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Disclosure of Investigations: Whether and When for Public Companies
You are the general counsel of a mid-cap company trading on the New York Stock Exchange. Because of your firm's international work, you have instituted a global anti-corruption compliance program, complete with a whistleblower hotline. Sunday night, an anonymous call comes in on the hotline. The manager of your Nigerian subsidiary has been inviting the tax minister on weekly yacht cruises in exchange for better tax treatment. Being the good corporate citizen you are, you quickly commence an internal investigation. On Monday afternoon, the Securities and Exchange Commission sends a document request and tells you it has opened an informal investigation.
Do you have to disclose to your shareholders the whistleblower's allegation, your internal investigation and/or the SEC's document request? What if there were a Formal Order of Investigation? Or a Wells Notice? What if the Nigerian business constitutes less than 1% of your company's revenue? Or there are price-fixing allegations? Or the minister appears on the Specially Designated Nationals list?
The Securities Laws and Regulations
Section 13(a) of the Exchange Act (15 U.S.C. 78m(a)) and the accompanying rules obligate issuers to file periodic reports with information that is accurate and not misleading. Failure to do so can result in the SEC charging a company with making material false statements or material omissions in violation of sections 17(a)(2) and (a)(3) of the Securities Act (15 U.S.C. 77q(a)(2) and (a)(3)) or Rule 10b-5 (17 C.F.R. §240.10b-5), the latter requiring a showing of scienter, the former requiring nothing more than mere negligence. An omission is material where there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available." In re Lions Gate Entertainment Corp. Sec. Litig., 165 F. Supp. 3d 1, 10-11 (S.D.N.Y. 2016); In re UBS AG Sec. Litig., No. 07-cv-11225, 2012 WL 4471265, at 31 (materiality analysis requires a showing of actual materiality, not the mere possibility that an investigation may be material).
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