Close, but No Cigar: Ensuring Accuracy in Public Disclosures

A recent enforcement action by the Securities and Exchange Commission (SEC) highlights the risks companies face when public disclosures may be viewed as misleading or fail to account for updated information.

To be clear, a disclosure accuracy case is very different from those enforcement actions where the SEC alleges fraud—those tough cases where executives allegedly inflate revenue, lie to their auditors in connection with an offering of securities, or issue guidance not necessarily based in reality. 

Instead, this article focuses on the situation where a company is trying to do the right thing but, despite those efforts, something went awry. I will also outline three strategies to help companies avoid similar fates. 

Recent SEC Enforcement Action: Other Than Intentional Misconduct 

A recent SEC enforcement action illustrates that companies don’t always have to engage in deliberate misconduct to find themselves under regulatory scrutiny. In some cases, it’s not an intentional effort to mislead investors, but rather process missteps that lead to problematic disclosures.

Even seemingly minor oversights or miscommunications can have serious consequences if the result is incomplete or inaccurate information being shared with the public. 

A deep dive into what went wrong provides valuable lessons on the importance of robust internal controls, effective communication, and proactive oversight to ensure accurate reporting and maintaining investor trust.

Recyclability Claims Lead to $1.5 Million Civil Penalty 

In an enforcement action announced in September 2024, the SEC charged Keurig Dr Pepper Inc. with making misleading statements about the recyclability of its K-Cup pods. To settle the charges, Keurig agreed to pay a $1.5 million civil penalty. According to the SEC’s order, in Keurig’s 2019 and 2020 annual reports, the company claimed that its tests “validated” the recyclability of its K-Cup pods. 

The SEC took issue with Keurig not disclosing that two of the nation’s largest recycling companies, which together operate over one-third of recycling facilities in the US, had “conveyed significant negative feedback to Keurig regarding the commercial feasibility of curbside recycling of pods at that time.”

You may be asking yourself, is the recyclability of K-Cup pods something that is material to investors?

Let’s hop into our DeLorean since the SEC’s order cited a sustainability report issued by Keurig in 2014, before it merged with Dr Pepper Snapple Group in 2018. Yes, folks, the SEC looked back into the archives for this one. The SEC noted that in that sustainability report, Keurig announced “certain sustainability goals, one of which was to make 100% of pods that it manufactured recyclable by 2020.” The order also cite consumer research conducted by Keurig in 2016 that “indicated that, for certain consumers, environmental concerns were a significant factor, among others, considered when deciding whether to purchase a Keurig brewing system.” 

With that information, along with some other data points, the SEC laid the foundation for why K-Cup recyclability could be material to investors. The order said that Keurig’s failure to disclose feedback it received regarding the commercial feasibility of recycling the pods made the statements regarding the recyclability of the pods incomplete and therefore inaccurate. 

Notably, the SEC order doesn’t go so far as to say that recyclability of K-Cup pods was material per se. This is something Commissioner Hester Peirce called out in her dissenting statement. From her statement: “That some consumers thought, among other factors, about environmental factors does not mean that the recyclability of pods was material to investors.” Preach. 

However, putting aside whether one agrees with the SEC order, the fact remains that it’s another case where the SEC contends that a company’s internal controls and processes didn’t function properly to ensure accurate reporting. Specifically, the order focused on how the company failed to reconcile internal findings from the recyclers with its public statements regarding recyclability. 

Three Strategies for Ensuring Complete and Accurate Disclosures 

The Keurig enforcement action reminds us why it’s critical for companies to test and maintain the accuracy of their statements and other public disclosures. What follows are three strategies to help in those efforts. 

1. Maintain Robust Internal Controls: Avoiding the “Telephone Game” Effect 

A strong internal control framework is crucial for ensuring the accuracy and reliability of a company’s disclosures. Without this, the process of gathering information internally can often resemble the game of “telephone,” where a message is passed along a chain of people and becomes increasingly distorted. For example, if a CEO requests data on growth potential for an investor call, that request might pass through multiple levels—from the CFO, to finance and sales teams, and back up the chain—resulting in unintentional discrepancies in the final message. 

To prevent such breakdowns, companies should implement a review process that allows all functional leads involved in developing the information to review and confirm the final disclosures. Regularly pressure-testing assumptions and projections can further ensure that public-facing statements remain accurate as market conditions evolve.

The alternative can create fodder for the SEC in an investigation. 

2. Monitor Evolving Investor and Regulatory Expectations: AI, ESG, and DEI, Oh My! 

It’s a good idea to remain mindful of evolving investor and regulatory expectations, particularly when it involves the topics du jour. The ones that come to mind right now are artificial intelligence (AI); environmental, social, and governance (ESG); and diversity, equity, and inclusion (DEI). 

Since the SEC has formed a “Task Force” and spoken about its intention to proactively ferret out misconduct related to certain topics, like ESG and AI, it’s best that any such statements go through an extra level of review before they see the light of day.

The Keurig case illustrates how the SEC may focus more fervently on sustainability-related claims. While it’s tough to say whether most companies would have approached the disclosure regarding the recyclability of K-Cup pods any differently than Keurig did, the SEC’s position in that case should serve as a cautionary tale.  

Heightened review on the SEC’s high-priority topics may seem like an extreme position to take but starting from that position may inspire a more thoughtful review of these statements. 

3. Foster a Culture of Transparency and Accountability: Helping to Prevent Issues from Escalating 

Enforcement actions like the one involving Keurig—where there doesn’t appear to have been a significant stock price drop, lawsuit, or other public event that one can point to related to the SEC’s investigation—beg the question as to why the SEC decided to investigate in the first place.

Two possibilities come to mind. The first, and perhaps most likely, is the SEC reviewed Keurig’s annual reports as part of a periodic review. Remember, the Sarbanes-Oxley Act requires the SEC to review each reporting company at least once every three years. So, it could have been the case that the SEC, in its review of Keurig’s annual report, zeroed in on the recyclability claims of its K-Cup pods, ultimately leading to the civil penalty. 

The other possibility, albeit a remote one in this case, is a whistleblower claim. For the uninitiated, the SEC’s Whistleblower Program incentivizes individuals to report specific, timely, and credible information about possible federal securities laws violations. In exchange, these individuals can receive financial rewards if their information leads to successful enforcement actions.

It’s possible that employees or former employees who had knowledge of the recyclability claims and negative feedback the company received regarding the commercial feasibility of being able to recycle the K-Cup pods flagged the issue to the SEC. 

In the end, creating a corporate culture that prioritizes transparency and accountability can help prevent issues from escalating to the point of regulatory action. 

Employees should feel empowered to report any concerns about the accuracy of internal data or public disclosures. This type of environment can go a long way in ensuring that internal concerns regarding disclosures are addressed early enough to allow for corrective actions, if necessary, and ultimately avoiding a whistleblower complaint. That said, if your company finds itself the subject of a whistleblower complaint, this article from Jones Day may be helpful. 

Final Thoughts 

This recent SEC enforcement action emphasizes the need for companies to maintain strong internal controls and actively monitor regulatory trends. Fostering a culture of transparency should also be prioritized. By implementing these strategies, companies can ensure their disclosures are accurate and complete, thereby minimizing the risk of enforcement actions and maintaining investor trust.