Today’s Financial Times (London) reports that Talisman Energy is under investigation by the US Securities and Exchange Commission for having “failed to disclose material information with respect to their operations in Sudan.” The investigation is confirmed by acting SEC Chair Laura Unger in a letter to Congressman Frank Wolf, one of Talisman’s harshest critics in the US Congress, and the chair of the subcommittee with authority over the SEC.
Eric Reeves [May 11, 2001]
Northampton, MA 01063
In an extraordinarily significant front-page story on an impending “sea-change in the way foreign companies list in the US,” the Financial Times (London)—arguably the most influential financial newspaper in the world—highlights the effectiveness with which Sudan advocacy has targeted US capital markets, and its success in battering share price of complicit companies. And in the course of telling the story (attached below), the Financial Times necessarily highlights Talisman Energy and PetroChina (capital market surrogate for Talisman’s Greater Nile partner, China National Petroleum Corp.).
The principle implications of the changes noted in the piece are forward-looking, and bear on disclosure obligations for foreign companies listing on American exchanges in the future. But there is one passage well worth noting with respect to Talisman’s present fate in the American capital markets. The Financial Times reports that SEC Chair Laura Unger has said:
“‘we take very seriously’ the charge made by Mr. Wolf that the two companies [Talisman and PetroChina] ‘may have failed to disclose material information’ with respect to their operations in Sudan. She would not say whether the two companies are under investigation, but said the matter had been referred to the SEC’s enforcement division.”
Well, it doesn’t take a genius to figure out that if the “matter has been referred to the SEC’s enforcement division,” there is clearly an investigation under way—that’s the whole point of the “enforcement division”!
Certainly Talisman would not begin to pass muster under the prospective disclosure requirements that are the focus of the Financial Times story. But the SEC is obviously investigating whether Talisman stands in violation of existing SEC disclosure requirements. There are, of course, many ways in which Talisman has been deeply remiss in disclosing the impact of its Sudan operations on share price, certainly if we use the standard of “materiality” that has been established by the US Supreme Court in such securities cases.
There is no telling how this investigation of Talisman Energy by the SEC will turn out, or what the range of sanctions against Talisman might be. We can be sure, though, that it will be no perfunctory investigation. The SEC budget, and confirmation processes, are overseen by the subcommittee of which Congressman Wolf is now chair—and there is no politician in Washington who is a more stalwart friend of Sudan, or a harsher critic of present oil development in this torn land. Congressman Wolf has made quite plain his acute displeasure at seeing Talisman and PetroChina listed on the New York Stock Exchange. And that displeasure is known to all involved.
Talisman simply could not be facing a tougher foe on Capitol Hill. And given Congressman Donald Payne’s pending resolution (HR 113) in the House of Representatives—declaring it to be the “sense of Congress” that Talisman Energy should be denied US capital market access—it is not so very difficult to imagine extremely difficult days ahead for Talisman Energy on the New York Stock Exchange.
Stay tuned: this story is only now truly underway.
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Copyright 2001 The Financial Times Limited
Financial Times (London)
May 11, 2001, Friday USA Edition 1
HEADLINE: SEC chief inherits disclosure bombshell
CAPITAL MARKETS WATCHDOG’S EXPANDED ROLE MAY CAUSE SEA CHANGE IN THE WAY FOREIGN COMPANIES LIST IN US
BYLINE: By EDWARD ALDEN
Laura Unger, the acting chairman of the US Securities and Exchange Commission, has handed a bombshell to her successor Harvey L. Pitt.
Mr. Pitt, who was nominated yesterday by President George W. Bush to head the SEC, will be given the task of implementing a decision that significantly expands the SEC’s role in ensuring that foreign companies listing in the US do not run foul of US sanctions policy.
The decision was conveyed in a letter this week from Ms Unger to Rep. Frank Wolf, who chairs the House appropriations subcommittee with authority over the SEC and is co-chair of the House human rights caucus.
The SEC, under its existing authority to require full disclosure, has
declared that investments in countries under US sanctions are a
significant material risk to investors.
While the US government has never been shy about using sanctions as a foreign policy tool, there has been great reluctance, particularly from the US Treasury, to link these measures in any way to the US capital markets. The fear is that companies could choose to list elsewhere if they believe US markets are tainted by political considerations.
The SEC’s move “could represent a sea change in the way in which foreign registrants access the US capital markets”, said Roger W Robinson Jr, chairman of the William J Casey Institute, a Washington policy group with close ties to conservative groups and human rights activists.
“National security, human rights and religious freedom concerns are now regarded as potential material risks to investors,” said Mr. Robinson, who was a senior National Security Council official in the Reagan administration.
While companies are already required in general terms to disclose political risks, the new requirements are much more targeted. US-listed companies must now spell out their dealings in places such as Iran, Iraq, Libya, Sudan, Burma and Cuba, and the SEC has promised aggressive oversight to ensure that US investors are fully aware of the risks they are taking in buying stocks or bonds in such companies.
In a background memorandum from David Martin, the director of corporate finance, the SEC says that such risks are not limited to the possibility that US sanctions could directly hurt the company.
In addition, “if it is reasonably likely that public opposition to the company would have a materially adverse effect on the operations of the company, this risk would also need to be disclosed”.
The decision is a big victory for human rights groups that have been trying to influence share prices by urging investors to avoid companies doing business in countries that violate human rights or religious freedoms. In effect, the SEC has said that the campaigns are hurting the stock prices of controversial companies.
The US focus has been on Sudan, where an 18-year civil war has claimed more than 2m lives. Mr. Wolf has urged that PetroChina and Talisman Energy, two of the companies involved in developing the Sudanese oil fields, be barred from trading in the US.
The campaign scored its biggest success last year when it put pressure on public pension funds and other investors to boycott a New York share offering by PetroChina. The offering eventually yielded Dollars 2.9bn, a fraction of the Dollars 10bn the company had been seeking.
Sudan activists, with the Casey Institute doing the research legwork, have also been calling for broader restrictions on the ability of these
companies to raise funds in the US.
However, Ms Unger said in the letter that she had no authority to take such a drastic step. But she said “we take very seriously” the charge made by Mr. Wolf that the two companies “may have failed to disclose material information” with respect to their operations in Sudan. She would not say whether the two companies are under investigation, but said the matter had been referred to the SEC’s enforcement division.
While the pressure has been focused on Sudan, Ms Unger’s decision will have much broader ramifications. Many foreign companies listing in the US, particularly energy companies, have operations in countries under US embargo and will be affected by the new requirements. The disclosure requirement affects any company or entity that is covered by sanctions administered by the Treasury’s Office of Foreign Assets Control.
One foreign securities regulator said the decision is a significant
departure that introduces expanded political criteria into securities
disclosure, on the grounds that it might affect share value. He said it
would lead to lobbying for further measures by the SEC to demand
additional disclosure on environmental or broader human rights grounds.
The decision will also put new pressure on mutual funds and pension funds to expand their assessments of the political risks of investing in certain companies. While some funds already eschew these companies on ethical grounds, the SEC’s decision is a clear statement that the investments could pose a financial risk as well.