Charter Communications to Pay $25 Million Penalty for Stock Buyback Controls Violations

(HedgeCo.Net) The Securities and Exchange Commission has announced settled charges against Charter Communications Inc. for violating internal accounting controls requirements relating to its stock buybacks.

According to the SEC’s order, Charter’s board authorized company personnel to conduct certain buybacks using trading plans that conform to SEC Rule 10b5-1. Rule 10b5-1 offers protection to companies and individuals from insider trading liability as long as they meet the conditions of the rule, including a requirement that they not retain the ability to change the planned purchases or sales after they adopt the trading plan. However, the SEC’s order finds that, from 2017 to 2021, Charter used plans that included “accordion” provisions, which company personnel described as giving Charter flexibility, that allowed Charter to change the total dollar amounts available to buy back stock and to change the timing of buybacks after the plans took effect. According to the SEC’s order, because Charter’s trading plans did not meet the conditions of Rule 10b5-1, the company’s buybacks did not comport with the board’s authorizations. The SEC’s order finds that Charter included accordion provisions in nine separate trading plans over the four-year period.

The SEC’s order finds that Charter’s repeated use of trading plans that did not conform to Rule 10b5-1 was the result of the company’s insufficient internal accounting controls, in particular, its absence of reasonably designed controls to analyze whether the discretion the accordion provisions gave executives to alter the company’s trading was consistent with the board’s authorizations.

“Companies whose boards authorize buybacks using Rule 10b5-1 plans must have controls that reasonably assure that their trading plans meet all of the rule’s conditions,” said Melissa Hodgman, Associate Director in the SEC’s Division of Enforcement. “This includes the fundamental requirement that, to benefit from the protection of Rule 10b5-1, traders have to relinquish their ability to influence the amount or timing of trades after their trading plans go into effect.”

The SEC’s order finds that Charter violated Section 13(b)(2)(B) of the Exchange Act. Without admitting or denying the findings in the order, Charter agreed to cease-and-desist from further violations of Section 13(b)(2)(B) and pay a civil penalty of $25 million.

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