Illumina: SEC's Proxy Fight Review
"Good luck with your regulations, SEC. I hope your comment letters go really well."
On May 1, 2023, Carl Icahn wrote the following when discussing my Illumina write-up Malignant Governance and follow-up piece Non-GAAP Activism:
“[We] would be shocked if regulators were not at least as interested as we are in learning whether there is any merit to the issues raised in these pieces.”
- Carl Icahn (source)
What I and (presumably) Illumina didn’t realize is he said that while knowing the SEC was actively monitoring and reviewing his proxy disclosures behind-the-scenes via SEC comment letters, and his counsel had even sent a letter to address their comments just a few days prior on April 26, 2023.
Basically, Carl Icahn low-key Office Space’d Illumina by granting me an audience with the regulators to unwittingly share my “I just don’t care” rundown of the issues. And like in the movie, I don’t think he nor anyone else realized what I was going to say once in the room.
Disclaimer: This newsletter is not investment advice. Views or opinions represented in this newsletter are personal and belong solely to the owner and do not represent those of companies that the owner may or may not be associated with in a professional capacity, unless explicitly stated. As previously disclosed, I submitted an SEC whistleblower tip regarding the Illumina situation.
Preamble: The Illumina-Grail Saga
If you haven’t kept up with the Illumina-Grail series, I’ve included a summary of all the topics I’ve covered to-date that you can explore at your own pace at the end of this write-up titled: “End Notes”.
Summary
After reviewing SEC comment letter and correspondence letters that were publicly released on July 12, 2023, I’m coming around to the idea the SEC was proactively reviewing the all the key proxy disclosures during this contested election and engaging both parties behind-the-scenes since April 2023.
This likely means the SEC was aware of the issues I flagged and looked into Illumina’s (in my opinion) misleading response. I don’t know if a comment letter was actually sent to Illumina, but I circumstantially suspect the SEC did send them a letter based on their subsequent disclosure activity.
Assuming the SEC was engaging Illumina on their proxy disclosures this entire time, it raises another major flag on the circumstances surrounding Francis deSouza’s abrupt Sunday resignation just ~2 weeks after the contested election.
At this point, I still can’t dismiss “for cause” misconduct and can now add heightened SEC scrutiny as potential contributing factors to Mr. deSouza’s departure.
Big picture, how the SEC reviewed the disclosures and engaged both parties throughout this proxy fight potentially has precedent-setting ramifications on future contested elections and proxy disclosures.
SEC Reviewing the Proxy Filings?
It’s always hard to predict which situations the SEC will prioritize year-to-year, but I always felt Illumina’s contested election was a prime candidate for heightened SEC scrutiny due to the parties involved and issues being debated.
Recently, Illumina’s filings offered some confirmatory evidence that this might be the case after the SEC publicly released comment letters and correspondence from April 2023 pertaining to proxy disclosures being made in Illumina’s contested election.
For background, the SEC staff will send comment letters on filings they review and have follow-up comments and/or requests such as: 1) further supporting information on disclosures made, 2) corrective disclosures, 3) additional disclosures.
Comment letters are not immediately disclosed to the public, and are posted no earlier than 20 days after their review is completed/resolved, meaning there could still be more SEC comment letters regarding proxy disclosures in Illumina’s contested election that haven’t been released yet.
Given my belief that Illumina’s response to Malignant Governance was misleading and violated SEC rules, the fact that the SEC was already sending comment letters before my write-up was even a topic of debate is a big deal to me.
In my opinion, it potentially means the SEC was actively monitoring, reviewing, and commenting on Illumina-Icahn proxy disclosures throughout May 2023 when things got more contentious, and their ongoing involvement in April 2023 positioned them to stay on top of the issues I was flagging.
SEC Publicly Releases Comment Letters
On July 12, 2023, the SEC publicly released comment letters they sent to Illumina (link) dated April 5, 2023 and Carl Icahn (link) dated April 17, 2023 regarding disclosures made in proxy filings filed on March 30, 2023 and April 11, 2023, respectively. They also released correspondence letters that Illumina (1) and Carl Icahn (1, 2) sent in response to SEC comment letters.
