SEC and Activist Investors Reach Settlement over Disclosure Violations

February 24, 2017

The U.S. Securities and Exchange Commission and a group of activist investors settled claims that the group failed to adequately disclose information during campaigns to exert influence over public companies.1


  • SEC rules require the acquiror of more than 5% of a public company’s stock to file a Schedule 13D within 10 days of the acquisition. Schedule 13D requires disclosure of the identity of the acquiror and other material information, including the purpose of the acquisition. When two or more persons act as a group, their shares are aggregated for purposes of the 5% ownership test. In addition, a Schedule 13D filer is required to promptly amend its filing to disclose any material changes. 
  •  A Schedule 13G, which requires much less burdensome disclosure, may be filed in lieu of Schedule 13D if, among other things, the filer acquires the securities in the ordinary course and not with the purpose of exerting influence over the issuer. However, a Schedule 13D must be filed within 10 days if a Schedule 13G filer subsequently holds the securities for the purpose of exerting influence.
  • During the course of campaigns to exert influence over five public companies, a group of activist investors allegedly failed to comply with the Schedule 13D requirements. The alleged violations included (a) failing to file a Schedule 13D to supersede a prior Schedule 13G, (b) omitting important information about the investors’ plan with respect to the issuer and (c) failing to disclose joint action by a group of investors.
  • Several of the investors agreed to pay monetary penalties to resolve the disclosure claims.
  • In certain respects, this enforcement action targeted so-called “wolf pack” behavior where unaffiliated investors may act together, but try to avoid being characterized as a “group” for Schedule 13D purposes. This enforcement action demonstrates that the SEC is willing to investigate undisclosed concerted behavior.
  • In this enforcement action, the SEC also continues to focus on disclosure of filers’ intentions in holding target company securities and their obligation to promptly amend filings for changes in their plans or proposals. In 2015, the SEC brought a number of similar enforcement actions alleging that filers had failed to update their disclosure after taking steps towards certain plans and proposals.2 These types of enforcement actions continue to create challenging issues for practitioners, particularly when potential transactions are still in the early stages of planning and preliminary negotiation.
  • Given that, absent irreparable harm, courts in civil actions have typically concluded that the appropriate remedy for Schedule 13D violations is corrective disclosure, this enforcement action is a reminder to investors, including activists, that Schedule 13D violations can result in monetary liability and, in the case of registered funds and investment advisers, can also have other regulatory consequences.


This SEC enforcement action involves alleged violations of a group of investors consisting of Jeffrey E. Eberwein, Lone Star Value Management, LLC, Charles M. Gillman, Boston Avenue Capital, LLC and Heartland Advisors, Inc. Eberwein is the founder of Lone Star, which is a registered investment advisor, and is also the CEO of a hedge fund that is advised by Lone Star. Gillman was employed by a “family office” and made investment recommendations to Boston Avenue, which was an investment vehicle for the family office. Heartland is a registered investment advisor. In addition to the foregoing relationships among the parties, Eberwein and Gillman were friends and colleagues, and Gillman and Boston Avenue had worked with Heartland on a proxy contest in 2010. The alleged violations described below arise out of the group’s activities from 2012 to 2014. 

