SEC Charges Privately-Held Stiefel Labs
The SEC regulates securities, not just publicly traded companies. This is no big mystery, and is obvious to many, and from many contexts. After all, the SEC brings enforcement actions against broker-dealers for faulty recordkeeping, against foreign persons for violations of the FCPA, and against hedge funds for fraud in selling their limited partnership interests. The securities at issue don’t even have to be real; they can be entirely fictitious, and the SEC will still have jurisdiction over them.
It is worth remembering that in the context of a case the Commission brought in December against Stiefel Laboratories and its then-CEO, Charles Stiefel. Founded in 1847, Stiefel Labs was a private, closely-held corporation until 2009, when the company was bought by GlaxoSmithKline. But while the company’s shares were not publicly traded on any exchange, it still had shares that one would construe as securities. The valuation of those shares is at issue in the pending litigation. The SEC alleges that Stiefel Labs defrauded its staff by using very low valuations for stock buybacks from November 2006 through April 2009. Specifically, the complaint alleges:
To value the company’s outstanding shares, Stiefel Labs engaged a third-party accountant who used a flawed methodology and was not qualified to perform the valuations.
The company failed to give this accountant or investors crucial information about offers and valuations it had received from investment firms.
Both Stiefel Labs and Charles Stiefel led employees to believe the company would remain private.
While at various points between 2006 and 2009, the company announced share valuations between $13,000 and $17,000 per share, the actual valuations based on analysis by outside investment firms were much higher.
In July 2009, Glaxo paid Stiefel Labs $2.9 billion for its outstanding shares, and Stiefel Labs eventually paid then-existing shareholders between $64,000 and $69,000 per share to complete the transaction.
The SEC’s complaint repeatedly emphasizes the information gap between Stiefel's management and the company’s shareholders regarding the true value of their shares. Unlike a company with shares trading on an exchange, Stiefel was not obligated to make public filings and was not subject to the same scrutiny from equity analysts that most publicly traded companies get. The Stiefel employees/investors were thus left in the hands of management, and according to the SEC, were quite badly treated.
The case is worth noting for privately held companies with more than just a few shareholders that have to periodically conduct share valuations. While low valuations could be useful for tax reasons or other purposes, management still maintains a duty to its investors and is not free to assign any valuation that is simply convenient or most beneficial to itself. The SEC will at least occasionally be there to ensure that those investors are protected. David Bergers, the head of the SEC’s Boston Regional Office, said as much in April 2011: “Whether selling stock or notes, public and private companies alike must play it straight with investors or be held accountable for their misconduct.”
The Stiefel case was not a settled matter and continues in litigation.