In a forthcoming paper, Professors Murali Jagannathan (Binghamton University School of Management) and A.C. Pritchard (University of Michigan Law School) evaluate whether there might be relationship between incorporation in Delaware and Chief Executive Officer turnover. The two professors conclude that Delaware firms terminate their CEOs significantly more frequently than the average firm in their study. They found that decisions by Delaware boards to force out the CEO are less sensitive to firm performance than decisions made by boards of companies incorporated in other states. The paper, entitled Do Delaware CEOs Get Fired? will appear in 4 J. Banking & Finance 85 (Jan. 2017).
The Securities and Exchange Commission continues to be on a tear about Non-GAAP financial measures. According to Broc Romanek, the SEC staff has commented on non-GAAP financial measure disclosures in over 150 letters since May of this year. Reportedly, the SEC’s enforcement division is also sending out letters. The letter points out that responses are “voluntary” but warn that a failure to respond in 14 days could result in the staff pursuing a range of options, including issuing an administrative subpoena pursuant to a formal order of investigation. This not-so-subtle warning helps set up a sort-of prisoner’s dilemma – registrants might be better off if all refused but worse of if they refused and others did not. See Confession Is Good For Soul And Equilibrium But Maybe Not Justice. What I find most troubling is the staff’s request that the registrant review its earnings releases for the past several years and report all instances in which the registrant failed to comply with Rule 100 of Regulation G or Item 10(e) of Regulation S-K.
Given the SEC’s warning, many registrants are likely to accede to the SEC’s request for 检讨 (jiantao or self-criticism). Before doing so, however, registrants should read SEC Form 1662 carefully. Among other things, it warns that criminal penalties may be imposed on any person who in any matter within the jurisdiction of the executive, judicial or legislative branch of the U.S. Government “makes any materially false, fictitious, or fraudulent statement or representation”. 18 U.S.C. § 1001. Thus, a registrant who reports that it has not violated Regulation G or Item 10(e) or fails to report all violations may find itself in far more trouble than if it had simply declined the SEC’s invitation to self-denunciation. There may be collateral damage as well to responding. If a violation is not-clear cut, a registrant may be inclined to identify it with an explanation. If the SEC disagrees, a subsequent enforcement or corrective action may lead to derivative or securities fraud suits from investors.