Attachments to Exhibits.  The Final Rules add new Item 601(a)(5) to allow registrants to omit entire schedules and similar attachments to exhibits, unless these schedules or attachments contain material information that is not otherwise disclosed in the exhibit or SEC filing.  This change extends the existing accommodation in Item 601(b)(2) for acquisition, reorganization, arrangement, liquidation, or succession agreements to all exhibits filed under Item 601, including material contracts.  As with Item 601(b)(2), exhibits relying on this provision must contain a list briefly identifying the contents of the omitted schedules or other attachments.  The SEC clarified, however, that registrants need not prepare a separate list if that information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments. Omission of Personally Identifiable Information (PII).  The Final Rules add new Item 601(a)(6) to allow registrants to omit PII (such as bank account numbers, social security numbers, home addresses, and similar information) from all exhibits without submitting a confidential treatment request for this information.  Registrants that use this accommodation can simply provide the exhibit with appropriate redactions and need not provide an analysis supporting the redactions at the time of filing.  This is consistent with the SEC staff’s current practice of not objecting when registrants seek confidential treatment and omission of PII. Elimination of Two-Year Look Back Period for Material Contracts.  With the exception of “newly reporting registrants,”[3] registrants will no longer be subject to the two-year look back period under Item 601(b)(10)(i), which requires the inclusion of all material contracts that were entered into during the last two years of the applicable registration statement or report.  Under the adopted amendments to Item 601(b)(10)(i), registrants need only to file as an exhibit contracts not made in the ordinary course of business that are material to the registrant and to be performed in whole or in part at or after the filing of the registration statement or report. New Requirement for Description of Securities.  The Final Rules amend Item 601(b)(4) to require that registrants provide a brief description of all securities registered under Section 12 of the Exchange Act (i.e., the information required by Item 202(a) through (d) and (f)) as an exhibit to their Form 10-K.  Previously, this disclosure was only required in registration statements. C.     Description of Property – Item 102 of Regulation S-K The Final Rules adopt the amendments to Item 102 as proposed.  Under these amendments, registrants are only required to describe a physical property to the extent the property is material to the registrant’s business, which contrasts with the previous requirement to disclose “principal” plants, mines, and other “materially important” physical properties.  However, given the significance and unique considerations of property disclosure for registrants operating in the mining, real estate, and oil and gas industries, the Final Rules did not modify the instructions to Item 102 that relate to those specific industries and as such they remain subject to their existing industry guides or other requirements of Regulation S-K.  For example, the oil and gas industry guide was replaced by Item 1200 et al. in 2008. D.     Changes to Item 405 – Compliance with Section 16(a) of the Exchange Act The Final Rules adopt amendments to Item 405 that eliminate the requirement for Section 16 persons to furnish Section 16 reports to the registrant; clarify that registrants may, but are not required to, rely only on Section 16 reports that have been filed on EDGAR (as well as any written representations from the reporting persons) to assess Section 16 delinquencies; change the disclosure heading required by Item 405(a)(1) from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports” and encourage excluding such heading altogether if there are no reportable Section 16(a) delinquencies; and eliminate the checkbox on the cover page of Form 10-K relating to Section 16(a) delinquencies. E.     Changes to SEC Forms – Cover Page The Final Rules adopt amendments that require disclosure of a registrant’s stock ticker symbol on the cover pages of certain filings, including Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F.  Because the cover pages of Form 10-K, Form 20-F, and Form 40-F already require disclosure of the title of each class of securities registered pursuant to Section 12(b) of the Exchange Act and each exchange on which they are registered, the amendments simply revise these cover pages to include a corresponding field for the trading symbols of any securities listed on an exchange.  Unlike Form 10-K, Form 20-F, and Form 40-F, however, the cover pages of Form 10-Q and Form 8-K do not currently require disclosure of the title of each class of securities and each exchange on which they are registered.  To maintain consistency across forms, the amendments will revise the cover pages of Form 10-Q and Form 8-K to include this disclosure (i.e., title of class and name of exchange) in addition to the trading symbol. While the text of the new cover page captions is contained in the adopting release, the release does not indicate exactly where the new text will be added to the Form 10-Q and 8-K cover pages.  It has historically taken the SEC staff several weeks or even months to incorporate updates to the PDF cover pages published on the SEC’s website. F.     Other Adopted Technical Amendments Changes to Clarify Unclear Instructions or Terms.  The Final Rules adopt amendments to Item 401 (Directors, Executive Officers, Promoters, and Control Persons), Item 407 (Corporate Governance), Item 501(b) (Outside Front Cover Page of the Prospectus), and Item 508 (Plan of Distribution) that help clarify unclear instructions or terms within these specific Items, such as clarifying when disclosure about executive officers need not be repeated in proxy or information statements if already included in Form 10-K (Item 401) or eliminating ambiguous terms discussing name change requirements and an exception to that requirement (Item 501(b)(1)). Relocation of Certain Requirements.  The Final Rules adopt amendments to Item 503(c) (Risk Factors) that relocate Item 503(c) from Subpart 500 to a new separate item under Subpart 100 of Regulation S-K (Item 105).  In particular, the SEC noted that Subpart 100 is a more appropriate location for Risk Factors because it covers a broad category of business information and, unlike Subpart 500, is not limited to offering-related disclosure.  This amendment does not change the requirements regarding content or placement of Risk Factors within Form 10-K and Form 10-Q. Elimination of Obsolete Undertakings.  The Final Rules adopt amendments to Item 512 (Undertakings) to eliminate undertakings that have become redundant and obsolete, including Item 512(c) (Warrants and rights offerings), (d) (Competitive bids), (e) (Incorporated annual and quarterly reports), and (f) (Equity offerings of nonreporting registrants). Changes to Improve Access to Information.  The Final Rules adopt amendments that aim to improve access to information by requiring data tagging for items on the cover pages of certain filings (Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F) and the use of hyperlinks for information available on EDGAR incorporated by reference into a registration statement or prospectus. II.     Summary of Proposed Rules Not Adopted Caption and Item Numbers.  The Final Rules did not adopt proposed amendments to Form 10, Form 10-K and Form 20-F that would have allowed registrants to exclude item numbers and captions or to create their own captions tailored to their disclosure.  The proposed amendments would not have affected captions that are expressly required by the forms or Regulation S-K.  A majority of commenters who addressed this issue disfavored the proposed amendments, noting the required captions and item numbers help investors navigate filings, make it more easy to locate information important to them, and enhance their ability to compare information in different filings.  The SEC ultimately agreed and stated that any benefits that might accrue by allowing more variability in the presentation of disclosure may be “outweighed by the risk that the changes could impair an investor’s ability to use and navigate the information efficiently and effectively.” Legal Entity Identifiers (LEIs).  The Final Rules did not adopt the proposed amendments to Item 601(b)(21)(i), which would have required all registrants and subsidiaries that had LEIs to disclose such LEIs as an exhibit.  LEIs are 20-character, globally-recognized alpha-numeric codes that allow for unique identification of entities engaged in financial transactions.  However, in light of several comments disfavoring the proposal, the SEC opted not to adopt such amendment.  The comments critical of the proposal generally expressed doubts about the benefits of the information or were concerned that it would be costly and time consuming to acquire and maintain LEIs. III.     Practical Considerations for Registrants In light of the adopted Final Rules, registrants should take a fresh look at the disclosure in their Exchange Act reports, starting with the first quarter Form 10-Q.  Compliance checks will need to be updated and reviewed closely.  Even beyond the technical changes, registrants should evaluate how their reports and registration statements can be revised to improve readability and navigability and eliminate repetitive or immaterial disclosure. Specifically, in light of the amendments to Item 303 of Regulation S-K, registrants should review their MD&A and consider what revisions should be made so that the discussion of current-year-to-prior-year results addresses material aspects of both years.  Although the SEC ultimately chose not to include, as an explicit condition, a requirement that the omitted discussion must not be material to an understanding of the registrant’s financial condition, changes in financial condition, and results of operations, materiality will remain a primary consideration as registrants consider revisions to the discussion included in their MD&A.  In the adopting release, the SEC noted that, “[i]n preparing MD&A, companies should evaluate issues presented in previous periods and consider reducing or omitting discussion of those that may no longer be material or helpful, or revise discussions where a revision would make the continuing relevance of an issue more apparent.”  In determining whether to omit a discussion of the earliest year in MD&A, companies will want to consider whether changes in their business (e.g., acquisitions, dispositions, or other corporate changes; changes in the mode of conducting business; changes in management’s strategy) would cause the discussion of the earliest year, or a portion of that discussion, to continue to be material. Registrants should also review the exhibits included in their Form 10-K or Form 10-Q or registration statements and consider whether any exhibits may be eliminated as a result of the amendments to Item 601 of Regulation S-K.  In addition to eliminating any exhibits that are no longer required, following effectiveness of the Final Rules, registrants must also remember to include in their Form 10-K the exhibit relating to the description of securities required under Item 601(b)(4), as amended. Lastly, while the adopted amendments will allow companies to redact confidential information from most exhibits without filing a separate confidential treatment request, such amendments do not substantively alter a registrant’s disclosure requirements and do not prevent the SEC from scrutinizing the appropriateness of any such omissions.  At this time, it is unclear how vigilant the SEC will be in scrutinizing omissions made pursuant to the revised redaction rules set forth in the Final Rules.  Accordingly, registrants should undertake substantially the same analysis in deciding whether to omit information following the effectiveness of the applicable amendments as one would take in making a confidential treatment request and be prepared to explain such analysis and reasoning if requested to do so by the SEC staff.  For guidance relating to the SEC staff’s views on appropriate redactions, registrants can continue to look to Staff Legal Bulletins 1 and 1A (available here).    [1]   Our discussion in this client alert is limited to the Division of Corporation Finance changes impacting reporting companies.    [2]   The SEC slightly revised the language of this second prong from the proposed language to add the term “likely.”    [3]   Under the Final Rules, a “newly reporting registrant” includes: (1) registrants that are not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act at the time of filing, (2) registrants that have not filed an annual report since the revival of a previously suspended reporting obligation, and (3) any registrant that (a) was a shell company, other than a business combination related shell company, as defined in Rule 12b-2 under the Exchange Act, immediately before completing a transaction that has the effect of causing it to cease being a shell company and (b) has not filed a registration statement or Form 8-K as required by Items 2.01 and 5.06 of that form, since the completion of such transaction (or, in the case of foreign private issuers, has not filed a Form 20-F since the completion of the transaction). Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any lawyer in the firm’s Securities Regulation and Corporate Governance and Capital Markets practice groups, or any of the following practice leaders and members: Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Michael A. Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Capital Markets Group: Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 25, 2019 |
M&A Report – 2018 Year-End Activism Update

Click for PDF This Client Alert provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion during the second half of 2018. Shareholder activism underwent a modest decline in the second half of 2017, but accelerated again in the first half of 2018. A similar pattern emerged during the second half of 2018, with a modest decline relative to the second half of 2017 in the numbers of public activist actions (40 vs. 46), activist investors taking actions (29 vs. 36) and companies targeted by such actions (34 vs. 39). However, in light of the robustness of shareholder activism activity in the first half of 2018, full-year numbers for 2018 are virtually identical to those of 2017, including with respect to the numbers of public activist actions (98 vs. 98), activist investors taking actions (65 vs. 63) and companies targeted by such actions (82 vs. 82). During the period spanning July 1, 2018 to December 31, 2018, four of the 34 companies targeted by activists were the subject of multiple campaigns, led by Dell Technologies Inc., which was the subject of four different activist campaigns. Bunge Limited was also the subject of two simultaneous campaigns by D.E. Shaw Group and a company before settling both campaigns at the same time. As to the activists, seven out of the 29 covered in this Client Alert launched multiple campaigns. The market capitalizations of those companies reviewed in this Client Alert ranged from just above the $1 billion minimum to just under $100 billion, as of December 31, 2018 (or as of the last date of trading for those companies that were acquired and delisted). By the Numbers – 2018 Full Year Public Activism Trends Additional statistical analyses may be found in the complete Activism Update linked below.  Compared to the first half of 2018, activists focused their campaigns more squarely on M&A as compared to other rationales. In the case of 65% of campaigns, M&A, including advocacy for or against spin-offs, acquisitions and sales, was an activist motivation (as compared to 32% in the first half of 2018), followed by business strategy (50% of campaigns, as compared to 36% in the first half of 2018). Changes to board composition, which had gained prominence in the first half of 2018 as the most common rationale for activist campaigns, represented the goal of activists in 45% of campaigns in the second half of 2018 (as compared to 76% in the first half of 2018). On the other hand, advocacy for changes in governance (20% of campaigns in the second half of 2018), return of capital (15% of campaigns), managerial changes (13% of campaigns) and attempts to take corporate control (5% of campaigns) represented less-frequently cited rationales for activist campaigns. Proxy solicitation transpired in 15% of the campaigns, representing a modest decline relative to the first half of 2018, in which 20% of campaigns featured activists filing proxy materials. (Note that the above-referenced percentages sum to over 100%, as certain activist campaigns had multiple rationales.) Consistent with the heightened focus on M&A and diminished attention paid by activists in their campaigns to board composition and governance, the number of publicly filed settlement agreements declined to nine (as compared to 21 in the first half of 2018). Consistent with prior trends, certain key terms have become increasingly standard in such settlement agreements. Voting agreements and standstill periods appeared in each of the settlement agreements, and non-disparagement covenants and minimum and/or maximum share ownership covenants appeared in all but one of the settlement agreements. Expense reimbursement appeared in over half of the settlement agreements reviewed (five), continuing a trend that began in the first half of 2018, when 62% of publicly filed settlement agreements contained such a provision (as compared to an historical average of 36% from 2014 through the first of 2017). Strategic initiatives did not figure prominently in settlement agreements entered into during the second half of 2018, being included in only two settlement agreements. We delve further into the data and the details in the latter half of this edition of Gibson Dunn’s Activism Update. We hope you find Gibson Dunn’s 2018 Year-End Activism Update informative. If you have any questions, please do not hesitate to reach out to a member of your Gibson Dunn team. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this publication.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following authors in the firm’s New York office: Barbara L. Becker (+1 212.351.4062, bbecker@gibsondunn.com) Dennis J. Friedman (+1 212.351.3900, dfriedman@gibsondunn.com) Richard J. Birns (+1 212.351.4032, rbirns@gibsondunn.com) Eduardo Gallardo (+1 212.351.3847, egallardo@gibsondunn.com) Saee Muzumdar (+1 212.351.3966, smuzumdar@gibsondunn.com) Daniel Alterbaum (+1 212.351.4084, dalterbaum@gibsondunn.com) William Koch (+1 212.351.4089, wkoch@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Mergers and Acquisitions Group: Jeffrey A. Chapman – Dallas (+1 214.698.3120, jchapman@gibsondunn.com) Stephen I. Glover – Washington, D.C. (+1 202.955.8593, siglover@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310.552.8641, jlayne@gibsondunn.com) Securities Regulation and Corporate Governance Group: Brian J. Lane – Washington, D.C. (+1 202.887.3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949.451.4343, jmoloney@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 11, 2019 |
Webcast: Shareholder Litigation Developments and Trends

Shareholder lawsuits are not only complicated to litigate, but due to the high financial stakes, these actions can be among the most threatening to a company and its directors and officers. It has been over twenty years since Congress enacted the Private Securities Litigation Reform Act of 1995, and since that time, private actions under the federal securities laws have continued to be filed at a steady pace. Over the last decade, the U.S. Supreme Court and the state supreme courts have issued multiple decisions impacting the way shareholder actions are litigated and decided. This One-Hour Briefing highlights recent developments and trends in this constantly evolving and complex area of the law. Faculty discuss: Shareholder actions filing and settlement trends Shareholder actions arising out of the #MeToo movement and claims of sexual harassment by senior executives Potential implications of future Supreme Court decisions in securities cases View Slides (PDF) PANELISTS: Jennifer L. Conn is a partner in the New York office of Gibson, Dunn & Crutcher.  Ms. Conn is co-editor of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. She has extensive experience in a wide range of complex commercial litigation matters, including those involving securities, accounting malpractice, antitrust, contracts, insurance and information technology. Ms. Conn is also a member of Gibson Dunn’s General Commercial Litigation, Securities Litigation, Appellate, and Privacy, Cybersecurity and Consumer Protection Practice Groups. Marshall R. King is a partner in the New York office of Gibson, Dunn & Crutcher. Mr. King is co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition.  He has extensive experience in commercial and business litigation matters, with particular focus on securities litigation and disputes arising out of acquisitions. Mr. King is also a member of Gibson Dunn’s Securities Litigation, Class Actions, International Arbitration, Litigation, Media, Entertainment and Technology and Transnational Litigation Practice Groups. Gabrielle Levin is a partner in the New York office of Gibson, Dunn & Crutcher.  Ms. Levin is co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition.  Her practice focuses on representing corporate clients in securities, employment, and general litigation matters. She has extensive experience in securities class actions, shareholder derivative litigation, SOX and Dodd-Frank whistleblower litigation, and employment litigation. Ms. Levin is a member of Gibson Dunn’s Securities Litigation Practice, Labor and Employment Practice, and Media, Entertainment and Technology Practice Groups, as well as the Firm’s Diversity Committee. MCLE INFORMATION:  This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