  • Digirad, Inc. is a NASDAQ listed medical imaging company. In 2011 and 2012, Heartland filed a Schedule 13G to report its ownership of more than 5% of Digirad’s outstanding shares, certifying that the shares were not held for the purpose of influencing the control of Digirad. However, between the 2011 and 2012 Schedule 13G filings, Heartland and Gillman discussed a sale of Digirad and then Heartland asked Digirad to consider adding a Heartland nominee to its board of directors. When Digirad agreed, Heartland proposed Gillman as its nominee and Gillman encouraged Heartland to also nominate Eberwein. After threatening a proxy fight, Digirad ultimately appointed Gillman, Eberwein and their associate to the Digirad board. By early 2013, and with Heartland’s support, the Digirad board shrank from eight directors to three and, as a result, the investor group had gained control with Eberwein serving as chairman. Despite exerting significant influence over Digirad, Heartland did not file a Schedule 13D to supersede its previously filed Schedule 13G. 
  • Aetrium, Inc. was a NASDAQ listed semiconductor test-equipment company. In the summer of 2012, Eberwein, Gillman, Boston Avenue and other investors acquired 16.7% of Aetrium’s stock and filed a Schedule 13D. In that filing and in subsequent amendments, the group included boilerplate disclosure about a general plan that might result in an extraordinary corporate transaction. However, in various emails during the relevant period of time, Eberwein described the group’s specific plan to sell Aetrium’s existing business and then use Aetrium as an acquisition vehicle in light of Aetrium’s net operating losses, which could be used to offset future gains of a newly-acquired, profitable business. After the group won a proxy fight in 2013, Eberwein assumed the role of chairman of Aetrium’s board. Then, in accordance with the group’s previously undisclosed plan, Aetrium sold its semiconductor business and acquired a modular housing business under the assumption that future taxes owed by the newly-acquired business would be reduced by Aetrium’s net operating losses. 
  • NTS, Inc. is a telecommunications service provider that was previously listed on the NYSE. In September of 2012, Eberwein, Gillman and Boston Avenue finalized an agreement with a 5.5% shareholder of NTS. The agreement provided that the group would take actions to enhance shareholder value. However, the parties delayed executing the agreement in order to postpone a Schedule 13D filing, which would allow more time for them to covertly buy additional NTS shares and less time for NTS to adopt defensive measures. The agreement was finally executed approximately six weeks later, and the group thereafter filed a Schedule 13D that disclosed an ownership stake of 12.2% of NTS’s outstanding shares. 
  • Analysts International Corp. is an information technology staffing company that was previously listed on the NASDAQ. In December of 2012, Heartland filed a Schedule 13D and disclosed that it had sent a proposal to Analysts to be included in its next proxy statement. However, Analysts refused to include the proposal. Thereafter Heartland began working on a campaign with Gillman, Boston Avenue and Eberwein, but Heartland did not amend its Schedule 13D to disclose that fact. Then, in May 2013, Heartland filed an amended Schedule 13D that asked Analysts to add three new directors to its board, noting that Heartland had identified three candidates. Although the Schedule 13D did not name those three individuals, they were in fact Gillman, a Gillman and Eberwein associate and, tentatively, Eberwein. In addition, in the months that followed, the group increased their position to 13.75% of the outstanding Analyst shares. 
  • Hudson Global, Inc. is a NASDAQ listed human resources company. Throughout 2013, Heartland and Gillman discussed a potential campaign against Hudson and ultimately filed a Schedule 13D disclosing its accumulation of 14.6% of Hudson’s outstanding shares. Throughout this period of time, Gillman updated Eberwein on the campaign and shared his research with Eberwein. In addition, Eberwein, who did not yet own shares of Hudson, updated Gillman on meetings that Eberwein had held with Hudson’s management and a large Hudson shareholder. By December of 2013, Heartland and Gillman had terminated their campaign. Eberwein, on the other hand, was preparing for a proxy fight and together with Lone Star filed a Schedule 13D. In that Schedule 13D and a later amendment, Eberwein and Lone Star did not identify Heartland or Gillman as a member of their group. In addition, Heartland and Gillman did not identify Eberwein or Lone Star in their Schedule 13D filings. 

Applicable SEC Rules 

SEC rules require any person to disclose on Schedule 13D when it has acquired beneficial ownership3 of more than 5% of a class of a public company’s stock. The Schedule 13D must be filed within 10 days after the acquisition and must include certain key information, including the purpose of the acquisition. Specifically, Item 4 of Schedule 13D requires the filer to describe any proposals which relate to, among other things, (a) an extraordinary corporate transaction involving the issuer, such as a merger, (b) a sale of a material amount of assets of the issuer, (c) any change to the board of directors of the issuer and (d) any other material change to the issuer’s business or corporate structure. When two or more persons act as a group,4 their shares are aggregated for purposes of the 5% ownership test and all members of the group must be identified in the disclosure. In addition, a Schedule 13D filer is required to promptly amend its filing to reflect any material changes. Persons who have acquired securities in the ordinary course and not with the purpose of exerting influence over the issuer may file a Schedule 13G annually in lieu of Schedule 13D. Schedule 13G was designed to minimize the disclosure burden on passive investors who are not seeking to influence “control” over the issuer.5 However, a Schedule 13D must be filed within 10 days if a Schedule 13G filer subsequently holds the issuer’s securities for purposes of influencing control. In addition, persons or groups may also be required to file Forms 3, 4 and 5 under Section 16 of the Exchange Act. 

