Controlling Shareholder Fined for Pledging Company Securities

A controlling shareholder and his publicly traded company settled SEC charges for failing to disclose material information concerning pledges of company securities that were used as collateral "to secure personal margin loans." 

According to an SEC Order, the controlling shareholder, who also served as Chair of the Board of Directors of the company's general partner, (hereafter "the individual") "pledged approximately 51% to 82% of [the company's] outstanding securities as collateral to secure personal margin loans worth billions of dollars under agreements with various lenders." The SEC found that the individual failed to file (i) required amendments which described his personal margin loan agreements and associated amendments that pledged the company securities as collateral, and (ii) the required exhibits which disclosed the company's entry into guaranty agreements. The SEC said these failures "[deprived] existing and prospective investors ... of required information."

According to a second Order, the SEC said that the company "was required to disclose the amount of depositary units that [the individual] pledged as collateral for personal indebtedness, ... because [the individual] was a director of the general partner ... and a named executive officer of [the company]." The SEC found that the company and its outside advisors were aware that the individual pledged the company's depositary units as collateral, however, the company failed to disclose this pledge or the amount of depositary units pledged in its Forms 10-K (which were referenced in at least eighteen other public filings), as required by Item 403(b) of Regulation S-K ("Security ownership of certain beneficial owners and management"). The SEC said that years later, the company disclosed that the individual pledged 167,658,659 of the company's depositary units as collateral for personal margin loans, representing approximately 57% of all outstanding depositary units at that time, and then only in a footnote to its beneficial ownership chart.

As a result, the SEC found that the individual violated SEA Section 13(d)(2) ("Periodical and other reports") and Rule 13d-2(a) ("Filing of amendments to Schedules 13D or 13G") thereunder and the company violated SEA Section 13(a) and Rule 13a-1 ("Requirements of annual reports") thereunder.

To settle the charges, the individual and the company respectively agreed to (i) cease and desist from committing future violations of SEA Section 13(d)(2) of the Exchange Act and Rule 13d-2(a) thereunder; and SEA Section 13(a) and Rule 13a-1 thereunder and (ii) pay a $500,000 and $1,500,000 civil money penalty.

The SEC said it considered the parties' "cooperation with the Commission's investigation, including by providing to Commission staff compilations of relevant documents, information, and data."