March 5, 2019 |
2018 Year-End Securities Litigation Update

Click for PDF 2018 witnessed even more securities litigation filings than 2017, in which we saw a dramatic uptick in securities litigation as compared to previous years.  This year-end update highlights what you most need to know in securities litigation developments and trends for the latter half of 2018, including: The Supreme Court heard oral argument in Lorenzo v. Securities and Exchange Commission, and is set to answer the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim even though it would not be actionable as a Rule 10b-5(b) claim under Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). The Supreme Court granted the petition for writ of certiorari in Emulex Corp. v. Varjabedian to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent (as opposed to knowing or reckless) misstatements or omissions made in connection with a tender offer. We discuss recent developments in Delaware law, including case law exploring, among other things, (1) appraisal rights, (2) the standard of review in controller transactions, (3) application of the Corwin doctrine, and (4) when a “Material Adverse Effect” permits termination of a merger agreement. We review case law implementing the Supreme Court’s decisions in Omnicare and Halliburton II. We review a decision from the Third Circuit regarding the obligation to disclose risk factors, and a decision from the Ninth Circuit regarding the utilization of judicial notice and the incorporation by reference doctrine at the motion to dismiss stage. 1. Filing and Settlement Trends Figure 1 below reflects filing rates for 2018 (all charts courtesy of NERA). Four hundred and forty-one cases were filed this past year. This figure does not include the many class suits filed in state courts or the increasing number of state court derivative suits, including many such suits filed in the Delaware Court of Chancery. Those state court cases represent a “force multiplier” of sorts in the dynamics of securities litigation today. Figure 1: As shown in Figure 2 below, over 200 “merger objection” cases were filed in federal courts in 2018. Building off a trend from 2017, this is nearly triple the number of such cases filed in 2016, and more than quadruple the number filed in 2014 and 2015. Note that this statistic only tracks cases filed in federal courts. Historically, most M&A litigation had occurred in state court, particularly the Delaware Court of Chancery. But as we have discussed in prior updates, the Delaware Court of Chancery announced in early 2016 in In re Trulia Inc. Stockholder Litigation, 29 A.3d 884 (Del. Ch. 2016) that the much-abused practice of filing an M&A case followed shortly by an agreement on “disclosure only” settlement is effectively at an end. This is likely driving an increasing number of cases to federal court. Figure 2: 2018 saw the continuation of a decline in the percentage of cases filed against healthcare companies, following the peak of such cases in 2016. The percentage of new cases involving electronics and technology companies, meanwhile, saw a significant bump, comprising 21% of all fillings in 2018. The proportion of cases in the finance sector remained roughly consistent as compared to 2017. Figure 3: As Figure 4 shows, the average settlement value was $69 million in 2018, returning to a number comparable to the average in 2016 ($77 million) after a sharp decline to $25 million in 2017. Figure 5 reflects that the median settlement value also rose from $6 million in 2017 to $13 million in 2018. In any given year, of course, median settlement statistics also can be influenced by the timing of large settlements, any one of which can skew the numbers.  The statistics are not highly predictive of the settlement value of any individual case, which is driven by a number of important factors, such as (i) the amount of D&O insurance; (ii) the presence of parallel proceedings, including government investigations and enforcement actions; (iii) the nature of the events that triggered the suit, such as the announcement of a major restatement; (iv) the range of provable damages in the case; and (v) whether the suit is brought under Section 10(b) of the Exchange Act or Section 11 of the Securities Act. Figure 4: Figure 5: Following a decline in 2017, 2018 witnessed the return of Median NERA-Defined Investor Losses and Median Ratio of Settlement to Investor Losses by Settlement Year to $479 million, a level similar to that seen in 2015 and 2016. Figure 6: 2018 also saw a greater number of settlement sizes in the $10 to $50 million range, with settlements in the $20 to $49.9 million range reaching an unprecedented 24% of all settlements. Figure 7: 2. What to Watch for in the Supreme Court A. Lorenzo Will Test the Reach of Janus on Who May Be Held Liable for False Statements In our 2018 Mid-Year Securities Litigation Update, we discussed the Supreme Court’s grant of certiorari in Lorenzo v. Securities and Exchange Commission, No. 17-1077. As readers will recall, Lorenzo involves the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim under Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c) even though it would not be actionable under Rule 10b-5(b) pursuant to the Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). In the decision below, the D.C. Circuit held that Lorenzo’s distribution of an email that included false statements drafted by his supervisor could not form the basis for 10b-5(b) liability under Janus, but could form the basis for “scheme” liability under 10b-5(a) and (c). Lorenzo v. Sec. & Exch. Comm’n, 872 F.3d 578, 580, 592 (D.C. Cir. 2017). Then-Judge Kavanaugh dissented from the panel opinion. In the merits brief, Petitioner (a securities broker) argued that allowing scheme liability would permit an end-run around the Court’s decision in Janus, which held that only the “maker” of a statement can face primary liability for securities fraud. Brief for Petitioner at 24. Petitioner specifically contended that the D.C. Circuit’s ruling would effectively nullify Janus, and would allow the SEC to impose liability for conduct under 10b-5(a) and (c) that is not actionable under 10b-5(b). Id. at 27-28. Petitioner also argued that the scheme liability theory adopted by the D.C. Circuit is functionally no different than aiding-and-abetting liability—a theory of liability under Section 10(b) of the Exchange Act that the Supreme Court rejected in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 177 (1994). Id. at 36. In its responsive brief on the merits, Respondent (the SEC) argued that neither Janus nor Central Bank purport to extend their holdings to claims made pursuant to Rules 10b-5(a) and (c). Brief for Respondent at 23-26, 31-33. On behalf of the SEC, the U.S. Solicitor General also argued that because the messages that contained the false statements were sent by Lorenzo, and because the transmission of the messages was necessary to the scheme, Lorenzo’s actions fall squarely within the provisions imposing scheme liability. Id. at 15-18. At oral argument on December 3, 2018, several Justices seemed troubled by Lorenzo’s argument because Janus relied on statutory text that prohibited the “making” of a false statement, but the statutory provisions under which the SEC charged Lorenzo do not include any references to the “making” of statements. Justice Alito repeatedly pressed Lorenzo’s counsel to explain why the alleged conduct did not “fall squarely within the language” of the statute. Tr. at 11. Justice Kagan expressed skepticism of Lorenzo’s theory that the various provisions of the anti-fraud statutes are “mutually exclusive,” such that misstatements can be sanctioned only under the provisions directed specifically at misstatements. Tr. at 25. Justice Gorsuch, however, appeared more accepting of Petitioner’s arguments, and pressed the government’s lawyer on how scheme liability could apply when the only fraud is the making of a false statement (a fraud claim barred by Janus on these facts). Tr. at 32-36. Justice Kavanaugh was recused because he participated in the decision below. We expect a decision in Lorenzo by the end of the 2018 Supreme Court Term in June 2019. We will continue to monitor developments in this area and report on any updates in our 2019 Mid-Year Securities Litigation Update. B. In Emulex, the Court Will Address whether Liability May Be Imposed under Section 14(e) for Negligent Conduct On January 4, 2019, the Supreme Court granted certiorari in Emulex Corp. v. Varjabedian, No. 18-459, to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent misstatements or omissions made in connection with a tender offer. The case arises out of the Ninth Circuit, which split with five of its sister circuits in holding that plaintiffs seeking to recover under Section 14(e) of the Exchange Act need only plead and prove negligence, not scienter. 888 F.3d 399, 405 (9th Cir. 2018). This case involves a joint press release announcing a merger between Avago Technologies Wireless Manufacturing, Inc. and Emulex Corp. The press release announced that Avago would pay a premium for Emulex stock. Documents filed with the SEC in support of the offer omitted a one-page “Premium Analysis” showing that while the premium fell within the normal range of merger premiums in comparable transactions, it was below average. A class of former Emulex shareholders filed a putative class action and alleged defendants had violated Section 14(e) by failing to summarize the Premium Analysis and to disclose that the premium was below the average for premiums in similar mergers. The district court dismissed the Section 14(e) claim for failure to plead that the misstatement or omission was made intentionally or with deliberate recklessness. The Ninth Circuit reversed the district court, noting that Section 14(e) contains two separate clauses, which each proscribe different conduct: (1) making or omitting an untrue statement of material fact and (2) engaging in fraudulent, deceptive or manipulative acts or practices. The Ninth Circuit reasoned that the first clause, on its face, does not include a scienter requirement. Although the Ninth Circuit acknowledged that five other circuits (the Second, Third, Fifth, Sixth, and Eleventh) have held that Section 14(e) requires that plaintiffs plead scienter, the Ninth Circuit believes those circuits ignored or misread Supreme Court precedent to import Rule 10b-5’s scienter requirement to Section 14(e) claims. Id. at 405. According to the Ninth Circuit, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976), found that Rule 10b-5 requires a showing of scienter because it was promulgated by the SEC, which only has the authority to regulate manipulative or deceptive devices that necessarily entail scienter. Varjabedian, 888 F. Supp. at 406. The Ninth Circuit also reasoned that the text of Section 14(e) is similar to that of Section 17(a)(2) of the Securities Act, which the Supreme Court held in Aaron v. SEC, 446 U.S. 680, 696-97 (1980), does not require a showing of scienter. Varjabedian, 888 F. Supp. at 406. The Ninth Circuit distinguished the contrary rulings in the other circuits by noting that they were either decided before Ernst & Ernst and Aaron or that they failed to follow the reasoning of those decisions and acknowledge the distinction between Rule 10b-5 and Section 14(e). Id. at 405. Emulex filed a petition for a writ of certiorari on October 11, 2018. Emulex argued that the Ninth Circuit’s decision “upset[] the statutory scheme enacted by Congress.” Petition for Writ of Certiorari at 15. Emulex further contended that the Supreme Court has not previously recognized a private right of action under Section 14(e) and declined to do so in Piper v. Chris-Craft Industries Inc., 430 U.S. 1, 24 (1977). While lower courts have inferred a private right of action, they have declined to create private rights of action for negligent conduct. Petition for Writ of Certiorari at 18-19. Emulex also argued that the circuit split “blew up” the consensus among circuit courts which had held that Section 14(e) does not support a private right of action or remedy based on mere negligence. Id. at 14. The Ninth Circuit’s decision, according to Petitioner, “creat[es] an expansive new regime at odds with the uniform view in the rest of the country.” Id. at 15. As noted, the Supreme Court granted certiorari in January 2019. We expect that the parties will submit their briefing to the Supreme Court in the spring of 2018, with oral argument to follow in the coming months. We will continue to monitor this appeal and provide an update in our 2019 Mid-Year Securities Litigation Update. C. Pending Certiorari Petitions There are two notable securities cases in which petitions for certiorari are pending. The first is Toshiba Corp. v. Automotive Industries Pension Trust Fund, No. 18-486, which also involves a circuit split created by the Ninth Circuit. The Ninth Circuit split from the Second Circuit in holding that the Supreme Court’s landmark decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), which held that U.S. securities laws do not apply extraterritorially, does not bar suits arising out of domestic transactions in the securities of a foreign issuer even when the foreign issuer has no role in facilitating the transaction. Also pending is First Solar Inc. v. Mineworkers’ Pension Scheme, No. 18-164, which we discussed in the 2018 Mid-Year Securities Litigation Update. Readers will recall that, in that case, the Ninth Circuit issued a per curiam opinion holding that loss causation can be established even when the corrective disclosure did not reveal the fraud on which the securities fraud claim is based. In both Toshiba and First Solar, the Supreme Court has entered orders requesting the Solicitor General to file briefs expressing the views of the United States. The government has not yet filed its brief in either case. We will continue to monitor these petitions and provide an update in our 2019 Mid-Year Securities Litigation Update if the Supreme Court grants certiorari. 3. Delaware Law Developments A. Contractual Waiver of Appraisal Rights Enforceable under Delaware Law In our 2018 Mid-Year Securities Litigation Update, we reported on two Court of Chancery decisions interpreting and applying new Delaware appraisal law set forth in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017). In the second half of 2018, the Court of Chancery continued implementing the Delaware Supreme Court’s directive by looking first—and primarily—to market factors to determine the fair value of a company’s stock when supported by appropriate facts. See Blueblade Capital Opportunities LLC v. Norcraft Cos., 2018 WL 3602940 (Del. Ch. July 27, 2018) (giving deal price no weight where stock thinly traded and sales process significantly flawed); In re Appraisal of Solera Holdings, Inc., 2018 WL 3625644 (Del. Ch. July 30, 2018) (giving deal price “dispositive” weight where sales process was “characterized by many objective indicia of reliability” and company’s actively traded stock had “a deep base of public stockholders”). Delaware courts also looked at appraisal mechanics in other contexts. In Manti Holdings, LLC v. Authentix Acquisition Co., the Court of Chancery enforced a provision in a stockholder agreement waiving stockholders’ right to pursue statutory appraisal for certain transactions. 2018 WL 4698255 (Del. Ch. Oct. 1, 2018). Stockholder-petitioners who had entered into the stockholder agreement lost their shares via merger. Id. at *1. Under the stockholder agreement, they had agreed “to refrain from the exercise of appraisal rights” if “a Company Sale [was] approved by the Board.” Id. at *2. That a “Company Sale” occurred was not disputed. In reaching its conclusion that the waiver was enforceable, the Court rejected as nonsensical the Petitioners’ argument that the waiver terminated upon consummation of the deal. Id. at *3. Importantly, the Court rejected the Petitioners’ argument that enforcing the Agreement “would impermissibly . . . impose a limitation on classes of stock by contract” in violation of DGCL Section 151(a), which, according to the Petitioners, requires such limits to derive from the corporate charter. Id. at *4. Reasoning that the Company entered into the agreement to “entice investment” and that the stockholders simply “took on contractual responsibilities in exchange for consideration,” the Court held that enforcing the stockholder agreement was “not the equivalent of imposing limitations on a class of stock under Section 151(a).” Id. B. Courts Clarify MFW’s “Ab Initio” Requirement In the second half of 2018, both the Delaware Supreme Court and the Court of Chancery clarified when the “ab initio” requirement is satisfied under Kahn v. M & F Worldwide Corp. (“MFW”), 88 A.3d 635, 644 (Del. 2014). Under MFW, a conflicted-controller transaction earns business judgment review when six elements are satisfied: (i) the procession of the transaction is conditioned ab initio on the approval of both a special committee and a majority of the minority stockholders (the “dual protections”); (ii) the special committee is independent; (iii) the special committee is empowered to freely select its own advisors and to say no definitively; (iv) the special committee meets its duty of care in negotiating a fair price; (v) the vote of the minority stockholders is informed; and (vi) there is no coercion of the minority stockholders. Id. at 645. In Olenik v. Lodzinski, the Court of Chancery held that the ab initio requirement was satisfied because the controller’s first offer, although extended after nine months of discussions, announced MFW’s dual protections “‘before any negotiations took place.’” 2018 WL 3493092, at *15 (Del. Ch. July 20, 2018) (quoting Swomley v. Schlecht, 2014 WL 4470947, at *21 (Del. Ch. 2014), aff’d, 128 A.3d 992 (Del. 2015) (TABLE)). The Court relied on settled Delaware law distinguishing between “discussions,” which were extensive in Olenik, and “negotiations,” which began only with the controller’s first offer. Id. at *16; see also Colonial Sch. Bd. v. Colonial Affiliate, NCCEA/DSEA/NEA, 449 A.2d 243, 247 (Del. 1982) (distinguishing between “negotiate,” which “means to bargain toward a desired contractual end,” and “discuss,” which “means merely to exchange thoughts and points of views on matters of mutual interest”). The Delaware Supreme Court weighed in three months later, holding in Flood v. Synutra International, Inc. that the ab initio element “require[s] the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and Special Committee bargain under the pressures exerted on both of them by these protections.” 195 A.3d 754, 763 (Del. 2018). In particular, the Supreme Court affirmed the trial court’s conclusion that the controller satisfied the ab initio element by conditioning the transaction on MFW’s dual protections in “the Follow-up Letter [sent] just over two weeks after [it] first proposed the Merger, before the Special Committee ever convened and before any negotiations ever took place.” Id. at 764. Although these decisions are based on notably different facts—for example, nine months elapsed between the initial communication and the first offer in Olenik, and only two weeks passed between the initial communication and “the Follow-up Letter” in Synutra—they appear to create one rule: MFW’s “ab initio” requirement will be satisfied as long as the controller commits to MFW’s dual protections before substantive economic negotiations occur. Olenik is on appeal to the Delaware Supreme Court, which may further clarify matters. C. Inadequate Disclosures Preclude Cleansing under Corwin In two recent cases, the Court of Chancery concluded the Corwin doctrine did not apply. In re Xura, Inc. S’holder Litig., 2018 WL 6498677 (Del. Ch. Dec. 10, 2018) (denying Corwin motion based on seven alleged material omissions); In re Tangoe, Inc. S’holder Litig., 2018 WL 6074435 (Del. Ch. Nov. 20, 2018) (holding stockholders were not adequately informed for Corwin purposes where audited financials and the facts underlying a restatement were not disclosed). Under Corwin, the business judgment rule applies to judicial review of transactions that are not otherwise subject to the entire fairness standard so long as the transaction was “approved by a fully informed, uncoerced vote of the disinterested stockholders.” See id. at *9 (quoting Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 309 (Del. 2015)). Initially an appraisal proceeding, Xura morphed into a plenary action after appraisal discovery revealed questionable conduct primarily by a seller’s CEO. Xura, 2018 WL 6498677, at *1. The CEO, it was alleged, steered his company into a transaction with an interest that differed from other stockholders: self-preservation. Id. at *11. He stood to lose his job and a $25 million payout if the company was not sold. Id. at *13. The proxy statement for the deal failed to disclose the CEO’s actions relating to the sales process, leaving stockholders “entirely ignorant” of his influence over the transaction and “his possible self-interested motivation for pushing an allegedly undervalued [t]ransaction on the [c]ompany and its stockholders.” Id. Vice Chancellor Slights held that Corwin-cleansing was unavailable because the “stockholders could not have cleansed conduct about which they did not know.” Id. at *12. The stockholders in Tangoe similarly were found to be uninformed. Thirteen months before the transaction at issue, the SEC notified Tangoe that it would need to restate almost three years of its financials. Tangoe, 2018 WL 6074435, at *1. Tangoe took so long to do so that NASDAQ delisted its stock and the SEC threatened to deregister it. Id. at *2. After an activist stockholder increased its stake in the company and signaled to the board that “a proxy contest was coming,” the board began shifting its focus from restating the financials to selling the company. Id. at *1, 4-6. While it did so, it also altered its own compensation so that its members collectively would receive nearly $5 million in the event of a change of control. Id. at *5, 12-13. Throughout the sales process, the board failed to provide stockholders with audited financial statements. Although the Court pointed out that audited financial statements are not per se material, when combined with the misstatements in the company’s financial statements, among other things, the stockholders were left in an “information vacuum.” Id. at *10. The Court also found it significant that the board failed to disclose information related to the process of restating the company’s financials. Id. at *11. Accordingly, the Court held that Corwin-cleansing was unavailable because a reasonable inference could be drawn that the stockholders were not fully informed when they approved the transactions. Id. at *10-12. D. Delaware Supreme Court Affirms MAE Ruling On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s recent post-trial ruling that a “Material Adverse Effect” (or “MAE”) permitted a buyer to terminate a merger agreement. Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff’d, — A.3d —-, 2018 WL 6427137 (Del. Dec. 7, 2018). Several factors contributed to the Court of Chancery’s finding that Akorn suffered an MAE. First, after Fresenius agreed to acquire Akorn, Akorn’s business “fell off a cliff”: in three consecutive quarters, it announced year-over-year declines in quarterly revenues of 29%, 29%, and 34%; in operating income of 84%, 89%, and 292%; and in earnings per share of 96%, 105%, and 300%. Id. at *21, 24, 35. Second, whistleblower letters prompted an investigation into Akorn’s product development and quality control process. Id. at *26. This investigation revealed many flaws, including falsification of laboratory data submitted to the FDA. Id. at *30-31. Third, Akorn failed to operate its business in the ordinary course post-signing, fundamentally changing its quality control and information technology functions without Fresenius’s consent. Id. at *88. On appeal, the Delaware Supreme Court held that the record “adequately support[ed]” the Court of Chancery’s determination. Akorn, Inc., — A.3d —-, 2018 WL 6427137 (Del. Dec. 7, 2018). E. N.Y. First Department Reverses Xerox, Dissolves Injunction As we reported in our 2018 Mid-Year Securities Litigation Update, in April 2018, the New York Supreme Court enjoined a multi-billion dollar merger of Xerox Corp. and Fujifilm Holdings Corp. (“Fujifilm”) because Xerox’s CEO, who negotiated the deal, and a majority of Xerox’s board were conflicted or lacked independence because they expected to continue serving the combined entity. In re Xerox Corp. Consolidated Shareholder Litigation, 2018 WL 2054280, at *7 (N.Y. Sup. Apr. 27, 2018). Xerox and Fujifilm appealed. In October 2018, the First Department reversed the decision unanimously “on the law and the facts,” holding that the business judgment rule applied and that the plaintiffs had failed to show a likelihood of success on their breach of fiduciary duty and fraud claims. Deason v. Fujifilm Holdings Corp., 165 A.D.3d 501 (1st Dep’t 2018). In particular, the plaintiffs “failed to show bad faith or a disabling interest on the part of the majority of the directors of Xerox” because “the possibility that any one of the directors would be named to [the combined] board alone was not a material benefit such that it was a disabling interest;” any potential conflict created by Xerox’s CEO continuing as the future CEO of the new company was acknowledged by the board; and the board “engaged outside advisers,” “discussed the proposed transaction on numerous occasions,” and the deal was not “unreasonable on its face.” Id. at 501-02. As a result, the First Department dismissed the complaints against Fujifilm and dissolved the injunctions enjoining the deal. Id. On February 21, 2019, the First Department denied the class plaintiffs’ motion for reargument or, in the alternative, leave to appeal to the Court of Appeals. 4. Falsity of Opinions – Omnicare Update As discussed in our prior securities litigation updates, courts continue to define the boundaries of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015). The Supreme Court’s Omnicare decision addressed the scope of liability for false opinion statements under Section 11 of the Securities Act. The Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Id. at 1327. An opinion statement can give rise to liability only when the speaker does not “actually hold[] the stated belief,” or when the opinion statement contains “embedded statements of fact” that are untrue. Id. at 1326–27. But in the heavily debated “omission” part of the opinion, the Court held that a factual omission from a statement of opinion gives rise to liability when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” Id. at 1329. The plaintiffs’ bar predicted that this omission theory of falsity would give rise to a wave of securities litigation complaints poised to survive the pleadings phase. While the theory has indeed become commonplace in complaints, it has fared little to no better in the last half of 2018 against the exacting pleading standards generally applicable to all theories of liability under the securities laws. See, e.g., Hering v. Rite Aid Corp., 331 F. Supp. 3d 412, 427 (M.D. Pa. 2018) (finding that “Plaintiff has failed to meet the exacting pleading standard of the PSLRA” where reasonable investors would understand the statements to be estimates). One district court recently emphasized that “a general allegation that ‘Defendants had knowledge of, or recklessly disregarded, omitted facts’” is insufficient. In re Under Armour Sec. Litig., 342 F. Supp. 3d 658, 676 (D. Md. 2018) (citation omitted). Another court rejected plaintiff’s claim that defendants should have conducted an inquiry into the facts underlying their opinion, finding that “[a] blanket conclusory assertion that no investigation occurred, without more, is insufficient.” Pension Tr. v. J. Jill, Inc., 2018 WL 6704751, at *8 (D. Mass. Dec. 20, 2018). Courts have specifically grappled with whether plaintiffs met the pleading standard in cases involving a company’s general opinions on its financial condition. In Frankfurt-Tr. Inv. Luxemburg AG v. United Technologies Corp., the Southern District of New York held that “omitting even significant, directly contradictory information from opinion statements is not misleading, ‘especially’ when there are countervailing disclosures.” 336 F. Supp. 3d 196, 230–31 (S.D.N.Y. 2018). Relying on Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016) and Martin v. Quartermain, 732 F. App’x 37 (2d Cir. 2018), the court found that statements about the company’s business and projected earnings per share were not misleading even where they failed to disclose specifics regarding a “slowdown of commercial aftermarket sales” and other potentially negative factors. Id. at 230. Plaintiff’s allegations—unlike the highly detailed allegations about test data in Sanofi and Martin—were “too scant in detail and scope” and “at a high level,” meaning that they failed to show that the alleged omissions would have a meaningful impact on a reasonable investor’s understanding of the company. Id. On the other hand, the District of Delaware found that plaintiffs met their pleading burden where they alleged that particular information omitted from a proxy statement, which recommended that shareholders vote in favor of a merger, made other specific statements about the fairness of the merger misleading. Laborers’ Local #231 Pension Fund v. Cowan, 2018 WL 3243975, at *10–12 (D. Del. July 2, 2018), reargument denied, 2018 WL 3468216 (D. Del. July 18, 2018). Because the board cited a fairness opinion in its decision to approve the merger, the court held that a reasonable investor may have thought that the company “placed confidence” in the fairness opinion and believed that it “accurately analyzed [the company’s] potential financial growth,” which “conflict[ed] with undisclosed facts or knowledge held by the board,” namely that the fairness opinion “did not incorporate acquisition based growth into its projections.” Id. at *10–11. Several courts also provided guidance for companies making opinion statements about legal and compliance risks, again highlighting the importance of context. For example, the Northern District of Illinois concluded that statements about legal compliance that were accompanied by disclosures concerning an ongoing IRS investigation would not be misleading to reasonable investors “unless they ignore[d] those disclosures.” Societe Generale Sec. Servs., GbmH v. Caterpillar, Inc., 2018 WL 4616356, at *4–5 (N.D. Ill. Sept. 26, 2018). Likewise, in Jaroslawicz v. M&T Bank Corp., the Third Circuit found that a company’s statements about its due diligence, which allegedly omitted deficiencies in its anti-money laundering compliance program, were not misleading. 912 F.3d 96, 113–14 (3d Cir. 2018). Paying close attention to the context, the court held that the statements were accompanied by sufficient facts that the company conducted a shorter period of diligence than investors may have otherwise expected. See id. at 114. In addition, the plaintiffs alleged both general negligence—insufficient to plead a violation under Omnicare—as well as that “a reasonable investor would have expected the banks to conduct a sampling of customer accounts” as part of their due diligence process. Id. The court found that a single allegation that the bank could have conducted a sampling was too weak to defeat the motion to dismiss. See id. In contrast, a Southern District of New York court found that a company’s statements regarding careful management and compliance with laws regarding its credit portfolio could be misleading because plaintiffs alleged that company was aware of particular facts suggesting the falsity of those statements. See In re Signet Jewelers Ltd. Sec. Litig., 2018 WL 6167889, at *12–13 (S.D.N.Y. Nov. 26, 2018). Noting that the pleading burden is “no small task,” the court held that plaintiffs nevertheless met their burden because they alleged “particularized and material[] facts” based on the testimony of former employees who provided information to the plaintiffs. Id. at *13. In particular, specific allegations that the company was “aware that a substantial and growing portion of its credit portfolio contained subprime loans and chose to disregard internal warnings about that fact” rendered the complaint sufficient to survive a motion to dismiss. Id. In the latter half of the year, courts also dealt with the circumstances in which a pharmaceutical company’s opinions on the safety of a drug undergoing clinical trials may give rise to liability under Omnicare. In Hirtenstein v. Cempra, Inc., the court held that the company’s statements that it believed a drug was safe was an inactionable opinion. 2018 WL 5312783, at *17–18 (M.D.N.C. Oct. 26, 2018). Plaintiffs claimed that because the company’s chief executive officer “elected to speak about [the drug’s] purportedly ‘compelling’ clinical data . . . [she] had a duty to disclose that . . . safety data showed a significant and genuine signal for liver toxicity and liver injury.” Id. at *17. The court held that the company did not have a “duty to disclose adverse events, particularly where the statements [were] couched as opinion and [did] not constitute affirmative statements that there are no safety concerns associated with the drug.” Id. at *18. These types of opinions could not be actionable, where they were “little more than vague optimistic statements regarding the safety profile of the drug.” Id. at *19. On the other hand, in SEB Inv. Mgmt. AB v. Endo International, PLC, the court found that plaintiff stated a Section 11 claim where it alleged that the company had specific knowledge of “an increasing number of serious adverse events linked to injection” of the drug at issue. 2018 WL 6444237, at *21–22 (E.D. Pa. Dec. 10, 2018). Despite the fact that the company allegedly knew about the “increased rate in injection use, [it] failed to disclose to investors that it faced a serious risk of regulatory action, including removal of the drug from the market,” forming the basis for an actionable Section 11 claim. Id. 5. Courts Continue to Shape “Price Impact” Analysis at the Class Certification Stage Courts across the country continue to grapple with implementing the Supreme Court’s landmark ruling in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), although the second half of 2018 did not bring any new decisions from the federal circuit courts of appeal. In Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption—a presumption enabling plaintiffs to maintain the common proof of reliance that is essential to class certification in a Rule 10b-5 case—but made room for defendants to rebut that presumption at the class certification stage with evidence that the alleged misrepresentation had no impact on the price of the issuer’s stock. Two key questions continue to recur. First, how should courts reconcile the Supreme Court’s explicit ruling in Halliburton II that direct and indirect evidence of price impact must be considered at the class certification stage, Halliburton II, 123 S. Ct. at 2417, with its previous decisions holding that plaintiffs need not prove loss causation or materiality until the merits stage? See Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (“Halliburton I”); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). Second, what standard of proof must defendants meet to rebut the presumption with evidence of no price impact? As we have previously reported, the Second Circuit has addressed both of these key questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays”) and Arkansas Teachers Retirement System v. Goldman Sachs, 879 F.3d 474 (2d Cir. 2018) (“Goldman Sachs”). Those decisions remain the most substantive interpretations of Halliburton II. Barclays addressed the standard of proof necessary to rebut the presumption of reliance and held that after a plaintiff establishes the presumption of reliance applies, defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence. As we have previously noted, this puts the Second Circuit at odds with the Eighth Circuit, which cited Rule 301 of the Federal Rules of Evidence when reversing a trial court’s certification order on price impact grounds, see IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016), because Rule 301 assigns only the burden of production—i.e., producing some evidence—to the party seeking to rebut a presumption, but “does not shift the burden of persuasion, which remains on the party who had it originally.” Fed. R. Evid. 301. That inconsistency, however, was not enough to persuade the Supreme Court to review the Second Circuit’s decision. Barclays PLC v. Waggoner, 138 S.Ct. 1702 (Mem) (2018) (denying writ of certiorari). In Goldman Sachs, the Second Circuit vacated the trial court’s ruling certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the issue of materiality. Goldman Sachs, 879 F.3d at 486. Following the Second Circuit’s decision, the district court held an evidentiary hearing and heard oral argument. In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1-2 (Aug. 14, 2018). The court, again, certified the class. Id. On remand, plaintiffs argued that because the company’s stock price declined following the announcement of three regulatory actions related to the company’s conflicts of interest, previous misstatements about its conflicts had inflated the company’s stock price. See id. at * 2. Defendants argued the alleged misstatements could not have caused the stock price drops for two reasons, and offered expert testimony to support each. Id. at *3. First, they argued that the company’s stock price had not reacted to thirty-six prior reports commenting on company conflicts, and, therefore, the identified stock price drops could not be linked to the alleged misstatements. Id. at *3. Second, they argued that news of enforcement activities (and not a correction of earlier statements regarding conflicts and business practices) caused the identified stock price drops. Id. The court found plaintiff’s expert’s “link between the news of Goldman’s conflicts and the subsequent stock price declines . . . sufficient.” Id. at *4. The court was persuaded that the first allegedly corrective disclosure revealed new information about the conflicts, see id., and held that defendants’ expert testimony regarding alternative explanations for the stock price decline (i.e., the nature of the enforcement actions rather than the subject matter) was not sufficient to “sever” that link. Id. at *5-6. The Second Circuit has agreed to review Goldman Sachs for a second time and has ordered an expedited briefing schedule. See Order, Ark. Teachers Ret. System v. Goldman Sachs, Case No. 18-3667 (2d Cir. Jan. 31, 2019). The Third Circuit is also poised to substantively address price impact analysis at the class certification stage in the coming months in its review of Li v. Aeterna Zentaris, Inc., 324 F.R.D. 331 (D.N.J. 2018) (“Aeterna”). See Order, Vizirgianakis v. Aeterna Zentaris, Inc., No. 18-8021 (3d Cir. Mar. 30, 2018). Substantive briefing is completed in Aeterna, which invites the Third Circuit to clarify the type of evidence defendants must present, including the burden of proof they must meet to rebut the presumption of reliance and whether statistical evidence rebutting the presumption must meet a 95% confidence threshold. In certifying the class, the district court described defendants’ burden as “producing [enough] evidence . . . ‘to withstand a motion for summary judgment or judgment as a matter of law,’” Aeterna, 324 F.R.D. at 344 (quoting Lupyan v. Corinthian Colleges, Inc., 761 F.3d 314, 320 (3d Cir. 2014) and citing Best Buy, 818 F.3d at 782 and Fed. R. Evid. 301), but then observed defendants failed to prove lack of price impact with “‘scientific certainty,’” see id. at 345 (quoting Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 310 F.R.D. 69, 95 (S.D.N.Y. 2015)). The district court rejected defendants’ argument that plaintiff’s event study, which did not attribute a statistically significant price movement to the alleged misstatement, rebutted the presumption and criticized defendants for not offering their own event study. See id. at 345. We will continue to monitor developments in these and other cases. 6. The Third Circuit Explores the Requirement to Disclose Risk Factors In late December 2018, the Third Circuit issued a decision in the latest case to address the scope of disclosure requirements for proxy solicitations under Section 14(a) of the Securities Exchange Act of 1934. In Jaroslawicz v. M&T Bank Corp., 912 F.3d 96 (3d Cir. 2018), former shareholders of Hudson City Bancorp filed suit against Hudson and M&T Bank, alleging the joint proxy soliciting votes for the merger between the two entities was materially misleading because (1) it failed to disclose certain practices that did not comply with relevant regulatory requirements, which posed significant risk factors facing the merger, as required under Item 503(c) of Regulation S-K (the “Regulatory Risk Disclosures”); and (2) these omissions rendered opinion statements regarding M&T Bank’s compliance with laws materially false and misleading (the “Legal Compliance Disclosures”). Specifically, as to the Regulatory Risk Disclosures, the proxy statement was alleged to be misleading because it did not discuss M&T Bank’s past consumer violations involving switching no-fee checking accounts to fee-based accounts. As to Legal Compliance Disclosures, the proxy statement was alleged to be misleading because M&T Bank had failed to discuss deficiencies in its Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance program until it filed a supplemental disclosure six days before the shareholder vote, when it disclosed for the first time that it was the subject of a Federal Reserve Board investigation on these programs. In interpreting the scope of disclosure under Item 503(c), which requires proxy issuers to discuss “the most significant factors that make the offering speculative or risky,” the Court explained that risk disclosures, such as the Regulatory Risk Disclosures at issue, must be “company-specific” in order to insulate an issuer from liability. Jaroslawicz, 912 F.3d at 106–08. Thus, “generic disclosures which could apply across an industry are insufficient” to protect a company in the event that a risk falling under a “boilerplate” disclosure later transpires. Id. at 108, 111. For this reason, the Court concluded that M&T Bank’s generic references to being subject to regulatory oversight were not “company-specific” risk factors that would “communicate anything meaningful” to stockholders. Id. at 111. Thus, even though the bank had ceased its alleged consumer violations, the Court found it plausible that the undisclosed “high volume of past violations made the upcoming merger vulnerable to regulatory delay.” Id. at 107. With respect to the plaintiffs’ allegations regarding BSA/AML deficiencies, the Court held that the supplemental proxy statement’s disclosure that the bank was the subject of an investigation regarding these practices, which “would likely result in delay of regulatory approval,” was “likely adequate” under Section 14(a). However, because the supplemental disclosures were issued a mere six days before the stockholder vote on the transaction, the Court concluded that the plaintiffs had adequately alleged that a reasonable investor did not have enough time to digest this relevant information. Id. at 112. Further, although the Court declined to expressly decide whether a heightened standard for pleading falsity applied to the Legal Compliance Disclosures and other claims brought under Section 14(a) of the Exchange Act, it found that the stockholders failed to allege a claim under their “misleading opinion” theory. Id. at 113. In dismissing plaintiffs’ Omnicare claims alleging that the Legal Compliance Disclosures were actionably misleading, the Court reiterated the longstanding principle that an opinion statement is not rendered misleading simply because it later “proved to be false.” Id. Crucially, the Court explained that the Legal Compliance Disclosures in the proxy statement were not plausibly alleged to be misleading because the bank adequately divulged the basis for its opinion. In particular, the proxy statement made clear that the bank had concluded it was in compliance with applicable laws based on a brief period of due diligence conducted in connection with the transaction. Id. at 114. 7. The Ninth Circuit Clarifies when Courts May Consider Documents Outside of the Pleadings on Motions to Dismiss Securities Claims On August 13, 2018, the Ninth Circuit revisited the extent to which a court can properly consider materials outside of the four corners of the complaint in ruling on a motion to dismiss a securities claim. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 994 (9th Cir. 2018). It is well settled that courts must not only accept all factual allegations in a complaint as true for purposes of deciding a motion to dismiss, but also consider “other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, [1] documents incorporated into the complaint by reference, and [2] matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). In the Ninth Circuit, a defendant can seek to treat a document as incorporated into the complaint “if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff’s claim.” United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003). The incorporation by reference doctrine allows courts to treat documents as if they are part of the complaint in their entirety, which “prevents plaintiffs from selecting only portions of documents that support their claims, while omitting portions of those very documents that weaken—or doom—their claims.” Khoja, 899 F.3d at 1002. Judicial notice, on the other hand, is explicitly permitted by Federal Rule of Evidence 201, and allows a court to take notice of an adjudicative fact if it is “not subject to reasonable dispute.” Fed. R. Evid. 201(b). In Khoja, the Ninth Circuit noted the “concerning pattern” of courts improperly using these procedures in securities cases “to defeat what would otherwise constitute adequately stated claims at the pleading stage,” and “aim[ed] to clarify when it is proper to take judicial notice of facts in documents, or to incorporate by reference documents into a complaint.” 899 F.3d at 998, 999. The district court in Khoja considered twenty-one documents quoted or referenced by the complaint, and granted the defendant’s motion to dismiss the claims plaintiff filed under Sections 10 and 20 of the Exchange Act. Id. at 997. On appeal, the Ninth Circuit reversed in part, holding that the district court had abused its discretion in taking judicial notice of at least one document and in treating at least seven documents as incorporated by reference. Id. at 1018. Regarding judicial notice under FRE 201, the Court explained that just because a document is subject to judicial notice “does not mean that every assertion of fact within that document is judicially noticeable for its truth.” Id. “‘[A] court may take judicial notice of matters of public record without converting a motion to dismiss into a motion for summary judgment,’” but “‘cannot take judicial notice of disputed facts contained in such public records.’” Id. (quoting Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001)). For example, in Khoja, the district court had judicially noticed a September 11, 2014 investors’ conference call transcript that was submitted with the defendant’s SEC filings. Khoja, 899 F.3d at 999. The Ninth Circuit explained that the district court could take judicial notice of the existence of the call, but could not take judicial notice of the statements in the transcript, as “the substance of the transcript ‘is subject to varying interpretations, and there is a reasonable dispute as to what the [transcript] establishes.’” Id. at 999-1000 (quoting Reina-Rodriguez v. United States, 655 F.3d 1182, 1193 (9th Cir. 2011)). Regarding incorporation by reference, the Ninth Circuit explained that a document that “merely creates a defense to the well-pled allegations in the complaint” should not automatically be incorporated by reference. Khoja, 899 F.3d at 1002. A contrary result would enable defendants to “insert their own version of events into the complaint to defeat otherwise cognizable claims.” Id. Applying these principles, the Ninth Circuit held that the district court abused its discretion by incorporating a Wall Street Journal blog post, as the complaint had quoted the post only once in a two-sentence footnote, and the quote conveyed only basic historical facts. Id. at 1003-04. The Khoja court explained that, under its prior precedent in Ritchie, a reference is not “extensive” enough to warrant incorporation by reference when the document is only referenced once, unless that “single reference is relatively lengthy.” Id. The Ninth Circuit held that the mere mention of the Wall Street Journal blog post was insufficient, especially as the document did not form the basis of any claim in the complaint. Id. at 1003. Ultimately, the Ninth Circuit held that the district court abused its discretion by incorporating by reference at least seven documents. Id. at 1018. It remains to be seen what impact Khoja will have in the Ninth Circuit, as Khoja did not eliminate a defendant’s ability to rely on documents outside the complaint at the motion to dismiss stage. 899 F.3d at 1018 (affirming district court with respect to half of the documents challenged on appeal). Nonetheless, the case may prompt other federal courts to revisit their practices of incorporation by reference and judicial notice, particularly in securities cases where such practices are common. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Jefferson Bell, Monica Loseman, Brian Lutz, Mark Perry, Shireen Barday, Lissa Percopo, Michael Kahn, Emily Riff, Mark Mixon, Jason Hilborn, Alisha Siqueira, Andrew Bernstein, and Kaylie Springer. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation Practice Group Steering Committee: Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) Jefferson Bell – New York (+1 212-351-2395, jbell@gibsondunn.com) Jennifer L. Conn – New York (+1 212-351-4086, jconn@gibsondunn.com) Thad A. Davis – San Francisco (+1 415-393-8251, tadavis@gibsondunn.com) Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark A. Kirsch – New York (+1 212-351-2662, mkirsch@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Monica K. Loseman – Denver (+1 303-298-5784, mloseman@gibsondunn.com) Jason J. Mendro – Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Alex Mircheff – Los Angeles (+1 213-229-7307, amircheff@gibsondunn.com) Robert C. Walters – Dallas (+1 214-698-3114, rwalters@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 14, 2019 |
2018 Year-End Government Contracts Litigation Update

