Intentional Misstatements in filings on SEC Form 4 may constitute Federal Criminal Violations

The sentence below in blue is on every SEC Form 4 filed by an officer, director or greater than 10 % owner.

Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).

Below are 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).

18 U.S. Code § 1001 - Statements or entries generally

(a)Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully-

(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;
(2) makes any materially false, fictitious, or fraudulent statement or representation; or
(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;
shall be fined under this title, imprisoned not more than 5 years or, if the offense involves international or domestic terrorism (as defined in section 2331), imprisoned not more than 8 years, or both. If the matter relates to an offense under chapter 109A, 109B, 110, or 117, or section 1591, then the term of imprisonment imposed under this section shall be not more than 8 years.

 (b) Subsection (a) does not apply to a party to a judicial proceeding, or that party's counsel, for statements, representations, writings or documents submitted by such party or counsel to a judge or magistrate in that proceeding.

(c)With respect to any matter within the jurisdiction of the legislative branch, subsection (a) shall apply only to-

(1) administrative matters, including a claim for payment, a matter related to the procurement of property or services, personnel or employment practices, or support services, or a document required by law, rule, or regulation to be submitted to the Congress or any office or officer within the legislative branch; or
(2) any investigation or review, conducted pursuant to the authority of any committee, subcommittee, commission or office of the Congress, consistent with applicable rules of the House or Senate.

15 U.S. Code § 78ff - Penalties

(a)Willful violations; false and misleading statements
Any person who willfully violates any provision of this chapter (other than section 78dd-1 of this title), or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 78o of this title, or by any self-regulatory organization in connection with an application for membership or participation therein or to become associated with a member thereof which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a person other than a natural person, a fine not exceeding $25,000,000 may be imposed; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.

(c)Violations by issuers, officers, directors, stockholders, employees, or agents of issuers

(A) Any issuer that violates subsection (a) or (g) of section 78dd-1 of this title shall be fined not more than $2,000,000.

(B) Any issuer that violates subsection (a) or (g) of section 78dd-1 of this title shall be subject to a civil penalty of not more than $10,000 imposed in an action brought by the Commission.
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Does making intentional false entries on a SEC Form 4 constitute a violation of Title 18 Section 1001 or 15 U.S.C. 78ff(a)? The answer is yes.

So let's examine some SEC Form 4 filings that have various Codes entered into column 3 of Table I.

Below is a copy of the SEC Form 4 Transactions Code:

General Transaction Codes

P - Open market or private purchase of non-derivative or derivative security
S - Open market or private sale of non-derivative or derivative security 6
V - Transaction voluntarily reported earlier than required

Rule 16b-3 Transaction Codes

A - Grant, award or other acquisition pursuant to Rule 16b-3(d)
D - Disposition to the issuer of issuer equity securities pursuant to Rule 16b-3(e)
F - Payment of exercise price or tax liability by delivering or withholding securities incident to the receipt, exercise or vesting of a security issued in accordance with Rule 16b-3
I - Discretionary transaction in accordance with Rule 16b-3(f) resulting in acquisition or disposition of issuer securities
M - Exercise or conversion of derivative security exempted pursuant to Rule 16b-3

Derivative Securities Codes (Except for transactions exempted pursuant to Rule 16b-3)

C - Conversion of derivative security
E - Expiration of short derivative position
H - Expiration (or cancellation) of long derivative position with value received
O - Exercise of out-of-the-money derivative security
X - Exercise of in-the-money or at-the-money derivative security

Other Section 16(b) Exempt Transaction and Small Acquisition Codes (except for Rule 16b-3 codes above)

G - Bona fide gift
L - Small acquisition under Rule 16a-6
W - Acquisition or disposition by will or the laws of descent and distribution
Z - Deposit into or withdrawal from voting trust

Other Transaction Codes

J - Other acquisition or disposition (describe transaction)
K - Transaction in equity swap or instrument with similar characteristics
U - Disposition pursuant to a tender of shares in a change of control transaction

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So if an officer enters a "D" in Column 3 of Table I of the SEC Form 4, the officer is stating that the transaction is a "Disposition to the issuer of issuer equity securities pursuant to Rule 16b-3(e)".

So what does it mean that the transaction is a "Disposition to the issuer of issuer equity securities pursuant to Rule 16b-3(e)"?

It means that the two paragraphs below apply:

§ 240.16b-3 Transactions between an issuer and its officers or directors.

