Types of SEC Cases: False Proxy Statement Disclosure

SEC Fines Investment Bank $2.5 Million For False Proxy Statement Disclosure

The SEC charged the U.S. division of an International Investment Banking Firm with false proxy statement disclosure in its rendering of a fairness opinion that contained materially false and misleading information.

False Proxy Statement Disclosure Violations Due to Misleading Valuation Analysis

false proxy statement disclosure

                                                    The SEC Order

RBC Capital Markets (“RBC”) acted as financial adviser to Rural/Metro Corporation (“Rural” or the “Company”) in Rural’s sale to a private equity firm.

According to the SEC, RBC caused Rural’s false proxy statement disclosure in connection with that sale.  The SEC found that Rural’s proxy statement, prepared by RBC, contained materially false and misleading information.

In preparation of the sale, a Special Committee of Rural’s board of directors hired RBC to act as lead financial adviser in the possible sale of the Company.  RBC stood to earn both advisory and financing fees in the sale; the advisory fees included both a fee if RBC issued a fairness opinion and a success fee if a sale was consummated.

A few months after it had retained RBC, Rural announced that it had entered into a definitive sale/merger agreement with Warburg Pincus LLP (“Warburg”).

Among other things, the SEC found that in RBC’s fairness presentation, a description of one of its valuations that stated “consensus projections based on Wall Street research” was false.  Rural’s EBITDA valuation figure, provided by RBC in its fairness opinion, was not based on independent Wall Street analyst research.  Rather, the figure was based on Rural’s actual prior year’s adjusted EBITDA.

The SEC asserted that this was misleading, as it led shareholders to believe that RBC used a $76.8 million Adjusted EBITDA figure for its transaction analysis, and that the resulting analysis was therefore consistent with “consensus projections.”

As a result, the SEC found that RBC’s role as financial adviser caused Rural to violate Section 14(a) of the Exchange Act and Rule 14a-9, which prohibit solicitation by means of a proxy statement that contains any materially false or misleading statement.

RBC’s Fairness Committee Oversight

The SEC also found that RBC’s fairness committee was complicit in the fraud.  According to the Order, the fairness committee advised RBC’s banking team to make changes to the precedent transaction analysis. RBC’s banking team then revised the precedent transaction analysis to make Warburg’s bid more attractive.

The Order states that an RBC managing director who sat on the fairness committee proposed “add[ing] some bullets that say Wall Street analyst[s] do not reflect any of these one-time expenses. Something to explain why we are not adjusting.”  The SEC determined that this showed evidence of RBC’s active role in providing false and misleading information.

In an SEC press release regarding the case, the Director of the SEC’s Enforcement Division stated:

Accurate disclosures about financial advisersʼ fairness opinions are important to shareholders in the sale of a corporation.  This enforcement action holds RBC accountable for causing its client to distribute material misstatements about its financial analysis to shareholders.

Penalties For False Proxy Statement Disclosure

RBC entered into a settlement with the Commission to resolve the charges related to its false proxy statement disclosure and agreed to cease and desist from causing further violations.

RBC also agreed to the following monetary fines:

  • $2,000,000 (penalty)
  • $500,000 (disgorgement)
  • $77,759 (interest)
false proxy statement disclosures

The SEC’s Press Release

The SEC’s Order also revealed that, in addition to the SEC’s case, Rural stockholders filed two lawsuits challenging the sale/merger, which were subsequently consolidated in Delaware state court.  Rural’s directors and its other financial adviser settled the lawsuit, whereas RBC proceeded to trial.  The Delaware Court of Chancery found RBC liable under Delaware law for conduct impacting the sale process and for misleading disclosures in Rural’s proxy statement.  On appeal, the Delaware Supreme Court upheld the Chancery Court’s decision.

Whistleblowers Can Report False Proxy Statement Disclosure Fraud To The SEC

This case illustrates some types of misconduct that could give rise to SEC whistleblower cases if reported to the Commission through the SEC whistleblower program.

However, the SEC has not made any public statement as to whether this case was itself an actual SEC whistleblower case.  The SEC Office of the Whistleblower posts Notices of Covered Action (“NoCA”) for Commission actions where a final judgment or order results in monetary sanctions exceeding $1 million.  The NoCA list does not disclose if a particular Enforcement action was brought as the result of an SEC whistleblower case, tip, complaint, or referral being filed with the Commission.

Additional Information

For more information about false proxy statement disclosure, click on the links below:

  • The SEC’s Order in SEC v. RBC. (External link to the SEC’s website.)
  • The SEC’s Press Release announcing the charges and settlement. (External link to the SEC’s website.)