Click for PDF In this year-end analysis of government contracts litigation, Gibson Dunn examines trends and summarizes key decisions of interest to government contractors from the second half of 2018.  This publication covers the waterfront of the opinions most important to this audience issued by the U.S. Court of Appeals for the Federal Circuit, U.S. Court of Federal Claims, Armed Services Board of Contract Appeals (“ASBCA”), and Civilian Board of Contract Appeals (“CBCA”). The last six months of 2018 yielded five government contracts-related opinions of note from the Federal Circuit.  From July 1 through December 31, 2018, the U.S. Court of Federal Claims issued 23 notable non-bid protest government contracts-related decisions, and the ASBCA and CBCA published 62 and 37 substantive government contracts decisions, respectively.  As discussed herein, these cases address a wide range of issues with which government contractors should be familiar, including matters of cost allowability, jurisdictional requirements, contract interpretation, terminations, and the various topics of federal common law that have developed in the government contracts arena.  Before addressing each of these areas, we briefly provide background concerning the tribunals that adjudicate government contracts disputes. I.    THE TRIBUNALS THAT ADJUDICATE GOVERNMENT CONTRACT DISPUTES Under the doctrine of sovereign immunity, the United States generally is immune from liability unless it waives its immunity and consents to suit.  Pursuant to statute, the government has waived immunity over certain claims arising under or related to federal contracts through the Contract Disputes Act (“CDA”), 41 U.S.C. §§ 7101 – 7109, and through the Tucker Act, 28 U.S.C. § 1491.  Under the CDA, any claim arising out of or relating to a government contract must be decided first by a contracting officer.  A contractor may contest the contracting officer’s final decision by either filing a complaint in the U.S. Court of Federal Claims or appealing to a board of contract appeals.  The Tucker Act, in turn, waives the government’s sovereign immunity with respect to certain claims arising under statute, regulation, or express or implied contract, and grants jurisdiction to the Court of Federal Claims to hear such claims. The Court of Federal Claims thus has jurisdiction over a wide range of monetary claims brought against the U.S. government including, but not limited to, contract disputes and bid protests pursuant to both the CDA and the Tucker Act.  If a contractor’s claim is founded on the Constitution or a statute instead of a contract, there is no CDA jurisdiction in any tribunal, but the Court of Federal Claims would have jurisdiction under the Tucker Act as long as the substantive source of law grants the right to recover damages.  Thus, the Court of Federal Claims’ jurisdiction is broader than that of the boards of contract appeals. In addition to establishing jurisdiction for certain causes of action in the Court of Federal Claims, the CDA establishes four administrative boards of contract appeals:  the Armed Services Board, the Civilian Board, the Tennessee Valley Authority Board, and the Postal Service Board.  See 41 U.S.C. § 7105.  The ASBCA hears and decides post-award contract disputes between contractors and the Department of Defense and its military departments, as well as the National Aeronautics and Space Administration (“NASA”).  In addition, the ASBCA adjudicates contract disputes for other departments and agencies by agreement.  For example, the U.S. Agency for International Development has designated the ASBCA to decide disputes arising under USAID contracts.  The ASBCA has jurisdiction pursuant to the CDA, its Charter, and certain remedy-granting contract provisions.  The CBCA hears and decides contract disputes between contractors and civilian executive agencies under the provisions of the CDA.  The CBCA’s authority extends to all agencies of the federal government except the Department of Defense and its constituent agencies, NASA, the U.S. Postal Service, the Postal Regulatory Commission, and the Tennessee Valley Authority.  In addition, the CBCA has jurisdiction, along with federal district courts, over Indian Self-Determination Act contracts. The U.S. Court of Appeals for the Federal Circuit hears and decides appeals from decisions of the Court of Federal Claims, the ASBCA, and the CBCA, among numerous other tribunals outside the area of government contract disputes.  Significantly, the Federal Circuit has a substantial patent and trademark docket, hearing appeals from the U.S. Patent and Trademark Office and federal district courts that by volume of cases greatly exceeds its government contracts litigation docket.  Of 1,444 cases pending before the Federal Circuit as of December 31, 2018, 13 were appeals from the boards of contract appeals and 117 were appeals from the Court of Federal Claims—cumulatively comprising just over 9% of the appellate court’s docket.  Only 4% of the appeals filed at the Federal Circuit in FY 2018 were Contracts cases.  Nevertheless, the Federal Circuit is the court of review for most government contracts disputes. In our 2018 Mid-Year Government Contracts Update, we reported the appointment of Judge Lis B. Young to the ASBCA.  Joining her on the bench in the latter half of 2018 was Judge Stephanie Cates-Harman, who was appointed to the ASBCA in June.  Judge Cates-Hartman served as a Trial Attorney and the Assistant Director Government Contracts in the Department of the Navy, Office of the General Counsel, Naval Litigation Office before her appointment to the ASBCA in 2018. Judge Margaret M. Sweeney, who has served as a Judge of the Court of Federal Claims since 2005, was designated Chief Judge of the Court on July 12, 2018. The CBCA issued new rules of procedure, which are published at 83 Fed. Reg. 41009 (Aug. 17, 2018), and became effective on September 17, 2018.  The final rules establish a preference for electronic filing, increase conformity between the Board’s rules and the Federal Rules of Civil Procedure, and clarify current rules and practices.  Under the new rules, the time for filing is amended from 4:30 p.m. to midnight Eastern Time. II.    COST ALLOWABILITY The ASBCA issued several important decisions during the second half of 2018 addressing cost allowability issues under the Federal Acquisition Regulation (“FAR”).  Pursuant to FAR 31.202, a cost is allowable if it (1) is reasonable; (2) is allocable; (3) complies with applicable accounting principles; (4) complies with the terms of the contract; and (5) complies with any express limitations set out in FAR Subpart 31. A.    Cost Allowability in Termination Settlements Phoenix Data Solutions LLC f/k/a Aetna Government Health Plans, ASBCA No. 60207 (Oct. 2, 2018) The Defense Health Agency (“DHA”) awarded a TRICARE managed care support contract to Aetna Government Health Plans (“AGHP”) in 2009.  Six months after the GAO sustained the incumbent contractor’s protest of the award to AGHP, DHA terminated AGHP’s contract for the convenience of the government.  Pursuant to FAR 49.201, when the government terminates a contract for convenience, the contracting officer should negotiate a settlement with the contractor that fairly compensates the contractor for the work performed, including profit.  DHA refused to negotiate, and instead, as observed by the ASBCA, “slow-rolled” AGHP for over five years, and then refused to compensate AGHP for any amount.  AGHP appealed from a deemed denial of its termination settlement claim. The ASBCA (D’Alessandris, A.J.) held that AGHP was entitled to almost all of its claimed costs.  Most notably, the ASBCA found that AGHP was entitled to its pre-contract costs under FAR 31.205-32, rejecting the government’s argument that pre-contract costs are unallowable unless agreed to by the government.  Moreover, the ASBCA rejected the government’s argument that AGHP’s claim should be reduced because AGHP was responsible for the circumstances leading to the protest and termination.  However, the ASBCA did find that a loss ratio applied, discussing in a case of first impression the language in FAR 52.249-2(g)(iii), which provides that “if it appears that the Contractor would have sustained a loss on the entire contract had it been completed” (emphasis added), profit is unallowable and the termination settlement should be reduced accordingly.  The ASBCA held that the reference to “entire contract” includes all of the awarded line items, including those that have not been performed, but does not include unexercised option years.  Therefore, because the record showed that AGHP would not have earned a profit until the unexercised option years, the ASBCA applied a loss ratio. B.    Cost Reasonableness Parsons Evergreene, LLC, ASBCA No. 58634 (Sept. 5, 2018) In a lengthy decision, the ASBCA (Clarke, A.J.) clarified the parties’ respective burdens when the government challenges the reasonableness of costs under FAR 31.201-3(a).  The dispute arose under a “design-build plus” contract between Parsons Evergreene, LLC (“PE”) and the Air Force.  PE submitted a $28.8 million claim for Air Force-caused delay, disruption, and constructive changes.  In a decision written by Judge Clarke, the ASBCA sustained in part and denied in part PE’s appeal, and awarded PE $10.5 million. Most notably, Administrative Judge Craig Clarke found that FAR 31.201-3(a) “unambiguous” in that it “requires two actions by the government: (1) it must perform an ‘initial review of the facts,’ and (2) that review results in a ‘challenge’ to ‘specific costs.’  It is the contractor’s burden to prove the reasonableness of the challenged specific costs.”  Judge Clarke discussed the holding in Kellogg Brown & Root, ASBCA No. 58081, 17-1 BCA ¶ 36,595, that the government’s general or blanket assertion that all costs are unreasonable is insufficient to require the contractor to do more to prove reasonableness.  Judge Clarke then held that in this case, the Air Force had not satisfied FAR 31.201-3(a) because although the Defense Contract Audit Agency’s (“DCAA”) audit satisfied the requirement for an “initial review of the facts,” neither DCAA nor the Air Force challenged the reasonableness of any “specific costs” in the claims.  Concluding that “[s]uch a blanket challenge to all costs is insufficient to satisfy FAR 31.201-3(a),” Judge Clarke held that PE satisfied its burden to prove that its claimed costs were reasonable. In a brief concurring opinion joined by Administrative Judge J. Reid Prouty, ASBCA Vice Chairman Richard Shackleford concurred in the result, but not in the analysis of Judge Clarke’s opinion.  The concurring judges agreed with the amounts awarded but took “great issue with that portion of the damages analysis which leads up to the conclusion that PE has satisfied its burden to prove its claimed costs were reasonable when the government challenged all costs but failed to challenge the reasonableness of any specific cost in the claim.”  The concurring opinion reasoned, “[o]nce a CO’s final decision is appealed to this Board, the parties start with a clean slate and the contractor bears the burden of proving liability and damages de novo,” and “‘[t]he claimant bears the burden of proving the fact of loss with certainty, as well as the burden of proving the amount of loss with sufficient certainty so that the determination of the amount of damages will be more than mere speculation.’”  However, the concurring opinion found that “[n]otwithstanding FAR 31.201-2 and -3, which direct[] how COs and the DCAA should evaluate costs, our review of the record leads us to conclude that for the damages awarded by Judge Clarke, appellant proved liability on the part of the government, proved the costs were incurred and were reasonable with ‘sufficient certainty’ such that the amount of damages awarded is ‘more than mere speculation.’” Kellogg Brown & Root Services, Inc., ASBCA Nos. 57530, 58161 (Nov. 19, 2018) In another decision discussing cost reasonableness, the ASBCA (Melnick, A.J.) held that Kellogg Brown & Root Services, Inc. (“KBR”) failed to show that its subcontractor costs were reasonable.  The disputed costs involved the settlement of requests for equitable adjustment (“REA”) submitted by a subcontractor for providing housing for military personnel in Iraq under the LOGCAP III contract.  The subcontract was fixed price, but entitled the subcontractor to an equitable adjustment in the event of delays caused by the government’s failure to perform the prime contract.  The subcontractor alleged that U.S. military-imposed convoy schedules caused delays in transporting materials from Kuwait into Iraq, creating delay costs for the subcontractor (such as storage, double-handling, repairs, and idle-truck time).  After some negotiation on the REAs, KBR settled with the subcontractor for approximately $50 million, then sought reimbursement from the government, which the government eventually denied in a final decision. The ASBCA denied recovery because KBR had not established the reasonableness of the costs, explaining that: (1) the subcontract allowed delay costs only if the government failed to perform the prime contract, and KBR did not make that determination before settling the REAs; (2) the delay model employed by the subcontractor was based on an unrealistic assumption that trailers arriving at the Iraqi border would be placed in convoys the next day; and (3) KBR awarded the REAs based on market prices without requesting evidence of actual costs, despite requirements in the FAR and DFARS (and incorporated into the subcontract) requiring such cost data to support equitable adjustments.  With regard to the lack of cost data, the ASBCA rejected KBR’s argument that the subcontract was for commercial items, and therefore in accordance with FAR subpart 15.4 (pertaining to contract pricing), KBR was prohibited from seeking information about its subcontractor’s costs. C.    Applicability of Cost Principles to Fixed-Price Level-of-Effort Contracts Tolliver Grp., Inc. v. United States, 140 Fed. Cl. 520 (Oct. 26, 2018) Tolliver Group, Inc. (“Tolliver”) had an Army contract to produce technical manuals, and it filed suit at the Court of Federal Claims (“COFC”) seeking reimbursement of legal fees totaling $195,889.78.  Tolliver incurred the legal fees in successfully defending its contract performance against a qui tam relator who alleged that Tolliver violated the False Claims Act (“FCA”).  The government declined to intervene in the FCA case, and Tolliver succeeded in having the case dismissed, which was affirmed on appeal.  Tolliver then submitted a claim for reimbursement of 80% of its attorneys’ fees, the maximum allowed by FAR 31.205-47 for a successful defense of an FCA suit.  The contracting officer denied the claim because the contract was firm fixed price.  However, the contract was initially awarded as a fixed-price level-of-effort, and was not converted to firm-fixed price until modification 8.  The government moved to dismiss Tolliver’s complaint for failure to state a claim upon which relief could be granted. The COFC (Lettow, J.) found as an initial matter that the FAR cost principles applied to the contract before Modification 8.  The COFC observed that “unlike other fixed-price contracts, a firm-fixed-price, level-of-effort contract requires (a) the contractor to provide a specified level of effort, over a stated period of time, on work that can be stated only in general terms and (b) the [g]overnment to pay the contractor a fixed dollar amount.  FAR § 16.207-1.  The government pays the contractor for effort expended, akin to actual costs incurred.”  Curiously, the COFC further found that the FAR cost principles applied to the contract by operation of law under the Christian doctrine.  The COFC concluded that Tolliver had “pled sufficient facts to satisfy the requirements of FAR § 31.205-47, and the remainder of FAR Subpart 31.2 does not otherwise prohibit reimbursement of the costs sought by Tolliver.”  Having concluded that Tolliver thus “sufficiently pleads the requirements for allowability,” the COFC denied the government’s motion to dismiss. D.    Penalties for Expressly Unallowable Costs Energy Matter Conversion Corp., ASBCA No. 61583 (Dec. 18, 2018) Energy Matter Conversion Corp. (“EMC2”) entered into settlements with the government regarding alleged mischarges under its government contracts.  Following the settlement, EMC2 included the legal costs it incurred in connection with the government’s investigations in its final indirect cost rate proposals.  The contracting officer assessed a penalty for claiming expressly unallowable legal costs, and denied EMC2’s request to waive the penalty.  Following EMC2’s appeal, the ASBCA (Sweet, A.J.) held that the government was entitled to summary judgment, because there was no genuine issue of material fact that the legal costs were incurred in connection with “proceedings [that] could have led to debarment” making them unallowable under FAR 31.205-47.  The ASBCA rejected EMC2’s argument that it would have prevailed on the merits had it not settled, explaining that “the government merely must show that the investigations ‘could have led to debarment’ not that it would have done so.”  Thus, the government met its burden to show that it was unreasonable under all circumstances for a person in the contractor’s position to conclude that the cost was allowable.  Likewise, the ASBCA upheld the denial of waiver because EMC2 did not have established accounting policies at the time it claimed the expressly unallowable costs; the contracting officer’s decision to waive similar costs in prior years is not binding on future waiver decisions; and the waiver cannot be apportioned to the legal costs attributable to the “successful” portion of the proceeding (i.e., the amount by which the settlements reduced EMC2’s liability). III.    JURISDICTIONAL ISSUES As is frequently the case, jurisdictional issues accounted for a substantial portion of the key government contracts decisions issued during the second half of 2018. A.    Requirement for a Valid Contract In order for there to be Contract Disputes Act jurisdiction over a claim, there must be a contract from which that claim arises.  See FAR 33.201 (defining a “claim” as “a written demand or written assertion by one of the contracting parties seeking . . . relief arising under or relating to this contract”).  The CDA applies to contracts made by an executive agency for: (1) the procurement of property, other than real property in being; (2) the procurement of services; (3) the procurement of construction, alteration, repair, or maintenance of real property; and (4) the disposal of personal property.  41 U.S.C. § 7102(a)(1)-(4). The Federal Circuit, COFC, and ASBCA considered issues relating to whether valid implied-in-fact contracts existed to confer CDA or Tucker Act jurisdiction. Lee v. United States, 895 F.3d 1363 (Fed. Cir. 2018) Individuals who entered into individual purchase order vendor (“POV”) contracts with the Broadcasting Board of Governors (“BBG”), a U.S. government-funded broadcast service that oversees Voice of America, filed a putative class action suit against the United States seeking additional compensation they would have received if their contracts had been classified as personal services contracts or if they had been appointed to civil service positions.  The Federal Circuit (Bryson, J.) affirmed the Court of Federal Clams’ dismissal of plaintiffs’ first amended complaint.  The court concluded that the POV contracts did not violate the prohibition against personal services contracts at FAR 37.104.  Thus, failing to void the express contracts, plaintiffs could not recover under implied-in-fact contracts that dealt with the same subject matter.  The court held that even if a contract was inconsistent with a statutory or regulatory requirement—such as a high degree of government supervision making the contract closer to a prohibited personal services contract—such inconsistency does not ipso facto render the contract void.  Instead, the court stressed, invalidation of a contract must be considered in light of the statutory or regulatory purpose, “with recognition of the strong policy of supporting the integrity of contracts made by and with the United States.” Am. Tel & Tel. Co. v. United States, 177 F.3d 1368, 1374 (Fed. Cir. 1999) (en banc).  Moreover, the court noted, because of the disruptive effect of retroactively invalidating a government contract, the “invalidation of a contract after it has been fully performed is not favored.”  Id. at 1375. Interaction Research Institute, Inc., ASBCA No. 61505 (Nov. 5, 2018) Interaction Research Institute, Inc. (“IRI”) claimed to have performed training services for the I Marine Expeditionary Force without receiving payment.  The government investigated and concluded that there was no such express or implied contract for the alleged training, although the government did ratify some services as “unauthorized commitments,” leaving the remaining services in dispute.  The ASBCA (Woodrow, A.J.) held that IRI had sufficiently made a non-frivolous allegation that an implied-in-fact contract existed and that, while the government could not locate any contract with IRI or documentation supporting an implied-in-fact contract, the existence of a contract goes to the merits of the appeal, and did not affect  jurisdiction. C & L Grp., LLC, et al. v. United States, No. 18-536 C (Fed. Cl. Nov. 28, 2018) Plaintiffs entered into contracts with Hospital Santa Rosa, Inc. (“HSR”), a private party, for the construction of various portions of a hospital in Puerto Rico.  The contracts required approval from the U.S. Department of Agriculture (“USDA”) in the form of “Concurrences,” as HSR expected that construction would be funded in part by USDA.  USDA signed the Concurrences, and ultimately issued five payments to HSR to pay for work completed by the plaintiffs.  HSR sometime thereafter filed for Chapter 11 bankruptcy, and plaintiffs filed a complaint seeking payment from USDA for the work it performed under its contracts with HSR. The government filed a motion to dismiss on the basis that the court had no jurisdiction under the Tucker Act, and the court (Braden, J.) granted the motion.  The court found that plaintiffs had failed to allege any facts indicating that they were in privity of contract with USDA.  USDA was not a party to the plaintiffs’ contracts with HSR, and the contracts expressly stated that neither the United States nor any agency was a party to the contract.  The court also found that the USDA Concurrences could not establish privity, “because they d[id] not displace the . . . Contracts’ express language to the contrary that plainly state[d] [the government] assumed no liability nor guaranteed any payment.”  The court also found that plaintiffs had failed to allege the existence of an implied-in-fact contract, because they had failed to allege any facts “to support a ‘meeting of minds.’”  To the contrary, the court found that the “express language” of the parties’ contracts with HSR and the Concurrences “affirmatively state[d] that [USDA] did not intend to contract with Plaintiffs.” B.    Adequacy of the Claim Another common issue arising before the tribunals that hear government contracts disputes is whether the contractor appealed a valid CDA claim.  FAR 33.201 defines a “claim” as “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract.”  Under the CDA, a claim for more than $100,000 must be certified.  In the second half of 2018, the boards considered whether a valid claim had been presented to and decided upon the contracting officer to confer CDA jurisdiction. Hartchrom, Inc., ASBCA No. 59726 (July 26, 2018) Hartchrom, Inc. had a lease with a private party allowing Hartchrom to use space at an Army manufacturing facility (the “Arsenal”).  The government was not a party to the lease.  Hartchrom later entered into a contract with the Army for chrome electroplating services, which Hartchrom performed at the Arsenal.  The lessor directed Hartchrom to remove hazardous waste that Hartchrom had discharged into the industrial wastewater treatment plant while performing its Army contract.  Hartchrom submitted a claim to the Army contracting officer for the hazardous waste removal costs, which the contracting officer denied in a final decision.  The ASBCA (Osterhout, A.J.) held that it had jurisdiction over the appeal because the claim was made pursuant to the Army contract and appealing a valid final decision.  However, the ASBCA dismissed the appeal for failure to state a claim upon which relief may be granted, because any relief to which Hartchrom could be entitled would have been under the terms of its lease with the private party.  Indeed, the clause Hartchrom relied upon was a provision in the lease, not in the Army contract.  Thus, the ASBCA had no way to grant Hartchrom any relief, even if it was so entitled under the lease. Parsons Evergreene, LLC, ASBCA No. 58634 (Sept. 5, 2018), In a decision issued separately from the Parsons Evergreene decision discussed in Section II.B, supra, the ASBCA (Clarke, A.J.) denied the Air Force’s motion to dismiss Claim V of PE’s complaint for lack of jurisdiction because the modified total cost claim lacked sufficient information and detail for the contracting officer to consider.  The contracting officer’s final decision denied Claim V of PE’s complaint in its entirety on the ground that “PE has not established that it has met the prerequisites for use of the modified total cost method.”  The ASBCA began its analysis by noting that the central issue was whether PE gave “adequate notice of the basis and amount of the claim” when it was submitted.  Although agreeing that a contracting officer cannot waive a jurisdictional requirement, the ASBCA found that the contracting officer apparently believed he had adequate notice because he requested and received a detailed technical analysis, and then issued a detailed 142-page final decision.  Stating that it was “exercising [its] discretion and applying common sense to the facts of this case,” the ASBCA found that the contracting officer was given sufficient information to engage in a “meaningful review” of the claim, which, in fact, the contracting officer did. Centerra Grp., LLC f/k/a The Wackenhut Services, Inc., ASBCA No. 61267 (Nov. 16, 2018) Centerra Group, LLC (“Centerra”) had a cost-reimbursement contract to provide fire protection services for NASA.  The contract required compliance with the Service Contract Act, 41 U.S.C. §§ 6701-6707, and incorporated a collective bargaining agreement (“CBA”) with the unionized firefighters.  After the finalization of an arbitration over the union’s grievance involving back pay of overtime and related costs, Centerra sought reimbursement from NASA for the arbitration award, which NASA denied.  NASA then moved to dismiss Centerra’s appeal on the ground that the Department of Labor has exclusive jurisdiction over labor standards requirements disputes under the Service Contract Act, in accordance with FAR 52.222-41(t). The ASBCA (Woodrow, A.J.) denied the motion to dismiss, agreeing with Centerra that the Service Contract Act did not apply to the underlying union’s grievance, which was based instead on an alleged violation of the Fair Labor Standards Act.  In any event, even if the SCA applied, the ASBCA still had jurisdiction because the appeal concerned NASA’s contractual obligation to reimburse Centerra for costs incurred pursuant to the arbitration award.  Although the underlying labor dispute formed part of the “factual predicate” for Centerra’s claim, the instant dispute did not concern labor standards requirements under the SCA and as such, the Department of Labor did not have jurisdiction. 1.    Defective Certification For claims seeking more than $100,000, the contractor must certify that: (a) the claim is made in good faith; (b) the supporting data are accurate and complete to the best of the contractor’s knowledge and belief; (c) the amount requested accurately reflects the contract adjustment for which the contractor believes the Federal government is liable; and (d) the certifier is authorized to certify the claim on behalf of the contractor.  41 U.S.C. § 7103(b)(1); FAR 52.233-1.  A defective certification that is not correctable deprives the Boards of jurisdiction. Development Alternatives, Inc. v. United States Agency for International Development, CBCA 5942 et al. (Sept. 27, 2018) Development Alternatives, Inc. (“DAI”) appealed the deemed denial by the Agency for International Development (“USAID”) of claims submitted on behalf of its subcontractor for reimbursement of fines paid to the Afghanistan Government.  The CBCA (Somers, A.J.) dismissed DAI’s appeal for lack of jurisdiction for failure to properly certify the claims.  The CBCA analyzed whether the purported certification was correctable by first discussing whether the defect was only technical in nature.  The CBCA held that the defect was more than technical because it bore “no resemblance to a CDA certification.”  Specifically, instead of certifying that “the claim is made in good faith” as required by the CDA, DAI stated only that it “believes there is sound basis for these claims,” and none of the other prerequisites for proper certification were present.  The CBCA then discussed whether the purported certification was made with intentional, reckless, or negligent disregard for the CDA’s certification requirements, therefore making it not correctable.  The CBCA concluded that DAI’s submission was “reckless” because the contracting officer informed DAI on two separate occasions that its certifications did not comply with CDA requirements, thus putting DAI on notice that its certification had substantial defects prior to filing the appeal.  Finally, although DAI submitted a properly certified claim after initiating the instant appeals, the CBCA concluded that the later certification had no legal bearing on the CBCA’s jurisdiction over the case, nor could it cure a lack of jurisdiction. WIT Assocs., Inc., ASBCA No. 61547 (Dec. 19, 2018) The contractor certified its claim by identifying its parent company instead of the contractor.  On the government’s motion to dismiss for defective certification, the ASBCA (McIlmail, A.J.) held that such an error was correctable and did not deprive the ASBCA of jurisdiction. 2.    Requirement for a Sum Certain For jurisdiction under the CDA, the claim must either assert a “sum certain” or be a nonmonetary claim seeking the interpretation of a contractual provision. Hensel Phelps Constr. Co. ASBCA No. 61517 (July 18, 2018) In a construction contract, the government revoked its prior acceptance of a portion of the contractor’s work, and issued a final decision directing the contractor to replace the allegedly defective work.  The final decision stated that the government intended to assert a demand for the costs to replace the work, “currently estimated at” $2.9 million, if the contractor did not comply.  The contractor appealed, seeking a declaratory judgment that it had already fulfilled its contractual obligations.  The ASBCA (McIlmail, A.J.) held that the final decision lacked a sum certain because it was contingent on future events, and merely “an effort to motivate [the contractor] to get back to work.”  However, the ASBCA held that it had jurisdiction over the contractor’s request for a non-monetary declaratory judgment. Elkton UCCC, LLC v. Gen. Servs. Admin., CBCA 6158 (July 25, 2018) Elkton UCCC, LCC (“Elkton”) leased space to the General Services Administration (“GSA”) for a Social Security Administration office.  In 2017, the parties began to dispute whether Elkton was fulfilling its duties as the landlord, and GSA began partially withholding rent.  In response to a letter from Elkton about the disagreement, the GSA contracting officer sent Elkton a letter itemizing Elkton’s lease violations and threatened to—but did not state that he actually did or would—deduct $21,000 from GSA’s rent payment.  The letter concluded that it was “the final decision of the Contracting Officer” and advised Elkton of its appeal rights.  The CBCA (Chadwick, A.J.) dismissed the appeal for lack of jurisdiction, noting that even when, as here, the contracting officer has issued a document styled as a final decision, it lacks CDA jurisdiction without a qualifying CDA claim.  Neither Elkton’s initial letter nor GSA’s response quantified a dollar amount then in dispute, thus lacking a sum certain necessary to satisfy the CDA’s requirements for a claim.  The CBCA further held that neither letter constituted a nonmonetary claim seeking interpretation of a contractual provision, because neither letter identified any specific provisions for interpretation.  Notably, the CBCA dismissed the appeal despite neither party asking it to do so. ECC CENTCOM Constructors, LLC, ASBCA No. 60647 (Sept. 4, 2018) ECC CENTCOM Constructors (“ECC”) appealed the default termination of its construction contract.  The ASBCA (O’Connell, A.J.) found that the government met its burden of proof that the default was justified because ECC did not perform in a timely manner.  The burden then shifted to ECC to show excusable delay.  However, the ASBCA held that it lacked jurisdiction to sustain any alleged excusable delays, because ECC never submitted a certified claim as required for CDA jurisdiction.  The ASBCA explained that “consideration of these delays would be contrary to the statutory purpose of encouraging resolution of disputes at the contracting officer level and beyond the limited waiver of sovereign immunity in the CDA, citing to M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), as recently upheld by Securiforce International America, LLC v. United States, 879 F.3d 1354 (Fed. Cir. 2018).  The ASBCA also rejected ECC’s argument that the ASBCA had jurisdiction because the contracting officer had actual knowledge of the alleged delays based on ECC’s extension requests.  Actual knowledge is insufficient to confer jurisdiction, and in any event, the extension requests were “estimated” delays lacking a sum certain and were not certified as required by the CDA. Northrop Grumman Sys. Corp. v. United States, 12-286C (Fed. Cl. Oct. 31, 2018) In a case involving numerous claims and counterclaims in connection with a contract for the provision of mail-processing machines, the court (Bruggink, J.) dismissed one of the contractor’s claims and one of the government’s claims.  The court dismissed the contractor’s claim for reformation of the contract based on a cardinal change, because the claim lacked the requisite sum certain.  In so doing, the court rejected the contractor’s argument that its claim was nonmonetary and therefore required no sum certain.  The court held that the claim was principally a monetary claim, because the ultimate remedy to the contractor for the alleged cardinal change would be to grant contractual damages, explaining that parties “may not circumvent the requirement to state a sum certain in its claim by camouflaging a monetary claim as one seeking only declaratory relief.” The court also partially dismissed one of the government’s counterclaims that exceeded the scope of the contracting officer’s final decision.  The final decision had identified a number of spare parts that the contractor allegedly failed to provide.  The counterclaim, however, identified entirely different parts, quantities, and prices than what the final decision identified.  The court held that although the legal theories and type of relief requested were “identical,” the counterclaim went beyond a mere correction of specifics or adjustment to quantum; it would require the government to prove up an entirely different set of facts.  Thus, the court dismissed the counterclaim to the extent the same parts did not appear in the final decision. 3.    Premature Claims The ASBCA and the CBCA each issued decisions declining to dismiss appeals in the face of government allegations that the appeals were premature. Delta Indus., Inc., ASBCA No. 61670 (Dec. 17, 2018) Delta Industries Inc. (“Delta”) filed a notice of appeal of a deemed denial of its claim only 20 days after submission of the claim to the contracting officer—well before any final decision was due under the CDA.  The government moved to dismiss the appeal for lack of jurisdiction, contending that Delta’s notice was premature.  The ASBCA (D’Alessandris, A.J.) disagreed, explaining that it can retain jurisdiction if, at the time it considers a motion to dismiss, no useful purpose would be served by dismissing an appeal and requiring an appellant to refile.  In this case, the ASBCA determined that dismissing the appeal for prematurity would be inefficient and “an elevation of form over substance.”  The ASBCA also rejected the government’s contention that the ASBCA lacked jurisdiction for the additional reason that the claim involved the withdrawal of a unilateral purchase order, because the contractor had sufficiently alleged the existence of a bilateral contract.  Accordingly, the ASBCA refused to dismiss the appeal for lack of jurisdiction. Eagle Peak Rock & Paving, Inc. v. Dep’t of Transp., CBCA No. 6198 (Oct. 23, 2018) At the time Eagle Peak Rock & Paving, Inc. (“Eagle Peak”) filed the instant appeal of the deemed denial of its claim for termination for convenience costs, Eagle Peak’s appeal of the termination for default of its contract was still pending.  The government therefore moved to dismiss the termination for convenience appeal, arguing that it was premature because the CBCA had not decided whether to convert the default termination into one for the convenience of the government.  The CBCA (Russel, A.J.) departed from ASBCA precedent and held that the termination for convenience claim (on the issue of quantum) may proceed concurrently with the termination for default claim (on the issue of entitlement).  The CBCA explained that neither its own rules nor the Federal Rules of Civil Procedure required dismissal in these circumstances, and that it would not dismiss an appeal solely for the purpose of judicial efficiency.  Rather, efficiency is better addressed through proper case management. C.     Requirement for a Contracting Officer’s Final Decision The tribunals that hear government contracts disputes dealt with two cases addressing the CDA’s requirement that a claim have been “the subject of a contracting officer’s final decision.” Planate Mgmt. Grp., LLC v. United States, 139 Fed. Cl. 61 (2018) Planate Management Group, LLC (“Planate”) brought action against United States, alleging that the Department of the Army Expeditionary Contracting Command breached a contract for Planate to provide professional support services throughout Afghanistan.  Planate alleged that the Army failed to reimburse it for the cost of arming its in-theater personnel in the face of increasing security threats to its personnel performing the contract.  The government moved to dismiss two counts for lack of subject-matter jurisdiction, arguing that the two counts were not first presented to the contracting officer for decision. For one count, Planate alleged that the government breached the implied duty of good faith and fair dealing.  The government argued that the count involved an “entirely distinct” legal theory than the constructive change and mutual mistake claims the contractor had presented to the contracting officer.  The court (Sweeney, J.) disagreed, finding that although Planate “did not specifically articulate a breach of the covenant of good faith and fair dealing in its certified claim, the factual recitations therein described the Army’s alleged failure to engage in reasonable contract administration.”  In a separate count, Planate alleged that the dramatically deteriorated security situation in Afghanistan amounted to a cardinal change to the contract. Although the claim before the contracting officer did not include the term “cardinal change,” the court determined that the issue was properly before the officer, as the contractor “discussed the change in risk posture; noted that, at the beginning of contract performance, the [government] advised plaintiff to arm its personnel; and described the increased costs it incurred to arm its personnel.” Charles F. Day & Associates LLC, ASBCA Nos. 60211, 60212, 60213 (Nov. 29, 2018)   Charles F. Day & Associates LLC (“CFD”) contracted to perform services for the Army in Iraq.  The personnel supplied by CFD performed work outside the scope of the written requirements of CFD’s contract in support of their customer, and later sought additional compensation for those efforts.  CFD submitted a Request for Equitable Adjustment delineating three separate requests for payment, which the Board characterized as “claims,”observing in a footnote that a request for equitable adjustment can be considered a claim under the CDA, regardless of its title, if it otherwise meets the requirements of a claim.  The contracting officer denied CFD’s claims, arguing that there had been no constructive change to the contract and that CFD thus had no entitlement to additional compensation. The government argued that the Board lacked jurisdiction to consider a portion of the case presented by CFD at the hearing, alleging that the basis of that claim (essentially a superior knowledge claim) was so different from that presented to the contracting officer that it should be dismissed.  The Board granted the government’s request to dismiss the additional issue raised at the hearing, noting that while the board is “relatively liberal in permitting appellants to present additional evidence and arguments not presented to the CO and to alter the legal bases for claims on the amount of damages,” “a claim on one matter does not support jurisdiction over an appeal on another” and “a claim must be specific enough and provide enough detail to permit the CO to enter into dialogue with the contractor.”  Although the Board agreed with CFD that the legal theory for the claim presented at trial was the same as in its claim—seeking recovery for out of scope work—the Board nevertheless found that the claim did not arise from the same underlying facts, and thus the factual basis for the claim presented at trial was not brought before the CO in CFD’s written claims. D.    Jurisdictional Filing Deadlines The CDA mandates that an appeal of a contracting officer’s final decision must be filed at the Boards of Contract Appeals within 90 days of the contractor’s receipt of the decision, or must be filed at the Court of Federal Claims within 12 months.  41 U.S.C. § 7104.  These deadlines are jurisdictional, and a number of Board decisions during the last half of 2018 serve as cautionary tales to would-be appellants. Aerospace Facilities Grp., ASBCA No. 61026 (July 19, 2018) The government terminated Aerospace Facilities Group (“AFG”)’s contract for cause, and AFG filed its notice of appeal at the ASBCA 91 days after receipt of the termination decision by email.  However, following its termination decision, the government engaged in numerous communications with AFG inviting the contractor to discuss proposals to resolve the termination, including the potential delivery of items under the contract that the government had purported to terminate.  The ASBCA (Shackleford, A.J.) denied the government’s motion to dismiss for lack of jurisdiction based on the alleged untimeliness of the notice of appeal (which the ASBCA also questioned sua sponte).  The ASBCA held that the government’s post-termination actions “created a cloud of uncertainty as to the status of the … termination.”  As such, the government led AFG to reasonably believe that it was reconsidering the termination decision, thereby vitiating the finality of the “final” decision. Piedmont-Independence Square, LLC v. Gen. Servs. Admin., CBCA 5605 (Aug. 6, 2018) Piedmont-Independence Square, LLC (“Piedmont”) filed an appeal arising from Piedmont’s claim for costs incurred in its work to refurbish space leased to the General Services Administration (“GSA”).  Piedmont had submitted an uncertified Request for Equitable Adjustment (“REA”) to the contracting officer in February 2015.  In response, the contracting officer issued a final decision in August 2016 determining that GSA owed Piedmont a portion of the amount requested in the REA, but offset that amount for costs for IT equipment that GSA alleged Piedmont was responsible to provide under the terms of the lease.  Instead of appealing the final decision, Piedmont asserted it was invalid because the underlying REA was not certified.  In October 2016, Piedmont submitted a certified claim that included the IT equipment costs offset by GSA in its August 2016 final decision.  Piedmont then appealed the deemed denial of its certified claim on January 18, 2017.  GSA sought summary relief arguing, inter alia, that the portion Piedmont’s appeal relating to the offset costs was filed more than 90 days after GSA’s August 2016 final decision.  The CBCA (Sullivan, A.J.) held that GSA’s August 2016 final decision triggered the 90 day statutory filing deadline, notwithstanding the fact that the decision was in response to Piedmont’s uncertified REA.  The CBCA explained that the contractor could not appeal the portion of the decision addressing the uncertified REA, but the offset amount was a Government claim asserted in a final decision with a sum certain that sufficiently notified Piedmont of its appeal rights. Eur-Pac Corp., ASBCA Nos. 61647, 61648 (Nov. 13, 2018) The contractor filed its notice of appeal of the government’s termination decision more than 90 days after receipt of the final decision.  The ASBCA (Wilson, A.J.) raised sua sponte the question of jurisdiction, and ultimately dismissed the appeal as untimely filed.  Although in certain limited circumstances, written correspondence to the contracting officer may satisfy the ASBCA’s notice requirement, those circumstances were not present here, because the contractor did not clearly express its intent to appeal the final decision in its emails to the contracting officer.  Moreover, the ASBCA noted that the contractor had numerous other appeals pending before the ASBCA, and therefore was familiar with ASBCA procedure. Hof Constr., Inc. v. Gen. Servs. Admin., CBCA No. 6306 (Dec. 12, 2018) The General Services Administration (“GSA”) terminated the contract for default in a contracting officer’s final decision, and HOF Construction, Inc. (“HOF”) filed its notice of appeal at the CBCA 11 months later.  HOF argued that its appeal was timely because the final decision failed to include the notice of appeal rights required by FAR 33.211(a)(4)(v).  Noting that government’s claim of termination for default was “imperfect” because it did not include the statement of appeal rights that FAR 33.211(a)(4)(v) says “shall” accompany a contracting officer’s decision on a claim, the CBCA (Chadwick, A.J.) held that where the notice of appeal rights in a contracting officer’s final decision is defective – but not completely lacking – the contractor must show detrimental reliance on the defective notice of appeal rights to preclude the start of the jurisdictional timeline to appeal the decision.  The CBCA identified conflicting precedent between two of its predecessor boards regarding whether a contractor is required to show detrimental reliance upon receipt of a defective notice of appeal rights.  Notably, the CBCA held, for the first time, how it would reconcile such conflicting precedent: “the panel will apply what it deems our better precedent and the panel decision will be the Board’s precedent on the issue.” The CBCA found that GSA’s communications were not unclear or misleading and that Hof could not show it reasonably relied on the defective notice to its detriment.  Thus, the CBCA ruled that Hof’s appeal was untimely. E.    Contract Disputes Act Statute Of Limitations Under the Contract Disputes Act, “[e]ach claim by a contractor against the Federal Government relating to a contract and each claim by the Federal Government against a contractor relating to a contract shall be submitted within 6 years after the accrual of the claim.”  41 U.S.C. § 7103(a)(4)(A).  Failure to meet the CDA’s six year statute of limitations is an affirmative defense, and, unlike the 90 day window to appeal a final decision at the appropriate board of contract appeals, it does not impact the Boards’ of jurisdiction over an appeal.  The CBCA and ASBCA each issued a notable decision discussing when a claim accrues. United Liquid Gas Co. d/b/a United Pacific Energy, CBCA No. 5846 (July 12, 2018) United Pacific Energy (“UPE”) had a multiple award schedule (“MAS”) contract with the General Services Administration (“GSA”) to provide propane gas at prices set forth in the schedule. The Fort Irwin Contracting Command (“Ft. Irwin”) issued four task orders against the MAS contract for propane gas during fiscal years 2011, 2012, 2013 and 2014, which UPE fulfilled.  In 2016, GSA determined that UPE overbilled and Ft. Irwin overpaid on the task orders.  UPE moved for partial summary relief with respect to $279,029.64 in overpayments that allegedly occurred prior to 2011, arguing that this portion of the claim was untimely under the CDA six year statute of limitations.  The CBCA granted partial summary relief, concluding that the claim began to accrue on January 5, 2011, when Ft. Irwin overpaid the first task order 1 invoice submitted for payment under the MAS contract.  The CBCA noted that, at that point in time, the terms of the MAS contract clearly put both Ft. Irwin and GSA on notice that UPE was overbilling the government, and all events that fixed the alleged liability, specifically, in this case, overpayments in a “sum certain,” were known or should have been known.  Furthermore, government claims continued accruing each time Ft. Irwin overpaid a task order 1 invoice under the MAS contract, because every time a payment was made on an invoice, the government knew or should have known of the overpayment and the “sum certain” it was overpaying. DRS Global Enter. Sols., Inc., ASBCA No. 61368 (August 30, 2018) The government sought repayment from DRS Global Enterprise Solutions, Inc. (“DRS”) for over $8.6 million, mostly for other direct costs that the administrative contracting officer determined to be unallowable based on the alleged lack of supporting documentation, including the lack of an invoice for the costs, proof of payment, and a signed purchase order.  DRS moved for summary judgment, arguing that the government’s claim was untimely because it accrued more than six years before the September 11, 2017 final decision.  DRS identified three alternative claim accrual dates. First, DRS argued that for direct costs, the government’s claim accrued no later than December 15, 2006, when it paid the last of the invoices at issue.  Second, for indirect costs, DRS argued that the government’s claim accrued when DRS submitted its annual incurred cost proposals (“ICPs”).  Third, DRS argued that the government’s claim accrued no later than July 17, 2009, when the Defense Contract Audit Agency (“DCAA”) conducted the entrance conference for its audit of DRS’ ICPs.  The government argued that interim vouchers by their very nature do not contain supporting documentation, and that there was no way the government could have known that DRS could not substantiate the amounts billed until it failed to provide DCAA with requested supporting documentation in October 2013. The Board denied DRS’s motion, finding that DRS’s contention that the government should have known of its claim in 2006 was undermined by letters DRS wrote to DCAA and DCMA in 2013 and 2014, and that generally, DRS’s sweeping statements with respect to the level of knowledge possessed by the government in 2006 were not supported by the current record.  For those reasons, the Board decided the best course of action was to allow further development of the record to determine when the government should reasonably have known of its claim. F.    Consolidation of Appeals Collecto, Inc. dba EOS CCA and Transworld Systems Inc., CBCA Nos. 6049, 6001 (July 26, 2018) In Collectco Inc., the Department of Education filed motions seeking to consolidate the appeal docketed as Transworld Sys. Inc. v. Dep’t of Ed., CBCA 6049, with the appeal docketed as Collecto, Inc. d/b/a EOS CCA v. Dep’t of Ed., CBCA 6001, asserting that the task orders underlying both appeals were essentially the same and that the issues to be decided in the two appeals were the same.  The government had filed claims with both appellants seeking reimbursement of allegedly overpaid amounts on certain invoices under contracts to perform student loan debt collection services as a result of a new debt management collection system that disrupted the invoicing process. The CBCA denied without prejudice the Agency’s request to consolidate the two appeals of the Agency’s claim for reimbursement of overpaid invoices, concluding that the matters did not constitute “complex litigation” warranting such consolidation.  Complex litigation, as it is traditionally defined, generally involves multiple related cases, extensive pretrial activity, extended trial times, difficult or novel issues, or post-judgment judicial supervision.  The Board noted that consolidation might be warranted were there a multitude of vendors with identical task orders challenging the same type of refund demand.  Here, however, the Board was presented with only two rather than multiple appellants, and the agency had not indicated that there were likely to be any other related appeals.  Further, only minimal discovery was anticipated and the Board found it possible that the issues could be resolved through dispositive motions rather than a hearing on the merits.  The Board noted, however, that the Agency could renew its motion if the cases could not be resolved through dispositive motions. IV.    DEFAULT TERMINATIONS The ASBCA issued three noteworthy decisions during the second half of 2018 arising from default terminations, in each case upholding the termination for default. Coastal Environmental Grp., Inc., ASBCA No. 60410 (July 17, 2018) The parties contracted for Coastal Environmental Group, Inc. (“Coastal”) to make repairs to the Security Boat Marina at Naval Weapons Station Earle, Leonardo, New Jersey.  With 50 days remaining before the contract completion deadline, the contracting officer terminated the contract for default, citing “continued lack of progress thereby endangering completion. . . ”  The Board declined to convert the default termination into a terminate for convenience because, despite evidence Coastal presented that it had a plan to complete the work on time, because there was no evidence that the government was actually aware of any such plan at the time of the termination.  As such, it was reasonable for the government to conclude that there was no reasonable likelihood that Coastal would complete the work on time.  The Board also rejected Coastal’s claim for excusable delay because it had released that claim in a bilateral modification which stated that the modification constituted an “accord an satisfaction…for delays and disruptions arising out of, or incidental to, the work as herein revised.” LKJ Crabbe Inc., ASBCA No. 60331 (Oct. 29, 2018) This appeal arose out of a commercial item contract between LKJ Crabbe Inc. (“LKJ”) and the Army Mission and Installation Contracting Command (“Army”) for custodial services at buildings located in two different locations at Ft. Polk, Louisiana.  LKJ appealed the Army’s termination for cause, contending that the Army’s termination was unjustified and that the Army breached the contract by failing to reform the contract after learning of an alleged mistake in LKJ’s bid.  LKJ also alleged that the Army breached the contract by violating its duty of good faith and fair dealing. The ASBCA (Woodrow, A.J.) denied the appeal, finding that LKJ’s failure to provide reasonable assurances of its ability to perform in response to the cure notice supported the Army’s decision to terminate for cause.  Instead, LKJ indicated that it “had failed to appreciate the level of service it would be required to perform” under the contract, and that it was suffering losses that it could absorb only through November.  The ASBCA found that this was an unequivocal statement that LKJ could not perform past November.  Further, the ASBCA concluded that LKJ’s statements were tantamount to an anticipatory repudiation of the contract, which justified the termination for cause on that basis as well.  Finally, the testimony and evidence at the hearing demonstrated that LKJ’s losses on the contract fundamentally were the result of faulty pricing throughout the contract. Ballistic Recovery Systems, Inc., ASBCA No. 61333 (Dec. 13, 2018) In 2016, Ballistic Recovery Systems, Inc. (“BRSI”) entered into a fixed-price contract for the supply of parachute deployment sleeves.  Pursuant to the contract, BRSI was supposed to deliver two test units for inspection, as part of the first article test (“FAT”).  Prior to the award of the contract, BRSI sought a FAT waiver based on a prior contract for the same item, however, the waiver was denied because no inspections had been performed on BRSI’s deployment sleeves for almost two years.  After delivery of the two test units, the government found numerous major deficiencies and recommended disapproval.  After BRSI submitted two subsequent test units, the government found further major deficiencies, and issued a show cause notice for BRSI to state any excusable causes of defects.  Rather than address any of the major deficiencies in the test units, BRSI referred to its earlier contract and argued that its units were “production standard.”  In 2017, the government terminated the contract for default as a result of the multiple FAT disapprovals. Upon the government’s motion for summary judgment, the ASBCA (Paul, A.J.) determined that the government met its initial burden of proving that the termination was reasonable and justified, and evidence that the contractor did not attempt to correct major and critical defects constituted a reasonable basis for default termination.  The ASBCA reasoned that the government had provided ample evidence of the major and critical failures of BRSI’s test units, and had submitted declarations in support thereof, thus, the lack of any substantive attempt by BRSI to address the faulty units constituted a reasonable basis for default termination.  Accordingly, the ASBCA denied BRSI’s appeal. V.    CONTRACT INTERPRETATION A number of noteworthy decisions from the second half of 2018 articulate broadly applicable contract interpretation principles that should be considered by government contractors. First Kuwaiti Trading & Contracting W.L.L. v. Dep’t of State, CBCA Nos. 3506, 6167 (Dec. 3, 2018) First Kuwaiti Trading & Contracting W.L.L. (“FKTC”) contracted with the Department of State (“DOS”) to build an embassy compound in Baghdad.  First Kuwaiti claimed that it was underpaid for costs associated with building in a war zone, and asserted 200 claims totaling $270 million against DOS.  DOS moved for summary judgment on thirteen of FKTC’s cost claims, challenging FKTC’s reliance upon the War Risks clause, the superior knowledge doctrine, the Changes clause, and the implied duty of good faith and fair dealing as the basis for these claims The CBCA (Sullivan, A.J.) rejected FKTC’s invocation of the War Risks clause as to each of the thirteen claims, applying various canons of contractual interpretation to find that the contract did not contemplate that DOS would compensate FKTC for all losses attributable to wartime conditions.  The CBCA granted DOS’s motion as to seven counts based on the superior knowledge doctrine, finding that DOS did not have “specific and vital” information that First Kuwaiti lacked in negotiating the contract to support its superior knowledge claim.  The CBCA denied DOS’s motion on six other counts where FKTC sought to recover costs in reliance upon the Changes clause, finding there were disputed issues of fact regarding responsibility over security and that DOS did not provide sufficient evidence to support a sovereign acts defense.  To successfully assert a sovereign acts defense, the government must prove that its action is “public and general,” meaning that its action has an impact on public contracts that is “merely incidental to the accomplishment of a broader governmental objective.”  The CBCA found that the government failed to provide specific evidence of the “public and general” nature of the government’s actions over objections by DOS that such evidence was unavailable because the Army kept poor records during the Iraq War. OMNIPLEX World Services Corp. v. Dep’t of Homeland Security, CBCA No. 5971 (Nov. 27, 2018) OMNIPLEX World Services Corporation (“OMNIPLEX”) contracted with the Department of Homeland Security to provide guard services.  OMNIPLEX’s contract contained clauses permitting the government to take deductions from payment for instances where the contractor fails to satisfy contract requirements, and a dispute arose concerning the applicability of the deduction provisions.  OMNIPLEX argued that the deduction clauses were ambiguous.  The CBCA (Vergilio, A.J.) rejected OMNIPLEX’s arguments, finding that (1) the provisions were not ambiguous and (2) even if the provisions were ambiguous, the ambiguity was patent.  Patent ambiguity occurs when “facially inconsistent provisions place a reasonable bidder or offeror on notice and prompt it to rectify the inconsistency by inquiry,” whereas latent ambiguity occurs when “the ambiguity is neither glaring nor substantial nor obvious.”  Though not explicitly stated in the CBCA decision, latent ambiguities are construed against the drafter of the agreement, whereas patent ambiguities are construed against the party later attempting to assert the ambiguity.  See, e.g.,  K-Con, Inc. v. Secretary of the Army, No. 2017- 2254 (Fed. Cir. Nov. 5, 2018).  Accordingly, the CBCA denied the appeal. Parsons Evergreene, LLC, ASBCA No. 61784 (Sept. 5, 2018) In an unusual five-judge decision, the ASBCA held that Parsons Evergreene, LLC (“PE”) was not entitled to compensation resulting from the government’s failure to engage in a “prompt” review of Davis-Bacon Act payrolls, which PE argued was in violation of FAR 22.406‑1 (which describes the government’s policy of “prompt” enforcement of labor standards).  The decision explained in a footnote that because the two judges who reviewed Judge Clarke’s original opinion in ASBCA No. 58634 (discussed in Sections II.B. and III.B., supra) came to a different conclusion, the remaining two judges in Judge Clarke’s division were asked to consider it, consistent with ASBCA practice and procedure.  The result was a four-to-one split, with Judge Clarke issuing a dissenting opinion.  For reasons of clarity and judicial efficiency, the ASBCA issued a separate opinion under a new appeal number.  The ASBCA accepted PE’s position that the Air Force’s delay in commencing payroll reviews until 2008, when the contract was almost over, caused additional expense to PE.  However, citing Freightliner Corp. v. Caldera, 225 F.3d 1361, 1365 (Fed.  Cir. 2000), the ASBCA stated that to have a cause of action against the government for violation of a regulation, a contractor must prove that the regulation exists for the benefit of the contractor.  The ASBCA thus concluded that FAR 22.406-1 does not provide a remedy to a contractor for the government’s untimely investigation of complaints relating to labor standards, and therefore denied the appeal. Judge Clarke’s dissenting opinion reasoned that because FAR 22.406-1 requires that if a problem is found during payroll reviews, on-site inspections or employee interviews, there will be “prompt initiation of corrective action,” “Prompt investigation and disposition of complaints,” and “Prompt submission of all reports required by this subpart,” the payroll reviews themselves must also be prompt, or the entire regulatory scheme becomes meaningless. A.    Course of Dealing Two ASBCA cases addressed the circumstances under which a prior course of dealing between the government and a contractor can give rise to an implied contractual right. ECC Int’l, LLC, ASBCA No. 60484 (Nov. 16, 2018) ECC International, LLC (“ECC”) entered into a contract with the U.S. Army Corps of Engineers (“USACE”) for the construction of a compound expansion in Afghanistan.  During performance, an access route to the construction site referred to as “Friendship Gate” was closed by the U.S. military due to a security incident, which resulted in delay and additional costs to ECC.  ECC sought to recover these costs, arguing that continued access through Friendship Gate was an implied warranty in the contract, the closure of which was a constructive change. The ASBCA (Woodrow, A.J.) denied the appeal and rejected ECC’s argument that a prior course of dealing between ECC and various Department of Defense agencies created an implied contractual right to access through Friendship Gate in its contract with the USACE.  The ASBCA explained that prior course of dealing can be established where there is justifiable reliance and proof of the same contracting agency, the same contractor, and essentially the same contract provisions over an extended period of time.  ECC could not establish these elements because its previous contracts with the USACE were performed concurrently with the subject contract, beginning only months before.  Moreover, the ASBCA found it notable that a prior course of dealing could not “change the fact that, in a war, security considerations could change over time.” TranLogistics LLC, ASBCA No. 61574 (Aug. 29, 2018) TranLogistics LLC had a contract with the Marine Corps to move ammunition lockers to locations in Honduras, Guatemala, Belize, and El Salvador.  TransLogistics claimed extra costs caused by delayed customs documentation.  The ASBCA (Kinner, A.J.), in a succinct decision, agreed with TransLogistics’ interpretation of the contract that the government was obligated to provide the customs documentation.  Although the Marines argued in briefing that the contract required TransLogistics to provide a customs broker, the parties’ course of dealing, both in the subject contract and in prior contracts, was consistent with TransLogistics’ interpretation.  The ASBCA found that the delay was therefore excusable, but only partially granted the appeal because the contractor did not offer direct proof of the amounts it incurred from the delay. B.    Release of Claims Penna Grp., LLC, CBCA No. 6155 (Sept. 27, 2018)             Penna Group, LLC sought $146,048.85 for costs incurred after performing under an expanded scope of work for a roofing contract with the Federal Bureau of Prisons.  The contracting officer denied the claim, relying upon a release of claims signed by the contractor’s president, which released the United States from any and all claims arising under the contract without exception.  The agency moved for summary judgment, contending that the contractor could not pursue the claim or prevail given the release.  The contractor asserted that the release was of no force or effect because it was completed by one without the actual or apparent authority to do so, and that material facts are in dispute so as to preclude summary judgment.  The contractor further argued that the release can be invalidated because of economic duress and because of mutual mistake. The CBCA rejected the contractor’s arguments and denied the claim, concluding that the release was enforceable.  Here, the release bore the signature of the contractor’s president.  While the individual who completed the release on behalf of the contractor was not the president, the president was aware that said individual had his signature stamp.  Thus, he had endowed her with actual or apparent authority, or both, to execute the release with his signature. Expresser Transport Corp., ASBCA No. 61464 (Dec. 7, 2018) In 1983, Expresser Transport Corporation (“Expresser”) and the United State entered into a time charter contract for a vessel to support the prepositioning of military equipment and supplies.  The contract allowed the government to place civilian contractors aboard the vessel, and also indemnified Expresser for liability arising from the carriage of such civilian contractors.  However, the contract also included a “waiver of claims” clause that stated that “all claims whatsoever for moneys due the Contractor” must be submitted within two years of the date of “redelivery of the Vessel[.]”  Upon termination for convenience of the charter contract on July 15, 2009, the parties considered the vessel “redelivered” on that date.  In 2007, a civilian contractor aboard suffered paraplegic injuries, which led to a settlement with Expresser of $2.5 million in 2011.  In 2017, Expresser submitted a claim seeking indemnity of the settlement amount.  The government denied the claim on the basis that the waiver of claims clause was unambiguous and that the claim was not submitted within two years of the redelivery of the vessel.  Expresser countered that the clause produced an unacceptable result, in that there could be claims that arose more than two years after redelivery and a cognizable claim cannot accrue until a sum certain is known or should have been known. The ASBCA (Melnick, A.J.) considered the charter contract as a whole and determined that the government’s indemnity obligations were expressly and unambiguously limited by the waiver of claims clause.  Simply because Expresser found the clause unacceptable with the benefit of hindsight did not release Expresser from the agreement it entered into.  The ASBCA likened the clause to a statute of repose, which cuts off a cause of action after a certain amount of time, irrespective of the time of accrual. United Facility Services Corporation dba Eastco Building Services, CBCA No. 5272 (July 7, 2018)            United Facility Services Corporation dba Eastco Building Services (“Eastco”) was awarded a task order under a GSA Schedule contract for operations and maintenance services at three federal buildings.  Eastco alleged that it found thousands of additional inventory pieces to be maintained that were not captured on the task order solicitation’s inventory list, and submitted to GSA a certified claim seeking a contract adjustment for servicing the additional equipment.  GSA denied the claim, and Eastco appealed.  On cross-motions for summary judgment, GSA claimed it was not responsible for any unanticipated performance costs incurred by Eastco because two provisions in the contract – a clause requiring the contractor to make a pre-bid site visit and inspection, and a disclaimer indicating that the list may contain some errors – placed upon the contractor the risk of any defects in the equipment list.  Eastco argued that GSA’s inclusion of the equipment list in the solicitation constituted a warranty regarding the facility’s equipment quantities that overrode the contract’s disclaimer and pre-bid site visit obligations. The CBCA (Lester, A.J.) described the factors used to determine whether and to what extent a tribunal will enforce an exculpatory disclaimer, noting (1) that exculpatory clauses are narrowly construed because they are drafted by the government and shift to the contractor risks that would otherwise be borne by the government; (2) the clearer the disclaimer language and the more narrowly tailored it is, the more likely it is to be held effective and enforceable as written; (3) exculpatory language disclaiming representations about latent conditions that a contractor would be unable to detect through a reasonable site inspection are less likely to be enforced; and (4) disclaimers are more likely to be found ineffective if the government possesses the only information by which the contractor might have learned the truth, and the government denies the contractor access to the data prior to entering into the contract.  Applying these criteria to the facts at hand, the CBCA denied the cross-motions for summary judgment based on the undeveloped record on factual issues. C.    Rights in Commercial and Noncommercial Computer Software & Rights in Technical Data CiyaSoft Corp., ASBCA Nos. 59519, 59913 (June 27, 2018) The ASBCA (McNulty, A.J.) held that the government breached the contract by violating the commercial “shrinkwrap” and “clickwrap” license agreements that were shipped with the contractor’s software, specifically by permitting installation of a copy of the software onto more than one computer, and failing to provide the contractor with a list of registered users.  Importantly, the ASBCA expressly held that the “government can be bound by the terms of a commercial software license it has neither negotiated nor seen prior to the receipt of the software, so long as the terms are consistent with those customarily provided by the vendor to other purchasers and do not otherwise violate federal law.”  In addition, much like the implied duty of good faith and fair dealing, with respect to commercial software licenses, “an implied duty exists that the licensee will take reasonable measures to protect the software, to keep it from being copied indiscriminately, which obviously could have a deleterious effect on the ultimate value of the software to the licensor.” The Boeing Co., ASBCA No. 60373 (July 17, 2018) The ASBCA (D’Alessandris, A.J.) held that software developed with costs charged to technology investment agreements (“TIAs”) pursuant to 10 U.S.C.A. § 2358 constitutes software developed “exclusively at private expense” as it is defined in Defense Federal Acquisition Regulation Supplement (“DFARS”) clause 252.227-7014, Rights in Noncommercial Computer Software and Noncommercial Computer Software Documentation.  The ASBCA also held that the TIAs at issue did not make a blanket grant of government purpose rights in nondeliverable software developed with costs charged to the TIAs.  The dispute arose under a low-rate initial production (“LRIP”) contract, after Boeing delivered software marked with restrictive rights and asserted that the software had been developed exclusively at private expense pursuant to the TIAs.  The government challenged Boeing’s assertion of restricted rights in the software, and asserted that it possessed government purpose rights because the software was developed with mixed funding.  The ASBCA found that a TIA is a cooperative agreement, and not a “contract” as defined in FAR 2.101.  Accordingly, to the extent that the software was funded by the TIAs, the costs were not allocated to a government contract and satisfy the definition of “developed exclusively at private expense” under DFARS 252.227-7014.  For the same reason, the ASBCA found that the expenditures do not satisfy the definition of “developed with mixed funding” because the costs charged to the TIAs were not charged directly to a government contract. The Boeing Co., ASBCA Nos. 61387, 61388 (Nov. 28, 2018) The ASBCA (O’Connell, A.J.) denied Boeing’s motion for summary judgment seeking the ASBCA’s interpretation as to whether the contracts at issue allowed Boeing to place certain marking legends on technical data, or whether the only authorized legends for marking technical data under the contracts were those found in DFARS 252.227-7013(f).  The Air Force contracting officer had concluded that because the legends used by Boeing to mark its data did not conform with DFARS 252.227-7013(f) that Boeing must remove them at its own expense and re-submit the data.  Boeing argued that the DFARS clauses, as interpreted by the Air Force, failed to protect its intellectual property rights, whereas the Air Force claimed it would be harmed by use of Boeing’s non-DFARS proposed legends. In denying Boeing’s motion, the ASBCA agreed with the government’s interpretation of DFARS 252.227-7013(f), finding that the legends authorized by that clause were the only permissible legends for limiting data rights under the contract.  However, the ASBCA also noted that the issue of whether those clauses adequately protect Boeing’s property rights could not be resolved based on the record developed to date.  Accordingly, the Board directed the parties to submit a joint status report proposing further proceedings. CANVS Corp., ASBCA Nos. 57784, 57987 (Sept. 6, 2018) CANVS Corporation (“CANVS”) appealed the denial of its claim for $100 million asserting breach of contract for the unauthorized disclosure of allegedly proprietary information regarding night vision color goggles.  CANVS had contracts under the Small Business Innovation Research (“SBIR”) program to develop and deliver color night vision technology, and alleged that the government displayed its technical data containing its proprietary information at industry conferences.  CANVS had delivered the technical data to the government under the SBIR contracts, but the parties disputed the rights conferred upon the government under DFARS 252.227-7018, including whether CANVS’s restrictive markings conformed and whether the data was first generated under the contract.  The ASBCA (Peacock, A.J.) declined to decide those issues, however, because even if the government did not comply with 252.227-7018 in disclosing its data, ultimately CANVS did not establish that it suffered any harm—much less $100 million in harm—caused by the government’s disclosure.  The fact that CANVS did not receive a follow-on production contract is insufficient, particularly when CANVS did not show that any competitors had produced a night-vision goggle using its technology, and when CANVS took no steps to mitigate any potential damages.  The ASBCA also held that CANVS did not demonstrate that the disclosed information was proprietary in any event; the disclosure did not enable a “a person of ordinary skill in the art to assemble an exact replica” of the goggle, and CANVS had previously voluntarily disclosed the information and thus lost any protectable interest. VI.    COMMON LAW PRINCIPLES The boards of contract appeals and Court of Federal Claims addressed a number of issues during the second half of 2018 arising out of the body of federal common law that has developed in the context of government contracts. Pros Cleaners, CBCA No. 6077 (Aug. 30, 2018) The CBCA (Sheridan, A.J.) considered whether an indefinite delivery, indefinite quantity (“IDIQ”) contract that does not set forth a minimum quantity is invalid for lack of consideration.  Pros Cleaners, sought damages totaling $750,000 on the basis that the Federal Emergency Management Agency (“FEMA”) breached its IDIQ contract.  FEMA moved for summary relief, asserting that its agreement with Pros Cleaners did not constitute a valid ID/IQ contract.  Pros Cleaners’ contract differed from the solicitation, which stated it was an RFP for a five-year IDIQ contract, in three aspects: it omitted the indefinite quantity clause; it did not state that it was an IDIQ contract; and it defined the period of performance as one “base year + four (4) option years.”  Further, although, the contract stated the value was not to exceed $150,000 and the contract contained a schedule establishing the unit price for labor at $25 per hour, it did not list a minimum quantity of labor.  The CBCA granted the Agency’s motion and denied the appeal finding that where, as here, a contract does not set forth a minimum quantity, it is defective and invalid for lack of consideration. A.    Christian Doctrine Under the Christian doctrine, a mandatory contract clause that expresses a significant or deeply ingrained strand of procurement policy is considered to be included in a contract by operation of law.  G.L. Christian & Assocs. v. United States, 312 F.2d 418 (Ct. Cl. 1963). K-Con, Inc. v. Secretary of the Army, 908 F.3d 719 (Fed. Cir. 2018) The dispute in this case arose from two contracts for pre-engineered metal buildings.  K-Con, Inc. (“K-Con”) claimed additional costs it said were caused by the Army’s two-year delay in imposing performance and payment bond requirements in FAR 52.228-15 that were not part of the original contracts.  The ASBCA held that bonding requirements were included in the contracts by operation of law at the time they were awarded, pursuant to the Christian doctrine.  The Federal Circuit (Stoll, J.) affirmed. The Federal Circuit first found that there was a patent ambiguity in the contracts because they were awarded as commercial-item acquisitions, but plainly required construction.  Because there was a patent ambiguity, K-Con was required to seek clarification from the contracting officer before award, which it failed to do.  Accordingly, the Federal Circuit concluded that K-Con could not now argue that the contracts should be for commercial items.  The Federal Circuit further held that FAR 52.228-15 satisfied both criteria necessary for the Christian doctrine to apply: (1) the clause is mandatory, and (2) it represents a deeply ingrained strand of public policy.  Bonding requirements, the court observed, which are meant to ensure a project is completed and that subcontractors and suppliers are paid, are a standard part of federal construction contracts under the 1935 Miller Act.  Because they are both mandatory and a “deeply ingrained strand of public procurement policy,” the court found they satisfy the Christian doctrine.  Therefore, because the clause was incorporated in the contracts at the time of award, there was no basis for K-Con to recover cost increases resulting from the two-year delay in obtaining the bonds. B.    Good Faith & Fair Dealing North American Landscaping, Construction and Dredge, Co., Inc., ASBCA Nos. 60235 et al. (Aug. 9, 2018) North American Landscaping, Construction and Dredge, Co., Inc. (“NALCO”) contracted with the U.S. Army Corps of Engineers (COE) for maintenance dredging of the Scarborough River. NALCO filed a claim for the unpaid contract balance, unabsorbed overhead, differing site conditions, and a time extension, most of which the ASBCA (Clarke, A.J.) sustained.  Most notably, the ASBCA found that the COE breached the implied duty of good faith, fair dealing and noninterference by: abusing its discretion to invoke DFARS 252.236-7004(b), which authorizes the contracting officer to require the contractor to furnish mobilization cost data; improperly denying NALCO funds that the COE knew it needed to perform; insisting on a more expensive dredge at the same price; maintaining a “disturbing attitude” toward NALCO, including mocking its legitimate concerns; and coercing NALCO into signing a “take it or leave it” modification by threatening to terminate for default if it was not signed.  The ASBCA observed that, “[a]t every point where an important decision had to be made, the COE chose to protect itself rather than act to successfully complete the contract or redress NALCO’s legitimate claims.”  In addition, the ASBCA held that the release of claims was unenforceable because NALCO signed it under coercion, because the COE threatened to terminate the contractor for default, without a good faith belief that the contractor was in default. Administrative Judge Prouty, joined by Administrative Judge Shackleford, disagreed that the COE abused its discretion and that the COE breached its duty of good faith, but concurred in the result because such findings were not necessary to award damages to NALCO (which were based on finding a constructive change).  However, the concurrence noted that it found “the government’s general behavior throughout the award and performance of the contract to be abhorrent.” C.    Sovereign Acts Doctrine Another important common law limitation on a contractor’s ability to obtain damages from the government is the sovereign acts doctrine, which insulates the government from liability for acts taken in its sovereign (not contractual) capacity. ANHAM FZCO, LLC, ASBCA No. 58999 (Nov. 13, 2018) ANHAM FZCO, LLC (“Anham”) had a contract with the Defense Logistics Agency – Troop Support for the supply and delivery of food and other items to military customers in Kuwait, Iraq and Jordan.  During performance of the contract, the government directed ANHAM to alter its delivery operations from Kuwait to Iraq by utilizing a certain commercial entry point instead of the contractually-required U.S. military controlled crossing, known as the K-Crossing.  ANHAM subsequently submitted a claim for the resulting increased costs, which the government denied. The ASBCA (Woodrow, A.J.) rejected the government’s argument that the closure of the K-Crossing was a sovereign act that insulated it from contractual liability.  The ASBCA held that while the closing of the crossing was a sovereign act, two exceptions to the defense applied here, because:  (1) the contracting officer issued instructions or orders to implement the sovereign act which exceeded contract requirements; and (2) the government expressly or impliedly agreed to pay the contractor’s losses resulting from the sovereign act.  In making that determination, the board found that the government had ordered appellant to develop a transition plan to accommodate the new delivery method, and had also expressly agreed to compensate appellant for the additional costs.  To support this, the board further found that the government was aware of the costs associated with changing the border crossing location and was open and willing to modify the contract to address the costs.  Further, the government continued to be involved directly in approving the operational changes.  D.    Accord & Satisfaction Ruby Emerald Constr. Co., ASBCA No. 61096 (Nov. 6, 2018) The Army and Ruby Emerald Construction Company (“Ruby”) entered into an arrangement for the purchase of crushed gravel.  The Army contended that there was never a contract because it cancelled the purchase order prior to acceptance by Ruby, notwithstanding the fact that the Army issued a notice to proceed, and the parties had executed a bilateral modification.  The Army also contended that if there were a contract, the bilateral modification cancelled the contract at no cost to the Army, therefore, summary judgment should be granted in favor of the Army. The ASBCA (Woodrow, A.J.) could not determine whether a contract existed due to contradictory and incomplete aspects of the record and denied summary judgment on this ground.  However, the ASBCA granted summary judgment based on accord and satisfaction, which operates to discharge a claim when some performance other than that which was claimed is accepted as full satisfaction of the claim.  To establish this, the government must show (1) proper subject matter; (2) competent parties; (3) consideration; and (4) a meeting of the minds of the parties.  The ASBCA held that the Army established all four elements.  In particular, there was sufficient consideration because the modification of the contract cancelled it at no cost to the Army, and Ruby in turn would not be required to perform.  The ASBCA also held that there was a meeting of the minds because Ruby sought termination of the contract, then signed the modification which explicitly provided for cancellation of the contract at no cost to the Army, confirmed that Ruby had not incurred any costs, and did not reserve any rights for Ruby to assert a claim. VII.    DAMAGES Avant Assessment, LLC v. Secretary of the Army, No. 2018-1235, (Fed. Cir. Nov. 9, 2018) Avant appealed from a decision of the ASBCA, challenging the Board’s decision to exclude evidence Avant offered regarding test items for which it argues it should have been paid under a contract with the Department of Army to deliver language testing materials to the Defense Language Institute.  The contract required that the test items be of “high quality,” and authorized the Army to reject unacceptable items.  The solicitation explained that the contract would carry a “potentially high rejection rate,” and noted that the historical rejection rate was about 33 percent.  Avant therefore built a 30 percent rejection rate into its bid. Avant claimed that the Army improperly rejected many of the test items based on “subjective and indefinite specifications.”  Avant sought compensation for all “test items rejected in excess of 30 percent . . . [,]”  demanding an equitable adjustment of approximately $1.9 million for the alleged breach.  Following the ASBCA’s denial, Avant appealed to the Federal Circuit. The Federal Circuit (Bryson, J.) rejected Avant’s contention that it was entitled to damages for all rejections over the 30 percent figure in the solicitation.  The court explained that that figure was an estimate and it not a promise by the Army to not exceed a certain rejection rate or to reimburse the contractor for items rejected over that rate.  Instead of seeking a blanket 30 percent recovery, Avant had to actually establish which items were improperly rejected, then the burden would shift to the government to show that the rejected items were nonconforming.  In so holding, the court also upheld the ASBCA’s exclusion of Avant’s untimely submission of approximately 40,000 pages of evidence relating to the rejected items.  The court suggested that had Avant timely submitted the evidence, it could have provided expert testimony; attempted to demonstrate breach by presenting a sample of the rejected items; or Avant could have submitted a summary of the documents under Federal Rule of Evidence 1006.  Having failed to show actual breach, Avant could not rely on an estimate in the solicitation. VIII.    OTHER CASES OF NOTE Palantir USG Inc. v. United States, 904 F.3d 980 (Fed. Cir. 2018) In our Mid-Year Update, we highlighted Palantir as a pending bid protest case to watch for the wide reaching impacts the decision would have on the procurement community and the deference afforded the government’s market research in developing its solicitation requirements.  Palantir argued that the Army violated the Federal Acquisition Streamlining Act (“FASA”) when it decided to develop a new data-management platform (“DCGS-A2”) from scratch without undertaking market research to determine whether its needs could be met by a commercially available product.  In September, Gibson Dunn secured a victory for Palantir in the case when the Federal Circuit (Stoll, J.) rejected the Army’s argument that the claims court should have deferred to its original choice to go with a custom solution for the disputed data platform. FASA requires that federal agencies, to the maximum extent practicable, procure commercially available technology to meet their needs.  Noting that that FASA achieves its preference for commercial items in part through preliminary market research, the court concluded that the Army’s procurement actions in this case were arbitrary and capricious and in violation of FASA.  Key to that holding was the fact that the Army was on notice of both the desirability of hybrid options that used commercial solutions and that Palantir claimed to have a commercial item that could meet or be modified to meet the Army’s needs.  The decision should cause federal agencies to take their market research obligations under FASA more seriously. The court also rejected the government’s argument that the trial court wrongly discarded the presumption of regularity in determining that the Army’s actions were arbitrary and capricious.  The court stressed that under the presumption of regularity, the agency is not required to provide an explanation unless that presumption has been rebutted by record evidence suggesting that the agency decision was arbitrary and capricious, which in this case had been amply satisfied.  In affirming the judgment of the lower court, the court stated that only after the Army complied with the requirements of FASA should it proceed with awarding a contract to meet its DCGS-A2 requirement. PDS Consultants v. United States, Nos. 2017-2379, 2017-2512 (Fed. Cir. Oct. 17, 2018) In our 2016 Mid-Year Update, we reported on the Supreme Court’s ruling in  Kingdomware Techs. v. United States, 136 S. Ct. 1969 (2016), which held that the Veterans Benefits, Health Care, and Information Technology Act of 2006 unambiguously requires the Department of Veteran’s Affairs (“VA”) to apply the so-called Rule of Two – a provision specifying that, “for purposes of meeting [veteran-owned business participation] goals,” the VA must restrict bidding to such businesses when there is a “reasonable expectation that two or more” veteran-owned businesses will make reasonable bids, with limited exceptions.  In PDS, the Federal Circuit affirmed an earlier Court of Federal Claims’ decision, applying Kingdomware and holding that the more specific nature of the Rule of Two overrides the more general preference to provide employment opportunities for the blind as set forth in the Javits-Wagner-O’Day Act of 1938, and as effectuated by the AbilityOne Program, despite the mandatory nature of both.  The Court of Federal Claims held that the VA must apply the Rule of Two analysis before procuring the work through a non-Veteran Owned Small Business set-aside, including set-asides through the AbilityOne Program.  In affirming the decision, the Federal Circuit “consider[ed] the plain language of the more specific, later enacted” Veteran’s Benefits, Health Care, and Information Technology Act of 2006, “as well as the legislative history and Congress’s intention in enacting it….” IX.    CONCLUSION We will continue to keep you informed on these and other related issues as they develop. The following Gibson Dunn lawyers assisted in preparing this client update: Karen L. Manos, John W.F. Chesley, Erin N. Rankin, Lindsay M. Paulin, Melinda R. Lewis, Ryan Comer, Shannon Han, Pooja Patel, Sydney Sherman, and Casper J. Yen. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: Washington, D.C. Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Michael Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) Michael K. Murphy(+1 202-995-8238, mmurphy@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Justin Paul Accomando (+1 202-887-3796, jaccomando@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Michael R. Dziuban (+1 202-887-8252, mdziuban@gibsondunn.com) Melissa L. Farrar (+1 202-887-3579, mfarrar@gibsondunn.com) Melinda R. Lewis (+1 202-887-3724, mrlewis@gibsondunn.com) Lindsay M. Paulin (+1 202-887-3701, lpaulin@gibsondunn.com) Laura J. Plack (+1 202-887-3678, lplack@gibsondunn.com) Erin N. Rankin (+1 202-955-8246, erankin@gibsondunn.com) Jeffrey S. Rosenberg (+1 202-955-8297, jrosenberg@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com) Los Angeles Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Maurice M. Suh (+1 213-229-7260, msuh@gibsondunn.com) James L. Zelenay, Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Dhananjay S. Manthripragada (+1 213-229-7366, dmanthripragada@gibsondunn.com) Sean S. Twomey (+1 213-229-7284, stwomey@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 8, 2019 |
Developments on Public Company Disclosures on Board and Executive Diversity