SEC Order 

In anticipation of the institution of cease-and-desist proceedings, the investors consented to the issuance of an administrative cease-and-desist order by the SEC, in final settlement of the SEC’s investigation into their alleged disclosure violations. Although the investors did not admit the findings in the SEC order, the order included the following key findings: 

  • When Eberwein, Gillman, Boston Avenue and Heartland exerted influence over, and ultimately took control of, Digirad’s board, Heartland failed to timely file a Schedule 13D to supersede its previously filed Schedule 13G. 
  • When Eberwein, Gillman and Boston Avenue engaged in a proxy fight for control of Aetrium’s board, the Schedule 13D included boilerplate disclosure regarding the group’s plan and failed to disclose the group’s specific plan to sell Aetrium’s existing business and then use Aetrium as an acquisition vehicle. 
  • When Eberwein, Gillman and Boston Avenue reached an agreement in principle with a 5.5% shareholder of NTS, the group failed to timely file a Schedule 13D and instead delayed the execution of the agreement in order to purchase additional shares in the interim period and allow less time for NTS to adopt defensive measures. 
  • When Eberwein, Gillman, Boston Avenue and Heartland formed a group for purposes of exerting control over Analysts, Heartland failed to amend its existing Schedule 13D to adequately disclose that fact. In addition, Eberwein, Gillman and Boston Avenue did not make any of the required filings. 
  • When Gillman, Heartland, Eberwein and Lone Star shared research and discussed strategies regarding Hudson, the filings of Gillman and Heartland, on the one hand, and Eberwein and Lone Star, on the other, failed to disclose that the parties were acting jointly. 

The SEC order reiterated the importance of the disclosures required by Schedule 13D, noting that the requirements were adopted in order to alert the market to large and rapid accumulation of shares that might represent a possible change in corporate control so that shares can be valued accordingly. The SEC order also noted that the requirements were designed to provide an issuer’s management with timely information to appropriately protect its shareholders’ interests. 

In addition, the SEC press release announcing the order noted: “Full, fair, and accurate disclosures from all parties in a battle for corporate influence or control are critically important to investors particularly when they are called upon to make decisions about their investments. Investors in these companies were deprived of key facts needed to make informed investment decisions.”6 In addition to agreeing not to engage in future violations of certain reporting provisions of the federal securities laws, Eberwein, Lone Star, Gillman and Heartland agreed to pay civil money penalties of US$90,000, US$120,000, US$30,000 and US$180,000 respectively, to resolve the disclosure claims. 


Investors should carefully consider disclosure requirements when acquiring shares of a public company. Even if the initial facts permit the filing of a Schedule 13G, investors should be prepared to file a Schedule 13D if their objective evolves from a passive investment to one which seeks to exert influence over the issuer. Investors should also carefully consider their interactions with other investors given that joint conduct may result in the investors being deemed a “group” for purposes of the applicable rules. Notwithstanding SEC pronouncements permitting shareholders to communicate with one another, care must be taken to avoid those communications constituting group activities with disclosure consequences. For example, in the case of NTS, the SEC viewed the agreement in principle among the parties as strong evidence of a “group,” despite the fact that the parties had delayed executing the agreement. In addition, in the cases of Analysts and Hudson, coordination among the parties or sharing of information was sufficient to form a group for Schedule 13D purposes. Once it has been determined that a Schedule 13D is required, investors should carefully review the disclosure requirements with counsel. For example, in the case of Aetrium, the SEC noted that boilerplate disclosure of the investors’ plan was inadequate given the group’s specific intentions. Although the SEC has rarely brought enforcement actions in this area, investors should expect that the SEC will increase its focus in this area in light of the surge in activist campaigns in recent years. 


1) See the SEC order.
2) See the SEC press release; SEC orders; and our article on this topic: SEC Charges Corporate Insiders for Failing to Update Beneficial Ownership Disclosure in Going Private Transactions.
3) “Beneficial ownership” is broadly defined under applicable SEC rules to include any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares voting power or the power to dispose of the security. However, beneficial ownership does not include derivative instruments, such as cash-settled equity swaps, which are often used by activist investors to provide economic exposure to the underlying security, but which provide no voting or investment power over the underlying security. Legislation has previously been introduced in Congress that would revise the rules to include derivatives of this nature. However, such proposed legislation has not been implemented.
4) A collection of persons or entities may be considered a “group” under the applicable SEC rules if they act for the purpose of indirectly or directly obtaining securities as part of a plan or scheme. Courts have held that the primary factor in determining if a group exists is whether the persons or entities are “combined in furtherance of a common objective.” Courts have also held that joint action need not be evidenced by a writing.
5) “Control” is a fact-specific analysis of whether the person is seeking to influence the issuer’s policies, management or actions.
6) See the SEC press release.


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