private company liability

Many readers undoubtedly saw the news last week of the enforcement action the SEC filed against Theranos, Inc., its founder, Chairman, and CEO Elizabeth Holmes, and its President and COO Ramesh “Sunny” Balwani. Theranos and Holmes have settled with the agency, although the complaint against Balwani apparently will be going forward. The SEC’s action is interesting at many levels, and it has several important implications that should not be overlooked. The SEC’s March 14, 2018 press release about the charges can be found here. The SEC’s complaint against Thernos and Holmes can be found here. The SEC’s separately complaint against Balwani can be found here.
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brazilOn November 14, 2016, in an interesting lawsuit that brings together a number of recent securities litigation trends, a noteholder of Samarco Mineração, S.A. filed a purported securities class action lawsuit in the Southern District of New York against the company and its CEO on behalf of investors who purchased the company’s debt securities. Samarco, a joint venture of mining giants Vale, S.A., and BHP Billiton, owned and operated the Fundão tailings dam that collapsed on November 5, 2015, in what has been called Brazil’s worst-ever environmental disaster. There are a number of interesting features to this new lawsuit, beyond just its relationship to the dam collapse disaster. A copy of the plaintiff’s November 14, 2016 complaint can be found here.
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TheranosEarlier this year, the SEC announced a “Silicon Valley Initiative,” reflecting the agency’s concerns about private and pre-IPO companies that were scoring sky-high valuations in private offerings. The agency said that it is particularly focused on so-called “unicorns” – that is, private companies with valuations greater than $1 billion. Although the agency did not name any of the specific companies in which it was interested, it soon became clear that one of the companies the agency was investigating was Theranos, the start-up company whose blood-testing technology and practices have recently gained media and regulatory scrutiny. The SEC’s scrutiny of a private company’s fund-raising practices was itself noteworthy; now, in yet another notable development, the privately-held company has drawn an investor lawsuit alleging securities fraud.
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sec sealThe Securities and Exchange Commission is primarily concerned with public companies and the securities markets in which the shares of public companies trade. However, in a series of recent speeches and presentations as part of what the agency had called the “Silicon Valley Initiative,” the agency made it clear that it is increasingly concerned with private and pre-IPO companies as well, particularly so-called “unicorns” – that is, the private start-up firms with valuations greater than $1 billion. SEC Chairman Mary Jo White highlighted these concerns in a March 31, 2016 speech at the Rock Center for Corporate Governance at Stanford Law School, a copy of which can be found here.

As summarized in an April 4, 2016 memo from the Fenwick & West law firm about the SEC’s Silicon Valley Initiative, “the SEC is closely watching the conduct of private companies as well as emerging platforms that trade in private company securities, and will bring enforcement cases as needed to protect investors.” The agency’s recent presentations and SEC Chair White’s speech, the memo said, underscored that “the SEC expects even private companies to embrace and demonstrate sound corporate governance.”

As discussed below, these pronouncements from the SEC raise troublesome questions about what has in the past been viewed as a clear demarcation between the potential liability exposures for private and public companies.
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In general, and at least in the United States, executives at public companies don’t need to be convinced that their companies need to have D&O insurance. That is not always true with officials at private companies. Some officials at some private companies – particularly very closely held private companies – are skeptical that they need

There is a great deal of information available about the liabilities of publicly traded companies, as well as about the D&O insurance implications arising from those liabilities. It can be a bit of a challenge to locate the same of information concerning private companies. For that reason, it is fortunate that Advisen and AIG have

The SEC has commenced an enforcement action against a private company and its former Chairman and CEO in connection with the company’s repurchase of company shares from company employees and others prior to the company’s acquisition.

The action involves Stiefel Laboratories, which prior to its April 2009 acquisition by GlaxoSmithKline for $68,000 a share