Click for PDF On February 6, 2019, the staff (Staff) of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) issued two new identical Compliance and Disclosure Interpretations (C&DIs).  The C&DIs address disclosure that the Staff expects public companies to include in their proxy statements and other SEC filings regarding “self-identified diversity characteristics” with respect to their directors and director nominees.  In addition, legislation was introduced in both the U.S. House of Representatives and the U.S. Senate that would require public companies to annually disclose the gender, race, ethnicity and veteran status of their directors, director nominees, and senior executive officers. Background The SEC already has rules requiring board diversity-related disclosure.  Item 407(c)(2)(vi) of Regulation S-K requires companies to disclose “whether, and if so how, the nominating committee (or the board) considers diversity in identifying nominees for director.”  It further requires that, “[i]f the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, [the company must] describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy.”  Historically, it has been our understanding that the Staff takes a broad view of what qualifies as a “policy,” and that if a company considers diversity in identifying director candidates, the company has a “policy” for purposes of this requirement and is expected to provide disclosure about the implementation and effectiveness of its policy.  This disclosure requirement therefore can influence what companies report under Item 401(e) of Regulation S-K, which requires directors’ and nominees’ biographical information to “briefly discuss the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director for the registrant at the time that the disclosure is made, in light of the registrant’s business and structure.” These rules have “been subject to some criticism” that they don’t provide “enough useful disclosure,”[1] as noted by Bill Hinman, the head of the SEC’s Division of Corporation Finance, in testimony before the House Committee on Financial Services Subcommittee on Capital Markets, Securities and Investment in April 2018.  Hinman added that the Staff had been reviewing company disclosures regarding directors’ diversity and considering concerns raised about directors’ privacy issues.  As a result, the SEC’s regulatory agenda states on the long-term agenda that the Division of Corporation Finance “is considering recommending that the [SEC] propose amendments to the proxy rules to require additional disclosure about the diversity of board members and nominees.”[2] New C&DIs The two new Regulation S-K interpretations are identical and are set forth in Question 116.11 (relating to Item 401, Directors, Executive Officers, Promoters and Control Persons) and Question 133.13 (relating to Item 407, Corporate Governance).[3]  They convey the Staff’s expectation that in some situations (1) a discussion of a director or nominee’s experience would include disclosure of “self-identified diversity characteristics” and how they were considered, and (2) the description of the company’s diversity policies would include how the company considers “the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account.”  The C&DIs are framed as addressing a situation where “board members or nominees have provided for inclusion in the company’s disclosure” those characteristics and where the “individual . . . has consented to the company’s disclosure of those characteristics,” demonstrating that the Staff recognizes important considerations that companies wrestle with when addressing these disclosure requirements. In light of the new interpretations, companies should review and consider whether their disclosures appropriately reflect information provided by directors and nominees (and whether those individuals have consented to disclosure of that information), and how that information is taken into account under their board diversity policies.  In practice, there are a wide variety of approaches that companies follow in evaluating directors and nominees and, as recognized in the new CD&Is, there are often also a wide variety of factors considered.  Among the ways that companies have addressed these matters to date are:  aggregated disclosure of the specific diversity characteristics of their boards; discussions of the stage in the nomination process at which diversity characteristics are considered; skills and characteristic matrices; and individualized discussions of qualifications and characteristics.  In light of the variety of factors typically considered by boards when identifying and nominating directors, we expect that many companies will enhance their existing diversity disclosures in a variety of ways depending on their specific circumstances. Text of New C&DIs The full text of the new C&Dis is set forth below: Question 116.11 and Question 133.13 Question: In connection with preparing Item 401 disclosure relating to director qualifications, certain board members or nominees have provided for inclusion in the company’s disclosure certain self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background. What disclosure of self-identified diversity characteristics is required under Item 401 or, with respect to nominees, under Item 407? Answer: Item 401(e) requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees. To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company’s disclosure of those characteristics, we would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered. Similarly, in these circumstances, we would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics. [February 6, 2019] Congressional Developments On the same day that the C&DI were issued, Representative Gregory Meeks (D-NY) – who was recently named the Chair of the House Committee on Financial Services’ Subcommittee on Consumer Protection and Financial Institutions – introduced legislation requiring public companies to provide additional diversity disclosures.[4]  The “Improving Corporate Governance Through Diversity Act of 2019,” would require public companies to disclose annually the gender, race, ethnicity, and veteran status of their directors, director nominees, and senior executive officers.  A companion bill in the Senate was simultaneously introduced by Senator Bob Menendez (D-NJ), who serves on the Senate’s Banking Committee. The bill also would involve the SEC’s Office of Minority and Women Inclusion (OMWI).  OMWI would (1) be empowered to publish triennially best practices, in consultation with an advisory council of investors and issuers, for compliance with these enhanced disclosure rules, (2) be required to create an advisory council consistent with the Federal Advisory Committee Act requiring formal reporting, public openness and accessibility, and various oversight procedures, and (3) be allowed to solicit public comment on its best practices publication consistent with the formal rulemaking process under the Administrative Procedures Act. According to a press release issued by Rep. Meeks, the bill is supported by The NAACP, the Urban League, the Council for Institutional Investors, and the U.S. Chamber of Commerce.    [1]   See https://www.congress.gov/committees/video/house-financial-services/hsba00/rNdly_FXlKs.    [2]   See https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201810&RIN=3235-AL91.    [3]   See https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.    [4]   See https://meeks.house.gov/media/press-releases/rep-meeks-and-sen-menendez-introduce-corporate-diversity-bill. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 29, 2019 |
Webcast: Challenges in Compliance and Corporate Governance

Every year brings new compliance challenges, and 2018 has been no exception. Join our panelists as they discuss key changes in the 2018 regulatory landscape and look forward to 2019 with insight on how to effectively navigate risks in the new year. Topics discussed include: Global Enforcement and Regulatory Developments Board Oversight of Cyber Threats and Governance Allocation How to Effectively Identify and Address Key Compliance Risks Practical Tips for Improving Corporate Compliance DOJ and SEC Priorities, Policies, and Penalties Update on Core Governance Issues and Regulatory Requirements Legislative Developments Impacting Board Governance View Slides (PDF) PANELISTS: Kendall Day, a partner in Washington, D.C., was an Acting Deputy Assistant Attorney General, the highest level of career official in the Criminal Division at DOJ. He represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, FCPA and other anti-corruption, securities, tax, wire and mail fraud, unlicensed money transmitter, and sensitive employee matters. Mr. Day’s practice also includes BSA/AML compliance counseling and due diligence, and the defense of forfeiture matters. Sacha Harber-Kelly, a partner in London, focuses his practice in global white-collar investigations. He was a Prosecutor and Case Controller at the United Kingdom’s Serious Fraud Office (SFO) where he was involved in the investigation and prosecution of international corporate corruption cases since 2007. He has worked extensively with a range of other enforcement authorities in the U.K., U.S. and beyond, including the DOJ, SEC, OFAC, the U.K. National Crime Agency, HM Revenue Commissioners, and the Financial Conduct Authority. He was awarded a Member of the Order of the British Empire (MBE) for services to the SFO. In private practice, he represents clients in criminal and regulatory investigations as well as cross-border enforcement inquiries. Stuart Delery, a partner in Washington, D.C., was the Acting Associate Attorney General, the No. 3 position in the Justice Department, where he oversaw the civil and criminal work of five litigating divisions — Antitrust, Civil, Tax, Civil Rights, and Environment and Natural Resources — as well as other components. His practice focuses on representing corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Adam M. Smith, a partner in Washington, D.C., was the Senior Advisor to the Director of the U.S. Treasury Department’s OFAC and the Director for Multilateral Affairs on the National Security Council. His practice focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. He routinely advises multi-national corporations regarding regulatory aspects of international business. Lori Zyskowski, a partner in New York, is Co-Chair of the firm’s Securities Regulation and Corporate Governance practice. She was previously Executive Counsel, Corporate, Securities & Finance at GE.  She advises clients, including public companies and their boards of directors, on a wide variety of corporate governance and securities disclosure issues, and provides a unique perspective gained from over 12 years working in-house at S&P 500 corporations. F. Joseph Warin, a partner in Washington, D.C., is Co-Chair of the firm’s White Collar Defense and Investigations practice and former Assistant U.S. Attorney in Washington, D.C. Mr. Warin is consistently recognized annually in the top-tier by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations acumen.  In 2018 Mr. Warin was selected by Chambers USAas a “Star” in FCPA, and “a “Leading Lawyer” in the nation in Securities Regulation: Enforcement.  Global Investigations Review reported that Mr. Warin has now advised on more FCPA resolutions than any other lawyer since 2008.  Who’s Who Legal and Global Investigations Review named Mr. Warin to their 2016 list of World’s Ten-Most Highly Regarded Investigations Lawyers based on a survey of clients and peers, noting that he was one of the “most highly nominated practitioners,” and a “’favourite’ of audit and special committees of public companies.”  Mr. Warin has handled cases and investigations in more than 40 states and dozens of countries.  His credibility at DOJ and the SEC is unsurpassed among private practitioners — a reputation based in large part on his experience as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ: Statoil ASA (2007-2009); Siemens AG (2009-2012); and Alliance One International (2011-2013). MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of  3.0 credit hours, of which 3.0 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 2.50 credit hours, of which 2.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 2.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

January 16, 2019 |
Law360 Names Gibson Dunn Among Its Securities 2018 Practice Groups of the Year

Law360 named Gibson Dunn one of its six Securities Practice Groups of the Year [PDF] for 2018. The practice group was recognized for “[s]ecuring a landmark U.S. Supreme Court decision that opened up potential appointments clause challenges to administrative law judges who decide enforcement cases for the U.S. Securities and Exchange Commission.” The firm’s Securities practice was profiled on January 16, 2019. Gibson Dunn’s securities practice offers comprehensive client services including in the defense and handling of securities class action litigation, derivative litigation, M&A litigation, internal investigations, and investigations and enforcement actions by the SEC, DOJ and state attorneys general.

January 13, 2019 |
Gibson Dunn Named a 2018 Law Firm of the Year

Gibson, Dunn & Crutcher LLP is pleased to announce its selection by Law360 as a Law Firm of the Year for 2018, featuring the four firms that received the most Practice Group of the Year awards in its profile, “The Firms That Dominated in 2018.” [PDF] Of the four, Gibson Dunn “led the pack with 11 winning practice areas” for “successfully securing wins in bet-the-company matters and closing high-profile, big-ticket deals for clients throughout 2018.” The awards were published on January 13, 2019. Law360 previously noted that Gibson Dunn “dominated the competition this year” for its Practice Groups of the Year, which were selected “with an eye toward landmark matters and general excellence.” Gibson Dunn is proud to have been honored in the following categories: Appellate [PDF]: Gibson Dunn’s Appellate and Constitutional Law Practice Group is one of the leading U.S. appellate practices, with broad experience in complex litigation at all levels of the state and federal court systems and an exceptionally strong and high-profile presence and record of success before the U.S. Supreme Court. Class Action [PDF]: Our Class Actions Practice Group has an unrivaled record of success in the defense of high-stakes class action lawsuits across the United States. We have successfully litigated many of the most significant class actions in recent years, amassing an impressive win record in trial and appellate courts, including before the U. S. Supreme Court, that have changed the class action landscape nationwide. Competition [PDF]: Gibson Dunn’s Antitrust and Competition Practice Group serves clients in a broad array of industries globally in every significant area of antitrust and competition law, including private antitrust litigation between large companies and class action treble damages litigation; government review of mergers and acquisitions; and cartel investigations, internationally across borders and jurisdictions. Cybersecurity & Privacy [PDF]: Our Privacy, Cybersecurity and Consumer Protection Practice Group represents clients across a wide range of industries in matters involving complex and rapidly evolving laws, regulations, and industry best practices relating to privacy, cybersecurity, and consumer protection. Our team includes the largest number of former federal cyber-crimes prosecutors of any law firm. Employment [PDF]: No firm has a more prominent position at the leading edge of labor and employment law than Gibson Dunn. With a Labor and Employment Practice Group that covers a complete range of matters, we are known for our unsurpassed ability to help the world’s preeminent companies tackle their most challenging labor and employment matters. Energy [PDF]: Across the firm’s Energy and Infrastructure, Oil and Gas, and Energy, Regulation and Litigation Practice Groups, our global energy practitioners counsel on a complex range of issues and proceedings in the transactional, regulatory, enforcement, investigatory and litigation arenas, serving clients in all energy industry segments. Environmental [PDF]: Gibson Dunn has represented clients in the environmental and mass tort area for more than 30 years, providing sophisticated counsel on the complete range of litigation matters as well as in connection with transactional concerns such as ongoing regulatory compliance, legislative activities and environmental due diligence. Real Estate [PDF]: The breadth of sophisticated matters handled by our real estate lawyers worldwide includes acquisitions and sales; joint ventures; financing; land use and development; and construction. Gibson Dunn additionally has one of the leading hotel and hospitality practices globally. Securities [PDF]: Our securities practice offers comprehensive client services including in the defense and handling of securities class action litigation, derivative litigation, M&A litigation, internal investigations, and investigations and enforcement actions by the SEC, DOJ and state attorneys general. Sports [PDF]: Gibson Dunn’s global Sports Law Practice represents a wide range of clients in matters relating to professional and amateur sports, including individual teams, sports facilities, athletic associations, athletes, financial institutions, television networks, sponsors and municipalities. Transportation [PDF]: Gibson Dunn’s experience with transportation-related entities is extensive and includes the automotive sector as well as all aspects of the airline and rail industries, freight, shipping, and maritime. We advise in a broad range of areas that include regulatory and compliance, customs and trade regulation, antitrust, litigation, corporate transactions, tax, real estate, environmental and insurance.

