Securities Industry Commentator by Bill Singer Esq

Did You Hear The One About The Zombie Who Requested An IRA Distribution? (BrokeAndBroker.com Blog)

DOJ RELEASES

Former Amtrak Employee Sentenced for Wire Fraud (DOJ Release)

SEC RELEASES

SEC Charges McDonald's Former CEO for Misrepresentations About His Termination / Fast Food Company Charged for Public Disclosure Violations (SEC Release)

Statement Regarding In the Matter of Stephen J. Easterbrook and McDonald's Corporation by SEC Commissioner Hester M. Peirce and SEC Commissioner Mark T. Uyeda

CFTC Releases

CFTC Charges Former New York City Commodity Pool Operator with Fraud (CFTC Release)

FINRA Release

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1/9/2023

NEW ORLEANS - U.S. Attorney Duane A. Evans announced that KENYA BUTLER-SMALL was sentenced on January 5, 2023 for conduct alleged to have occurred while she was employed by Amtrak as an On-board Services Train Attendant.

U.S. District Judge Sarah S. Vance ordered BUTLER-SMALL to serve concurrent terms of six months of incarceration for each of the two wire count charges to which BUTLER-SMALL previously pleaded guilty. Judge Vance also ordered BUTLER-SMALL to serve two years of supervised release following her incarceration, the first six months of which will consist of home incarceration with location monitoring as well as a mandatory $100 special assessment fee for each count. Additionally, Judge Vance ordered that BUTLER-SMALL pay restitution to the victims.

BUTLER-SMALL recruited more than 40 victims to purchase spots on a purported trip from New Orleans to New York City. BUTLER-SMALL told the victims that she had booked roundtrip Amtrak train travel for the trip, as well as activities, such as shows and museum visits. In truth, BUTLER-SMALL had not booked the Amtrak travel or the activities. When the date of the trip approached, BUTLER-SMALL told the victims, from whom she had taken a total of approximately $23,000 to $26,000, that Amtrak had canceled the trip because an incident occurred in which one of the trip's passengers assaulted an Amtrak employee and made a bomb threat. In truth, no such incident had occurred.

BUTLER-SMALL also submitted fraudulent sick benefit claims to the Railroad Retirement Board, a federal agency that provides benefits to Amtrak employees. BUTLER-SMALL claimed that she was too sick to work when, in truth, she was working another job. This caused the government to pay BUTLER-SMALL approximately $4,679 in sick benefits for days she falsely claimed to have been unable to work.

[T]he Commission determined not to impose a financial penalty on McDonald's in light of the substantial cooperation it provided to SEC staff during the course of its investigation, including voluntarily providing information not otherwise required to be produced in response to the staff's requests, as well as the remedial measures undertaken by McDonald's, including seeking and ultimately recovering the compensation Easterbrook received pursuant to the separation agreement.

[M]cDonald's terminated Easterbrook for exercising poor judgment and engaging in an inappropriate personal relationship with a McDonald's employee in violation of company policy. However, McDonald's and Easterbrook entered into a separation agreement that concluded his termination was without cause, which allowed him to retain substantial equity compensation that otherwise would have been forfeited. In making this conclusion, McDonald's exercised discretion that was not disclosed to investors.

Subsequently, in July 2020, McDonald's discovered through an internal investigation that Easterbrook had engaged in other undisclosed, improper relationships with additional McDonald's employees. According to the SEC's order, Easterbrook knew or was reckless in not knowing that his failure to disclose these additional violations of company policy prior to his termination would influence McDonald's disclosures to investors related to his departure and compensation.

We are unable to support the charges against McDonald's Corporation ("McDonald's") for failing to disclose sufficient information regarding the termination of its former CEO, Stephen Easterbrook, in its 2020 proxy statement.  The Order[1] casts McDonald's, the victim of Mr. Easterbrook's deception, as a securities law violator through a novel interpretation of the Commission's expansive executive compensation disclosure requirements.

