It isn’t often that the SEC challenges a company’s determination that a particular person is not a Section 16 “officer” of the company, but it does happen occasionally in an enforcement action, usually one alleging fraudulent conduct unrelated to Section 16. Earlier this week, in SEC v. Blackburn, a federal district judge granted (in part) the SEC’s motion for summary judgment against four promoters of a penny stock company named Treaty Energy Corp., finding that the promoters violated various provisions of the federal securities laws, including Rule 10b-5, in raising money for Treaty and supporting the market for its stock. The SEC also alleged that three of the defendants, two of whom were named as officers in the company’s filings and one of whom was identified as a “consultant,” had violated Section 16(a) by failing to report their transactions in the company’s stock.
The consultant was, the court found, the “driving force” behind the formation of the company and its business, but the company didn’t name him as an officer because he was a convicted felon, and designating him an officer would have required the company to disclose his felony convictions. The court found that the consultant was nevertheless an officer, noting that he (1) hired or appointed the company’s officers and directors, (2) controlled the content and timing of the company’s press releases, (3) led company’s acquisitions and fundraising efforts, (4) sold his personal shares to raise money for the company, in some cases using the proceeds to pay the company’s expenses and in other cases depositing the proceeds in the company’s bank account, (5) negotiated loans made to the company, some times pledging his own stock as collateral, and (6) met with a foreign government on multiple occasions to manage the company’s interests there. The consultant also had an office next to the CEO’s office.
The court granted the SEC’s motion for summary judgment on the 16(a) claim against the consultant, but denied the motion as to the other two officers, saying only that the SEC failed to identify record evidence of all of the elements of the claim against them.
It’s helpful to see the factors that courts and the SEC take into account when determining whether a person is a Section 16 officer. Most of us, though, aren’t likely to encounter facts like these when making the annual assessment of who is a Section 16 officer.
-Alan Dye, Section16.net December 19, 2019