January 15, 2019 |
2018 Year-End Securities Enforcement Update

Click for PDF I.   Introduction: Themes and Developments A.   2018 In Review The Securities and Exchange Commission, like most federal agencies, ended 2018 with a whimper, not a bang. Most staffers were furloughed as part of the federal government shutdown, a note on the SEC homepage cautioning that until further notice only a limited number of personnel would be on hand to respond to emergency situations. The shutdown curtailed the Division of Enforcement’s ability to close out the year with a raft of last-minute filings, not to mention causing most SEC investigations to grind to a halt.  That said, between the December 27 shutdown and the date of this publication, the SEC did manage to institute two enforcement actions – a settlement with a car rental company for accounting errors occurring between 2012 and 2014[1]; and a settlement with a small accounting firm for failing to comply with the Custody Rule in connection with audits of an investment adviser conducted between 2012 and 2015.[2]  Given the age of the conduct, it is unclear the nature of the “emergency” requiring unpaid SEC staffers to come to work in the midst of the shutdown to release these two particular cases, though perhaps an impending statute of limitations was to blame. While the shutdown may have cut the Enforcement Division’s year short, it was more than compensated for by the flurry of actions filed as the agency’s September 30 fiscal year-end loomed.  Indeed, the SEC issued nearly a dozen press releases announcing enforcement actions on the last three days of the fiscal year, including several significant cases involving prominent public companies and financial institutions. The (fiscal) year-end rush appeared intended to blunt some of the criticism of the Enforcement Division’s productivity in the new administration.  After filing 446 new stand-alone enforcement actions in fiscal 2017, an over 18% drop from the 548 actions filed in 2016, the docket recovered somewhat in 2018, with the SEC filing 490 new actions.[3]  (The SEC’s tally of “stand-alone” enforcement actions excludes “follow-on” proceedings sanctioning individuals separately charged for violating the securities laws, and routine administrative proceedings to deregister the stock of companies with delinquent SEC filings.)  While still falling short of the final years under the prior SEC and Enforcement Division leadership, the current Division Directors were quick to note in their Annual Report that the 2015 and 2016 results were somewhat skewed by the SEC’s Municipalities Continuing Disclosure (MCDC) Initiative, under which municipal securities issuers and underwriters who self-reported disclosure violations to the Division received leniency.  The initiative produced nearly 150 enforcement actions; stripped of those matters, the 2018 results actually exceeded those of recent years. The Division Directors further explained that these results were achieved notwithstanding a hiring freeze in place at the SEC since the onset of the Trump administration, and the Division’s Annual Report included a plea for additional resources.  As stated in the Report, “While this achievement is a testament to the hardworking women and men of the Division, with more resources the SEC could focus more on individual accountability, as individuals are more likely to litigate and the ensuing litigation is resource intensive.”  The Directors also noted the challenges posed by the Supreme Court’s decision in Kokesh v. SEC, which confirmed a strict five-year statute of limitations on SEC demands for disgorgement[4], as well as the Court’s more recent decision in Lucia v. SEC, which held that the SEC’s method of appointing its administrative law judges violated the Appointments Clause of the U.S. Constitution and has necessitated the potential re-litigation of myriad administrative proceedings.[5] Thematically, the Enforcement Division (as well as SEC Chairman Clayton) repeatedly reiterated their focus on protecting “retail” or “Main Street” investors.  Indeed, the Division’s Annual Report invoked the word “retail” no fewer than twenty-six times.  (A close second was “cyber,” another Division priority, which appeared twenty-four times in the Report.)  The “retail” focus has led the SEC to highlight cases in which average investors appear to be victimized, particularly offering frauds, pump-and-dump-schemes, and misconduct by investment advisers and broker dealers directed at individual clients.  For fiscal 2018, according to the Annual Report, securities offering cases (which range from Ponzi schemes to various disclosure and registration violations in connection with securities offerings) comprised 25% of the year’s enforcement actions, the largest single category.  Cases against investment advisers and investment companies were just behind at 22% of the caseload; and while the SEC continues to bring cases involving private funds and institutional investors, the lion’s share of investment adviser cases fit within the SEC’s “retail” focus. Despite efforts in recent years for the Enforcement Division to renew its scrutiny of public company financial reporting and disclosure – which in the past had often been the top category of SEC enforcement actions, representing a quarter or more of the docket – such cases comprised only 16% of the SEC’s enforcement actions in 2018.  Rounding out the docket were cases involving broker-dealers (13%), insider trading (10%), and market manipulation (7%); FCPA cases and public finance abuse checked in at 3% of the enforcement filings apiece. B.   Whistleblowers The whistleblower bounty program enacted as part of Dodd-Frank continues to grow apace with each new year.  In its November 2018 annual report to Congress, the SEC’s Office of the Whistleblower reported that the program had once again netted a record number of tips.[6]  A total of 5,282 whistleblower complaints were received in fiscal 2018, up nearly 18% from 2017.  (The report noted that the Whistleblower Office appears to have its share of vexatious whistleblowers who submit an “unusually high” number of tips, which are excluded from the tally.) As with enforcement cases ultimately filed by the Enforcement Division in 2018, the largest single category for tips for 2018 was offering frauds, representing 20% of all complaints; tips concerning corporate disclosures and financials were a close second, representing 19% of the complaints. The SEC has also continued to announce large award payments to whistleblowers whose tips led to successful enforcement actions.  In September, the SEC announced that it had awarded $39 million to a single whistleblower, the second highest award in the history of the program; the same investigation also resulted in a $15 million payment to a second whistleblower.[7]  However, due to the whistleblower regulations’ confidentiality requirements, the nature of the enforcement action resulting in these awards is not reported. The SEC announced two additional whistleblower awards later that same month. First, the SEC reported a $1.5 million payment, while noting that “the award was reduced because the whistleblower did not promptly report the misconduct and benefitted financially during the delay.”[8]  And in a second case, the SEC awarded $4 million to an overseas whistleblower, touting the important service that even those outside the U.S. can provide to the SEC.[9]  The SEC further heralded the tipster’s continuing assistance throughout the course of the investigation. According to its most recent release, the SEC has now awarded over $326 million to 59 individuals under its whistleblower program. C.   Cybersecurity and Cryptocurrency As noted above, the SEC’s Enforcement Division remains acutely focused on all things “cyber.”  While this has manifested itself primarily, in recent months, on enforcement actions involving cryptocurrency and digital assets, the Division also had several noteworthy firsts in matters of cybersecurity in the latter half of the year. First, in September, the SEC brought its first enforcement action alleging violations of the Identity Theft Red Flags Rule.[10]  The SEC alleged that a broker-dealer lacked adequate safeguards to prevent intruders from resetting contractor passwords in order to gain access to personal information about certain customers.  Without admitting the allegations, the firm agreed to pay a $1 million penalty and to retain a consultant to evaluate its compliance with the Safeguards Rule and the Identity Theft Red Flags Rule. Then, in October, the Enforcement Division issued a report on its investigations of nine public companies which had been victimized by cyber fraud.[11]  According to the SEC, attackers had used fraudulent emails to pose as executives or vendors in order to dupe company personnel into sending about $100 million (in the aggregate) into bank accounts controlled by the perpetrators.  The SEC declined to charge the companies with wrongdoing, but cautioned companies that the internal controls provisions of the federal securities laws require them to ensure they have adequate policies and procedures to mitigate such incidents and safeguard shareholder assets.[12] But most of the high-tech action happened on the cryptocurrency front, with the Enforcement Division similarly touting a number of firsts.  Most of these actions related to registration-related conduct engaged in after the Commission’s 2017 DAO Report, in which the Commission concluded that digital assets may be securities under the federal securities laws. In September, the SEC settled an action against a so-called “ICO superstore” and its owners for acting as unregistered broker-dealers by operating a website that permitted visitors to purchase tokens in ICOs and engage in secondary trading.[13] This was the first case in which the SEC charged unregistered broker-dealers for selling digital assets.  Collectively, the company and owners paid nearly $475,000 in disgorgement, while the owners also paid $45,000 each in penalties and consented to industry and penny stock bars and an investment company prohibition with a right to reapply after three years. The same day, the SEC found for the first time that a hedge fund manager’s investments in digital assets constituted an investment company registration violation.[14]  According to the SEC, the fund falsely claimed to be regulated by and to have filed a registration statement with the SEC, and raised more than $3.6 million in four months.  It also engaged in an unregistered public offering and invested more than 40% of its assets in digital asset securities. The fund and its sole principal consented to pay a combined $200,000 penalty to settle the case. In November, the SEC settled an action against the founder of a digital token-trading platform, finding for the first time that such a platform operated as an unregistered national securities exchange.[15]  The platform in question matched buyers and sellers of digital assets, executed smart contracts, and updated a distributed ledger via the Ethereum blockchain, among other things. The founder consented to disgorge $300,000 and pay a $75,000 penalty.  The SEC noted that its investigation remains ongoing. Also in November, the SEC settled actions against two technology companies for failing to register their ICOs pursuant to federal securities laws.[16]  Both companies raised over $10 million worth of digital assets to fund their respective business ventures.  These were the first cases in which the SEC imposed civil penalties solely for ICO-related registration violations. The companies consented to return funds to investors, register their tokens as securities, file periodic reports with the SEC for at least one year, and pay $500,000 in total penalties. That same month, the SEC also for the first time brought actions against individuals for improperly promoting ICOs.  The SEC settled actions against two celebrities for their respective failures to disclose that they were being compensated for promoting upcoming ICOs on their social media accounts.[17]  The celebrities received approximately $350,000 in total for their promotions, all of which they were required to disgorge, along with $400,000 in total penalties. The celebrities also consented to a combined five-year ban on promoting any security. The second half of this year also saw the SEC crack down on ICOs claiming to be registered with the SEC.  In October, the SEC suspended trading of a company’s securities after the company issued two press releases falsely claiming to have partnered with an SEC-qualified custodian for use with cryptocurrency transactions and to be conducting an “officially registered” ICO.[18]  Also in October, the SEC obtained an emergency court order halting a planned ICO that falsely claimed to be SEC-approved.[19]  On October 11, a federal judge froze the assets of the defendants—the company and its founder.  Notably, in one of the few setbacks to the SEC’s aggressive enforcement program in the cryptocurrency space, the same judge subsequently denied the SEC’s motion for a preliminary injunction, finding that the Commission had failed to show that the digital asset offered in the ICO was a security subject to federal securities laws.[20]  Litigation remains ongoing. Finally, September saw the SEC file a litigated action against an international securities dealer and its CEO for soliciting investors to buy and sell securities-based swaps.[21]  The SEC filed the case after an undercover FBI agent allegedly purchased securities-based swaps on the company’s platform despite not meeting the required discretionary investment thresholds.  The SEC alleged that the company failed to register as a security-based swaps dealer and transacted the securities-based swaps outside of a registered national exchange. II.   Issuer and Auditor Cases A.   Accounting Fraud and Internal Controls In July, the SEC charged a drainage pipe manufacturer and its former CFO with reporting and accounting violations.[22]  According to the SEC, the company allegedly overstated its income before taxes from 2013-2015 as a result of insufficient internal accounting controls, improper accounting, and “unsupported journal entries directed or approved” by the former CFO.  Without admitting or denying the allegations, the company agreed to pay a $1 million penalty while the CFO agreed to pay a $100,000 penalty, reimburse the company approximately $175,000 in stock sale profits, and be barred from practicing as an accountant before the SEC. In early September, the SEC announced a settlement with a telecommunications expense management company and three members of the company’s senior management related to allegedly fraudulent accounting practices.[23]  According to the complaint, the company prematurely reported revenue for work that had not been performed or for transactions that did not actually produce revenue.  The SEC also alleged that the company’s former senior vice president of expense management operations falsified business records that were provided to auditors.  The company and three executives agreed to pay a combined penalty of $1.67 million to settle the allegations.  The litigated action against the senior VP of expense management operations remains pending. Later that month, the SEC charged a U.S.-based CFO of a public company in China with using his personal bank account to transfer over $400,000 in corporate funds from China to the U.S. to pay the company’s U.S. expenses.[24]  The SEC’s complaint alleged that he had previously engaged in the same practice for at least two other China-based public companies.  The SEC contended that the commingling of corporate and personal funds put the company’s assets at risk of misuse and loss, and that the CFO had failed to implement an adequate set of internal accounting controls.  The CFO agreed to settle the charges without admitting wrongdoing, agreeing to pay a $20,000 fine and to be barred from serving as a public company officer or director for five years. Also in September, the SEC initiated enforcement actions against a business services company, its former CFO, and the company’s former controller related to allegations of accounting fraud.[25]  The complaint alleged that the CFO manipulated the company’s books to hide the increasing expense of its workers’ compensation relative to revenue from its independent auditor.  When the company announced that it needed to restate its financial results to reflect the actual workers’ compensation expenses, the stock price fell by 32%.  Without admitting or denying the allegations, the company agreed to pay $1.5 million to settle the charges, and the controller, who allegedly approved some of the CFO’s accounting entries, agreed to pay $20,000 and be suspended from appearing before the SEC as an accountant for one year.  The case against the CFO is being litigated, and he has also been charged criminally by the United States Attorney’s Office for the Western District of Washington.  The company’s CEO, who was not charged with wrongdoing, agreed to pay the company back his $20,800 in cash bonuses received during the period of the alleged accounting violations. The following day, a pipeline construction company agreed to settle charges that it failed to implement adequate internal accounting controls, and failed to adequately evaluate its control deficiencies when assessing the effectiveness of its Internal Control over Financial Reporting (“ICFR”), after problems with its revenue recognition surfaced.[26]  According to the SEC, the company used contingent cost estimates to cover potential risks inherent in a project that could add unanticipated expenses to its total costs.  The company failed to implement adequate controls around its contingent cost estimates, despite recognizing that such estimates were critical for properly recognizing revenue.  Without admitting liability, the company agreed to pay a $200,000 civil penalty. Later in September, the SEC announced a settled action against a pharmaceutical company and its former CFO for allegedly understating the amount of inventory held by its wholesaler customers, which occurred as a result of the company flooding its distribution channel with products.[27]  According to the complaint, this created more short-term revenue at the expense of future sales.  Without admitting or denying the allegations, the company agreed to be enjoined from future violations and the former CFO agreed to pay approximately $1 million in penalties and disgorgement, be subject to an officer and director bar for five years, and to be barred from appearing before the SEC as an accountant with a right to apply for reinstatement after five years. In a November case involving the Kenyan subsidiary of a U.S.-based tobacco company, the SEC charged that managers at the subsidiary overrode existing internal controls and failed to report accounting errors to the parent company.[28]  As a result, the parent company filed materially misstated financial statements for more than four years, including errors to its inventory, accounts receivable, and retained earnings numbers.  The parent company agreed to settle the internal controls violations on a no admit/no deny basis.  The SEC imposed a cease-and-desist order, noting the company’s remedial actions already undertaken, including sharing the results of its internal investigation with the SEC, hiring new accounting control positions within the African region, and implementing new internal accounting control procedures and policies. In December, the SEC filed a complaint against a multinational agricultural company and its executive chairman, alleging that they concealed substantial losses by improperly accounting for the divestiture of its China-based operating company.[29]  According to the SEC, the company overstated the value of stock received in the transaction and assigned a value of nearly $60 million to worthless land use rights.  The company agreed to pay a $3 million penalty and to cooperate with the SEC in future investigations, without admitting or denying the allegations.  Additionally, the CEO agreed to pay $400,000 and accept a five year officer and director bar. The next day, the SEC brought charges against a natural food company stemming from alleged weaknesses in the company’s internal controls regarding end-of-quarter sales practices that helped the company meet its internal sales targets.[30]  According to the SEC, the company’s sales personnel regularly offered incentives to customers to move inventory near quarter-end, including the right to return products that expired or spoiled prior to ultimate purchase, cash incentives, substantial discounts, and extended payment terms.  The company had failed to implement adequate controls to both detect and document these practices.  According to the SEC’s press release, no monetary penalties were imposed based on the company’s self-reporting to the SEC and significant remediation efforts, which included significant organizational changes and changes to its revenue recognition policies. Also in December, the SEC also instituted settled proceedings against a publicly-traded issuer of subprime automobile loan securities related to allegations that the company failed to accurately calculate its credit loss allowance from certain impaired loans and failed to segregate those loans from its general loan assets.[31]  The SEC also alleged that flaws in the company’s internal controls led to its errors in calculating credit loss allowance and caused the company to restate its financial statements twice in a one-year period.  Without admitting or denying the allegations, the company agreed to pay a $1.5 million penalty. Finally, the SEC brought a settled proceedings against five separate companies for filing quarterly financial forms without having their financial statements reviewed in advance, which is a violation of Regulation S-X.[32]  The SEC announced the charges against all five companies in a single press release, and each company agreed to remedial action, including payment of penalties ranging from $25,000 to $75,000. B.   Misleading Disclosures Beyond the accounting-related cases discussed above, the SEC pursued an unusual number of cases based on misleading disclosures by public companies in the latter half of the year. Misleading Metrics Many of the disclosure cases instituted by the SEC involved the use of allegedly misleading metrics of interest to investors. In July, the SEC filed settled proceedings against an engineering and construction company related to allegations that it inflated a key performance metric and had various accounting control deficiencies.[33]  According to the SEC’s order, the company’s “work in backlog” metric, which measured the revenue the company expected to earn from future firm orders under existing contracts, improperly included at least $450 million from orders that the company had not received.  Additionally, the SEC alleged that the company’s deficient accounting controls caused it to make inaccurate estimates of the costs to complete seven contracts, leading the company to restate its earnings.  Without admitting wrongdoing, the company agreed to pay a $2.5 million penalty. In August, the SEC separately instituted proceedings against a cloud communications company and two of its executives as well as executives at two online marketing companies related to allegations that they provided misleading numbers to investors.  In the first order, the SEC alleged that the company projected first quarter 2015 revenue of $74 million based on improperly reclassified sales forecasts when the CFO was aware of red flags that undermined confidence in that figure.[34]  Just a week before the end of the quarter, the company announced revenue projects that were approximately $25 million lower, causing the stock price to fall 33%.  Without admitting wrongdoing, the company agreed to pay $1.9 million and the two executives agreed to pay penalties ranging from $30,000 to $40,000.  In the second complaint, the SEC alleged that the former CEO and CFO of two online marketing companies, which formed a parent-subsidiary relationship in 2016, knowingly provided inflated subscriber figures.[35]  These charges arose out of a settled enforcement action the SEC brought against the companies themselves in June, in which the parent company agreed to pay a $8 million penalty.  Without admitting or denying the allegations, the two executives agreed to pay $1.38 million and $34,000, respectively. In September, the SEC announced a settled action with a payment processing company and its CEO.[36]  According to the SEC’s allegations, the company materially overstated a key operating metric that caused research analysts to overrate the company’s stock and promoted it in  its filings with the SEC, even though both the company and CEO had reason to know that the metric was inaccurate.  Without admitting or denying the allegations, the company agreed to pay a penalty of $2.1 million while the former CEO agreed to pay $120,000. Finally, in a relatively novel action, the SEC settled charges against a seller of home and business security services for failing to afford equal or greater prominence to comparable GAAP earnings measures in two of its financial statements containing non-GAAP measures.[37]  While the SEC has highlighted concerns about the prominence of non-GAAP metrics previously, this appears to be the first case in which that issue alone has resulted in an enforcement action.  Without admitting or denying the allegations, the company agreed to pay $100,000 to settle the matter. Executive Perks The SEC also brought several cases involving executive perks.  In July, the SEC announced a settlement with a chemical company related to charges that the company allegedly failed to adequately disclose approximately $3 million in perquisites given to its CEO in its 2013-2016 proxy statements.[38]  The SEC alleged that the company failed to disclose personal benefits not widely available and not integrally and directly related to an executive’s job duties.  The company agreed to pay a $1.75 million penalty and hire an independent consultant to help implement new perquisite disclosure policies. Also in July, the SEC alleged that the CEO of an oil company hid approximately $10.5 million in personal loans from a company vendor and a prospective member of the board.[39]  Additionally, the SEC alleged that the CEO received undisclosed compensation and perks, and that the company failed to report more than $1 million in excess compensation in its disclosures.  Without admitting or denying the SEC’s allegations, the CEO agreed to pay a $180,000 penalty and be subject to a five year bar from serving as an officer or director of a public company.  The board member also agreed to pay a penalty. Other Disclosures In July, the SEC instituted settled proceedings against a publicly-traded real estate investment trust and four executives, alleging that they failed to adequately disclose certain cashflow issues and the status of real property within its portfolio.[40]  The parties agreed to settle the charges without admitting or denying the allegations. In September, the SEC instituted proceedings against an industrial waste water treatment company and two senior executives, alleging that they failed to disclose to investors certain contractual contingencies that had not occurred in a material contract with Nassau, New York.[41]  To settle the allegations, without admitting or denying the SEC’s findings, the company agreed to pay $133,000 in penalties, disgorgement, and pre-judgment interest and the two executives agreed to pay civil penalties of $60,000 and $35,000 respectively. Also in September, the SEC announced a settlement with SeaWorld Entertainment Inc. and its former CEO.[42]  The SEC’s complaint alleged that the company and its CEO failed to adequately disclose the damaging impact a critical documentary had on the company’s business.  Without admitting or denying the allegations, the company and former CEO agreed to pay $5 million in penalties and disgorgement.  A former vice president of communications also agreed to pay $100,000 in disgorgement and prejudgment interest, without admitting or denying the allegations. That same day, the SEC filed a settled action against a biopharmaceutical company, its CEO, and former CFO, related to allegations that the company failed to timely disclose questions about the efficacy of its flagship lung cancer drug.[43]  Without admitting or denying the SEC’s allegations, the company and the executives agreed to the payment of disgorgement and penalties. Later that month, the SEC filed a settled action against a large drugstore chain, its former CEO, and former CFO for failing to communicate the increased risk of missing operating income projections in the wake of a corporate merger.[44]  The SEC alleged that in 2012, one of the predecessor entities had reaffirmed earlier projections despite internal projections showing an increased risk of falling short.  Without admitting or denying the allegations, the company paid a $34.5 million penalty and the two executives each agreed to pay $160,000. And at the end of September, the SEC announced a settlement with Tesla, Inc. and its CEO arising out of the CEO’s tweets about plans to take the company private.[45]  The SEC alleged that the potential transaction was subject to numerous contingencies, and that the company lacked sufficient controls to review the CEOs tweets.  Without admitting or denying the allegations, the company and its CEO agreed to pay civil penalties; additionally, the CEO agreed to step down from the board and be replaced by an independent chairman, and the company agreed to install two new independent directors, implement controls to oversee the CEO’s tweets, and establish a new committee of independent directors. C.   Auditor Cases In September, the SEC instituted proceedings against an accounting firm for improper professional conduct and violations of the securities law during the course of an audit of an information technology company.[46]   According to the SEC’s complaint, the firm ignored a series of red flags concerning cash held by a related entity and provided an unqualified opinion.  The firm and two of its principals agreed to be barred from appearing before the SEC as accountants for five years, and to pay monetary penalties. In October, the SEC suspended three former accountants from a larger audit firm related to allegations that they violated auditing standards and engaged in unprofessional conduct during an audit of an insurance company.[47]  According to the SEC’s order, the audit team fell behind schedule during the audit, but the senior manager directed team members to sign off on “predated” workpapers to make it appear that the audit had been completed before the company’s annual report was filed with the SEC.  The SEC also concluded that the engagement partner and quality review partner failed to exercise due professional care that would have prevented these deficiencies in the audit.  Without admitting or denying the SEC’s findings, the three accountants agreed to be suspended from practicing before the SEC as accountants for periods ranging from one to five years, pending applications for reinstatement. In December, the SEC instituted proceedings against an audit firm, two of its partners, and two partners from a now-defunct auditing firm, relating to “significant failures” in their audit of a company that went bankrupt after the discovery of more than $100 million in federal tax liability.[48]  According to the SEC’s order, the firm identified pervasive risks of fraud in the company but failed to undertake additional steps to address the risk.  The SEC also alleged that the audit firm was not actually independent of the company due to an ongoing business relationship.  To settle the allegations, the firm agreed to  pay a penalty of $1.5 million, and hire an independent compliance consultant.  All four partners agreed to be suspended from practicing before the SEC for between one and three years, and to pay penalties ranging from $15,000 to $25,000. Finally, outside the public company audit context, the SEC charged an audit firm with failing to maintain its independence when conducting “Custody Rule” and broker-dealer audits.  The SEC alleged that the firm violated independence standards by both preparing and auditing client financial statements, accompanying notes, and accounting entries for more than 60 audits over five years.  Without admitting nor denying the allegations, the firm settled with the SEC, agreeing to pay a $300,000 penalty and to cease any engagements that fall within the purview of the SEC for one year.  If the firm later chooses to accept such engagements, it must retain an independent complaint consultant for a three-year period and comply with all of the consultant’s recommendations for auditor independence. D.   Private Company Cases Finally, the SEC brought a number of financial reporting and disclosure cases against private (or pre-public) companies, including the following: In September, the SEC instituted settled proceedings against a seller of drones, toys, and other consumer products and its CEO related to allegations that they provided inaccurate sales information to the company’s auditor, which caused its Form S-1 registration statement to overstate the company’s revenue by approximately 15%.[49]  Without admitting or denying the SEC’s allegations, the CEO agreed to pay a $10,000 penalty and the company agreed to withdraw its registration statement, which had never been declared effective. Also in September, the SEC instituted proceedings against a California-based medical aesthetics company and its former CEO.[50]  The SEC alleged that just days before the company was going to close a stock offering, the CEO learned that its Brazilian manufacturer’s certificate to sell products in the European Union had been suspended, but concealed it from the company’s General Counsel and underwriters.  After the offering closed and the suspension subsequently became public, the stock price fell by 52% and the CEO continued to misrepresent his knowledge.  The SEC settled with the company, recognizing the company’s self-reporting to the SEC and extensive cooperation.  The SEC is litigating against the CEO. In November, the SEC instituted proceedings against an entertainment media company and five of its former officers and directors.[51]  According to the complaint, the company purchased downloads for its mobile app from outside marketing firms in order to boost its download ranking in the Apple App Store.  The company allegedly misrepresented to its shareholders why its app had risen in the download rankings, and continued to allegedly lie to shareholders about the growth of its downloads even after it stopped paying for downloads and its rankings plummeted.  The parties agreed to settle the charges without admitting or denying the allegations; the individuals agreed to pay penalties of varying amounts, three agreed to a permanent officer and director bar, and one agreed to a five-year bar. III.   Investment Advisers and Funds A.   Fees and Expenses In November, a California-based investment adviser settled allegations that it overcharged clients by failing to apply “breakpoint” discounts as provided in its fee schedule.[52]  According to the SEC, the adviser’s fee schedule entailed “breakpoints” which would decrease advisory fees as the amount of client assets under management increased.  For approximately eight years, however, the advisory fee discounts were applied haphazardly, resulting in overcharges to certain client accounts.  Without admitting the allegations, the adviser agreed to pay a penalty of $50,000.  The SEC recognized that, during the investigation, the adviser undertook remedial efforts, including reimbursements to clients of overcharged fees and modifications to its policies. In December, a formerly SEC-registered fund manager settled allegations that it misallocated expenses (such as rent, overhead, and compensation) to its business development company clients as well as failed to review valuation models that caused a client to overvalue its portfolio companies.[53]  The adviser agreed to pay approximately $2.3 million disgorgement and prejudgment interest, as well as a civil money penalty of approximately $1.6 million. Also in December, the SEC filed a settled administrative proceeding against a Milwaukee-based investment adviser and its owner/chairman in connection with alleged undisclosed fees.[54]  According to the SEC, the adviser added a sum to client transactions, which it called a “Service Charge.”  Part of this “Service Charge” would go towards paying a third-party broker, while the remainder went to the adviser.  The SEC alleges that the adviser did not disclose these payments to clients.  Without admitting or denying the allegations, the investment adviser and its owner agreed to pay approximately $470,000 in disgorgement and prejudgment interest, as well as a $130,000 civil penalty. Later that month, the SEC settled with a private equity fund adviser for allegedly improperly allocating compensation-related expenses to three private equity funds that it advised.[55]  According to the SEC, firm employees charged the funds for work unrelated to the three funds, violating the mandates of the governing documents of the funds.  The alleged wrongdoing spanned four years.  The firm cooperated extensively with the SEC, and the Commission accounted for those remedial efforts in settlement.  The firm agreed to more than $2 million in disgorgement and a civil monetary penalty of $375,000.   In a similar case also filed in December, the SEC settled with a fund manager for inadequate disclosures regarding certain expense allocations, as well as the alleged failure to disclose potential conflicts of interest arising from certain third-party service providers.[56]  Without admitting or denying the SEC’s allegations, the company agreed to pay $1.9 million in disgorgement and prejudgment interest and a $1 million civil penalty to settle the charges. At the end of December, the SEC settled with a private equity investment adviser in connection with allegations of improper expense allocations.[57]  According to the SEC, the investment adviser manages private equity funds and as well as co-investment funds on behalf of the company’s employees.  The two types of funds invest alongside each other.  When the adviser sought to acquire certain portfolio companies, co-investors were able to provide additional capital to invest.  According to the SEC, over the course of approximately fifteen years, the adviser failed to allocate certain expenses on a proportional basis between the private equity funds and the co-investor funds.  In connection with settlement, the SEC acknowledged that, following an examination by the Commission’s Office of Compliance Inspections and Examinations but prior to being contacted by the Division of Enforcement staff, the adviser proactively made full reimbursements, with interest, to affected funds.  The adviser agreed to pay a civil money penalty of $400,000. The SEC also brought a number of cases involving wrap fee programs. In August, an investment advisory firm settled allegations that it lacked policies and procedures to provide investors with sufficient information for investors to evaluate the appropriateness of their investments in the company’s wrap fee programs.[58]  Without admitting or denying the allegations, the firm agreed to pay a $200,000 civil penalty and to undertake efforts to enhance its procedures.  And in September, an affiliated investment adviser settled allegations that it failed to disclose conflicts of interest in connection with wrap fee programs.[59]  According to the SEC, over the course of three years, the investment adviser recommended that its clients invest in wrap fee programs, one of which was sponsored by the investment adviser.  Without admitting or denying the allegations, the company agreed to pay a $100,000 civil penalty. B.   Conflicts of Interest In July, the SEC filed a settled administrative proceeding against the managing partner and chief compliance officer of a private equity fund adviser, alleging that he arranged for one of his funds to make a loan to a portfolio company, the proceeds of which were used to purchase his personal interest in the company.[60]  The SEC alleged that the manager failed to disclose the conflicted transaction to the fund’s limited partnership advisory committee.  The manager agreed to pay a civil money penalty of $80,000 without admitting or denying the allegations.  The SEC’s order noted that the fund ultimately did not lose any money on the transaction. In late August, the SEC instituted settled proceedings against an investment adviser in connection with alleged failures to disclose a conflict of interest relating to third-party products.[61]  According to the SEC, the adviser’s retail advisory accounts were invested in third-party products that a U.S. subsidiary of a foreign bank managed.  In contravention of established practice, the adviser’s governance committee did not vote on a proposed recommendation to terminate the third-party products, and instead later permitted new adviser accounts to invest in these products.  In so doing, according to the SEC, the adviser did not disclose a conflict of interest.  Without admitting or denying the allegations, the adviser agreed to pay nearly $5 million in disgorgement and prejudgment interest, as well as a $4 million penalty. C.   Fraud and Other Misconduct In July, the SEC charged a Connecticut-based advisory firm and its CEO with placing around $19 million of investor funds into risky investments, including into companies in which they had an ownership stake, while charging large commissions on top of those investments.[62]  The complaint further alleged that the company overbilled some of its clients by calculating fees based on the earlier value of investments that had decreased in value.  The case is being litigated. In August, a Michigan-based investment management firm and its representative settled claims that they had engaged in a cherry-picking scheme.[63]  According to the SEC, the representative disproportionately allocated profitable trades to favored accounts, including personal and family accounts, at the expense of other clients.  The firm agreed to pay $75,000, and the individual respondent agreed to pay approximately $450,000 in disgorgement and penalties and to be barred from the industry.  The following month, the SEC pursued similar cherry-picking claims against a Louisiana-based adviser and its co-founder.[64]  That case is being litigated.  According to the SEC, it was the sixth case arising out of a recent initiative to combat cherry picking. September was a particularly busy month, as the SEC settled a number of fraud-based cases with investment advisers. The SEC settled charges with two New York City-based investment advisers and their 100% owner and president.[65]  The advisers allegedly engaged in a complex scheme to conceal the loss in the value of their clients’ assets by making false statements, improperly redeeming investments, and failing to disclose a variety of conflicts of interest.  To settle the charges, the advisers agreed to jointly and severally pay disgorgement of approximately $1.85 million and a civil penalty of $600,000. Also in September, the SEC charged a hedge fund adviser and its principal with running a “short and distort” scheme, taking a short position and then making a series of false statements to shake investor confidence and lower the stock price of a publicly-traded pharmaceutical company.[66]  According to the SEC, the fund used written reports, interviews and social media to spread untrue claims, driving the stock price down by more than a third.  The matter is being litigated. Later that month, the SEC settled with an asset manager, its former president, and its former CFO.[67]  The asset manager and former president were charged with fraudulently using investor funds to purchase interests in products offered by the firm’s parent corporation to benefit the parent, at which the former president also worked.  The individuals were also charged with improperly adjusting fund returns to show more favorable results to investors.  No charges were pursued against the parent corporation because of its prompt reporting of the misconduct, extraordinary cooperation with the SEC, and the reimbursement of around $1 million to adversely impacted investors.  The company settled for more than $4.2 million in penalties and disgorgement.  The former president and CFO agreed to pay penalties, and the president also agreed to a three-year bar from the securities industry. Early in December, an investment company settled charges of improperly recording and distributing taxable dividends, when those monies should have been recorded as return of capital.[68]  According to the SEC, while the error was not quantitatively large, it impacted a key metric used by investors and analysts to evaluate performance.  The only sanction imposed was a cease-and-desist order.  The firm admitted that its conduct violated federal securities laws and consented to the imposition of the order. D.   Share Class Selection The SEC has been particularly focused on advisers which recommend mutual funds to clients without adequately disclosing the availability of less expensive share classes.  In February 2018, the Division of Enforcement announced its Share Class Selection Disclosure Initiative, under which the Division agreed not to recommend financial penalties against advisers which self-report violations of the federal securities laws relating to mutual fund share class selection and promptly return money to victimized investors.  While the SEC has yet to announce any enforcement actions resulting from the self-reporting initiative, it has filed a number of actions against advisers which did not self-report such violations. In August, the SEC filed a settled administrative proceeding against a Utah-based investment adviser and broker-dealer relating to mutual fund distribution fees, known as 12b-1 fees.[69]  According to the SEC, for more than four years, the company, in its capacity as a broker-dealer, reaped compensation in the form of 12b-1 fees due to its clients’ mutual fund investments.  However, the company, in its capacity as an investment adviser, disclosed to advisory clients that it did not receive compensation from the sale of mutual funds.  In addition, the adviser recommended more expensive share classes of certain mutual funds when cheaper shares of the same funds were available.  The company agreed to pay over $150,000 to compensate advisory clients and a $50,000 civil money penalty. In mid-September, the SEC filed a settled administrative proceeding against a limited liability company in connection with 12b-1 fees.[70]  According to the SEC, for approximately three years, the adviser improperly collected 12b-1 fees from clients by recommending more expensive mutual fund share classes with 12b-1 fees when lower-cost share classes, without 12b-1 fees, were available.  Further, the SEC alleged that the adviser received, but did not disclose, compensation it received when the adviser invested its clients in certain no-transaction fee mutual funds.  The SEC acknowledged remedial acts undertaken and the company’s cooperation with the Commission.  The adviser agreed to pay over $1.3 million in disgorgement and penalties. On the same day in late December, the SEC settled two additional share class selection cases.  In the first, a Tennessee-based investment adviser settled charges in connection with the recommendation and sale of higher-fee mutual fund shares when less expensive share classes were available.[71]  The SEC alleged that for a period of approximately four years, the company’s president and investment adviser representative were the top two recipients of avoidable 12b-1 fees.  The investment adviser agreed to pay approximately $850,000 in disgorgement and prejudgment interest, as well as $260,000 as a civil penalty; collectively, the two individuals agreed to pay approximately $430,000 in disgorgement and prejudgment interest, in addition to $140,000 in civil penalties.  In the second case, the SEC settled charges with two investment advisers and a CEO of one of the firm on the ground that, despite the availability of less expensive share classes of the same funds, advisory clients’ funds were invested in mutual fund share classes that paid 12b-1 fees to the firms’ investment adviser representatives.[72]  In total, the investment advisers and CEO agreed to pay more than $1.8 million to settle the charges. E.   Misleading Disclosures The SEC brought a number of cases alleging misleading disclosures and omissions in the second half of 2018.  In July, the SEC announced a settlement with a California-based investment adviser and its majority owner.[73]  In the firm’s written disclosures to clients, the firm allegedly made material misstatements about the firm’s financial condition – most saliently, omitting to disclose the firm was insolvent during the relevant period and was operating on $700,000 in loans.  The SEC also alleged that the firm improperly withheld refunds of prepaid advisory fees from clients who requested via email to terminate their relationships.  The firm and its majority owner agreed to pay $100,000 and $50,000 respectively in civil monetary penalties to settle the charges. In August, the SEC settled two cases based on failures to disclose and misleading disclosures by investment advisers.  First, a Boston–based employee-owned hedge fund sponsor settled with the SEC over allegations of omissions, misrepresentations, and compliance failures relating to its practices which resulted in materially different redemption amounts when the fund lost value in a short period of time.[74]  The allegations included a failure to implement a compliance program consistent with the adviser’s obligations under the Advisers Act, a lack of disclosure to all investors of their option to redeem their investment in the fund, and inaccurate statements concerning assets in the Form ADV filed annually with the SEC.  The firm agreed to pay a civil penalty of $150,000. Four days later, the SEC settled with four related investment adviser entities for allegedly misleading investors through the use of faulty investment models.[75]  According to the SEC, the  quantitative investment models contained errors, and after discovering the issue the firms discontinued their use but did not disclose the errors.  The entities agreed to pay $97 million in disgorgement and penalties without admitting liability.  Two individual defendants, the former Chief Investment Officer and the former Director of New Initiatives of one of the entities, were also charged and settled with civil penalties of $65,000 and $25,000 respectively. Also in August, the SEC filed a litigated case against a Buffalo-based advisory firm and principal.[76]  According to the SEC, in anticipation of an SEC imposed bar, the owner of the firm sold the firm to his son.  Yet, after the imposition of the bar, his son failed to apprise clients of the bar and made misleading statements when clients inquired about the bar.  Moreover, the father allegedly impersonated his son when on phone calls with clients. A Massachusetts-based investment manager settled with the SEC on the final day of August.[77]  The company allegedly disseminated advertisements touting hypothetical returns based on blended research strategies while failing to disclose that some key quantitative ratings were determined using a retroactive, back-tested application of the financial model.  The company agreed to pay a civil penalty in the amount of $1.9 million to settle the allegations of violating the Advisers Act by publishing, circulating, and distributing advertisements containing misleading statements of material fact. In the first week of September, the SEC settled with a private investment firm and its managing partner for allegedly failing to provide limited partners in a fund with material information related to a change in the valuation of the fund.[78]  The respondents jointly agreed to pay a civil penalty in the amount of $200,000.  A week later, the SEC filed a lawsuit against an Indianapolis-based investment advisory firm and its sole owner for omitting to disclose that the firm and its owner would receive commissions of almost 20% on sales of securities which it encouraged its clients to buy.[79]  The latter case is being litigated. In December, the SEC settled with a California-based registered investment adviser for material misstatements and omissions in its advertising materials, allegedly inflating the results and success of the back-tested performance for one of its indexes over the course of eight years.[80]  The adviser agreed to pay a civil penalty of $175,000. And in late December, the SEC brought its first enforcement action against robo-advisers for misleading disclosures.[81]  Robo-advisers provide software-based, automated portfolio management services.  In the first robo-adviser case, the company disclosed to clients that it would monitor client accounts for “wash sales,” which could negate the tax-loss harvesting strategy it provided to clients.  According to the SEC, however, for approximately three years the adviser did not provide such monitoring, and wash sales took place in almost one-third of accounts enrolled in the tax-loss harvesting program.  This robo-adviser agreed to pay a $250,000 penalty.  In a separate case, a second robo-adviser agreed to settle charges that it provided misleading performance information on its website and social media.  According to the SEC, the company purported to show its investment performance as compared to robo-adviser competitors, but only included a small fraction of its client accounts in the comparison.  This adviser agreed to pay a $80,000 penalty to settle the matter. F.   Other Investment Adviser Issues Supervision and Oversight In August, the SEC announced a settled action against a Minnesota-based diversified financial services company that had allegedly failed to protect retail investor assets from theft by its agents.[82]  The SEC alleged that the respondents’ agents, many of whom pled guilty to criminal charges, committed fraudulent actions such as stealing client funds and forging client documents.  The company allegedly failed to adopt and implement policies and procedures reasonably designed to safeguard investor assets against misappropriation by its representatives.  The company agreed to pay a penalty of $4.5 million to settle the charges. In November, the SEC settled charges with a formerly registered investment adviser and its former CEO for negligently failing to perform adequate due diligence on certain investments.[83]  The SEC alleges that the firm failed to implement and reasonably design compliance policies and procedures which led to a failure to escalate and advise clients regarding concerns surrounding the investments, which turned out to be fraudulent.  Without admitting or denying the allegations, the firm agreed to pay a $400,000 civil penalty and the CEO agreed to a $45,000 civil penalty. Cross-Trades The SEC brought a handful of cases involving cross-trades between client accounts which favored one client at the expense of another.  In August, an investment adviser settled allegations that it had engaged in mispriced cross trades that resulted in the allocation of market savings to selected clients.[84]  According to the SEC, approximately 15,000 cross trades were executed at the bid price, resulting in the allocation of market savings to the adviser’s buying clients, while depriving selling clients of market savings.  The SEC further alleged that the adviser cajoled broker-dealers into increasing the price of certain municipal bonds and executed cross trades at these inflated prices, thereby causing buying advisory clients to overpay in these transactions.  To settle the matter, the adviser agreed to reimburse its clients over $600,000, plus interest, and pay a $900,000 penalty.  The following month, the SEC instituted a similar settled administrative proceeding against a Texas-based investment adviser for failing to disclose two cross trades, causing its clients to sustain $125,000 in brokerage fees.[85] Also in September, the SEC brought a settled action against a Boston firm and one of its portfolio managers, alleging that they facilitated a number of pre-arranged cross-trades between advisory client accounts that purposefully benefited certain clients at the expense of others.[86]  In addition to paying a $1 million penalty, the company agreed to reimburse approximately $1.1 million to its harmed clients.  The former portfolio manager agreed to pay a $50,000 penalty and to submit to a nine-month suspension. Testimonial Rule Violations In July, the SEC instituted five distinct settled proceedings against two registered investment advisers, three investment adviser representatives, and one marketing consultant in connection with violations of the Testimonial Rule, which bars investment advisers from publishing testimonial advertisements.[87]  The advertisements were published on social media and YouTube.  The civil penalties ranged from $10,000 to $35,000 for each of the individuals. In September, a Kansas-based investment adviser and its president/majority owner agreed to settle charges in connection with violations of the Testimonial Rule and ethics violations.[88]  The SEC alleges that the investment adviser broadcast advertisements through the radio, and one of the radio hosts later became a client and broadcast his experience.  According to the SEC, the investment adviser contravened its policies by not monitoring the radio coverage.  The firm agreed to pay a civil penalty of $200,000.  Separately, the company’s president/majority owner violated the company’s code of ethics by not reporting transactions in brokerage accounts held for the benefit of his family.  He agreed to pay a civil penalty of $50,000. Pay To Play Abuses There were two “pay to play” cases settled on the same day in July.  In the first matter, the SEC alleged that three associates of a California-based investment adviser made campaign contributions to candidates who had the ability to decide on the investment advisers for public pension plans.[89]  Within two years of the contributions, in contravention of the Advisers Act, the investment adviser received compensation in connection with advising the public pension plans.  The investment adviser agreed to pay a civil penalty of $100,000.  In the other case, the SEC alleged that the firm’s associates made contributions in a number of states, and the investment adviser similarly received payment to advise public pension plans in those states.[90]  The investment adviser agreed to pay a $500,000 civil penalty to settle the charges. Custody Rule Compliance The second half of the year entailed two Custody Rule cases against New York-based investment advisory firms.  Neither firm distributed annual audited financial statements in a timely fashion.  In the July matter, the SEC also alleged that the investment adviser lacked policies and procedures to preclude violations of the Advisers Act.  Without admitting or denying the allegations, the adviser agreed to pay a $75,000 civil penalty.[91]  In the September matter, the SEC also alleged that the firm violated the Compliance Rule by failing to review its policies and procedures on an annual basis.