Bad Actors Spoiling the Bunch? Conditions, Consequences and Cures

Companies facing government enforcement or administrative actions often focus their attention narrowly on a few key issues, such as their chances of success at trial, their potential settlement payments and the prospects of follow-on litigation. While these areas of focus are understandable, it is critical that companies also understand the so-called “bad actor” disqualification rules under the U.S. federal securities laws. Absent an express waiver by the U.S. Securities and Exchange Commission (the “SEC”), bad actor status has potentially far-reaching and significant effects on future capital raising by these companies and, in some cases, their successors and affiliates.

Just as importantly, if a natural person (including directors and officers) becomes a “bad actor,” he or she is a bad actor for purposes of each other entity for which he or she is a “covered person.” This can result in disqualification of other companies of which such a natural person bad actor is or later becomes a director or officer. The ripple effects may be unforeseen and carry with them serious consequences. In a very real sense, when it comes to capital raising, one “bad actor,” like the proverbial “one bad apple,” may spoil the bunch.