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The SEC Pushes The Internal Controls Envelope


To push the envelope means to surpass normal limits or attempt something viewed as radical or risky.

The FCPA’s enforcement agencies (the DOJ and SEC) have long pushed the envelope and enforcement agency officials may think – why not – a risk averse company is often going to cough up millions of dollars just to make us go away regardless of the underlying enforcement theory.

As highlighted in this post, the SEC recently charged SolarWinds with, among other things, FCPA internal controls violations (in a so-called non-FCPA, FCPA enforcement action) in connection with cybersecurity issues. The SEC filed a civil complaint and it appears – for now at least – that SolarWinds is contesting the enforcement action.

Not so with Charter Communications. Earlier this week, the company agreed to cough up $25 million in a non-FCPA, FCPA enforcement action in which the SEC found that the company violated the FCPA’s internal controls provisions in connection with stock buybacks.

In summary fashion, this administrative order finds:

“This matter concerns Charter’s failure to devise and maintain internal accounting controls that reasonably assured that the company’s stock buybacks were conducted in accordance with management authorizations.

Since September 2016, Charter has executed over $70 billion in stock buybacks, reducing its outstanding shares by nearly 50%. As part of the share repurchase program, Charter personnel requested authorization from the Board of Directors to engage in buybacks within certain financial parameters and guidelines. For repurchases that were to occur during Charter’s closed trading windows, the Board’s authorizations were predicated on the company’s use of trading plans that conform to Commission Rule 10b5-1, which provides an affirmative defense to insider trading if certain conditions are met. Charter’s Board did not authorize the use of nonconforming plans.

From 2017 to 2021, many of Charter’s trading plans did not comport with the requirements of Rule 10b5-1. These plans contained “accordion” provisions through which the amount of share repurchases under the plans would increase if the company elected to complete certain debt offerings. Because the company retained discretion over whether and when to conduct these offerings, the accordion provisions gave Charter the ability to increase its trading activity after adoption of the plans. Charter adopted nine trading plans that included accordion provisions during the relevant period. This was inconsistent with the requirements of Rule 10b5-1 and, consequently, the Board’s authorizations.

These failures to comport with management authorizations were the result of Charter’s insufficient internal accounting controls. Although Charter had controls designed to obtain share repurchase authorization from the Board, to stay within the Board’s financial parameters and guidelines, and to confirm that its buyback transactions were accurately reflected in its accounts and ledgers, the company did not have reasonably designed controls to analyze whether the discretionary element of the accordion provisions was consistent with the Board’s authorizations.

Consequently, Charter violated Exchange Act Section 13(b)(2)(B) [the FCPA’s internal controls provisions], which requires all reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that corporate transactions, including share repurchases, are executed and access to assets is permitted only in accordance with management’s general or specific authorization.”

In seeming recognition of its unique enforcement theory, the SEC’s order contains the following long footnote.

“We have long recognized that the scope of Section 13(b)(2)(B) goes beyond the preparation of financial statements and broadly covers management authorizations for transactions. See, e.g., Final Rule: Promotion of the Reliability of Financial Information and Prevention of the Concealment of Questionable or Illegal Corporate Payments and Practices, Exchange Act Rel. No. 15,570 (Feb. 15, 1979) (adopting release) [44 Fed. Reg. 10,966 (Feb. 23, 1979)] (“It bears emphasis that the accounting provisions of the FCPA are not exclusively concerned with the preparation of financial statements. An equally important objective of the new law … is the goal of corporate accountability.”) (emphasis in original); Statement of Policy Regarding the Foreign Corrupt Practices Act of 1977, Exchange Act Rel. No. 17,500 (Jan. 29, 1981) [46 Fed. Reg. 11,547 (Feb. 9, 1981)] (“The purpose of the internal accounting control provisions, after all, is to assure that a public company adopts accepted methods of recording economic events, safe-guarding assets, and conforming transactions to management’s authorization.”); Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding Certain CyberRelated Frauds Perpetrated Against Public Companies and Related Internal Accounting Controls Requirements, Exchange Act Rel. No. 84,429 (Oct. 16, 2018), at 1 (“As the Senate emphasized over four decades ago when passing [Section 13(b)(2)(B)], a fundamental aspect of management’s stewardship responsibility is to provide shareholders with reasonable assurances that the business is adequately controlled.”) (internal references omitted).”

This footnote will be the focus of a future post.

This isn’t the first time the SEC has asserted internal controls violations in connection with a corporate stock buyback.

In 2020, the SEC extracted $20 million from Andeavor. This administrative order states in summary fashion:

“This matter involves Andeavor’s failure to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that stock buyback transactions were executed in accordance with management’s authorization.

In 2015 and 2016, Andeavor’s Board of Directors authorized the company to spend $2 billion for share repurchases. This authorization required Andeavor to comply with a policy that prohibited the company from repurchasing stock while it was in possession of material nonpublic information.

Andeavor did not, however, have internal accounting controls sufficient to provide reasonable assurance it was complying with this policy such that buyback transactions were executed in accordance with management’s authorization. Specifically, Andeavor lacked an effective process for obtaining an accurate and complete understanding of the facts and circumstances necessary to determine whether it was in possession of material non-public information and therefore prohibited from engaging in buyback transactions. As a consequence of this internal accounting controls failure, Andeavor engaged in buyback transactions that were not executed in accordance with management’s authorization.

On February 21, 2018, Andeavor’s then-Chairman and Chief Executive Officer (Andeavor’s CEO) directed the company’s Chief Financial Officer to initiate a share buyback to repurchase $250 million of shares over a period of several weeks. At the time of this direction, Andeavor’s CEO was scheduled to meet with his counterpart at Marathon two days later to resume the confidential discussions about Marathon’s potential acquisition of Andeavor at a significant premium that had taken place in 2017 (but were suspended in October of that year).

On February 22, 2018, Andeavor’s legal department approved a Rule 10b5-1 plan to repurchase $250 million of stock. It did so after concluding, based on a deficient understanding of all relevant facts and circumstances regarding the two companies’ discussions, that those discussions did not constitute material non-public information. 6. This lack of understanding was the result of Andeavor’s insufficient internal accounting controls. Andeavor used an abbreviated and informal process to evaluate the materiality of the acquisition discussions that did not allow for a proper analysis of the probability that Andeavor would be acquired. Andeavor’s informal process did not require conferring with persons reasonably likely to have potentially material information regarding significant corporate developments prior to approval of share repurchases. As a result, for example, despite Andeavor’s CEO’s leadership role at the company and the fact that he was the primary negotiator with Marathon, no one involved in Andeavor’s process discussed with him the prospects that Andeavor and Marathon would agree to a deal. Because they did not do so, the company failed to appreciate that the probability of Marathon’s acquisition of Andeavor was sufficiently high at that time as to be material to investors. In short, Andeavor did not have internal accounting controls that provided reasonable assurance that its buyback would be executed in accordance with its Board’s authorization.

On February 23, 2018, Andeavor executed the Rule 10b5-1 plan that its legal department had approved. Pursuant to that plan, Andeavor repurchased 2.6 million shares of its stock from investors at an average of $97 per share in February and March 2018. About six weeks after initiating the buyback, and two weeks after completing the buyback, the two companies’ CEOs reached an agreement in principle for Marathon to acquire Andeavor. On April 30, 2018, Andeavor publicly announced that it would be acquired by Marathon in a deal valuing Andeavor at over $150 per share.”

For more on the Andeavor enforcement action, see here.


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