[92]  Without admitting or denying the allegations, the adviser agreed to pay $65,000 as a civil penalty. IV.   Brokers and Financial Institutions A.   Supervisory Controls and Internal Systems Deficiencies In the latter half of 2018, the SEC brought a number of cases relating to failures of supervisory controls and internal systems – an increase in this area over the first half of the year.  As part of its ongoing initiative into American Depositary Receipt (“ADR”) practices, the SEC brought numerous cases relating to the handling of ADRs—U.S. securities that represent foreign shares of a foreign company and require corresponding foreign shares to be held in custody at a depositary bank.  In July, the SEC announced settled charges against two U.S. based-subsidiaries, a broker-dealer and a depositary bank, of an international financial institution alleging improper ADR handling that led to facilitating inappropriate short selling and profits.[93]  Without admitting or denying the allegations, the subsidiaries agreed to pay $75 million in disgorgement and penalties.  In September, the SEC brought settled charges against a broker-dealer and subsidiary of a French financial institution; the broker-dealer agreed to pay approximately $800,000 in disgorgement and penalties without admitting or denying the findings.[94]  In December, the SEC settled charges against a depositary bank; the bank agreed to pay $38 million in disgorgement and penalties without admitting or denying the findings. [95] And finally, also in December, the SEC brought settled charges in two cases for providing ADRs to brokers when neither the broker nor its customer owned the corresponding foreign shares.  In the first December case, the SEC settled charges with a depositary bank headquartered in New York; the bank agreed to disgorgement, interest, and penalties of approximately $55 million without admitting or denying the charges.[96]  In the second case, the SEC settled charges with another depositary bank, a subsidiary of a large New York financial services firm.[97]  The SEC’s order alleged that the improper ADR handling led to inappropriate short selling and dividend arbitrage.  The firm agreed to pay over $135 million in disgorgement, and penalties without admitting or denying the charges. In addition to the ADR cases, the SEC also brought supervision cases for the failure to safeguard customer information and for the failure to supervise representatives who sold unsuitable products.  In July, the SEC brought settled charges against an international investment banking firm for failing to maintain and enforce policies and procedures designed to protect confidential customer information, including the failure to maintain effective information barriers.[98]  The SEC’s order alleged that traders at the bank regularly disclosed material nonpublic customer stock buyback information to other traders and hedge fund clients; the bank agreed to a $1.25 million penalty without admitting or denying the charges.  In September, the SEC announced settled charges against a New York-based broker-dealer and two of its executives for failure to supervise representatives in sales of a leveraged exchange-traded note (“ETN”) linked to oil.[99]  The SEC’s order alleged that the broker-dealer’s representatives did not reasonably research or understand the risks of the ETN or the index it tracked.  The broker-dealer agreed to pay over $500,000 in penalties, interest, and customer disgorgement without admitting or denying the charges, and the two executives agreed to penalties as well as a 12-month supervisory suspension.  The broker who recommended the largest number of ETN sales also agreed to a penalty of $250,000. Along with the supervisory cases described above, the SEC also brought a few cases relating to internal controls.  In August, the SEC announced settled charges in two cases against a large financial institution and two subsidiary broker-dealers involving books and records, internal accounting controls, and trader supervision.[100]  The charges in one action related to losses due to trader mismarking and unauthorized proprietary trading, which the SEC alleged were not discovered earlier due to a failure to supervise.  In the second action, the SEC alleged that the bank lacked controls necessary to prevent certain fraudulent loans. The financial institution and subsidiaries agreed to pay over $10 million without admitting or denying the allegations. Also in August, the SEC initiated settled proceedings against a credit ratings agency for alleged internal controls deficiencies relating to a purported failure to consistently apply credit ratings symbols which were used in models used to rate residential mortgage backed securities.[101]  The ratings agency agreed to pay over $16 million without admitting or denying the allegations. B.   Anti-Money Laundering As in the first half of the year, the SEC continued to bring a number of cases in the anti-money laundering (“AML”) area, all relating to the failure to file suspicious activity reports (“SARs”).  The Bank Secrecy Act requires broker-dealers to file SARs to report transactions suspected to involve fraud or with no apparent lawful purpose. In July, the SEC announced the settlement with a national broker-dealer relating to the failure to file SARs on the transactions of independent investment advisers that it had terminated.[102]  The broker-dealer agreed to pay a $2.8 million penalty to settle the action, without admitting or denying the charges.  Similarly, in September, the SEC instituted a settled administrative proceeding against a New York brokerage firm for failing to file SARs relating to a number of terminated investment advisers.[103]  Without admitting or denying the allegations, the firm agreed to pay a penalty of $500,000; the SEC’s Order noted that the settlement took into account remedial acts undertaken by the firm.  Also in September, the SEC settled charges against a clearing firm for failure to file SARs relating to suspicious penny stock trades.[104]  As part of the settlement, the clearing firm agreed to pay a penalty of $800,000 without admitting or denying the allegations, and also agreed that it would no longer sell penny stocks deposited at the firm. In December, the SEC brought settled charges against a broker-dealer alleging that during the period 2011-2013 it neglected to monitor certain movements of funds through customers’ accounts and to properly review suspicious transactions flagged by its internal monitoring systems.[105]  The firm agreed to pay a $5 million penalty to resolve the charges, as well as a $10 million penalty to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and the Financial Industry Regulatory Authority (FINRA) to resolve parallel charges.  The broker-dealer did not admit or deny the SEC’s allegations except to the extent they appeared in the settlement with FinCEN. Also In December, the SEC announced settled charges against a broker-dealer for the failure to file SARs concerning over $40 million in suspicious wire transfers made by one customer in connection with a payday lending scam.[106]  The firm agreed to certain undertakings, including the hiring of an independent compliance consultant, without admitting or denying the allegations.  The U.S. Attorney’s Office for the Southern District of New York also instituted a settled civil forfeiture action against the broker-dealer in which it paid $400,000; the U.S. Attorney’s Office additionally entered into a deferred prosecution agreement with the firm. C.   Market Abuse Cases In the second half of 2018, the SEC’s Market Abuse Unit was involved in bringing three cases relating to “dark pools” (i.e., private exchanges) and the use and execution of customer orders.  In September, the SEC announced settled charges against a large financial institution relating to alleged misrepresentations in connection with the operation of a dark pool by one of its affiliates.[107]  The SEC alleged that the firm misled customers relating to high-frequency trading taking place in the pool and also failed to disclose that over half of the orders routed to the dark pool were executed in other trading venues.  The firm and its affiliate agreed to pay over $12 million in disgorgement and penalties without admitting or denying the SEC’s allegations. Also in September, the SEC, together with the New York Attorney General (“NYAG”), brought settled charges against an investment bank relating to the execution of customer orders by one of its desks responsible for handling order flow for retail investors.[108]  The SEC alleged that while the firm promoted the desk’s access to dark pool liquidity, a minimal number of orders were executed in dark pools; additionally, the firm allegedly failed to disclose that retail customers did not receive price improvement on non-reportable orders.  The firm agreed to pay a total of $10 million ($5 million to the SEC and $5 million to the NYAG) without admitting or denying the allegations. And in November, the SEC brought charges against a financial technology company and its affiliate for misstatements and omissions relating to the operation of the firm’s dark pool.[109]  The SEC alleged that the firm failed to safeguard subscribers’ confidential trading information despite assuring firm clients that it would do so, and also did not disclose certain structural features of the dark pool to clients.  The firm and its affiliate agreed to pay a $12 million penalty to settle the charges without admitting or denying the allegations. D.   Books and Records In July, the SEC brought settled charges against a New York-based broker-dealer relating to its failure to preserve records.[110]  The SEC alleged that the broker-dealer deleted audio files after receiving a document request from the Division of Enforcement (because the department responsible for the files was unaware of the request), and also failed to maintain books and records that accurately recorded expenses.  Without admitting or denying the allegations, the firm agreed to pay a penalty of $1.25 million. In September, the SEC announced charges against a broker-dealer for providing the SEC with incomplete and deficient securities trading information known as “blue sheet data” used by the SEC in its investigations.[111]  The SEC’s order alleged that approximately 29% of the broker-dealer’s blue sheet submissions over a four-year time period contained deficiencies due to coding errors.  The broker-dealer admitted the findings in the SEC’s Order and agreed to pay a $2.75 million penalty to settled the charges.  In December, the SEC instituted settled administrative proceedings against three broker-dealers for recordkeeping violations in another matter relating to deficient blue sheet data submissions.[112]  The SEC’s Orders noted that as a result largely of undetected coding errors, the three firms submitted blue sheet data that continued various inaccuracies.  The three broker-dealers admitted the findings in the SEC’s Orders and agreed to pay penalties totaling approximately $6 million.  The SEC’s Orders noted the remedial efforts undertaken by the firms, including the retention of an outside consultant and the adoption of new policies and procedures for processing blue sheet requests. E.   Individual Brokers Finally, in addition to its cases involving large financial institutions, the SEC brought a number of cases against individual broker-dealer representatives.  In September, the SEC filed complaints against two brokers in New York and Florida for excessive trading in retail customer accounts which generated large commissions for the brokers but caused losses for their customers.[113]  The case is being litigated. Also in September, the SEC filed a complaint against a broker for a cherry-picking scheme in which the broker allegedly misused his access to an allocation account to cherry pick profitable trades for his own account while placing unprofitable trades in customer accounts.[114]  The SEC noted that it uncovered the alleged fraud using data analysis.  The case is being litigated, and the U.S. Attorney’s Office for the District of Massachusetts announced parallel criminal charges. Finally, in December, the SEC settled with a self-employed trader (and entities that he owned and controlled) for violations of Rule 105 of Regulation M, which prohibits a person from purchasing an equity security during the restricted period of an offering where that person has sold short the same security.[115]  The SEC’s Order alleged that the trader violated Rule 105 by effecting short sales during restricted periods and mismarking short sales as “long sales” in a total of 116 offerings.  The trader agreed to pay disgorgement, interest, and penalties total approximately $1.1 million without admitting or denying the charges V.   Insider Trading A.   Cases Against Corporate Insiders Corporate Executives July was a busy month for corporate executives accused of insider trading and tipping.  First, the SEC charged the former CEO of a New Jersey-based payment processing company and his romantic partner in an insider trading scheme that leveraged nonpublic information about the potential acquisition of his company by another payment processing company.[116]  On the CEO’s instructions and with his funds, the romantic partner opened a brokerage account and used almost $1 million of the funds to purchase stock in the target company.  According to the SEC, the pair generated $250,000 in profits after the merger was announced.  The case is being litigated. The SEC also settled with a former VP of Investor Relations at a company operating country clubs and sports clubs alleged to have traded in his company’s stock after learning that it was negotiating to be acquired.[117]  After receiving an inquiry from FINRA, the officer resigned from the company and retained counsel who reported the misconduct to the SEC and provided them substantiating documentation.  In return, the SEC agreed to a settlement that involved disgorgement of his profits of approximately $78,000 and a civil penalty equal to about one-half of the disgorgement amount. Later in July, the SEC sued a senior executive at a Silicon Valley tech company for allegedly short selling as well as selling stock in his company ahead of three different quarterly announcements that the company was likely going to miss its revenue guidance.[118]  According to the SEC, the executive made nearly $200,000 in profits from these trades.  Without admitting wrongdoing, the executive agreed to disgorge his profits and pay a corresponding civil penalty, and to bebarred from acting as an officer or director of a public company for five years.  The SEC noted that it had utilized data analysis from its Market Abuse Unit’s Analysis and Detection Center to detect suspicious trading patterns in advance of earnings announcements over time. And at the end of July, the SEC sued a VP of Finance who learned from a senior executive at his company that a Chinese investment group might acquire the company.[119]  While preparing financial projections and conducting diligence, the VP allegedly used his spouse’s brokerage account to purchase shares of his company.  When it became public that his company had rejected the Chinese investment group’s offer in the hopes of receiving a higher price, the company’s share increased 24%, resulting in the VP earning nearly $90,000.  Without admitting liability, the officer agreed to disgorgement of his gains and a corresponding civil penalty. In August, the SEC charged a former biotech executive and others with participating in a scheme that generated $1.5 million of profits by trading ahead of the announcement of a licensing agreement between his company and another large pharmaceutical company.[120]  According to the complaint, the executive informed a friend of the license agreement.  The friend then tipped a former day trader, who, in connection with an insider-trading ring, purchased stock and options and made $1.5 million in illegal profits when the agreement was announced and the company’s stock price jumped 38 percent.  In a parallel action, the U.S. Attorney’s Office for the District of New Jersey charged the day trader and four members of his group with illegal insider trading ahead of secondary public stock offerings. All five defendants have pled guilty to the parallel criminal charges; the four members of the insider-trading ring other than the trader have agreed to partial settlements with the SEC for conduct including their trading on the license agreement, with potential monetary sanctions to be determined at a later date.  The SEC is continuing a previous action against the trader for alleged insider trading ahead of the secondary stock offerings. In August, the SEC sued a former Sales VP at a cemetery and funeral home operator for allegedly benefiting from confidential information obtained through his employer.[121]  After learning about a substantial decline in sales that would necessitate a reduction in the company’s distribution payments, the executive sold all of his shares in the company.  As part of a settlement, the executive agreed to pay disgorgement and a civil penalty. Also in August, the SEC settled charges against a former executive of a cloud security and services company.[122]  According to the SEC, the executive informed his two brothers, to whom he had gifted stock in the past, that the company would miss its revenue guidance, and contacted his brothers’ brokerage firm to coordinate the sale of all of their stock.  When the negative news was announced, the stock price dropped significantly and the brothers collectively avoided losses of over $580,000.  Under the terms of his settlement, the former executive will be barred from serving as an officer or director of a public company for two years and will pay a $581,170 penalty. In September, the SEC brought a settled action against a former executive at a mortgage servicing company.[123]  The SEC alleged that the executive engaged in insider trading surrounding three separate events, including the resolution of litigation and a CFPB enforcement action against the company, as well as negotiations to sell the company. Without admitting or denying the allegations, the executive agreed to disgorge his ill-gotten gains of almost $65,000 and to pay a penalty equal to the disgorgement amount. In October, the SEC charged a company’s former Director of SEC Reporting with trading ahead of a corporate acquisition.[124]  The complaint alleged that the individual bought call options and stock in a company targeted for acquisition by a subsidiary of the company. The matter is being litigated. In November, the acquisition of two health care networks by a large health care company led to two separate misappropriation cases.  The SEC charged a man with insider trading based on information he misappropriated from his wife, a human resources executive at the acquiring company, about the planned acquisitions.[125]  According the SEC, the man overheard his wife’s phone calls while she was working at home.  The husband agreed to pay disgorgement of about $64,000 and a penalty of $72,144.  The SEC also settled an insider trading charge against a man alleged to have misappropriated information from his brother, an executive at one of the target companies.[126]  According to the SEC, the insider had shared the information in confidence at a family holiday party.  The trader agreed to pay disgorgement and penalties totaling about $40,000. Board Members In a high profile case involving drug trials, the SEC and DOJ filed parallel charges for insider trading against a U.S. Congressman, his son, and a host of other individuals.[127]  According to the SEC’s complaint, the Congressman learned of negative drug trial results through his seat on a biotech company’s board.  The Congressman allegedly provided his son the inside information, who then told a third individual.  Over the next few days, the Congressman’s son, the third individual, and a number of their friends and family members sold over a million shares of the biotech company’s stock, which plummeted more than 92 percent following the announcement of the negative results.  As a result of the trading, the Congressman’s son and the third individual avoided approximately $700,000 in losses.  Two of the individuals sued ultimately settled with the SEC without admitting or denying the charges, agreeing to disgorge their gains totaling approximately $35,000 and to pay a matching civil penalty.  The SEC’s cases against the Congressmen, his son, and a third individual are ongoing. In August, the SEC sued the son of a bank board member who learned of the bank’s potential acquisition by another bank from his father prior to the acquisition’s public announcement.[128]  The son realized approximately $40,000 in gains after the acquisition became public.  Without admitting or denying the charges, the son agreed to disgorge the gains and to pay a matching civil penalty. Employee Insiders In July, the SEC sued a former financial analyst at a medical waste disposal company and his mother for trading on inside information that the company would miss its revenue guidance.[129]  Following the company’s earnings announcement, its stock fell 22%, resulting in the analyst and his mother avoiding losses and earning profits of approximately $330,000.  Both the analyst and his mother agreed to settle the case without admitting liability.  They will be required to disgorge their profits and pay a civil penalty in amounts to be later determined by the court. Also in July, in the second SEC case arising out of the Equifax data breach, the SEC charged a software engineer tasked with constructing a website for consumers who were impacted by the data breach for trading the company’s stock before the data breach was publicly disclosed .[130]  The engineer was fired after refusing to cooperate with the company’s investigation, though he and the SEC ultimately settled the case.  As part of that settlement, the engineer was ordered to disgorge $75,000 in profits.  The U.S. Attorney’s Office also filed criminal charges against the engineer. The SEC also filed a number of cases involving corporate scientists.  In July, the SEC charged a scientist at a California biotech company for trading based on positive developments in a genetic sequencing platform.[131]  According to the SEC, the scientist traded during company trading blackouts, in a brokerage account not disclosed to his employer.  He settled the case, agreeing to disgorge approximately $40,000 in profits and paying a similar civil penalty.  In August, the SEC filed suit against a scientist who learned that his healthcare diagnostics company was about to acquire another company in a tender offer.[132]  On the date the acquisition was announced, his company’s stock increased 176%.  As part of the settlement, the scientist agreed to disgorge $14,000 in profits and pay a corresponding civil penalty.  And in a third case, the SEC settled with a scientist at a pharmaceutical company for allegedly trading in advance of positive results of a clinical trial.[133]  The scientist agreed to disgorgement of $134,000, but based on her voluntarily coming forward and reporting her improper trades, the SEC agreed to a reduced penalty of $67,000. The SEC brought charges in August against an in-house attorney for a shipping company who traded on inside information that his company had entered into a strategic partnership with a private equity fund.[134]  As part of a settlement, he was ordered to disgorge nearly $30,000 in profits with a matching civil penalty. And in September, the SEC charged a former professional motorcycle racer handling promotional activities for a beverage company, as well as his father, family friend, and investment adviser, with insider trading for tipping and trading ahead of an impending deal with a large beverage company.[135]  According to the SEC, after the racer had learned a significant deal was imminent, the four individuals collectively purchased over $770,000 in stock and options, in certain instances borrowing funds for the purchases.  Following the announcement, they made over $283,000 in trading profits. Without admitting or denying the findings, the individuals agreed to disgorge ill-gotten gains and to pay civil penalties. B.   Misappropriation by Investment Professionals and Other Advisors Several deal advisors, including bankers, corporate advisors, and accountants, were charged with insider trading by the SEC.  In August, the SEC charged a professional football player and a former investment banker with insider trading in advance of corporate acquisitions.[136]  The SEC alleges that after meeting at a party, the player began receiving illegal tips, facilitated through coded text messages and FaceTime conversations, from the banker about upcoming corporate mergers.  The player allegedly made $1.2 million in illegal profits by purchasing securities in companies that were soon to be acquired, in one instance generating a nearly 400 percent return.  In return, he is alleged to have rewarded the analyst by setting up an online brokerage account that both men could access, by providing cash kickbacks, free NFL tickets, and an evening on the set of a pop star’s music video in which the player made a cameo appearance.  The SEC action is being litigated; both men have pled guilty to related criminal charges.  In November, the SEC also charged a family friend of the banker in connection with the same scheme.[137]  The U.S. Attorney’s Office announced parallel criminal charges against this individual. In September, the SEC filed insider trading charges against a corporate deal advisor for trading in securities of two China-based companies based on confidential information about their impending acquisitions.[138]  According to the SEC, the individual, who had been providing advice to the acquiring companies, opened a brokerage account in his wife’s name and used that account to generate more than $79,500 in trading profits. That same executive later became a director at a Hong Kong-based investment banking firm.  In connection with advising a client on an acquisition of its rival, he was alleged to have again used his wife’s brokerage account to buy high risk call options, which he sold after news of the acquisition for profits of more than $94,400. The case is being litigated. And in December, the SEC charged an individual with misappropriating information from his fiancé, an investment banker working on a merger between two airline companies.[139]   According to the SEC, the trader overheard calls his now-wife made at home on nights and weekends, purchasing call options in the target company and netting approximately $250,000 in profits.  Without admitting or denying liability, the trader agreed to disgorge his profits and pay a matching penalty. Also in December, the SEC alleged that an IT contractor working at an investment bank had traded, and tipped his wife and father, based on information he’d learned from the bank.[140] According to the SEC, the three collectively reaped approximately $600,000 in profits by trading in advance of at least 40 corporate events.  The SEC obtained a court-ordered freeze of assets in multiple brokerage accounts connected to the alleged trading. The SEC brought several cases against accountants and their tippees.  In August, the SEC brought a settled action against a CPA who learned of an acquisition through his work as an accountant providing tax advice to a private company owned by a member of one of the companies.[141]  The individual agreed to disgorge his profits of approximately $8,000 and pay a matching civil penalty. Also that month, the SEC sued a former director of a major accounting and auditing firm for trading ahead of a merger between two of the firm’s clients.[142]  According to the SEC, after learning of the planned merger, the director used a relative’s account to purchase call options, which increased in value by about $150,000 following announcement of the merger.  Though the director later allowed the options to expire without selling or exercising them, he did not inform his employer that he controlled the account when the relative’s name appeared on a list of individuals in connection with a FINRA investigation into suspect trading.  Without admitting liability, the director agreed to pay a $150,500 penalty and to be barred from appearing and practicing before the SEC as an accountant for two years. The SEC brought several other cases involving misappropriation by industry professionals.  In July 2018, the SEC settled charges against a broker who traded ahead of a multi-billion dollar acquisition.[143]  According to the SEC, the broker misappropriated the information from a friend who was a certified public accountant providing personal tax advice to a senior executive at the company being acquired, and who had shared the information in confidence.  Without admitting liability, he agreed to disgorgement of his nearly $90,000 in profits, a comparable civil penalty, and debarment from being a broker.  And in September, the SEC settled a claim against a CPA and a doctor for allegedly trading while in possession of confidential information regarding an impending acquisition.[144]  According to the SEC, the CPA misappropriated the information from a friend who worked at one of the companies. The SEC alleges that after the CPA shared the information with the doctor, both purchased call options in the target company.  Both the CPA and doctor agreed to pay disgorgement and civil penalties. VI.   Municipal Securities and Public Finance Cases With the SEC’s Municipalities Continuing Disclosure (MCDC) Initiative (which as noted above generated  a significant number of cases) completed, the SEC’s Public Finance Abuse Unit returned to its traditionally slower pace, filing just a few cases in the latter half of the year. In August, the SEC charged two firms and 18 individuals with participating in a municipal bond “flipping” scheme (i.e. improperly obtaining new bond allocations from brokers and reselling to broker-dealers for a fee.[145]  According to the SEC, the firms and their principals used false identities to pose as retail investors in order to receive priority from the bond underwriters, and then resold the bonds to brokers for a pre-arranged commission.  The SEC also charged a municipal underwriter with taking kickbacks as part of the scheme.  Most of the parties settled (with sanctions including disgorgement, penalties, and industry bars and suspensions), but aspects of the case are being litigated as well.  The SEC filed another settled case for municipal bond flipping in December.[146] In September, the SEC instituted a settled action against a municipal adviser and its principal for failing to register as municipal advisor and failing to disclose its nonregistration to a school district to which it provided services.[147]  The firm and its principal agreed to pay about $50,000 in disgorgement and penalties, and the principal agreed to be barred from the securities industry. [1]      Admin. Proc. File No. 3-18965, In re Hertz Global Holdings, Inc. (Dec. 31, 2018), available at www.sec.gov/litigation/admin/2018/33-10601.pdf. [2]      Admin. Proc. File No. 3-18966, In re Katz, Sapper & Miller, LLP (Jan. 9, 2019), available at www.sec.gov/litigation/admin/2019/34-84980.pdf. [3]      See SEC Press Release, SEC Enforcement Division Issues Report on FY 2018 Results (Nov. 2, 2018), available at www.sec.gov/news/press-release/2018-250; and accompanying Annual Report at www.sec.gov/files/enforcement-annual-report-2018.pdf. [4]      For more on Kokesh, see Gibson Dunn Client Alert, United States Supreme Court Limits SEC Power to Seek Disgorgement Based on Stale Conduct (June 5, 2017), available at www.gibsondunn.com/united-states-supreme-court-limits-sec-power-to-seek-disgorgement-based-on-stale-conduct/. [5]      For more on Lucia, see Gibson Dunn Client Alert, Supreme Court Rules That SEC ALJs Were Unconstitutionally Appointed (June 21, 2018), available at www.gibsondunn.com/supreme-court-rules-that-sec-aljs-were-unconstitutionally-appointed. [6]      Whistleblower Program, 2018 Annual Report to Congress, available at www.sec.gov/files/sec-2018-annual-report-whistleblower-program.pdf. [7]      SEC Press Release, SEC Awards more Than $54 Million to Two Whistleblowers (Sept. 6, 2018), available at www.sec.gov/news/press-release/2018-179. [8]      SEC Press Release, Whistleblower Receives Award of Approximately $1.5 Million (Sept. 14, 2018), available at www.sec.gov/news/press-release/2018-194. [9]      SEC Press Release, SEC Awards Almost $4 Million to Overseas Whistleblower (Sept. 24, 2018), available at www.sec.gov/news/press-release/2018-209. [10]     SEC Press Release, SEC Charges Firm with Deficient Cybersecurity Procedures (Sept. 26, 2018), available at www.sec.gov/news/press-release/2018-213. [11]     SEC Press Release, SEC Investigative Report: Public Companies Should Consider Cyber Threats When Implementing Internal Controls (Oct. 16, 2018), available at www.sec.gov/news/press-release/2018-236. [12]     For further discussion, see Gibson Dunn Client Alert, SEC Warns Public Companies on Cyber-Fraud Controls (Oct. 27, 2018), available at www.gibsondunn.com/sec-warns-public-companies-on-cyber-fraud-controls/. [13]     SEC Press Release, SEC Charges ICO Superstore and Owners with Operating as Unregistered Broker-Dealers (Sept. 11, 2018), available at www.sec.gov/news/press-release/2018-185. [14]     SEC Press Release, SEC Charges Digital Asset Hedge Fund Manager with Misrepresentations and Registration Failures (Sept. 11, 2018), available at www.sec.gov/news/press-release/2018-186. [15]     SEC Press Release, SEC Charges EtherDelta Founder with Operating an Unregistered Exchange (Nov. 8, 2018), available at www.sec.gov/news/press-release/2018-258. [16]     SEC Press Release, Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities (Nov. 16, 2018), available at www.sec.gov/news/press-release/2018-264. [17]     Admin. Proc. File No. 3-18906, In re Floyd Mayweather Jr. (Nov. 29, 2018), available at www.sec.gov/litigation/admin/2018/33-10578.pdf; SEC Admin. Proc. File No. 3-18907, In re Khaled Khaled (Nov. 29, 2018), available at www.sec.gov/litigation/admin/2018/33-10579.pdf. [18]     SEC Press Release, SEC Suspends Trading in Company for Making False Cryptocurrency-Related Claims about SEC Regulation and Registration (Oct. 22, 2018), available at www.sec.gov/news/press-release/2018-242. [19]     SEC Press Release, SEC Stops Fraudulent ICO That Falsely Claimed SEC Approval (Oct. 11, 2018), available at www.sec.gov/news/press-release/2018-232. [20]     R. Todd, Judge to SEC: You Haven’t Shown This ICO Is a Security Offering, The Recorder (Nov. 27, 2018), available at www.law.com/therecorder/2018/11/27/judge-to-sec-this-ico-isnt-a-security-offering/. [21]     SEC Press Release, SEC Charges Bitcoin-Funded Securities Dealer and CEO (Sept. 27, 2018), available at www.sec.gov/news/press-release/2018-218. [22]     Admin. Proc. File No. 3-18582, SEC Charges Pipe Manufacturer and Former CFO with Reporting and Accounting Violations (July 10, 2018), available at www.sec.gov/enforce/33-10517-s. [23]     SEC Press Release, SEC Charges Telecommunications Expense Management Company with Accounting Fraud (Sept. 4, 2018), available at www.sec.gov/news/press-release/2018-175. [24]     SEC Litigation Release, SEC Charges Outsourced CFO with Accounting Controls Deficiencies (Sept. 12, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24265.htm.  [25]     SEC Press Release, Business Services Company and Former CFO Charged With Accounting Fraud (Sept. 20, 2018), available at www.sec.gov/news/press-release/2018-205. [26]     Admin. Proc. File No. 3-18816, Pipeline Construction Company Settles Charges Relating to Internal Control Failures (Sept. 21, 2018), available at www.sec.gov/enforce/34-84251-s. [27]     SEC Press Release, SEC Charges Salix Pharmaceuticals and Former CFO With Lying About Distribution Channel (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-221. [28]     Admin. Proc. File No. 3-18891, Tobacco Company Settles Accounting and Internal Control Charges (Nov. 9, 2016), available at www.sec.gov/enforce/34-84562-s.  For a description of the company’s remedial measures, see www.sec.gov/litigation/admin/2018/34-84562.pdf.  [29]     SEC Press Release, SEC Charges Agria Corporation and Executive Chairman With Fraud (Dec. 10, 2018), available at www.sec.gov/news/press-release/2018-276. [30]     SEC Press Release, SEC Charges The Hain Celestial Group with Internal Controls Failures (Dec. 11, 2018), available at www.sec.gov/news/press-release/2018-277. [31]     Admin. Proc. File No. 3-18932, SEC Charges Santander Consumer for Accounting and Internal Control Failures (Dec. 17, 2018), available at www.sec.gov/enforce/34-84829-s. [32]     SEC Press Release, Public Companies Charged with Failing to Comply with Quarterly Reporting Obligations (Sept. 21, 2018), available at www.sec.gov/news/press-release/2018-207. [33]     SEC Press Release, SEC Charges KBR for Inflating Key Performance Metric and Accounting Controls Deficiencies (July 2, 2018), available at www.sec.gov/news/press-release/2018-127. [34]     SEC Press Release, SEC Charges Cloud Communications Company and Two Senior Executives With Misleading Revenue Projections (Aug. 7, 2018), available at www.sec.gov/news/press-release/2018-150. [35]     SEC Press Release, SEC Charges Former Online Marketing Company Executives With Inflating Operating Metrics (Aug. 21, 2018), available at www.sec.gov/news/press-release/2018-161. [36]     Admin. Proc. File No. 3-18819, SEC Charges Payment Processing Company and Former CEO for Overstating Key Operating Metric (Sept. 21, 2018), available at www.sec.gov/enforce/33-10558-s. [37]     Admin. Proc. File No. 3-18955, In re ADT Inc. (Dec. 26, 2018), available at www.sec.gov/litigation/admin/2018/34-84956.pdf. [38]     Admin. Proc. File No. 3-18570, Dow Chemical Agrees to $1.75 Million Penalty and Independent Consultant for Failing to Disclose Perquisites (July 2, 2018), available at www.sec.gov/enforce/34-83581-s. [39]     SEC Press Release, SEC Charges Oil Company CEO, Board Member With Hiding Personal Loans (July 16, 2018), available at www.sec.gov/news/press-release/2018-133. [40]     SEC Litigation Release, SEC Charges Real Estate Investment Funds and Executives for Misleading Investors (July 3, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24185.htm. [41]     Admin. Proc. File No. 3-18770, SEC Charges Arizona Company And Two Senior Executives In Connection With Misleading Disclosures About Material Contract (Sept. 17, 2018), available at www.sec.gov/enforce/33-10550-s. [42]     SEC Press Release, SeaWorld and Former CEO to Pay More Than $5 Million to Settle Fraud Charges (Sept. 18, 2018), available at www.sec.gov/news/press-release/2018-198. [43]     SEC Press Release, Biopharmaceutical Company, Executives Charged With Misleading Investors About Cancer Drug (Sept. 18, 2018), available at www.sec.gov/news/press-release/2018-199. [44]     SEC Press Release, SEC Charges Walgreens and Two Former Executives With Misleading Investors About  Forecasted Earnings Goal (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-220. [45]     SEC Press Release, Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge (Sept. 29, 2018), available at www.sec.gov/news/press-release/2018-226. [46]     Admin. Proc. File No. 3-18838, In re Lichter, Yu and Associates, Inc. et al. (Sept. 25, 2018), available at www.sec.gov/litigation/admin/2018/34-84281.pdf. [47]     SEC Press Release, SEC Suspends Former BDO Accountants for Improperly “Predating” Audit Work Papers (Oct. 12, 2018), available at www.sec.gov/news/press-release/2018-235. [48]     SEC Press Release, SEC Charges Audit Firm and Suspends Accountants for Deficient Audits (Dec. 21, 2018), available at www.sec.gov/news/press-release/2018-302. [49]     Admin. Proc. File No. 3-18856, SEC Charges Drone Seller for Failing to Ensure Accuracy of Financial Statement in Advance of Planned IPO (Sept. 28, 2018), available at www.sec.gov/enforce/33-10564-s. [50]     SEC Litigation Release, SEC Charges Medical Aesthetics Company and Its Former CEO with Misleading Investors in a $60 Million Stock Offering (Sept. 19, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24275.htm. [51]     SEC Press Release, SEC Charges Giga Entertainment Media, Former Officers and Directors with Fraud in Pay-For-Download Campaign (Nov. 15, 2018), available at www.sec.gov/news/press-release/2018-263. [52]     Admin. Proc. File No. 3-18901, SEC Charges San Jose Investment Adviser for Overcharging Fees (Nov. 19, 2018), available at www.sec.gov/enforce/ia-5065-s. [53]     Admin. Proc. File No. 3-18909, Investment Adviser Settles Charges Related to Expense Misallocation and Valuation Review Failures (Dec. 3, 2018), available at www.sec.gov/enforce/33-10581-s. [54]     Admin. Proc. File No. 3-18926, SEC Charges Milwaukee-Based Advisory Firm for Receiving Undisclosed Compensation on Client Transactions (Dec. 12, 2018), available at www.sec.gov/enforce/34-84807-s. [55]     Admin. Proc. File No. 3-18935, SEC Charges Private Equity Fund Adviser for Overcharging Expenses (Dec. 17, 2018), available at www.sec.gov/enforce/ia-5079-s. [56]     Admin. Proc. File No. 3-18930, SEC Settles with Investment Adviser Who Failed to Disclose Conflicts of Interest and Misallocated Expenses (Dec. 13, 2018), available at www.sec.gov/enforce/ia-5074-s. [57]     Admin Proc. File No. 3-18958, In re Lightyear Capital LLC (Dec. 26, 2018), available at www.sec.gov/litigation/admin/2018/ia-5096.pdf. [58]     Admin. Proc. File No. 3-18638, SEC Charges Investment Adviser for Compliance Failures Relating to Wrap Fee Programs (Aug. 14, 2018), available at www.sec.gov/enforce/ia-4984-s. [59]     Admin. Proc. File No. 3-18730, SEC Charges Investment Adviser for Failing to Fully Disclose Affiliate Compensation Arrangement (Sept. 7, 2018), available at www.sec.gov/enforce/ia-5002-s. [60]     Admin. Proc. File No. 3-18604, In re Michael Devlin (July 19, 2018), available at www.sec.gov/litigation/admin/2018/ia-4973.pdf. [61]     SEC Press Release, Merrill Lynch Settles SEC Charges of Undisclosed Conflict in Advisory Decision (Aug. 20, 2018), available at www.sec.gov/news/press-release/2018-159. [62]     SEC Press Release, SEC Charges Investment Adviser and CEO with Misleading Retail Investors (July 18, 2018), available at www.sec.gov/news/press-release/2018-137. [63]     Admin. Proc. File No. 3-18649, In re Roger T. Denha (Aug. 17, 2018), available at www.sec.gov/litigation/admin/2018/34-83873.pdf; Admin. Proc. File No. 3-18648, In re BKS Advisors LLC (Aug. 17, 2018), available at www.sec.gov/litigation/admin/2018/ia-4987.pdf. [64]     SEC Litigation Release, SEC Charges Investment Adviser and Senior Officers with Defrauding Clients (Sept. 20, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24278.htm. [65]     Admin. Proc. File No. 3-18724, In re Mark R. Graham et al. (Sept. 6, 2018), available at www.sec.gov/litigation/admin/2018/ia-5000.pdf. [66]     SEC Litigation Release, SEC Charges Hedge Fund Adviser with Short-And-Distort Scheme (Sept. 13, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24267.htm. [67]     SEC Press Release, SEC Charges LendingClub Asset Management and Former Executives With Misleading Investors and Breaching Fiduciary Duty (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-223. [68]     Admin. Proc. File No. 3-18912, In re KCAP Financial, Inc. (Dec. 4, 2018), available at www.sec.gov/litigation/admin/2018/34-84718.pdf. [69]     Admin. Proc. File No. 3-18673, In re First Western Advisors (Aug. 24, 2018), available at www.sec.gov/litigation/admin/2018/34-83934.pdf. [70]     Admin. Proc. File 3-18765, In re Capital Analysts, LLC (Sept. 14, 2018), available at www.sec.gov/litigation/admin/2018/ia-5009.pdf. [71]     Admin. Proc. File No. 3-18952, SEC Charges Tennessee Investment Advisory Firm and Two Advisory Representatives with Steering Clients to Higher-Fee Mutual Fund Share Classes (Dec. 21, 2018), available at www.sec.gov/enforce/34-84918-s. [72]     SEC Press Release, Two Advisory Firms, CEO Charged With Mutual Fund Share Class Disclosure Violations (Dec. 21, 2018), available at www.sec.gov/news/press-release/2018-303. [73]     Admin. Proc. File No. 3-18607, SEC Charges Beverly Hills Investment Adviser for Improper Fees and False Filings (July 20, 2018), available at www.sec.gov/enforce/ia-4975-s. [74]     Admin. Proc. File No. 3-18657, In re Aria Partners GP, LLC (Aug. 22, 2018), available at www.sec.gov/litigation/admin/2018/ia-4991.pdf. [75]     SEC Press Release, Transamerica Entities to Pay $97 Million to Investors Relating to Errors in Quantitative Investment Models (Aug. 27, 2018), available at www.sec.gov/news/press-release/2018-167. [76]     SEC Press Release, SEC Charges Buffalo Advisory Firm and Principal With Fraud Relating to Association With Barred Adviser (Aug. 30, 2018), available at www.sec.gov/news/press-release/2018-172.  [77]     Admin. Proc. File No. 3-18704, In re Mass. Financial Services Co. (Aug. 31, 2018), available at www.sec.gov/litigation/admin/2018/ia-4999.pdf. [78]     Admin. Proc. File No 3-18729, In re VSS Fund Mmgt. LLC and Jeffrey T. Stevenson (Sept. 7, 2018), available at www.sec.gov/litigation/admin/2018/ia-5001.pdf. [79]     SEC Press Release, SEC Charges Investment Advisers With Defrauding Retail Advisory Clients (Sept. 14, 2018), available at www.sec.gov/news/press-release/2018-195. [80]     Admin. Proc. File No. 3-18948, In re Sterling Global Strategies LLC (Dec. 20, 2018), available at www.sec.gov/litigation/admin/2018/ia-5085.pdf. [81]     SEC Press Release, SEC Charges Two Robo-Advisers With False Disclosures (Dec. 21, 2018), available at www.sec.gov/news/press-release/2018-300. [82]     SEC Press Release, SEC Charges Ameriprise Financial Services for Failing to Safeguard Client Assets (Aug. 15, 2018), available at www.sec.gov/news/press-release/2018-154. [83]     Admin. Proc. File No. 3-18884, SEC Charges Advisory Firm With Due Diligence and Monitoring Failures (Nov. 6, 2018), available at www.sec.gov/enforce/ia-5061-s. [84]     Admin. Proc. File No. 3-18636, SEC Charges Investment Adviser With Mispricing Cross Trades Between Clients (Aug. 10, 2018), available at www.sec.gov/enforce/ia-4983-s. [85]     Admin. Proc. File No. 3-18767, In re Cushing Asset Management, LP (Sept. 14, 2018), available at www.sec.gov/litigation/admin/2018/ic-33226.pdf. [86]     Admin. Proc. File No. 3-18844, SEC Orders Putnam to Pay $1 Million Penalty, Suspends and Fines Former Portfolio Manager for Prearranged Cross-Trades (Sept. 27, 2018), available at www.sec.gov/enforce/ia-5050-s. [87]     Admin. Proc. File Nos. 3-18586, 3-18587, 3-18588, 3-18589, 3-18590, SEC Charges Investment Advisers and Representatives for Violating the Testimonial Rule Using Social Media and the Internet (July 10, 2018), available at www.sec.gov/enforce/3-18586-90-s. [88]     Admin. Proc. File No. 3-18779, Investment Adviser and Its President Settle Charges for Testimonial Rule and Code of Ethics Violations (Sept. 18, 2018), available at www.sec.gov/enforce/ia-5035-s. [89]     Admin. Proc. File No. 3-18585, In re Oaktree Capital Management, L.P. (July 10, 2018), available at www.sec.gov/litigation/admin/2018/ia-4960.pdf. [90]     Admin. Proc. File No. 3-18584, In re EnCap Investments L.P. (July 10, 2018), available at www.sec.gov/litigation/admin/2018/ia-4959.pdf.    [91]     Admin. Proc. File No. 3-18599, Investment Adviser Settles Charges for Custody Rule Violations (July 17, 2018), available at www.sec.gov/enforce/ia-4970-s. [92]     Admin. Proc. File No. 3-18837, Investment Adviser Settles Charges for Custody Rule and Compliance Rule Violations (Sept. 25, 2018), available at www.sec.gov/enforce/ia-5047-s. [93]     SEC Press Release, Deutsche Bank to Pay Nearly $75 Million for Improper Handling of ADRs (Jul. 20, 2018), available at www.sec.gov/news/press-release/2018-138. [94]     SEC Press Release, SG Americas Securities Charged for Improper Handling of ADRs (Sept. 25, 2018), available at www.sec.gov/news/press-release/2018-211. [95]     SEC Press Release, Citibank to Pay More Than $38 Million for Improper Handling of ADRs (Nov. 7, 2018), available at www.sec.gov/news/press-release/2018-255. [96]     Admin. Proc. File No. 3-18933, In re Bank of New York Mellon (Dec. 17, 2018), available at www.sec.gov/litigation/admin/2018/33-10586.pdf. [97]     SEC Press Release, JPMorgan to Pay More Than $135 Million for Improper Handling of ADRs (Dec. 26, 2018), available at www.sec.gov/news/press-release/2018-306. [98]     SEC Press Release, SEC Charges Mizuho Securities for Failure to Safeguard Customer Information (Jul. 23, 2018), available at www.sec.gov/news/press-release/2018-140. [99]     SEC Press Release, SEC Obtains Relief to Fully Reimburse Retail Investors Sold Unsuitable Product (Sept. 11, 2018), available at www.sec.gov/news/press-release/2018-184. [100]   SEC Press Release, Citigroup to Pay More Than $10 Million for Books and Records Violations and Inadequate Controls (Aug. 16, 2018), available at www.sec.gov/news/press-release/2018-155-0. [101]   SEC Press Release, SEC Charges Moody’s With Internal Controls Failures and Ratings Symbols Deficiencies (Aug. 28, 2018), available at www.sec.gov/news/press-release/2018-169. [102]   SEC Litigation Release, SEC Charges Charles Schwab with Failing to Report Suspicious Transactions (Jul. 9, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24189.htm. [103]   Admin. Proc. File No. 3-18829, In the Matter of TD Ameritrade, Inc. (Sept. 24, 2018), available at www.sec.gov/litigation/admin/2018/34-84269.pdf. [104]   SEC Press Release, Brokerage Firm to Exit Penny stock Deposit Business and Pay Penalty for Repeatedly Failing to Report Suspicious Trading (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-225. [105]   Admin. Proc. File No. 3-18931, SEC Charges UBS Financial Services Inc. with Anti-Money Laundering Violations (Dec. 17, 2018), available at www.sec.gov/enforce/34-84828-s. [106]   Admin. Proc. File No. 30-18940, Broker-Dealer Settles Anti-Money Laundering Charges (Dec. 19, 2018), available at www.sec.gov/enforce/34-84851-s. [107]   SEC Press Release, SEC Charges Citigroup for Dark Pool Misrepresentations (Sept. 14, 2018), available at www.sec.gov/news/press-release/2018-193. [108]   SEC Press Release, Credit Suisse Agrees to Pay $10 Million to Settle Charges Related to Handling of Retail Customer Orders (Sept. 28, 2018), available at www.sec.gov/news/press-release/2018-224. [109]   SEC Press Release, SEC Charges ITG With Misleading Dark Pool Subscribers (Nov. 7, 2018), available at www.sec.gov/news/press-release/2018-256. [110]   SEC Press Release, SEC Charges BCG Financial for Failure to Preserve Documents and Maintain Accurate Books and Records (Jul. 17, 2018), available at www.sec.gov/news/press-release/2018-134. [111]   SEC Press Release, Broker-Dealer to Pay $2.75 Million Penalty for Providing Deficient Blue Sheet Data (Sept. 13, 2018), available at www.sec.gov/news/press-release/2018-191. [112]   SEC Press Release, Three Broker-Dealers to Pay More Than $6 Million in Penalties for Providing Deficient Blue Sheet Data (Dec. 10, 2018), available at www.sec.gov/news/press-release/2018-275. [113]   SEC Press Release, SEC Charges Two Brokers With Defrauding Customers (Sept. 10, 2018), available at www.sec.gov/news/press-release/2018-183. [114]   SEC Press Release, SEC Uses Data Analysis to Detect Cherry-Picking By Broker (Sept. 12, 2018), available at www.sec.gov/news/press-release/2018-189. [115]   Admin. Proc. File No. 3-18941, In the Matter of Andrew Nicoletta et al. (Dec. 19, 2018), available at www.sec.gov/litigation/admin/2018/34-84876.pdf. [116]   SEC Litigation Release, SEC Charges Former Heartland CEO, Romantic Partner in Insider Trading Scheme (Jul. 10, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24191.htm. [117]   SEC Litigation Release, SEC Charges Former Executive for Insider Trading (Jul. 5, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24186.htm. [118]   SEC Press Release, SEC Detects Silicon Valley Executive’s Insider Trading (Jul. 24, 2018), available at www.sec.gov/news/press-release/2018-142. [119]   Admin. Proc. File No. 3-18618, SEC Charges VP of Finance with Insider Trading (Jul. 31, 2018), available at www.sec.gov/enforce/34-83742-s. [120]   SEC Litigation Release, SEC Charges Former Pharma Executive and Others with Insider Trading (Aug. 23, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24245.htm. [121]   Admin. Proc. File No. 3-18665, In re James T. Lentz (Aug. 22, 2018), available at www.sec.gov/litigation/admin/2018/33-10535.pdf. [122]   SEC Litigation Release, SEC Charges Former Senior Executive At Silicon Valley Company with Insider Trading (Aug. 30, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24251.htm. [123]   SEC Litigation Release, SEC Charges Former Vice President of Ocwen Financial Corporation with Insider Trading (Sept. 28, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24298.htm. [124]   SEC Litigation Release, SEC Charges Ebay’s Former Director of SEC Reporting with Insider Trading (Oct. 16, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24317.htm. [125]   SEC Litigation Release, SEC Charges Husband with Insider Trading Ahead of Announcements by Wife’s Employer (Nov. 8, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24340.htm. [126]   SEC Litigation Release, SEC Charges California Software Consultant with Insider Trading (Nov. 8, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24338.htm. [127]   SEC Press Release, SEC Charges U.S. Congressman and Others With Insider Trading (Aug. 8, 2018), available at www.sec.gov/news/press-release/2018-151; see also SEC Litigation Release, SEC Announces Settlement with Two Traders in Innate Insider Trading Case (Aug. 16, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24236.htm. [128]   Admin. Proc. File No. 34-83795, SEC Charges California Bank Board Member’s Son with Insider Trading (Aug. 7, 2018), available at www.sec.gov/enforce/34-83795-s. [129]   SEC Litigation Release, SEC Charges Former Stericycle Financial Analyst and His Mother with Insider Trading (Jul. 24, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24212.htm. [130]   SEC Litigation Release, Former Equifax Manager Charged With Insider Trading (Jul. 2, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24183.htm. [131]   SEC Litigation. Release, Former Biotech Company Employee Charged with Insider Trading (Jul. 10, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24194.htm. [132]   SEC Litigation Release, SEC Charges Scientist for Insider Trading (Aug. 1, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24221.htm. [133]   Admin. Proc. File No. 3-18645, In re Honglan Wang (Aug. 16, 2018), available at www.sec.gov/litigation/admin/2018/34-83857.pdf. [134]   Admin. Proc. File No. 3-18655, SEC Charges Former In-House Counsel with Insider Trading (Aug. 21, 2018), available at www.sec.gov/enforce/34-83896-s. [135]   SEC Press Release, SEC Charges Former Professional Motorcycle Racer, his Investment Adviser, and Others With Insider Trading (Sept. 27, 2018), available at www.sec.gov/enforce/34-84304-s. [136]   SEC Press Release, SEC Charges NFL Player and Former Investment Banker With Insider Trading (Aug. 29, 2018), available at www.sec.gov/news/press-release/2018-170. [137]   SEC Press Release, SEC Charges Family Friend of Former Investment Banker With Insider Trading (Nov. 2, 2018), available at www.sec.gov/news/press-release/2018-251. [138]   SEC Litigation Release, SEC Charges Acquisition Advisor with Insider Trading (Sept. 14, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24269.htm. [139]   SEC Litigation Release, SEC Charges Husband of Investment Banker with Insider Trading (Dec. 17, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24375.htm. [140]   SEC Press Release, SEC Halts Alleged Insider Trading Ring Spanning Three Countries (Dec. 6, 2018), available at www.sec.gov/news/press-release/2018-273. [141]   SEC Litigation Release, SEC Charges Certified Public Accountant with Insider Trading (Aug. 21, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24240.htm. [142]   Admin. Proc. File No. 3-18652, Former Director At Major Accounting Firm Settles Insider Trading Charges (Aug. 20, 2018), available at www.sec.gov/enforce/34-83889-s. [143]   Admin. Proc. File No. 3-18574, In re Michael Johnson (July 6, 2018), available at www.sec.gov/litigation/admin/2018/34-83602.pdf. [144]   Admin. Proc. File No. 3-18858, In re Unal Patel (Sept. 28, 2018), available at www.sec.gov/litigation/admin/2018/34-84315.pdf. [145]   SEC Press Release, SEC Files Charges in Municipal Bond “Flipping” and Kickback Schemes (Aug. 14, 2018), available at www.sec.gov/news/press-release/2018-153. [146]   Admin. Proc. File No. 3-18936, SEC Charges Former Municipal Bond Salesman with Fraudulent Trading Practices (Dec. 18, 2018), available at www.sec.gov/enforce/33-10587-s. [147]   Admin. Proc. File No. 3-18803, SEC Bars Head of Unregistered Municipal Advisory Firm for Failing to Disclose Material Facts to School District (Sept. 20, 2018), available at www.sec.gov/enforce/34-84224-s. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Marc Fagel, Amy Mayer, Andrew Paulson, Tina Samanta, Elizabeth Snow, Craig Streit, Collin James Vierra, Timothy Zimmerman and Maya Ziv. Gibson Dunn is one of the nation’s leading law firms in representing companies and individuals who face enforcement investigations by the Securities and Exchange Commission, the Department of Justice, the Commodities Futures Trading Commission, the New York and other state attorneys general and regulators, the Public Company Accounting Oversight Board (PCAOB), the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange, and federal and state banking regulators. Our Securities Enforcement Group offers broad and deep experience.  Our partners include the former Directors of the SEC’s New York and San Francisco Regional Offices, the former head of FINRA’s Department of Enforcement, the former United States Attorneys for the Central and Eastern Districts of California, and former Assistant United States Attorneys from federal prosecutors’ offices in New York, Los Angeles, San Francisco and Washington, D.C., including the Securities and Commodities Fraud Task Force. Securities enforcement investigations are often one aspect of a problem facing our clients. Our securities enforcement lawyers work closely with lawyers from our Securities Regulation and Corporate Governance Group to provide expertise regarding parallel corporate governance, securities regulation, and securities trading issues, our Securities Litigation Group, and our White Collar Defense Group. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Barry R. Goldsmith (+1 212-351-2440, bgoldsmith@gibsondunn.com) Laura Kathryn O’Boyle (+1 212-351-2304, loboyle@gibsondunn.com) Mark K. Schonfeld (+1 212-351-2433, mschonfeld@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Tina Samanta (+1 212-351-2469 , tsamanta@gibsondunn.com) Washington, D.C. Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung(+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Marc J. Fagel (+1 415-393-8332, mfagel@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Michael D. Celio (+1 650-849-5326, mcelio@gibsondunn.com) Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 9, 2019 |
The Most Notable Government Contract Cost and Pricing Decisions of 2018

