Long Odds: Appealing A Delisting Decision To The SEC

Thursday, August 15, 2013 - 16:14

Sometimes you know the odds are long, and success for the other side is supposed to be a preordained walk-over victory. When a client has been wronged, however, you need to ignore the odds and trust that rational minds will prevail. Recently, we had the chance to represent CleanTech Innovations, Inc. (CleanTech) in an appeal to the United States Securities & Exchange Commission (SEC). NASDAQ Stock Market, LLC (NASDAQ) had delisted CleanTech’s securities for allegedly withholding information during the listing process. Despite the slim chance of success on appeal, the client deserved to have another arbiter judge what had happened in the process of delisting. Cooler heads prevailed in a remarkable SEC decision overturning the delisting.  

The SEC’s July 11 decision setting aside NASDAQ’s decision to delist CleanTech has been described as “landmark,” “highly unusual,” “rare” and perhaps “a first.” The lawyers, the parties and the press have struggled to no avail to find another instance where an Exchange’s decision to delist a company had been set aside by the SEC. The relief granted by the SEC was all the more remarkable in that it was awarded to a Chinese company listed on NASDAQ through a reverse merger at a time when such companies are being closely scrutinized and harshly criticized. For example, during the appeal process, the SEC approved a NASDAQ rule change imposing additional requirements for companies seeking listing through a reverse merger. Similarly, the NASDAQ decision delisting CleanTech specifically referred to CleanTech as a “Chinese reverse merger” company as if CleanTech’s country of origin somehow defined it.

CleanTech, however, is not just a “Chinese reverse merger” company. It is a clean energy company that designs and manufactures wind turbine towers and other products that directly address the air pollution and high energy consumption issues in China. It applied for listing on NASDAQ in July 2010. The heightened scrutiny of Chinese reverse merger companies quickly became apparent during the listing process, which was overly rigorous and intrusive. NASDAQ insisted on obtaining detailed information about various financing transactions. Based upon a newspaper article, NASDAQ extensively probed CleanTech’s association with a consultant connected to a company from which CleanTech obtained financing. CleanTech was entirely cooperative during the process, including making arrangements for NASDAQ to speak to the consultant directly during a five-hour interview.

This was apparently not satisfactory as NASDAQ then made the extraordinary demand that CleanTech waive its attorney-client privilege and produce various privileged email communications. CleanTech, in order to obtain listing, waived the attorney-client privilege for communications with its corporate counsel, its U.S. legal and disclosure counsel and its listing counsel. Ultimately, after a five-month review process, NASDAQ was unable to find any reason not to list CleanTech and, on Dec. 10, 2010, approved CleanTech’s application.

Shortly thereafter, CleanTech (in accordance with the appropriate federal regulations) disclosed financing from the company previously challenged by NASDAQ, which closed after NASDAQ’s approval of CleanTech’s listing. NASDAQ promptly delisted CleanTech, claiming that CleanTech had intentionally withheld information from NASDAQ staff. NASDAQ asserted that its information and documents requests to CleanTech implicitly required CleanTech to continuously supplement its responses despite the lack of any indication in NASDAQ’s requests of such a requirement. Thus, despite the fact that the financing at issue had not been contemplated until after CleanTech fully responded to NASDAQ’s requests, NASDAQ asserted that the failure to disclose information about the financing constituted willful concealment during the listing process.

NASDAQ’s listing qualifications panel reviewed and affirmed the delisting. During that process, NASDAQ’s staff made unflattering statements generally about Chinese reverse merger companies and specifically about CleanTech. Additionally, after NASDAQ’s listing council, an appellate body of NASDAQ, found it required development of the factual record before it could resolve the initial decision to delist, NASDAQ’s general counsel intervened. In an ex parte communication that CleanTech never saw until it received the response to its Freedom of Information Act (FOIA) request, NASDAQ’s general counsel asserted that a brief CleanTech filed with the NASDAQ office of appeals was an ex parte communication. This was a shock as CleanTech had been explicitly told that its brief was to be filed with the NASDAQ office of appeals.  Perhaps not surprisingly, the listing council subsequently affirmed the decision to delist.

CleanTech felt clearly wronged by the actions of NASDAQ and began a search of counsel with some level of success at the SEC. CleanTech knew that Stradley Ronon Stevens & Young, LLP (Stradley) had successfully represented clients in the appeal of an adverse disciplinary decision imposed by NASDAQ OMX PHLX, Inc. (PHLX). Husky Trading LLC, Eugene O'Brien, Michael Inemer, Stephen Floriendo, Exchange Act Rel. 60180, June 26, 2009. In the Husky matter, we successfully appealed the PHLX’s disciplinary action against a PHLX member, its president and two employees for violations of various PHLX Rules. CleanTech, seeking similar results, contacted us in July 2011. At that time, though, the appeal could not proceed because NASDAQ had not yet deemed its delisting decision a “final action.” In the first of many procedural hurdles, CleanTech was forced to wait to appeal until NASDAQ eventually deemed its delisting decision final in November.

