[Don’t] Tell Me Lies, Tell Me Sweet Little Lies … or the SEC will charge you with fraud

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by John Ludlum

Many private companies assume that if valid federal and state exemptions from registration are available for private company securities that there is little risk of problems with the Securities Exchange Commission (SEC).  While it is rare for the SEC to take an interest in private company transactions, many SEC Rules apply to private company securities and transactions.

In one example, Stiefel Labs (Company) maintained an Employee Stock Bonus Plan (Plan) with Company contributions funded, at least in part, by shares of Company stock.  As a private company, repurchases by the Company were the only way for employees to receive liquid funds for their shares.  The Company engaged independent accountants to perform fiscal year end valuations and made this valuation information available to Plan participants and used this value for repurchases for the next year. 

According to SEC allegations in a 2011 complaint, between 2006 and 2008, the Company started to investigate possible investment transactions, and the Company received investment offers and offers to purchase the entire company at valuations significantly higher than the valuations used for repurchasing Plan participant shares.  The Company was purchased by GlaxoSmithKline in 2009 for $2.9 billion, and after the transaction, Plan participants were paid $68,131 per Company share.  According to the SEC complaint, the Company repurchased shares between 2006 and 2009 for prices ranging from $13,000 per share to $16,500 per share.  The SEC alleges that the Company knowingly communicated false and misleading stock information and used an artificially low stock price to repurchase shares from stockholders leading to charges against the company and its former chairman and CEO of fraud in violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. 

The case is U.S. Securities and Exchange Commission v. Stiefel Laboratories Inc. et al., case number 1:11-cv-24438, in the U.S. District Court for the Southern District of Florida.

If you have questions about your stockholder transactions, we would be happy to help.