A few things stood out after reviewing the publicly released letters:
The SEC sent Carl Icahn a detailed comment letter early-on in the proxy contest, implying this was a priority situation they were monitor. This scrutiny also means he knew the SEC was watching the filings closely.
The letters came from the SEC’s Office of M&A who potentially had additional interest to follow the contested election due to the Grail transaction being a hot button topic of debate and within their area of regulatory oversight.
Illumina’s comment letter is focused on clarifying disclosures on voting, meaning they were probably less aware of how closely the SEC was following the disclosures in this contested election.
Carl Icahn’s comment letter is focused on clarifying and/or finding support for several critical statements directed at Illumina as part of his activist campaign.
As far as I can tell, the SEC has not publicly released any other comment letters or correspondence dated after April 26, 2023. That’s noteworthy to me, because Carl Icahn first references my write-up Malignant Governance on April 28, 2023 (filing).
Again, this is all my speculative opinion, but, overall, it does appear the SEC was keen on making sure the proxy disclosures in this contested election weren’t misleading and adequately supported based on their comment letter sent to Carl Icahn.
The big question mark, of course, is whether or not the SEC kept proactively reviewing and commenting on disclosures made beyond April 26, 2023 when Malignant Governance becomes a debated topic, and held Illumina’s proxy disclosures to the same level of scrutiny.
More Letters to Come?
I do believe more comment letters will eventually get publicly released, assuming the SEC maintained the same standards and priorities established in Carl Icahn’s April 17, 2023 SEC comment letter.
In that letter, the SEC focused on the “accuracy and adequacy” of arguments Carl Icahn was making in his activist campaign, with many of them being core talking points to drum up support for his director slate.
Consequently, I believe the SEC would need to monitor and review subsequent proxy disclosures to referee “fair play” as both sides debated these issues.
So far, and based on my search efforts, all of the publicly released comments and correspondence pre-date Carl Icahn’s April 28, 2023 filing that first references Malignant Governance.
Obviously, I’m biased, but I find it really interesting no other comment letters have been publicly released for filings made in May 2023 when things got contentious and focused on the issues I flagged. I suspect comment letters were sent, but the SEC’s review process on those disclosures have not been completed/resolved to publicly release them on July 12, 2023.
SEC Office of Mergers & Acquisitions
I wouldn’t overlook nor underestimate the significance of the SEC’s Office of Mergers & Acquisitions (OM&A) being the sender of comment letters.
The OM&A oversees the regulation of domestic and cross-border mergers and acquisition transactions and the statutory and regulatory interpretive functions of the SEC as they relate to tender offers, mergers, contested and other non-routine proxy solicitations, going private transactions, reorganizations, debt restructurings and beneficial ownership reporting.
Basically, OM&A’s oversight responsibilities gives them standing to look into all the issues I’ve flagged in this ongoing series beyond the proxy disclosures. There are potentially several precedent-setting M&A, governance, accounting, and proxy disclosure issues this group can address simply by focusing on Illumina-Grail.
Revisiting Francis deSouza’s Abrupt Resignation
Assuming the SEC has been engaging Illumina on their proxy disclosures this entire time, it raises another major flag on the circumstances surrounding Francis deSouza’s abrupt Sunday resignation just ~2 weeks after the contested election.
At this point, I still can’t dismiss “for cause” misconduct and can now add heightened SEC scrutiny as potential contributing factors to Mr. deSouza’s departure.
If it turns out he was forced to resign due to the prospect of being terminated “for cause”, an independent investigations to determine this arguably takes weeks, if not months. This potentially means the Board was inappropriately supporting Francis deSouza’s Board nomination during this contested election while fully aware he was under investigation and/or needed to step down.
If true, not disclosing the situation to shareholders denied them an opportunity to make a fully informed vote in this contested election, and possibly denied Carl Icahn the opportunity to win 2 to 3 Board seats, instead of the 1 seat he ultimately won.
