SEC Targeting Fraudulent Disclosures During Pandemic

While there are, without a doubt, legitimate business opportunities that are available in this current environment, companies that are poised to seize on those opportunities should do so with caution, particularly if they are subject to reporting requirements and/or are traded on any index, from the OTC on up.

So, what guidance should companies and their executives should be following?

The SEC chairman along with the SEC's director of Division of Corporate Finance have issued a public statement, titled "The Importance of Disclosure — For Investors, Markets and Our Fight Against COVID-19," that should be a must read for every executive. Stressing the need that companies must provide full and accurate disclosure in this ever-changing economic landscape, the statement states:

• Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company's COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.
• Providing detailed information regarding future operating conditions and resource needs is challenging, including because our response strategies are in their incipient stages (and are likely to change), but it is important on many levels.  Updating and refining these estimates should become less difficult over time.
• High quality disclosure will not only provide benefits to investors and companies, it also will enhance valuable communication and coordination across our economy — including between the public and private sectors — as together we pursue the fight against COVID-19. |
  • This transparency can foster confidence in countless specific instances, for example, between a supplier and a manufacturer as well as between an investor and a company, which in combination will benefit all.

That said, given the SEC's clear emphasis on enforcement, there is the ever-present danger of misinterpretation and over-reach. Companies, in non-COVID-19 times, were entitled to certain leeway with respect to projections and "puffery." While the law remains unchanged from a mere two months ago (which seems like a lifetime ago in these times), there is the potential for a different initial interpretation by the SEC and the courts in the grey areas given the current climate. As always, striking the proper balance is the key. In times like these, however, given that everything is out of balance, where that sweet-spot falls is going to be a matter of interpretation and advocacy.

While we are all following COVID-19 "curve," hoping it continues its apparent downward trend, do not be surprised if the SEC enforcement numbers show the opposite. Companies and their executives should be vigilant to avoid becoming a statistic.

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Russell Koonin and Adam Schwartz are partners at Homer Bonner Jacobs Ortiz, located in Miami Florida. Koonin and Schwartz both previously served as SEC Senior Trial Counsel, and were Assistant U.S. Attorneys in the Southern District of Florida. They can be reached at [email protected] and [email protected], respectively. This article also appeared in Daily Business Review, an ALM sibling of Business Crimes Bulletin.