The Commission's Order finds, among other things, that McDonald's violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-3 thereunder because the company failed to provide the disclosure required by Item 402(b) and (j)(5) of Regulation S-K.  Item 402(b) requires companies to disclose all material elements of compensation of named executive officers.  Item 402(j) requires disclosure of material factors regarding agreements that provide for payments to a named executive officer in connection with his or her termination.  The Order states that McDonald's violated the aforementioned paragraphs of Item 402 by failing to disclose its use of discretion in treating Mr. Easterbrook's termination as "without cause" (as opposed to "with cause") after finding that Mr. Easterbrook violated the company's Standards of Business Conduct.  The Order states that the exercise of discretion by McDonald's allowed Mr. Easterbrook's stock options and performance-based restricted stock units to continue to vest, which would not have occurred if the termination were "with cause."  We have concerns that this action creates a slippery slope that may expand Item 402's disclosure requirements into unintended areas - a form of regulatory expansion through enforcement.

The Commission adopted the current version of Item 402(b) and (j)(5) in 2006.[2]  The 2006 amendments to Item 402 introduced a principles-based disclosure regime for executive compensation, primarily in a new Compensation Discussion and Analysis ("CD&A") section.  Over the past sixteen-plus years, the Division of Corporation Finance staff has provided many interpretations[3] and issued numerous comment letters that have helped guide companies' compliance with, and understanding of, these principles-based disclosure requirements.  By the time that McDonald's and other companies were preparing their 2020 proxy statements, an industry practice for drafting the CD&A section had developed.  Most seasoned public companies share a prevailing view of what the industry practice is for Item 402's principles-based disclosure requirements.  Providing disclosure pursuant to Item 402(b) and (j)(5) based on the facts in this action appears to fall outside of this industry practice.

This action is also a case of first impression.  We are unaware of prior Commission or staff actions or positions applying Item 402 in the way that the Order does.  Additionally, the Order can be read to suggest that the underlying reasons for why the company decided to terminate a named executive officer "without cause" instead of "with cause," and vice versa, need to be disclosed under Item 402.  Such "hiring and firing discussion and analysis," however, is beyond the rule's scope.  A principles-based disclosure rule does not need to expressly describe every possible factual permutation that falls within its scope; however, it also does not provide the Commission with a blank check to find violations when disclosures outside of the rule's ambit are not made.  Industry practice for complying with Item 402 has developed over many years, so to spring a novel interpretation through an enforcement action is not a reasonable regulatory approach.  If the Commission intends to expand a settled disclosure requirement, the Commission or its staff should publicly articulate its views through rulemaking or formal guidance[4] so that companies understand the requirement before the Commission starts enforcing it.

[1] In the Matter of Stephen J. Easterbrook and McDonald's Corporation, Release No. 33-11144 (Jan. 9, 2023), available at https://www.sec.gov/litigation/admin/2023/33-11144.pdf.

[2] Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 8, 2006)], available at https://www.sec.gov/rules/final/2006/33-8732a.pdf.

[3] See Regulation S-K Compliance and Disclosure Interpretations Sections 117-126, available at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.

[4] Additionally, the Commission could issue a report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934.

[B]eginning in at least March 2019 and continuing through at least September 2021, Ramkishun, acted as an unregistered commodity pool operator to fraudulently solicit and receive funds from more than 30 pool participants for the purpose of trading, among other things, commodity futures and options contracts in the pool. The complaint further alleges that both in the course of soliciting as well as after receiving pool participant funds, Ramkishun knowingly made fraudulent and material misrepresentations and/or omitted material facts about the use of pool participant funds and the profits purportedly earned from Ramkishun's trading. Furthermore, rather than use all of the pool participant funds to trade in the pool as he had promised, Ramkishun traded less than half of these funds (resulting in net trading losses) and ultimately misappropriated a substantial portion of pool participant funds on personal expenditures and to make Ponzi-type payments to pool participants. The complaint also alleges that Ramkishun failed to operate the pool as a separate entity from himself and commingled his personal funds with pool participant funds in violation of CFTC regulations.

Parallel Criminal Action

In December 2022, Ramkishun was arrested in Florida and subsequently arraigned on a 56-count indictment obtained by the Kings County District Attorney's Office in Brooklyn, New York based on much of the same conduct alleged in the CFTC's complaint.   

• Securities Industry Commentator
• Bill Singer