Washington, D.C. partner Karen Manos is the author of “The Most Notable Government Contract Cost and Pricing Decisions of 2018,” [PDF] published in Thomson Reuters’ The Government Contractor on January 9, 2019.

November 29, 2018 |
SEC Imposes Civil Penalties for ICO Registration Violations; Suggests a Path for Future Compliance

Click for PDF On November 16, 2018, the Securities and Exchange Commission (SEC) announced settled charges in its first cases imposing civil penalties solely for registration violations related to initial coin offerings (ICOs).[1]  The SEC brought charges against CarrierEQ Inc. (AirFox) and Paragon Coin Inc. (Paragon) for their respective ICOs conducted in 2017 on the basis that (i) the digital tokens sold in those ICOs were securities under Section 2(a)(1) of the Securities Act of 1933 (Securities Act) and (ii) those securities were neither registered nor exempt from registration under Section 5 of the Securities Act. Both AirFox and Paragon issued unregistered tokens in spite of an earlier warning from the SEC that certain tokens, coins or other digital assets can be considered securities under the federal securities laws and, consequently, issuers who offer or sell such securities must register the offering and sale with the SEC or qualify for an exemption.[2]  The cases follow the SEC’s first non-fraud registration case, Munchee, Inc., in which the SEC halted a coin sale by means of cease-and-desist order and no monetary penalties were imposed. In 2017, AirFox raised approximately $15 million worth of digital assets to finance its development of a token-denominated “ecosystem,” and Paragon raised approximately $12 million worth of digital assets to develop and implement its business plan related to the cannabis industry. After reviewing the nature of these tokens, the SEC concluded that they were securities under the Howey test, thereby making those offerings subject to the requirements of Section 5 of the Securities Act and related rules. The resolution of these charges has been suggested as a “model for companies that have issued tokens in ICOs . . . to seek to comply with the federal securities laws,” according to Steven Peiken, Co-Director of the SEC’s Enforcement Division.  The remedy has three parts.  First, both Airfox and Paragon agreed to pay monetary penalties of $250,000 each.  Second, in a nod to the statutory remedies provided by Section 12(a)(1) of the Securities Act, both companies agreed to distribute a “claim form” to their respective investors whereby purchased tokens could be exchanged for the amount of consideration paid plus interest and, for those investors no longer in possession of their purchased tokens, damages.  The  “claim form” approach was agreed to over another potential remedy used by other companies in the past, a “rescission offer” in which the companies would offer to repurchase issued tokens and, in the event an investor declined that offer, such investor would hold freely tradable tokens.  Third, perhaps most significantly, both companies agreed to register the tokens as securities under the Exchange Act and file periodic reports with the SEC, thereby granting investors the disclosure protections of the securities laws in deciding whether to put their securities.  It is likely that compliance with this regime will likely impose significant compliance burdens, particularly on smaller issuers.  It remains to be seen whether other ICO issuers who have conducted unregistered securities offerings will opt for this remedy following discussions with the SEC. [1]   See SEC Release No. 10574 and Release No. 10575. [2]   See Report of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017)). See also www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?List=f3551fe8-411e-4ea4-830c-d680a8c0da43&ID=297&Web=97364e78-c7b4-4464-a28c-fd4eea1956ac. The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long, Alan Bannister, Nicolas Dumont, and Jordan Garside. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions, Capital Markets or Securities Enforcement practice groups, or the following: Financial Institutions and Capital Markets Groups: Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) Nicolas H.R. Dumont – New York (+1 212-351-3837, ndumont@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Securities Enforcement Group: Marc J. Fagel – San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 29, 2018 |
Five Gibson Dunn Attorneys Named Among Washingtonian Magazine’s 2018 Top Lawyers

Washingtonian magazine named five DC partners to its 2018 Top Lawyers, featuring “[t]he area’s star legal talent” in their respective practice areas: Karen Manos was named a Top Lawyer in Government Contracts – Karen is Chair of the firm’s Government Contracts Practice Group.  She has nearly 30 years’ experience on a broad range of government contracts issues, including civil and criminal fraud investigations and litigation, complex claims preparation and litigation, bid protests, qui tam suits under the False Claims Act, defective pricing, cost allowability, the Cost Accounting Standards, and corporate compliance programs Eugene Scalia was named a Top Lawyer in Employment Defense – Co-Chair of the Administrative Law and Regulatory Practice Group, Gene has a national practice handling a broad range of labor, employment, appellate, and regulatory matters. His success bringing legal challenges to federal agency actions has been widely reported in the legal and business press Jason Schwartz was recognized as a Top Lawyer in Employment Defense – Jason’s practice includes sensitive workplace investigations, high-profile trade secret and non-compete matters, wage-hour and discrimination class actions, Sarbanes-Oxley and other whistleblower protection claims, executive and other significant employment disputes, labor union controversies, and workplace safety litigation F. Joseph Warin is a Top Lawyer in Criminal Defense, White Collar – Co-chair of the firm’s global White Collar Defense and Investigations Practice Group. His practice includes complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation Joseph West was named a Top Lawyer in Government Contracts – Joe concentrates his practice on contract counseling, compliance/enforcement, and dispute resolution.  He has represented both contractors and government agencies, and has been involved in cases before various United States Courts of Appeals and District Courts, the United States Court of Federal Claims, numerous Federal Government Boards of Contract Appeals, and both the United States Government Accountability Office and Small Business Administration The list was published in the December 2018 issue.

November 28, 2018 |
Law360 Names Eight Gibson Dunn Partners as MVPs

Law360 named eight Gibson Dunn partners among its 2018 MVPs and noted that the firm had the most MVPs of any law firms this year.  Law360 MVPs feature lawyers who have “distinguished themselves from their peers by securing hard-earned successes in high-stakes litigation, complex global matters and record-breaking deals.” Gibson Dunn’s MVPs are: Christopher Chorba, a Class Action MVP [PDF] – Co-Chair of the firm’s Class Actions Group and a partner in our Los Angeles office, he defends class actions and handles a broad range of complex commercial litigation with an emphasis on claims involving California’s Unfair Competition and False Advertising Laws, the Consumers Legal Remedies Act, the Lanham Act, and the Class Action Fairness Act of 2005. His litigation and counseling experience includes work for companies in the automotive, consumer products, entertainment, financial services, food and beverage, social media, technology, telecommunications, insurance, health care, retail, and utility industries. Michael P. Darden, an Energy MVP [PDF] – Partner in charge of the Houston office, Mike focuses his practice on international and U.S. oil & gas ventures and infrastructure projects (including LNG, deep-water and unconventional resource development projects), asset acquisitions and divestitures, and energy-based financings (including project financings, reserve-based loans and production payments). Thomas H. Dupree Jr., an MVP in Transportation [PDF] –  Co-partner in charge of the Washington, DC office, Tom has represented clients in a wide variety of trial and appellate matters, including cases involving punitive damages, class actions, product liability, arbitration, intellectual property, employment, and constitutional challenges to federal and state statutes.  He has argued more than 80 appeals in the federal courts, including in all 13 circuits as well as the United States Supreme Court. Joanne Franzel, a Real Estate MVP [PDF] – Joanne is a partner in the New York office, and her practice has included all forms of real estate transactions, including acquisitions and dispositions and financing, as well as office and retail leasing with anchor, as well as shopping center tenants. She also has represented a number of clients in New York City real estate development, representing developers as well as users in various mixed-use projects, often with a significant public/private component. Matthew McGill, an MVP in the Sports category [PDF] – A partner in the Washington, D.C. office, Matt practices appellate and constitutional law. He has participated in 21 cases before the Supreme Court of the United States, prevailing in 16. Spanning a wide range of substantive areas, those representations have included several high-profile triumphs over foreign and domestic sovereigns. Outside the Supreme Court, his practice focuses on cases involving novel and complex questions of federal law, often in high-profile litigation against governmental entities. Mark A. Perry, an MVP in the Securities category [PDF] – Mark is a partner in the Washington, D.C. office and is Co-chair of the firm’s Appellate and Constitutional Law Group.  His practice focuses on complex commercial litigation at both the trial and appellate levels. He is an accomplished appellate lawyer who has briefed and argued many cases in the Supreme Court of the United States. He has served as chief appellate counsel to Fortune 100 companies in significant securities, intellectual property, and employment cases.  He also appears frequently in federal district courts, serving both as lead counsel and as legal strategist in complex commercial cases. Eugene Scalia, an Appellate MVP [PDF] – A partner in the Washington, D.C. office and Co-Chair of the Administrative Law and Regulatory Practice Group, Gene has a national practice handling a broad range of labor, employment, appellate, and regulatory matters. His success bringing legal challenges to federal agency actions has been widely reported in the legal and business press. Michael Li-Ming Wong, an MVP in Cybersecurity and Privacy – Michael is a partner in the San Francisco and Palo Alto offices. He focuses on white-collar criminal matters, complex civil litigation, data-privacy investigations and litigation, and internal investigations. Michael has tried more than 20 civil and criminal jury trials in federal and state courts, including five multi-week jury trials over the past five years.

