3 February 2023

Whistleblower Complaint Capitalizes On SEC Interest In Sustainability Fraud

Katten Muchin Rosenman LLP


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Multiple news outlets recently reported that the activist group Mighty Earth filed a whistleblower tip
United States Corporate/Commercial Law
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Multiple news outlets recently reported that the activist group Mighty Earth filed a whistleblower tip, which it styled as an informal complaint, urging the SEC to investigate whether a multinational food company (the "offeror") fraudulently misled investors in connection with multiple offerings of more than $3 billion worth of so-called "green bonds." The SEC investigates whistleblower tips privately, and thus the public usually never hears about them. Mighty Earth described the complaint on its website, however, making it one of the first "greenwashing" complaints known to have been lodged with the SEC. Mighty Earth appears to dispute the veracity of statements calling at least one of the issuances "sustainability-linked" and "aligned" with the offeror's "ambition to achieve net-zero greenhouse gas emissions by 2040 and its commitment to reduce greenhouse gas emissions in its operations by 30% by 2030."

Mighty Earth alleges, among other things, that the offeror's statements about its environmental goals were fraudulent, as evidenced by purported increases, not decreases, in the offeror's greenhouse gas emissions. According to Mighty Earth's website, the offeror also misled investors by failing to disclose the true number of animals it slaughters each year, thereby depriving investors of information needed to accurately assess the offeror's sustainability claims. Mighty Earth's website states:

[The offeror's] greenwashing achieved its desired effect: the [offeror] accessed U.S. capital markets to raise billions from unsuspecting investors, including asset managers who had signed on to a pledge to avoid issuers whose conduct fuels climate change. We are confident that when the SEC's Climate and ESG Task Force...examines what has happened here, it will take appropriate action....

The SEC's Climate and ESG Task Force was established in March 2021, and since then it has brought ESG cases pursuant to the current disclosure framework in the securities laws. The agency is widely expected to adopt sweeping new ESG-related rules this coming April, which could present more opportunities for SEC Enforcement staff to investigate and prosecute alleged ESG-linked violations.

Whistleblowers as a whole may play a key role in driving up the SEC's ESG enforcement statistics in the near future. Last November, we wrote about settled charges that the SEC brought against an asset manager for alleged policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as ESG investments (See " New DOL Rule Enables Consideration of ESG Factors in Investing, Plus the SEC Continues its ESG Enforcement Push in the Absence of Final SEC Rules"). Subsequently, at least one well-known whistleblower news publication wrote a story about that case. Would-be tipsters might be encouraged by that story, as well as the news coverage of Mighty Earth's more recent complaint, to approach the SEC about suspected ESG violations going forward.

ESG whistleblowers may also be inspired by the SEC's rapidly growing payments to those who filed tips with the agency. As of the close of the SEC's fiscal year 2022, the agency had paid more than $1.3 billion to over 300 individuals for providing information that led to successful enforcement actions. Fiscal year 2022 was the SEC's second highest year in terms of dollar amounts and number of whistleblower awards paid, while the prior year was its highest ever. Of course, awards lag the filing of tips, which can take years to investigate. Whistleblowers reportedly filed a record number of tips with the SEC in fiscal year 2022. The agency is probably still investigating at least some of these tips, and companies should understand that the SEC will want to continue to incentivize whistleblowers to report potential ESG-centric and other securities law violations through headline-grabbing payouts in fiscal year 2023.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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