 
(a)General. A transaction between the issuer (including an employee benefit plan sponsored by the issuer) and an officer or director of the issuer that involves issuer equity securities shall be exempt from section 16(b) of the Act if the transaction satisfies the applicable conditions set forth in this section.
And

(e)Dispositions to the issuer. Any transaction, other than a Discretionary Transaction, involving the disposition to the issuer of issuer equity securities, whether or not intended for a compensatory or other particular purpose, shall be exempt, provided that the terms of such disposition are approved in advance in the manner prescribed by either paragraph (d)(1) or paragraph (d)(2) of this section.

So if "D" is entered into Column 3 of Table I of an SEC Form 4 and the transaction does not meet the requirement of both 240.16b-3(a) and 16 b-3(e), the entry is false and is probably a violation of Title 18 section 1001 and 15 U.S.C. 78ff(a).
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If an officer or director enters an "A" in Column 3 of Table I of the SEC Form 4, the officer or director is stating that the transaction is a Grant, award or other acquisition pursuant to Rule 16b-3(d).This means that the two paragraphs 16 b-3(a) and 16 b-3(d) below apply:

§ 240.16b-3 Transactions between an issuer and its officers or directors.

(a)General. A transaction between the issuer (including an employee benefit plan sponsored by the issuer) and an officer or director of the issuer that involves issuer equity securities shall be exempt from section 16(b) of the Act if the transaction satisfies the applicable conditions set forth in this section.

And

(d)Acquisitions from the issuer. Any transaction, other than a Discretionary Transaction, involving an acquisition from the issuer (including without limitation a grant or award), whether or not intended for a compensatory or other particular purpose, shall be exempt if:

 
(1) The transaction is approved by the board of directors of the issuer, or a committee of the board of directors that is composed solely of two or more Non-Employee Directors;

 
(2) The transaction is approved or ratified, in compliance with section 14 of the Act, by either: the affirmative votes of the holders of a majority of the securities of the issuer present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the state or other jurisdiction in which the issuer is incorporated; or the written consent of the holders of a majority of the securities of the issuer entitled to vote; provided that such ratification occurs no later than the date of the next annual meeting of shareholders; or

 
(3) The issuer equity securities so acquired are held by the officer or director for a period of six months following the date of such acquisition, provided that this condition shall be satisfied with respect to a derivative security if at least six months elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security.

Also, when a "D" or "A" is entered into column 3 of Table I of the SEC Form 4, Note 3 below must be complied with:

Note (3):

The approval conditions of paragraphs (d)(1), (d)(2) and (e) of this section require
the approval of each specific transaction, and are not satisfied by approval of a plan
in its entirety except for the approval of a plan pursuant to which the terms
And conditions of each transaction are fixed in advance, such as a formula
plan. Where the terms of a subsequent transaction (such as the exercise price of
an option, or the provision of an exercise or tax withholding right) are provided for in a transaction as initially approved pursuant to paragraphs (d)(1), (d)(2) or (e),
such subsequent transaction shall not require further specific approval.

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So if you are an officer or director and you file a SEC Form 4 which has a "D" entered into Column 3 of Table 1 of the SEC Form 4, but one of the requirements of of SEC Rule 16 b-3(a) or 16 b-3(e) or Note 3 is missing, the transaction is not exempt from 16 (b) and you may have committed a violation of Title 18 section 1001 and you may have violated 15 U.S.C. 78ff(a).

If a person has made non exempt purchases of the same stock three months earlier at prices lower than the sales (indicated as a "D") were made, but the entry of "D" was incorrect, the profits from the purchase and sale may be recoverable by the issuer pursuant to Section 16 (b) of the 1934 Act. This penalty is in addition to the possible criminal penalty. The recoveries of the profits pursuant to Section 16 (b) do not require an intentional misstatement.

My experience is that there are very few attorneys who understand the requirements to be able to correctly enter a "A" or "D" or even an "F" into column 3 of Table I on an SEC Form 4.com.

Here is an example of a non exempt transaction, which is often reported as an exempt transaction.

A CEO of a company in California holds 100,000 NQESO which have a expiration date of December 4, 2019 with an exercise price of $25. The stock is trading for $50.00 on September 4, 2019. If the CEO exercises all of the NQESO with the stock trading at $50.00, the CEO will have ordinary income of $2,500,000. According to the ESO Plan agreement, the CEO has a choice of delivering shares to the issuer to pay the taxes or the CEO can hold on to all of the shares and pay cash to the issuer for the taxes.

Since the CEO knows the company will soon report very bad earnings in the next month, the CEO decides to deliver 52% of the shares to the issuer for the taxes.

The CEO then files a SEC Form 4 with a "D" inserted into column 3 of Table 1.

This is a violation of Title 18 section 1001. But the CEO is rarely arrested for such a violation.
 




John Olagues
504-305-4071
olagues@gmail.com