On September 22, 2022, the Securities and Exchange Commission (“SEC”) brought an enforcement action against two officers and a director of Spyr, Inc. for false and misleading statements to the company’s auditors in violation of Rule 13b2-2 under the Securities Exchange Act of 1934 regarding an SEC investigation that was not disclosed as a loss
Although not involving directly a lawyer’s audit response letter, this latest enforcement action underscores the SEC’s continued focus on loss contingencies. It serves as a reminder, not only to directors and officers, but also to lawyers responding to audit requests, of the need to carefully assess the statements made to auditors about loss contingencies, especially the challenges often associated with government investigations when making disclosure and/or accrual determinations under Accounting Standards Codification 450-20 (Contingencies—Loss Contingencies). The loss contingency at issue in this action involved an SEC investigation into the company’s investment in a biotechnology company.
According to the complaint filed by the SEC in the United States District Court for the District of Nevada, the SEC commenced an investigation in 2014 and carried it on over several years. Shortly after the investigation commenced, the company sent a letter to its auditor from its outside counsel regarding the SEC investigation. Thereafter, nothing was updated or disclosed to the auditor and, in fact, in response to a question whether management knew of any possible violations of law, the company’s response was “no.” During the course of the investigation, the SEC Division of Enforcement sent multiple subpoenas to the company and its officers and directors seeking documents and testimony related to the investigation, and in April 2017 sent a Wells Notice that indicated that the SEC staff intended to recommend to the Commission that charges be brought for violating the federal securities laws, describing the charges and potential remedies.
After responding to the Wells Notice and having several interactions with the SEC staff, in January 2018 the company sent a settlement offer to the SEC staff, to which the staff responded(i) that any settlement offer must include an injunction prohibiting further violations and a civil penalty and (ii) that the SEC’s process was moving forward. The company replied, indicating that if it could come up with a counteroffer, it would present it, but no counteroffer was ever presented.