Another day, another non-Foreign Corrupt Practices Act, Foreign Corrupt Practices Act enforcement action.
Confused? Don’t be.
The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.
Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.
Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.
However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions on this site.
The latest example concerns Meta Materials, Inc. (a Nevada corporation headquartered in Dartmouth, Nova Scotia, Canada created in 2021 through a reverse merger between Torchlight Energy Resources, Inc. (a publicly traded Texas corporation in the business of oil and gas exploration and production) and Metamaterial, Inc. (a Canadian headquartered company focused on early-stage applied materials technology research and development).
In summary fashion, this administrative order finds:
In June 2021, Respondent raised $137.5 million in an at-the-market offering (the “ATM Offering”). Leading up to the offering and in connection with a merger, Respondent engaged in a scheme to inflate the price of its stock and defraud investors through numerous material misstatements and omissions about the potential value of a stock dividend to be issued as part of the merger. As a result of its fraudulent conduct, Respondent sold 16.2 million shares during its ATM Offering for tens of millions of dollars more than it could have absent its efforts to inflate its stock price.
Respondent artificially inflated the value of its common stock by structuring a merger between its predecessor entities (Torchlight Energy Resources and Metamaterial Inc.) to include an unregistered preferred stock dividend that would not be immediately publicly tradeable (the “Preferred Dividend”), specifically designed to cause a “short squeeze.” Respondent privately and selectively disseminated—through paid consultants, private conversations with investors, and via social-media messages—the theory that the Preferred Dividend would cause a short squeeze by forcing short-sellers in Respondent’s stock to cover their positions before Torchlight issued the Preferred Dividend or risk violating their short contracts by having difficulty delivering the Preferred Dividend when the merger closed. But Respondent never disclosed in its public filings its intent to cause a short squeeze, and it waited until the last minute to announce the ATM Offering to capitalize on what Respondent believed would be a short-term price inflation of its stock.
In support of its scheme, Respondent made false and misleading statements about the Preferred Dividend, which entitled its holders to receive the net proceeds of the sale of Respondent’s oil and gas assets. In its public filings, Respondent misrepresented the status of its efforts to market and sell those assets while concealing a planned spin-off of the assets into a new entity. Further, in May 2021, Respondent’s incoming Chief Executive Officer baselessly claimed that the value of the Preferred Dividend could be between $1 and $20 per share when, in fact, a valuation study by Respondent’s investment bankers only supported a per-share value range of $0.03 to $0.83.
Respondent’s scheme occurred against the backdrop of a lax internal control environment. Respondent failed to devise and maintain internal accounting controls and make and keep adequate books and records by failing to account properly for the disposition of corporate assets or the recognition of legitimate expenses related to a series of payments made to stock promoters who rendered services to the company without any documentation. In addition, Respondent paid consulting fees designed to conceal the recruitment and compensation of a team of individuals that were retained to spin-off Respondent’s oil and gas assets into a new entity at the same time that Respondent touted in its public statements its intention to make efforts to sell the oil and gas assets and distribute the net proceeds to Preferred Dividend holders.
Based on the above, the SEC found that Meta Materials violated, among other things, the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, Meta Materials consented to a cease-and-desist order and agreed to pay a $1 million civil penalty.
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