An issuer settled SEC charges for internal accounting controls violations that resulted in an improper management authorization of a stock buyback plan. The SEC found that the transaction violated the company's policy of repurchasing while the company was in possession of "material non-public information" ("MNPI").

As described in the Order, the company's CEO initiated the buyback during discussions on the acquisition. According to the Order, the company's then-CEO instructed the company's CFO to initiate a $250 million buyback shortly before merger discussions were scheduled to resume after they had been suspended. The SEC found that the buyback was subject to a company policy prohibiting buybacks while the company possessed MNPI, but due to the company's "abbreviated and informal" evaluation process, the negotiations (and by extension, the likelihood of a deal) were not considered MNPI, and management authorized the transaction. The SEC concluded that the company failed to maintain sufficient internal controls to provide reasonable assurance that its policies were followed.

The SEC stated that during the buyback, the company repurchased 2.6 million shares at $97 per share; one month after completing the buyback, the acquisition was announced with the company's value listed at over $150 per share.

To settle the SEC's charges, the company agreed to (i) cease and desist from future violations and (ii) pay a $20 million civil penalty.

Commentary Kyle DeYoung

While stock buybacks have received a lot of attention in the past few years, SEC enforcement actions related to buybacks have been few and far between. The short period of time between  the buyback and the merger announcement and the significant increase in the stock's price certainly attracted the SEC's attention here. Still, it will be interesting to see if this case is a one-off based on these facts, or if it is indicative of an increased focus on stock buybacks by the division of enforcement.

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