It also arguably resulted in a FOR recommendation from ISS as well:
“In consideration of the lack of evidence of malfeasance by the CEO, and the fact that the dissident does not have a CEO candidate in hand…removal of CEO deSouza from the board seems excessively disruptive at this stage.” (source)
Illumina can’t say their objective is to maintain a Board of “individuals of the highest personal character, integrity, and ethical standards”, and allegedly conduct themselves this way.
I’ve already shared my rationale for why shareholders should consider the possibility the Board was prepared to terminate Mr. deSouza “for cause” if he didn’t resign, and this view was recently reinforced when the Board approved an additional $50,000 monthly stipend on July 12, 2023 to interim CEO and General Counsel Charles Dadswell for added responsibilities following Mr. deSouza’s departure, retroactive to June 1, 2023.
Keep in mind Francis deSouza resigned on June 11, 2023, but they backdated Mr. Dadswell’s stipend to June 1, 2023. To reconcile this, it’s conceivable Francis deSouza was given his “for cause” termination notice on June 1, 2023 to start his 15-day clock and his duties were given to Charles Dadswell that day.
Also, the timing of Francis deSouza’s June 11, 2023 departure fits a scenario where Illumina “resolved” their SEC review the next day on June 12, 2023, which started the clock to publicly release some SEC comment letters and correspondence on July 12, 2023 (the same day Mr. Dadswell’s stipend was approved).
This is why I believe more transparency and disclosure is needed regarding the circumstances of Francis deSouza’s departure. There’s too much smoke here to ignore.
Dang, it feels good to be a blogger:
End Notes: Non-GAAP Illumina Write-Ups
Malignant Governance: I explore the possibility Illumina insiders (past and present) reaped a material financial windfall from splitting-off and subsequently re-acquiring Grail (and the period in between).
Non-GAAP Activism: I discuss the potential impact of Carl Icahn featuring my write-up in his activist campaign.
Icahn’s Gambit: I lay the initial groundwork on why I believe Illumina’s “bad faith” response to the questions and issues I raised will eventually lead to resignations and how the company is in “checkmate”.
Baillie Gifford and Edgewood’s Position: I explain why top shareholders Baillie Gifford and Edgewood have legitimate conflicts to consider in regards to the upcoming vote and are potentially in possession of material non-public information regarding the unanswered questions and issues I raised.
Mutually Insured [D&O]estruction: I critique Illumina’s Grail-related D&O insurance for potential signals.
Commencing a Regulation Game: I explore the potential impact of Glass Lewis supporting two Carl Icahn Directors and share my SEC whistleblower tip on Illumina’s misleading reply to the questions and issues I raised.
Prelude to Endgame: I share why all of this matters to me and the material second-order effects that are in-play if I’m directionally correct on what I think happened at Illumina.
Fraud by Omission: I explain why I believe Illumina potentially committed fraud (by omission) to help facilitate undisclosed Grail transactions that will likely require financial restatements if proven true.
Chair Doubles Down on SEC Violations: I explain why I believe Chairman John Thompson is “doubling down” on misleading voters by omitting material facts, and his transgression is so blatant and egregious that I wouldn’t dismiss the possibility John Thompson ends up resigning from Microsoft’s Board once this saga is all said and done.
An Impossible Task: I share my disclosure-based rationale for why I believe insiders violated insider trading laws in regards to undisclosed Grail transactions and how the “scheme” potentially worked.
[Premium] The Calm Before the Storm: I explain why shareholders should consider this current period a “calm before the storm”, because we could see some material and acute changes announced in the near future. I also unpack the appointment of new Chairman Stephen Macmillan, walk through how Director Andrew Teno can quickly establish leverage and influence in the Boardroom, and how strategic alternatives potentially comes into play.
CEO Abruptly Resigns: I explore the possibility Francis deSouza’s departure may have been triggered by something “material” the Board and/or its new Directors were made aware of that compelled and warranted his abrupt resignation.