CleanTech felt that, fundamentally, it had been treated unfairly by NASDAQ. CleanTech believed that NASDAQ had violated three sacrosanct principles of American jurisprudence: first, that a person or company is entitled to due process regardless of country of origin; second, that the attorney-client privilege is to be carefully guarded in light of its promotion of broad public interests; and finally, that a company or person accused of wrongdoing is presumed innocent until proven guilty and that this presumption may not be overcome without substantial evidence. CleanTech’s belief regarding the unfairness of the process was reinforced when NASDAQ refused to provide CleanTech with a copy of the paginated record that NASDAQ filed with the SEC for purposes of CleanTech’s appeal. The SEC also refused to provide a copy of the record and instead directed us to file an expedited FOIA request to obtain the documents that constituted the record. As a result, it was not until four days before our initial brief was due that we had a full copy of the record on appeal.

Undeterred, we detailed what CleanTech felt was the unfair and cynical scrutiny that it had received in the delisting process. CleanTech’s meticulous compliance with NASDAQ’s onerous requests was set forth in step-by-step fashion for the SEC. CleanTech believed that it had been singled out as a Chinese reverse merger company, and the unfortunate generalizations of the staff were laid bare. We highlighted the highly unusual demand to waive the attorney-client privilege. We outlined the application of a different interpretation of rules in the NASDAQ appeal process. Most importantly, we detailed CleanTech’s rigorous adherence to the rules in place and its complete candor during the listing and appeal process. CleanTech had not intentionally withheld information from NASDAQ.

Simultaneous with filing the appeal, former U.S. Senator Arlen Specter participated with New York counsel in filing a lawsuit against NASDAQ asserting that the decision to delist was based on racial animus in violation of the equal protection clause of the U.S. Constitution. Senator Specter was passionate about the issue and called NASDAQ’s delisting decision “a terrible miscarriage of justice.” However, the Southern District of New York dismissed CleanTech’s suit with a decision that the issues were subsumed within the SEC appeal. The fate of CleanTech’s arguments were to be left to the SEC to decide.

In light of NASDAQ’s broad discretion, we all understood that it would be difficult to overturn the NASDAQ decision. Predictably, NASDAQ’s first point in its brief was that the SEC could not substitute its discretion for NASDAQ’s. NASDAQ also stressed that Chinese reverse merger companies presented unique and potentially excessive risks to investors.

With briefing fully completed by March 2012, an anxious wait for the decision began. A few months passed, then many months, then a year. There was a presidential election and significant changes in the composition of the Commission, including a new chair. At every point we hoped a decision was imminent. After waiting more than 16 months, it seemed that the delay alone was a message to CleanTech. It seemed that CleanTech’s appeal would effectively be dismissed simply by the passage of time.

Finally, on July 11, the decision of the Commission was published. The SEC concluded that CleanTech had not intentionally withheld any information from the staff of NASDAQ and NASDAQ’s delisting was set aside. The decision was a necessary victory for the company since the original delisting had been devastating. The CEO of CleanTech viewed the decision as an “historic SEC decision [which] rights a great wrong that was done to CleanTech and company investors by NASDAQ.” The decision was a welcome vindication of CleanTech’s actions during the listing process and thereafter. At the end of the day, long odds are daunting but can be overcome when a wrong must be righted. CleanTech prevailed on appeal despite the longest of odds. 

Paula D. Shaffner is a Partner in Stradley Ronon's Philadelphia office and co-chairs the Securities Litigation & Enforcement practice group. She represents financial institutions in virtually all aspects of their business, particularly in litigation and regulatory matters. Her practice is concentrated in litigation and investigations involving the financial industry, including securities litigation and regulatory matters. Ms. Shaffner regularly represents banks, brokerage firms, hedge funds, investment advisers and brokers. She defends members of the financial services industry in all types of litigation and also handles internal investigations and enforcement actions. Ms. Shaffner is designated by FINRA and the Wharton School of the University of Pennsylvania as a Certified Regulatory and Compliance Professional.

Joshua R. Dutill is an Associate in Stradley Ronon's Malvern office. He represents clients in complex commercial cases and legal matters, including prosecuting and defending business torts and commercial contract disputes. He also defends financial service clients in a broad spectrum of corporate and commercial litigation. He is involved in all aspects of litigation, including trial and appeal, having represented clients in federal and state court trials as well as arbitration proceedings. 


Please email the authors at pshaffner@stradley.com or jdutill@stradley.com with questions about this article.