SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 51283 / March 1, 2005
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on potential Exchange Act Section 10(b) and Section 14(a) liability1
Today, the Commission filed a settled federal court enforcement action against The Titan Corporation (“Titan”), a military intelligence and communications solutions provider.2 The Commission’s complaint alleged that Titan violated the Foreign Corrupt Practices Act of 1977 (“FCPA”) by paying over $3.5 million to its agent in Benin, Africa approximately $2 million of which was funneled toward the election campaign of Benin’s incumbent President at the direction of at least one former senior Titan officer based in the United States. According to the complaint, Titan made these payments to assist the company in its development of a telecommunications project in Benin and to obtain the Benin government’s consent to an increase in the percentage of Titan’s project management fees for that project.
On September 15, 2003, Titan became a party to a merger agreement (the “Merger Agreement”), in which Lockheed Martin Corporation (“Lockheed”) agreed to acquire Titan, pending certain contingencies. Titan affirmatively represented in the Merger Agreement that:
To the knowledge of the Company, neither Company nor any of its Subsidiaries, nor any director, officer, agent or employee of the Company or any of its Subsidiaries, has … taken any action which would cause the Company or any of its Subsidiaries to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any applicable law of similar effect. (“FCPA Representation.”)
The FCPA Representation was publicly disclosed and disseminated by Titan in two places. The proxy statement disclosed that “the merger agreement contains representations and warranties by Titan that expire upon completion of the merger as to, among other things … Titan’s compliance with the Foreign Corrupt Practices Act of 1977, as amended.” In addition, the Merger Agreement containing the FCPA Representation was appended to Titan’s proxy statement. The proxy statement was filed with the Commission and sent to Titan’s shareholders. The Merger Agreement and the proxy statement were amended at various times after September 15, 2003, primarily due to SEC and Department of Justice investigations of potential Titan violations of the FCPA. Throughout this period, the FCPA Representation itself remained unchanged. In June 2004, Lockheed terminated the Merger Agreement.
We issue this Report of Investigation ("Report") pursuant to Section 21(a) of the Securities Exchange Act of 1934 ("Exchange Act") to provide guidance concerning potential liability under Exchange Act Sections 10(b) and 14(a), and Rules 10b-5 and 14a-9 thereunder, for publication of false or misleading material disclosures regarding material contractual provisions such as representations.
This Report highlights for issuers their responsibility to ensure that disclosures regarding material contractual provisions such as representations are not misleading. When an issuer makes a public disclosure of information -- via filing a proxy statement or otherwise -- the issuer is required to consider whether additional disclosure is necessary in order to put the information contained in, or otherwise incorporated into that publication, into context so that such information is not misleading. The issuer cannot avoid this disclosure obligation simply because the information published was contained in an agreement or other document not prepared as a disclosure document. Representations, covenants, or other provisions of an agreement made by an issuer that are not public or disclosed to shareholders are not covered by the scope of this Report.
In this case, the shareholders of Titan were not beneficiaries of the FCPA Representation as it appeared in the Merger Agreement. However, the inclusion of the FCPA Representation in a disclosure document filed with the Commission, whether by incorporation by reference or other inclusion, constitutes a disclosure to investors. Depending on the context in which the disclosure is made (including the significance of the representation or other contractual provision and the total mix of information available to the investor), a reasonable investor could conclude that the statements made in the representation describe the actual state of affairs and the information could be material. Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988) (“materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information”). In such a situation, where a document containing such a representation is disclosed, if additional material facts exist, such as those contradicting or qualifying the disclosure of the original representation (for example, knowledge by the senior officers of the company that the facts described in the representation are not true), omission of which makes that disclosure misleading, a company would also be required to disclose those facts. This is particularly true when an issuer knows of new information before the original proxy statement, or amendments, are published. Where the failure to make such disclosure is negligent, an issuer would violate Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, and where the failure involved scienter, the issuer would also violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
This Report is not intended to change the way issuers engage in merger, or other contractual, negotiations or to alter existing diligence obligations or to suggest, absent special circumstances (such as provisions intended to create third party beneficiaries), that provisions such as representations and covenants in such agreements are binding on or intended to benefit persons other than parties thereto.
As is the case in other circumstances, where specific additional material facts exist that are known to an issuer, or an issuer was reckless in not knowing them, (in the case of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder), or an issuer was negligent in not knowing them, (in the case of Section 14(a) of the Exchange Act or Rule 14a-9 thereunder) general disclaimers regarding the material accuracy and completeness of disclosure may not be sufficient disclosure, for example, in situations where an issuer has material information contradictory to representations it has made. Rubinstein v. Collins, 20 F.3d 160, 171 (5th Cir. 1994) (“[T]he inclusion of general cautionary language regarding a prediction would not excuse the alleged failure to reveal known material, adverse facts.”); In re Initial Public Offering Sec. Litig., 2004 WL 2320364, at *15 (S.D.N.Y. October 15, 2004) (party may not rely on general disclosure if party is aware of “problem worthy of disclosure”).
We highlight the important principle that disclosures regarding material contractual terms such as representations may be actionable by the Commission. We will consider bringing an enforcement action under Sections 10(b) and 14(a) of the Exchange Act and Rules 10b-5 and 14a-9 thereunder in the future if we determine that the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted.
By the Commission.
1 Section 21(a) of the Exchange Act authorizes the Commission to investigate “whether any person has violated, is violating, or is about to violate” the federal securities laws. “The Commission is authorized . . . to publish information concerning such violations, and to investigate any facts, conditions, practices, or matters which it may deem necessary or proper to aid in the enforcement of” the federal securities laws. This report does not allege a violation by Titan of Sections 10(b) or 14(a) of the Exchange Act or Rules 10b-5 and 14a-9 thereunder and the Commission has not charged Titan with such violations. This Report also does not constitute factual findings or an adjudication of any issue addressed herein. Titan does not admit or deny any of the statements or conclusions contained herein.
2 On March 1, 2005, the Commission filed SEC v. The Titan Corporation, Civil Action No. 05-0411 (D.D.C.) (JR). Without admitting or denying the allegations in the complaint, Titan consented to the entry of a final judgment permanently enjoining it from violating Sections 30A, 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder. Pursuant to the final judgment, Titan will pay $15,479,195.47, comprising $12,620,000 in disgorgement and $2,859,195.47 in prejudgment interest.