By Mark S. Nelson, J.D.
SEC Commissioners Hester Peirce and Elad Roisman issued a public statement dissenting from the Commission’s imposition of a $20 million penalty on Andeavor LLC for failing to have adequate internal accounting controls that would reasonably assure compliance with the company’s share buyback policy. Peirce and Roisman explained that they disagreed with the majority’s application of Exchange Act Section 13(b)(2)(B) to conduct that is not more closely related to accounting matters. The Peirce-Roisman statement comes nearly a month after the Commission issued its order against Andeavor.
Inadequate accounting controls. Andeavor’s CEO directed the company’s CFO to begin the process of buying back up to $250 million of company shares at a time when Andeavor’s CEO was about to resume discussions with another company to acquire Andeavor. Andeavor’s board had previously authorized a $2 billion buyback plan in 2015 and 2016 subject to a policy stating that the buybacks must not occur when the company possesses material nonpublic information (MNPI).
The company eventually executed buybacks pursuant to a Rule 10b5-1 plan for 2.6 million shares at $97 per share. Within about a six week period after initiating the buyback, Andeavor agreed in principle to be acquired by Marathon Petroleum Corp. Marathon’s acquisition of Andeavor was publicly announced in late April 2018 and the deal was priced at $150 per share.
Andeavor, without admitting or denying the SEC’s findings, agreed to a cease and desist order and to pay a civil money penalty of $20 million. "As described in the SEC’s order, Andeavor’s Board of Directors set clear lines around when the company could buy back its shares, but Andeavor failed to have a process that was reasonably designed to ensure that it stayed within those lines," said SEC Enforcement Director Stephanie Avakian.
Catch-all provision? The Commission vote to impose a penalty on Andeavor was 3-2, as revealed in a public statement issued by Commissioners Peirce and Roisman. According to Peirce and Roisman, the provision relied on by the majority, Exchange Act Section 13(b)(2)(B), was intended to address accounting-specific issues and was not intended to function as a catch-all provision for violations outside of the accounting procedures context, such as the "abbreviated and informal process" cited by the majority in the Andeavor order. Peirce and Roisman also noted that a Section 13(b)(2)(B) violation does not require a showing of scienter, while a violation of Exchange Act Rule 10b-5 would require such showing.
Peirce and Roisman also observed that the Andeavor matter presented several "complications." For one, the Andeavor buyback was done pursuant to a Rule 10b5-1 plan—an exception that they said allows a company to conduct a buyback while in possession of MNPI if certain requirements are met—and, among other things, that the acquisition talks with Marathon had been suspended for a period of time. They further noted that Andeavor’s board had authorized the buyback. As a result, Peirce and Roisman viewed the Commission’s order, the first of its kind said the commissioners, as an attempt to broaden the reach of Section 13(b)(2)(B) to more generalized failures to implement internal controls.
Commissioners Peirce and Roisman concluded their statement thus: "While we agree that Andeavor’s decision processes in this case left substantial room for improvement, and inadequate processes may expose a company to potential Rule 10b-5 liability, we doubt it is our role under Section 13(b)(2)(B) to second guess management’s decision processes on matters that do not directly implicate the accuracy of a company’s accounting and financial statements."