Who may be interested: Board of Directors; Registered Investment Advisers; Registered Investment Companies; Broker-Dealers; Transfer Agents; Compliance Staff

Quick Take: The SEC announced that it settled charges against a publicly traded company (the “Company”) and its controlling shareholder, who is also the chairman of the Board of Directors of the general partner of the Company (the “Chairman”). According to the SEC’s orders, since at least 2018, the Chairman pledged the majority of the Company’s outstanding securities as collateral to secure personal margin loans worth billions of dollars. Neither the Company nor the Chairman disclosed the pledges or loan agreements in applicable SEC filings.

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According to the SEC’s orders, since at least December 2018, the Chairman pledged approximately 51% to 82% of the Company’s outstanding securities to secure billions of dollars of personal margin loans. The Company failed to disclose the pledges in its Form 10K until February 2022. Further, the Chairman failed to file amendments to Schedule 13D describing his loan agreements until July 2023, and failed to include a required guaranty agreement on Schedule 13D until July 2024.

The Chairman represented that he disclosed his various margin loan agreements and amendments to his advisors, and the Company represented that it, and its outside advisors, were aware that the Chairman had pledged the Company’s securities as collateral during the relevant period. According to the SEC, shareholders are entitled to know the extent to which management-owned shares have been used as collateral, due to the potential to influence management’s performance and decisions and potential material risks or contingencies that do not apply to other shares.

The SEC’s orders found that the Company violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, and that the Chairman violated the beneficial ownership reporting provisions under Section 13(d)(2) of the Exchange Act and Rule 13d-2(a) thereunder. Without admitting or denying the findings set forth in the SEC’s orders, the Company and the Chairman each agreed to a cease and desist order and to pay civil penalties of $1.5 million and $500,000, respectively.

The SEC’s press release announcing the orders can be found here. The order announcing charges against the Chairman can be found here, and the order announcing charges against the Company can be found here.