November 26, 2018 |
FERC Issues Proposed Rule on Return of Excess ADITs by Electric Utilities

Click for PDF On November 15, 2018, the Federal Energy Regulatory Commission (“FERC”) issued a Notice of Proposed Rulemaking (“NOPR”) addressing how electric utilities are to modify their cost-based rates to account for the impact of the Tax Cuts and Jobs Act of 2017 on accumulated deferred income taxes (“ADITs”).  FERC’s prior orders related to tax reform had deferred action on how to treat ADITs. FERC-jurisdictional transmission providers have billions of dollars of ADITs recorded on their books and the return of excess ADITs resulting from the Tax Act could return billions of dollars to ratepayers in coming years.  FERC’s rulemaking proceeding should provide guidance on how utilities are to address these ADITs, but the details will likely only be decided in company-specific proceedings initiated in the next year or so. ADITs are values recorded on the books of utilities that arise from the differences between the accelerated rates of depreciation used to calculate federal corporate income taxes and straight-line depreciation used to calculate FERC jurisdictional cost-based rates.  ADITs are generally liabilities that reflect money that will need to be paid to the IRS in the future and are based on an assumption that current income tax rates will remain the same. If federal corporate income tax rates fall, however, the amount the utility will actually need to pay to the IRS in the future is less than what was assumed.  And, as a result, the utility will be viewed as having over-collected from customers in the past.  In accounting parlance, the utility will be considered to have recovered “excess ADITs” through rates that, in the view of many, will need to be returned to customers, lest the utility enjoy a windfall from the tax cut that is not shared with customers. Indeed, this is the view taken by FERC in its NOPR.  It proposes to require utilities with formula transmission rates to adjust their rates to reflect the impact of the Tax Act on ADITs, whether that means returning excess ADITs to ratepayers or collecting deficient ADITs from ratepayers (though the former is likely to eclipse the latter for most utilities). Specifically, FERC proposes requiring such utilities to include a mechanism in their formula transmission rates that deducts any excess ADITs from rate base (or adds any deficient ADITs to rate base).  Notably, FERC states in the NOPR that it does not intend to adopt a “one size fits all” approach.  Instead, it intends to “allow public utilities to propose any necessary changes to their formula rates on an individual basis.” FERC also proposes that these utilities include a mechanism to decrease (or increase) any income tax allowances—i.e., a mechanism that provides for the return to or collection of excess or deficient ADITs from ratepayers over time.  In keeping with its approach of allowing flexibility, FERC does not propose any specific period of time but, instead, states that a “case-by-case approach to amortizing excess or deficient unprotected ADIT remains appropriate.”  Following this case-by-case approach, shortly before the NOPR issued, FERC approved a proposal by Emera Maine to return unprotected excess ADITs to customers over a period of 10 years. For utilities with stated transmission rates, however, FERC does not propose to require rate base adjustments prior to their next rate case.  But it does propose to require that such utilities determine their excess and deficient ADITs and propose in compliance filings a manner to return or recover these amounts from ratepayers. FERC-regulated transmission providers appear to have billions of dollars of ADITs recorded on their books.  Assuming FERC’s final rule generally follows its proposal, these utilities will likely need to return billions of dollars in excess ADITs.  But the precise manner in which this is done—and importantly the period of time over which excess ADITs will be returned—will likely be resolved only in company specific proceedings in the future. These proceedings are likely to be contentious at times, as customers will generally push for a faster return, but at the same time will need to balance that speed against future rate shock once the amortization is complete.  FERC recently approved Emera Maine’s request to return unprotected excess ADITs over 10 years, finding that doing so “balances passing through the benefits of the Tax Cuts and Jobs Act to ratepayers in a timely manner with avoiding rate shock.”  Whether other utilities will propose similar or different periods, and how FERC will respond, remains to be seen. The deadline for comments on the NOPR (issued in Docket No. RM19-5-000) is December 24, 2018.  FERC proposes that compliance filings be due within 90 days of the date of any Final Rule. *   *   *   * Gibson Dunn was counsel to Emera Maine in the matter noted above. Gibson Dunn’s Energy, Regulation and Litigation lawyers are available to assist in addressing any questions you may have regarding the developments discussed above.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or the authors: William S. Scherman – Washington, D.C. (+1 202-887-3510, wscherman@gibsondunn.com) Jeffrey M. Jakubiak – New York (+1 212-351-2498, jjakubiak@gibsondunn.com) Jennifer C. Mansh – Washington, D.C. (+1 202-955-8590, jmansh@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 9, 2018 |
Iran Sanctions 2.0: The Trump Administration Completes Its Abandonment of the Iran Nuclear Agreement

Click for PDF Six months ago, President Donald Trump announced his decision to abandon the 2015 Iran nuclear deal—the Joint Comprehensive Plan of Action (the “JCPOA”)—and re-impose U.S. nuclear-related sanctions on the Iranian regime.[1]  The second and final wind-down period for those sanctions expired on November 5, 2018, triggering the “snap back” of remaining U.S. secondary sanctions on Iran’s oil, energy, and financial sectors, among other measures.  As of this week, the primary and secondary U.S. sanctions that were in place prior to the JCPOA have been restored, U.S.-owned or -controlled foreign entities are once again prohibited from engaging with Iran, and over 700 parties have been added to the U.S. Department of the Treasury’s Specially Designated Nationals and Blocked Persons (“SDN”) List, increasing the total number of SDNs by 10 percent—the largest single-day set of designations in the history of the Office of Foreign Assets Control (“OFAC”).[2] The Trump administration’s May 2018 decision to re-impose sanctions on Iran went further than many had anticipated, leading many to believe that the sanctions imposed this week would result in an aggressive expansion of U.S. economic pressure on Iran.  In fact, a number of waivers and exceptions should mitigate the impact of these new measures.  The United States has agreed to temporarily waive prohibitions on oil imports for eight countries: China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey.[3]  The U.S. administration stopped short of pressuring the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) to disconnect each and every Iranian financial institution, which leaves some international payment channels open to Iran for the time being.[4]  Furthermore, OFAC has issued guidance expressly noting that non-U.S. persons will not be targeted by sanctions for engaging in transactions with or involving non-designated Iranian entities and non-sanctionable goods and services.[5] Nevertheless, the task of complying with these complex regulations will be a heavy burden for multinational companies in the coming months.  Complicating matters, the Trump administration’s decision to abandon the JCPOA sowed discord with European allies, and has given rise to competing compliance obligations for multinational companies.  As we described here, and discuss further below, in August 2018 the European Union implemented a blocking statute to prevent European firms from complying with U.S. sanctions on Iran. Background As we described here, the JCPOA, signed between Iran and the five permanent members of the United Nations Security Council (the United States, the United Kingdom, France, Russia, and China) and Germany (the “P5+1”) in 2015, committed both sides to certain obligations related to Iran’s nuclear development.[6]  Iran committed to various limitations on its nuclear program, and in return the international community (the P5+1 alongside the European Union and the United Nations) committed to relieving substantial portions of the sanctions that had been placed on Iran to address that country’s nuclear activities.  This relief included the United States’ agreement to ease certain secondary sanctions, thus opening up the Iranian economy for non-U.S. persons without risking their access to the U.S. market to pursue Iranian deals. On May 8, 2018, President Donald Trump announced his decision to withdraw from the JCPOA and re-impose U.S. nuclear-related sanctions.[7] Though this announcement was in accord with the President’s long-stated opposition to the JCPOA, his decision went further than many observers had anticipated.  In conjunction with the May announcement, the President issued a National Security Presidential Memorandum (“NSPM”) directing the Secretary of State and the Secretary of the Treasury to prepare immediately for the re-imposition of all U.S. sanctions lifted or waived in connection with the JCPOA, to be accomplished as expeditiously as possible and in no case later than 180 days from the date of the NSPM—November 4, 2018.  As described in an initial set of frequently asked questions (“FAQs”) set forth by OFAC, the re-imposition of sanctions was subject to certain 90- and 180-day wind-down periods that expired on August 6 and November 4, respectively.[8] As we discussed here, on August 6, 2018 the President issued a new executive order authorizing OFAC to re-impose sanctions that had been subject to the 90-day wind-down period.[9] That executive order consolidated Iran-related sanctions authorities and re-imposed the first tranche of secondary sanctions on transactions involving Iranian rials, Iranian sovereign debt, certain metals, and the Iranian automotive sector, among other measures.[10] The August executive order also set forth the tranche of sanctions authorizations that were subsequently imposed this week. New Sanctions With the expiration of the 180-day wind-down period on November 5, 2018, the United States has now re-imposed sanctions on the following:[11] Iranian port operators, shipping and shipbuilding; Petroleum-related transactions; Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions; Provision of specialized financial messaging services to the Central Bank of Iran and certain Iranian financial institutions; Underwriting services, insurance and reinsurance; and Iran’s energy sector. Pursuant to the executive order issued on August 6, the following types of secondary sanctions may be imposed on non-U.S. persons: Blocking sanctions on non-U.S. persons who materially assist, sponsor, or provide support for or goods or services in support of: the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), or the Central Bank of Iran;[12] Iranian SDNs;[13] or any other person included on the SDN List pursuant to Section 1(a) of the New Iran E.O. or Executive Order 13599 (i.e., the Government of Iran and certain Iranian financial entities);[14] Blocking sanctions on non-U.S. persons who: are part of the Iranian energy, shipping, or shipbuilding sectors;[15] operate Iranian ports;[16] or provide significant support to or goods or service in support of persons that are part of Iran’s energy, shipping, or shipbuilding sectors; Iranian port operators; or Iranian SDNs (excluding certain Iranian financial institutions);[17] “Menu-based” sanctions on non-U.S. persons who: knowingly engage in significant transactions in Iranian petroleum, petroleum products, or petrochemical products;[18] are successors, subsidiaries, parents, or affiliates of persons who have knowingly engaged in significant transactions in Iranian petroleum, petroleum products, or petrochemical products or in Iran’s automotive sector;[19] provide underwriting services, insurance, or reinsurance for sanctionable activities with or involving Iran;[20] or provide specialized financial messaging services to the Central Bank of Iran;[21] Correspondent and payable-through account sanctions on foreign financial institutions that conduct or facilitate significant transactions: on behalf of Iranian SDNs or other SDNs (as described above);[22] with NIOC or NICO;[23] or for transactions in Iranian petroleum, petroleum products, or petrochemical products.[24] Key Issues Oil Waivers The recently re-imposed U.S. restrictions on the export of Iran’s oil could have a significant impact on the Iranian economy.  Iranian oil exports have already dropped by one-third since hitting a peak of 2.8 million barrels per day in April 2018—shortly before the Trump administration announced it would re-impose nuclear-related sanctions.[25]  South Korea and Japan have stopped buying Iranian oil, and India has reduced its imports.[26]  Chinese imports are more difficult to determine given a robust black market oil trade.[27] Notably, the United States has agreed to temporarily waive these sanctions for eight jurisdictions that have agreed to significantly reduce or eliminate their imports of Iranian oil, including China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey.[28]  The revenue owed to Iran for continued trade subject to these waivers will not be paid directly to Iran, but instead will be held in escrow accounts in the waiver jurisdictions for use by Iran, but only for humanitarian trade or bilateral trade with waiver jurisdictions in non-sanctioned goods.  This is the same model that existed during the Obama administration and that, given trade surpluses (and the value of oil), resulted in the buildup of billions of dollars of “trapped” Iranian money in bank accounts around the world.  This money represented the difference between the revenue paid to Iran by jurisdictions who had waivers and the remaining funds after Iran purchased various non-sanctioned goods from those jurisdictions. The waivers are only temporary—lasting for six months—and their extension is dependent on the Trump administration’s assessment that the benefiting jurisdictions have continued their efforts to significantly reduce their dependence on Iranian oil.  The United States has indicated that it expects two of the eight exempt jurisdictions to eliminate their Iranian oil imports within the first six-month period.  These waivers were granted despite initial indications from Trump administration officials that OFAC would only grant waivers if countries entirely eliminated their Iranian oil imports.  Interestingly, as with the waivers granted prior to the JCPOA, none of these documents or materials have yet been made public. SWIFT In connection with the re-imposition of sanctions, the United States has successfully cut off certain Iranian financial institutions from access to the SWIFT network,[29] the financial messaging system by which more than 11,000 banks worldwide facilitate transactions.[30] According to Secretary of the Treasury Steven Mnuchin, the United States has advised the Belgium-based cooperative that runs the messaging service that it must disconnect certain designated Iranian financial institutions “as soon as technologically feasible” or else become subject to U.S. sanctions.[31]  In that sense, the approach taken by the Trump administration represents a sort of compromise in that the United States has stopped short of pressuring SWIFT to disconnect each and every Iranian financial institution.[32]  Instead, the United States has (for now) left open at least some international payment channels. In response, without specifically mentioning the re-imposition of U.S. sanctions, SWIFT on November 5, 2018 announced that it would suspend certain unspecified Iranian financial institutions from the messaging service.[33]  (In a brief statement, SWIFT attributed its decision instead to its interest in maintaining “the stability and integrity of the wider global financial system,” an explanation likely calculated to avoid running afoul of Council Regulation (EC) No 2271/96 (as amended, the “EU Blocking Statute”).[34]) Viewed in broader context, there is certainly precedent for cutting off Iranian access to the messaging network.  SWIFT did precisely that in 2012 at the behest of the United States and the European Union, before restoring Iranian access in 2016 in connection with implementation of the JCPOA.[35]  However, given that the European Union strongly supports the JCPOA, it is possible that SWIFT—which is headquartered in Belgium and subject to European law—could have declined to disconnect the Iranian financial institutions designated by the United States.[36]  For now, however, the practical result of SWIFT’s action is that targeted Iranian banks will be almost entirely severed from the international financial system, severely complicating Iran’s ability to move funds in and out of the country. SDN Designations OFAC has also added 700 individuals, entities, aircraft, and vessels to the SDN List.  This is OFAC’s largest single addition to the SDN List and it increases the total number of SDNs by over 10 percent.  These 700 additions to the SDN List include the re-designation of persons previously granted sanctions relief under the JCPOA, the transfer of Iranian government or financial entities from the List of Persons Blocked Solely Pursuant to E.O. 13599 (the “E.O. 13599 List”), and the imposition of sanctions on 300 first-time designees.  U.S. persons, including their non-U.S. subsidiaries, are broadly prohibited from engaging in transactions with or involving these persons. Notably, the restrictions on non-U.S. persons engaging with SDNs vary based on the authority under which such SDNs were designated.  For example, U.S. secondary sanctions do not apply to dealings with Iranian banks that are designated solely because of their status as “Iranian financial institutions” pursuant to Executive Order 13599.[37]  That said, some entities moved to the SDN List from the E.O. 13599 List also have been designated under additional authorities and, therefore, have received new unique identification numbers (“UIDs”) when added to the SDN List.[38]  In October and November 2018, OFAC designated multiple Iranian financial institutions and other persons previously blocked solely pursuant to E.O. 13599 under E.O. 13224 (relating to counterterrorism), E.O. 13382 (relating to WMD proliferation), and E.O. 13553 (relating to serious human rights abuses by the Government of Iran).[39] Furthermore, the volume of SDNs in Iran means that non-U.S. persons must continue to assess the risks of a transaction on the basis of the sectoral sanctions that may apply, as well as the restrictions that pertain to SDNs based on the nature of their designation. Foreign Subsidiaries of U.S. Companies U.S. sanctions again prohibit non-U.S. entities owned or controlled by U.S. persons (e.g., foreign subsidiaries of U.S. companies) from generally engaging in business operations with or involving Iran.  Under the JCPOA, General License H had permitted U.S.-owned or -controlled non-U.S. entities to engage in Iran.  On June 27, 2018, the U.S. government revoked General License H, replacing it with a narrower authorization permitting the wind-down of such activities on or before the end of the 180-day wind-down period on November 4, 2018.[40]  These non-U.S. entities are now no longer permitted to provide goods, services, or financing to Iranian counterparties, even pursuant to agreements pre-dating the U.S. withdrawal from the JCPOA.  In this regard, these non-U.S. entities now are generally subject to the same limitations on engagement with Iran that restrict their U.S. parents.  We discuss the implications with respect to the EU Blocking Statute below. Iranian Ports While U.S. sanctions have now been re-imposed on certain Iranian port operators, the Trump administration has preserved a lenient regulatory interpretation adopted during the Obama era.  Transactions at Iranian ports that do not involve one particular port operator or other designated entities will not generally trigger secondary sanctions. As a general matter, non-U.S. persons can trigger secondary sanctions by engaging in significant transactions involving two types of entities: (i) designated entities identified as “port operators,” and (ii) other designated Iranian entities performing shipping and logistics services inside Iranian ports.  In an FAQ published this past August, OFAC clarified that to the extent that a shipping company transacts with port operators in Iran that have not been designated, except as “port operators” under the Iran Freedom and Counter-Proliferation Act of 2012, and “as long as such payments are limited strictly to routine fees including port dues, docking fees, or cargo handling fees, paid for the loading and unloading of non-sanctioned goods at Iranian ports,” such transactions are unlikely to be considered “significant.”[41]  As of now, there are no Iranian entities designated solely as “port operators” that would qualify for this exception. To date, only one identified Iranian “port operator,” Tidewater Middle East Co., has been added to the SDN List, in this case for its involvement in Iran’s proliferation of weapons of mass destruction.[42]  Critically, although Tidewater is the only port operator identified as such, the company has operations at many of Iran’s largest ports.  Tidewater has historically had operations at seven Iranian ports, including Bandar Abbas’ main container terminal, Shahid Rajaee, and played a key role in facilitating the Government of Iran’s weapons trade prior to the implementation of the JCPOA.  Importantly, when the JCPOA was implemented, OFAC announced that Tidewater was no longer the port operator of Bandar Abbas and that transactions with that port would not be prohibited if other designated entities were not involved.[43]  However, OFAC now cautions that companies should “exercise great caution to avoid engaging in transactions” with Tidewater in ports where Tidewater currently operates, as transactions with Tidewater may trigger secondary sanctions. Additionally, as a result of Monday’s designations, several Iranian shipping and logistics companies with operations at Bandar Abbas, Fujairah Port, the B.I.K. Port Complex, and Assaluyeh Port, among others, were designated to the SDN List.  As noted above, non-U.S. persons may face secondary sanctions for providing goods, services, or support to these entities.  However, non-U.S. persons are not broadly restricted from engaging with the ports where these entities operate.  The designations of both Tidewater and the Iranian shipping and logistics companies do not result in the blocking of all Iranian ports or port operators. Interestingly, the United States has purportedly carved out an exception from the imposition of sanctions with regard to Iran’s Chabahar port, the construction of an associated railway, the shipment of non-sanctionable goods through the port for Afghanistan’s use, and Afghanistan’s continued imports of Iranian petroleum products.  The exemption for Chabahar is most likely linked to the port’s importance for both India and Afghanistan, and likewise the importance of India and Afghanistan to U.S. foreign policy aims.[44]  India has invested heavily in developing the Chabahar port, which provides strategic access not just to Iran but Central Asia, bypassing Pakistan.  After U.S. sanctions were relaxed pursuant to the JCPOA, India announced its plans to spend $500 million on developing Chabahar and in December 2017 Iran inaugurated the latest phase of the port, including five new piers.  Plans to link the port to the Iranian rail system, which connects to Afghanistan and on to Central Asia, likely featured in the U.S. State Department’s decision.  Landlocked Afghanistan also has few better options for importing petroleum products than Iran for the time being.[45]  It is not clear whether the reported waiver extends to erstwhile prohibited engagements with SDNs—in our view that would be unlikely.  Indeed, the mention of the Chabahar port is likely tangential to the waiver for Afghanistan and India’s oil imports. Permissible Post-Wind Down Activities At the same time that the Trump administration is promising to conduct a “maximum pressure” economic campaign against the regime in Tehran,[46] OFAC has also clarified that U.S. persons and non-U.S. persons are expressly permitted to engage in certain narrow categories of transactions involving Iran.  Among the general licenses and authorizations that remain in effect even after U.S. nuclear-related sanctions have been fully re-imposed are the following: Collecting Payment for Goods, Services, Loans or Credits Provided to an Iranian Counterparty During the Wind-Down Period In the event a non-U.S., non-Iranian person is owed payment after the applicable wind-down period for goods, services, loans or credits lawfully provided to an Iranian counterparty during the wind-down period, the U.S. government will allow that person to receive payment according to the terms of the written contract or written agreement.[47]  The policy rationale behind this allowance appears to be that, in order to promote an orderly wind-down of existing activities involving Iran, OFAC felt that such persons needed to be given comfort that they would be made whole for any final goods, services, loans or credits they might deliver to an Iranian counterparty.[48]  Absent such an allowance, Iranian counterparties could conceivably have continued to receive goods, services, loans and credits during the 90- and 180-day wind-down periods and then use the re-imposition of U.S. sanctions as a pretext to refuse payment. In order to avail itself of this allowance, a non-U.S., non-Iranian person must satisfy three criteria.  First, the goods, services, loans or credits must have been provided to an Iranian counterparty pursuant to a written contract or written agreement entered into prior to May 8, 2018.[49]  Second, the goods or services must have been fully provided or delivered, or the loans or credits extended, to an Iranian counterparty prior to the end of the applicable wind-down period.[50]  Third, any payments would need to be consistent with U.S. sanctions, including that payments could not involve U.S. persons or the U.S. financial system, unless the transactions are exempt from regulation or authorized by OFAC.[51] OFAC has also indicated that, prior to the receipt of payment, non-U.S., non-Iranian persons can seek guidance from OFAC or the U.S. Department of State, as appropriate, regarding whether a particular payment would satisfy the criteria described above.[52]  Non-U.S., non-Iranian persons are encouraged to seek such guidance if the counterparty from whom they are seeking repayment has subsequently been added to the SDN List.[53] Authorized Activities General License J-1: Civil Aircraft on Temporary Sojourn to Iran General License J-1, which authorizes non-U.S. persons to fly U.S.-origin civil aircraft into Iran, remains in effect.[54]  This license represents a recognition that almost any aircraft that flies into Iran is “U.S.-origin” under U.S. law and that without such a license nearly all international flights to and from Iran would violate U.S. sanctions.[55]  With this license still in effect, non-U.S. air carriers may continue to fly U.S.-origin civil aircraft into and out of Iran, subject to the conditions in the license and the U.S. Export Administration Regulations. General License D-1: Services, Software and Hardware Incident to Personal Communications General License D-1, which authorizes U.S. persons to export or reexport to Iran certain hardware, software and services “incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging,” also remains in effect.[56]  The fact that the Trump administration has elected to leave this license undisturbed is not altogether surprising and implies a continued U.S. policy interest in facilitating the ability of the Iranian people to communicate and organize among themselves, which requires access to certain telecommunications services and equipment. Humanitarian Exceptions Finally, humanitarian exceptions for transactions involving the export of agricultural commodities, food, medicine and medical devices to Iran, continue to apply.[57]  As they have previously, these exceptions extend to transactions by both U.S. persons and non-U.S. persons and are limited only in that such transactions cannot involve persons on the SDN List.[58]  These authorities have likely remained in effect for several reasons.  First, as a technical matter, they were not provided pursuant to the JCPOA and thus did not need to be removed in order for the United States to withdraw from the JCPOA.  Second, and more broadly, these humanitarian exceptions are consistent with long-standing U.S. policy that sanctions should target only the Iranian regime, and not the Iranian people.[59] Despite the flexibility afforded by the general licenses and authorizations described above—which will be very helpful to certain industries active in the implicated sectors (such as airlines and telecommunications)—it is important to remember that these exceptions operate at the margins.  In general, the Trump administration has stressed that it plans to adopt “the toughest sanctions regime ever imposed on Iran,” including aggressive enforcement efforts against persons that attempt to violate or circumvent U.S. sanctions.[60] The EU Response As we described here, on August 6, 2018 the European Union enacted Commission Delegated Regulation (EU) 2018/1100 (the “Re-imposed Iran Sanctions Blocking Regulation”), which supplements the EU Blocking Statute.  The combined effect of the EU Blocking Statute and the Re-imposed Iran Sanctions Blocking Regulation is to prohibit compliance by EU entities with U.S. sanctions on Iran which have been re-imposed following the U.S. withdrawal from the JCPOA.  To date, the dominance of the U.S. dollar, together with robust U.S. sanctions enforcement, forces many global firms to comply with the re-imposed U.S. sanctions described above, even in light of legal risks arising from the EU Blocking Statute and other national anti-boycott legislation. European Union leaders have discussed creating a clearinghouse to manage trade with Iran denominated in Euros,[61] but no EU member state is as of yet willing to play host.[62]  Major European companies have already abandoned their Iranian deals,[63] yet others are moving away from the use of U.S. dollar and/or business with the United States altogether in an attempt to be able to continue business with Iran.  Additionally, while not all Iranian banks have been disconnected, the significant new restrictions on Iranian access to the SWIFT network discussed above will further discourage European engagements with Iran.[64] These competing obligations are a concern for U.S. companies seeking to acquire EU firms that have a history of engagement with Iran.  Once acquired and as discussed above, the EU “target” would be considered a U.S. person from an U.S. sanctions perspective and thus obliged to comply with U.S. sanctions—in potential violation of the EU Blocking Statute, due to being considered an EU person by EU jurisdictions.  We have described the generally available possible options for affected companies here.  In the discussion below we shall focus on the option to acquire respective licenses to remain compliant with both the re-imposed U.S. sanctions and the EU Blocking Statute. One way forward in such situations is to reach out to the U.S. authorities to request a specific license for a particular transaction with Iran.  Apart from the time such process might take and the potentially limited chance of success, according to the EU Commission, requesting from the U.S. authorities an individual license granting a derogation/exemption from the listed extra-territorial legislation, which include the re-imposed U.S. sanctions, would amount to complying with the latter.  The EU Commission notes that this would necessarily imply recognizing the U.S. jurisdiction over EU operators[65] which should be subject to the jurisdiction of the EU/Member States.  Applying for a special license is thus considered a breach of the EU Blocking Statute.  EU operators may, nevertheless, under a new streamlined process, request the EU Commission directly, not the EU member state authorities, to authorize them to apply for a special license with the U.S. authorities, pursuant to Article 5, second paragraph of the EU Blocking Statute. Another way forward is to apply directly for an exception from the EU Blocking Statute to be able to comply with the re-imposed U.S. sanctions in a fashion that is legally permissible.  This will not only limit the risk of prosecution and litigation, but also ease reasonable worries of management and employees of the acquired EU subsidiary.  According to article 5 (2) of the EU Blocking Statute the applicant will have to provide in their application sufficient evidence that non-compliance would cause serious damage to at least one protected interest. “Protected interests” are defined as the interest of any EU operator, the interest of the EU or both. The EU has legislated that when assessing whether serious damage to the protected interests as referred to in the second paragraph of Article 5 of Regulation (EC) No 2271/96 would arise, the Commission will consider, among other things, “the existence of a substantial connecting link with the third country which is at the origin of the listed extraterritorial legislation (including the re-imposed U.S. sanctions) or the subsequent actions; for example the applicant has parent companies or subsidiaries, or participation of natural or legal persons subject to the primary jurisdiction of the third country which is at the origin of the listed extra-territorial legislation or the subsequent actions.”[66] As first cases appear, any company caught between the re-imposed U.S. sanctions and the EU Blocking Statute should also be aware of a heightened risk of litigation and position themselves accordingly.  Third parties might successfully sue under using the EU Blocking Regulation, for example if the above mentioned EU company with a U.S. parent were to decide to not deliver a product to Iran based on compliance with the re-imposed U.S. sanctions, despite a prior contractual obligation, a European court will likely not accept termination merely on the grounds of such U.S. sanctions compliance. Finally, EU operators are required to inform the EU Commission within 30 days from the date on which information is obtained that the economic and/or financial interests of any EU operator is affected, directly or indirectly, by the laws specified in the Annex of the EU Blocking Statute (including the re-imposed U.S. sanctions) or by actions based thereon or resulting therefrom.  If the EU operator is a legal person, this obligation applies to the directors, managers and other persons with management responsibilities of such legal person. Conclusion In our assessment, November 5, 2018 marks a new phase in U.S. sanctions implementation against Iran.  National Security Adviser John Bolton warned on November 5 that the administration will impose “sanctions that even go beyond” those imposed this week or which existed under the Obama administration.[67]  “More are coming,” he noted, adding that the United States would “have very strict, very tight enforcement of the sanctions that exist.”[68] In particular, we assess that this new phase will be marked by robust U.S. government activities across three distinct work streams.  First, we assess that the U.S. government will continue and likely expand diplomatic outreach efforts to negotiate, cajole, and perhaps threaten states and corporations that do not comply with U.S. measures.  The eight oil waiver jurisdictions are likely to receive significant attention, as will jurisdictions of concern with respect to sanctions evasion and subversion—among others, we expect U.S. outreach to Qatar, Oman, Turkey, the Caucasus, Iraq, Central Asia, and perhaps Sri Lanka and South Africa.  All were the focus of sustained attention during the last round of robust secondary sanctions under President Obama.  Second, we assess that OFAC and other agencies will be active in enforcement of violations.  We note that OFAC has only published three enforcement actions this year—which is comparatively very light for an agency that historically has published 20 or more.  We assume that there are other enforcement actions that have yet to be published—even if those actions concern activities that far pre-dated November 5, there could be a significant deterrent benefit in announcing substantial enforcement actions shortly after the resumption of the Iran sanctions.  The unilateral approach to Iran sanctions under President Trump may compel a more public and robust enforcement action to achieve the same level of deterrence as the multilateral approach achieved under President Obama.  Finally, the third work stream involves the continuing efforts of OFAC’s Office of Global Targeting (which constructs the evidentiary material needed to list entities).  We are confident that OFAC will be very active in both identifying more Iranian actors for listing and potentially changing the designations of some already listed entities so as to impose secondary sanctions as needed. Even so, uncertainty abounds.  It is unknown whether an aggressive approach to U.S. enforcement will lead European signatories to the JCPOA to enforce the EU Blocking Statute.  Or will the U.S. steamroll such efforts by virtue of its economic power?  Will Iranian president Hassan Rouhani consider renegotiating the nuclear deal to meet U.S. demands, or will he be replaced by a hardliner when he leaves office in 2021?  Whatever happens next, we anticipate a continuing fluidity in the sanctions environment and consequently an increasingly complex set of compliance challenges for global companies.    [1]   Press Release, White House, Remarks by President Trump on the Joint Comprehensive Plan of Action (May 8, 2018), available at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-joint-comprehensive-plan-action; see also Presidential Memorandum, Ceasing U.S. Participation in the JCPOA and Taking Additional Action to Counter Iran’s Malign Influence and Deny Iran All Paths to a Nuclear Weapon (May 8, 2018), available at https://www.whitehouse.gov/presidential-actions/ceasing-u-s-participation-jcpoa-taking-additional-action-counter-irans-malign-influence-deny-iran-paths-nuclear-weapon.    [2]   See Press Release, U.S. Dep’t of Treasury, U.S. Government Fully Re-Imposes Sanctions on the Iranian Regime as Part of Unprecedented U.S. Economic Pressure Campaign (Nov. 5, 2018), available at https://home.treasury.gov/news/press-releases/sm541.    [3]   Press Release, U.S. Dep’t of State, Press Availability With Secretary of Treasury Steven T. Mnuchin (Nov. 5, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287132.htm.    [4]   Eli Lake, Opinion, Trump Bank Sanctions Will Hit Iran Where It Hurts, Bloomberg (Nov. 2, 2018), available at https://www.bloomberg.com/opinion/articles/2018-11-02/trump-s-iran-bank-cutoff-from-swift-will-make-u-s-sanctions-hurt.    [5]   U.S. Dep’t of Treasury, Frequently Asked Questions Related to the “Snap-Back” of Iranian Sanctions in November, 2018, FAQ No. 637 (Nov. 5, 2018), available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx#630.    [6]   U.S. Dep’t of State, Joint Comprehensive Plan of Action (July 14, 2015), available at https://www.state.gov/documents/organization/245317.pdf.    [7]   Press Release, White House, Remarks by President Trump on the Joint Comprehensive Plan of Action (May 8, 2018), available at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-joint-comprehensive-plan-action; see also Presidential Memorandum, Ceasing U.S. Participation in the JCPOA and Taking Additional Action to Counter Iran’s Malign Influence and Deny Iran All Paths to a Nuclear Weapon (May 8, 2018), available at https://www.whitehouse.gov/presidential-actions/ceasing-u-s-participation-jcpoa-taking-additional-action-counter-irans-malign-influence-deny-iran-paths-nuclear-weapon; Press Release, U.S. Dep’t of Treasury, Guidance Relating to the Lifting of Certain U.S. Sanctions Pursuant to the Joint Comprehensive Plan of Action on Implementation Day (Jan. 16, 2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/implement_guide_jcpoa.pdf.    [8]   Press Release, U.S. Dep’t of Treasury, Statement by Secretary Steven T. Mnuchin on Iran Decision (May 8, 2018), available at https://home.treasury.gov/news/press-releases/sm0382.    [9]   Exec. Order No. 13,846, 83 Fed. Reg. 38,939 (Aug. 6, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf. [10]   In connection with the end of the 90-day wind-down period, the U.S. government also revoked authorizations to import into the United States Iranian carpets and foodstuffs and to sell to Iran commercial passenger aircraft and related parts and services.  U.S. Dep’t of Treasury, Revocation of JCPOA-Related General Licenses; Amendment of the Iranian Transactions and Sanctions Regulations; Publication of Updated FAQs (June 27, 2018), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20180627.aspx. [11]   U.S. Dep’t of Treasury, Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA) (May 8, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf, FAQ No. 1.3. [12]   Exec. Order No. 13,846 § 1(a)(ii) (Aug. 6, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf. [13]   Id. § 1(a)(iii). [14]   Id. [15]   Id. § 1(a)(iv). [16]   Id. [17]   Id. [18]   Id. § 3(a)(ii)-(iii). [19]   Id. § 3(a)(iv)-(vi). [20]   Id. § 5. [21]   Id.  This provision refers to the electronic messaging provided principally by the SWIFT inter-bank messaging system. [22]   Id. § 2(a)(ii). [23]   Id. § 2(a)(iii). [24]   Id. § 2(a)(iv)-(v). [25]   Turning the Screws, The Economist (Nov. 3, 2018). [26]   Id. [27]   Id. [28]   Press Release, U.S. Dep’t of State, Press Availability With Secretary of Treasury Steven T. Mnuchin (Nov. 5, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287132.htm. [29]   Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm. [30]   SWIFT, Introduction to SWIFT, https://www.swift.com/about-us/discover-swift (last visited Nov. 4, 2018); see also Peter Eavis, Trump’s New Iran Sanctions May Hit Snag with Global Financial Service, N.Y. Times: DealBook (Oct. 12, 2018), available at https://www.nytimes.com/2018/10/12/business/dealbook/swift-sanctions-iran.html (“The messaging service is run by a Belgian cooperative called Swift.  The service, which is owned and used by banks around the world, plays a central role in the flow of money across the globe.  If, say, a Bank of America customer wants to send money to a client of Barclays, Bank of America will send a message over Swift’s network to Barclays, notifying it of its intention to move the money.  Swift does not hold any of the money itself.”). [31]   See Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm.  Secretary Mnuchin has also indicated that a narrow class of humanitarian transactions (e.g., providing food or medicine to non-designated entities) will still be allowed to use the SWIFT network. [32]   Eli Lake, Opinion, Trump Bank Sanctions Will Hit Iran Where It Hurts, Bloomberg (Nov. 2, 2018), available at https://www.bloomberg.com/opinion/articles/2018-11-02/trump-s-iran-bank-cutoff-from-swift-will-make-u-s-sanctions-hurt. [33]   Arshad Mohammed, SWIFT Says Suspending Some Iranian Banks’ Access to Messaging System, Reuters (Nov. 5, 2018), available at https://www.reuters.com/article/us-usa-iran-sanctions-swift/swift-says-suspending-some-iranian-banks-access-to-messaging-system-idUSKCN1NA1PN. [34]   Id. [35]   E.g., Peter Eavis, Trump’s New Iran Sanctions May Hit Snag with Global Financial Service, N.Y. Times: DealBook (Oct. 12, 2018), https://www.nytimes.com/2018/10/12/business/dealbook/swift-sanctions-iran.html. [36]   See id. [37]   See Exec. Order No. 13,846 § 1(a)(iii) (Aug. 6, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf.  In accordance with this authority and OFAC FAQ No. 3.1, the SDN List entries for these Iranian financial institutions do not have the notation warning that they are “Subject to Secondary Sanctions.” [38]   OFAC FAQ No. 638 (Nov. 5, 2018). [39]   OFAC FAQ No. 639 (Nov. 5, 2018). [40]   U.S. Dep’t of Treasury, Revocation of JCPOA-Related General Licenses; Amendment of the Iranian Transactions and Sanctions Regulations; Publication of Updated FAQs (June 27, 218), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20180627.aspx. [41]   See OFAC FAQ No. 315. [42]   Id. [43]   See U.S. Dep’t of Treasury, Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day (updated Dec. 15, 2016), FAQ No. 3.2, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf. [44]   See Catherine Putz, Iran’s Chabahar Port Scores an India- and Afghanistan-Inspired Sanctions Exemption, The Diplomat (Nov. 8, 2018), available at https://thediplomat.com/2018/11/irans-chabahar-port-scores-an-india-and-afghanistan-inspired-sanctions-exemption. [45]   Id. [46]   See, e.g., Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm. [47]   OFAC FAQ No. 631 (Nov. 5, 2018). [48]   See id. [49]   Id.  The logic behind this requirement appears to be a desire on the part of OFAC to avoid an unseemly rush to generate new business inside Iran on the eve of sanctions being re-imposed.  Contracts entered into after President Trump’s May 8, 2018 announcement do not enjoy any such assurance of the ability to collect payment after the wind-down periods end. [50]   OFAC FAQ Nos. 630 and 631 (Nov. 5, 2018).  According to OFAC, “[a]s a general matter, goods or services will be considered fully provided or delivered when the party providing or delivering the goods or services has performed all the actions and satisfied all the obligations necessary to be eligible for payment or other agreed-to compensation.  With respect to goods exported to or from Iran, at a minimum, title to the goods must have transferred to the relevant party.”  OFAC FAQ No. 633 (Nov. 5, 2018).  To the extent a non-U.S., non-Iranian person continues to perform under such a contract after the applicable wind-down period has ended, they would not only have no assurance of being repaid, but would also risk incurring secondary sanctions liability. [51]   OFAC FAQ No. 631 (Nov. 5, 2018). [52]   OFAC FAQ No. 632 (Nov. 5, 2018). [53]   OFAC FAQ No. 636 (Nov. 5, 2018). [54]   OFAC, General License J-1: Authorizing the Reexportation of Certain Civil Aircraft to Iran on Temporary Sojourn and Related Transactions (Dec. 15, 2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_glj_1.pdf. [55]   Foreign-made items incorporating more than 10 percent U.S.-origin content by value, including civilian aircraft, may not be reexported by non-U.S. persons to Iran without authorization (31 C.F.R. § 560.205).  Most civilian aircraft—even those produced by non-U.S. manufacturers outside the United States—exceed this threshold. [56]   OFAC, General License D-1: General License with Respect to Certain Services, Software, and Hardware Incident to Personal Communications (Feb. 7, 2014), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_gld1.pdf. [57]   Exec. Order No. 13,846, 83 Fed. Reg. 38,939, 38,941 (Aug. 6, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf; see also Fact Sheet, President Donald J. Trump Is Reimposing All Sanctions Lifted Under the Unacceptable Iran Deal, White House (Nov. 2, 2018), available at https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-reimposing-sanctions-lifted-unacceptable-iran-deal (“Sales of food, agricultural commodities, medicine and medical devices to Iran have long been—and remain—exempt from our sanctions.”). [58]   OFAC FAQ Nos. 630 and 637 (Nov. 5, 2018). [59]   E.g., Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm (“[O]ur actions today are targeted at the regime, not the people of Iran, who have suffered grievously under this regime.  It’s why we have and will maintain many humanitarian exemptions to our sanctions including food, agricultural commodities, medicine, and medical devices.”). [60]   See, e.g., Fact Sheet, President Donald J. Trump Is Reimposing All Sanctions Lifted Under the Unacceptable Iran Deal, White House (Nov. 2, 2018), available at https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-reimposing-sanctions-lifted-unacceptable-iran-deal. [61]   Europe Accelerates Work on So-Called SPV to Counter U.S.’s Iran Sanctions, Bloomberg (Nov. 8, 2018), available at https://www.bloomberg.com/news/articles/2018-11-07/europe-accelerates-work-on-spv-to-counter-u-s-s-iran-sanctions. [62]   Turning the Screws, The Economist (Nov. 3, 2018). [63]   How Companies Around the World are Reversing Course on Iran Business, Iran Watch (Nov. 5, 2018), available at https://www.iranwatch.org/our-publications/policy-briefs/how-companies-around-world-are-reversing-course-iran-business. [64]   Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm; see also SWIFT, Introduction to SWIFT, available at https://www.swift.com/about-us/discover-swift (last visited Nov. 4, 2018); Peter Eavis, Trump’s New Iran Sanctions May Hit Snag with Global Financial Service, N.Y. Times: DealBook (Oct. 12, 2018), available at https://www.nytimes.com/2018/10/12/business/dealbook/swift-sanctions-iran.html (“The messaging service is run by a Belgian cooperative called Swift.  The service, which is owned and used by banks around the world, plays a central role in the flow of money across the globe.  If, say, a Bank of America customer wants to send money to a client of Barclays, Bank of America will send a message over Swift’s network to Barclays, notifying it of its intention to move the money.  Swift does not hold any of the money itself.”). [65]   The respective EU Guidance refers to EU operators when referring to the natural and legal persons for whom the EU Blocking Statute applies according to Article 11 of the EU Blocking Statute.  Those are (i) any natural person being a resident in the Community (EU) (whereas “being a resident in the Community” means: being legally established in the Community for a period of at least six months within the 12-month period immediately prior to the date on which, under this Regulation, an obligation arises or a right is exercised) and a national of a EU Member State, (ii) any legal person incorporated within the Community, (iii) any natural or legal person referred to in Article 1 (2) of Regulation (EEC) No 4055/86 (i.e. nationals of the Member States established outside the Community and to shipping companies established outside the Community and controlled by nationals of a Member State, if their vessels are registered in that Member State in accordance with its legislation), (iv) any other natural person being a resident in the Community, unless that person is in the country of which he is a national, and (v) any other natural person within the Community, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of a Member State, acting in a professional capacity. [66]   Article 4(c) of Commission Implementing Regulation (EU) 2018/1101 of 3 August 2018 laying down the criteria for the application of the second paragraph of Article 5 of Council Regulation (EC) No 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom. [67]   Emily Birnbaum, Bolton: Even More Iran Sanctions Planned, The Hill (Nov. 5, 2018), available at https://thehill.com/policy/finance/414891-bolton-even-more-iran-sanctions-planned. [68]   Id. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, Stephanie Connor, R.L. Pratt, Richard Roeder and Scott Toussaint. 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