Charter Communications Settles with SEC, Agrees to $25 Million Penalty for Violating Internal Controls

The Securities and Exchange Commission (SEC) has reached a settlement with Charter Communications Inc., imposing a $25 million penalty on the telecommunications giant. The settlement arises from charges related to violations of internal accounting controls requirements, particularly in connection with unauthorized stock buybacks.

The SEC's order highlights Charter's breach of internal accounting controls when engaging in stock buybacks that were not explicitly authorized by its board of directors. The board had previously sanctioned specific buybacks, utilizing trading plans designed to comply with SEC Rule 10b5-1. This rule provides protection against insider trading liability, contingent on adhering to its conditions, which include an explicit prohibition on modifying planned purchases or sales once a trading plan is adopted.

However, the SEC's investigation revealed that between 2017 and 2021, Charter employed trading plans incorporating what the company referred to as "accordion" provisions. These provisions allowed Charter the flexibility to adjust the total dollar amounts earmarked for stock buybacks and to modify the timing of these buybacks after the plans had taken effect. Importantly, these practices did not align with the conditions stipulated in Rule 10b5-1, thereby rendering Charter's buybacks inconsistent with the board's authorizations.

The SEC's order specifically notes that Charter included accordion provisions in nine separate trading plans over the four-year period, indicating a recurring pattern of non-compliance.

The SEC attributes Charter's repeated use of non-compliant trading plans to its inadequate internal accounting controls. The absence of controls reasonably designed to assess whether the discretion provided by accordion provisions aligned with the board's authorizations resulted in the recurrent violations.

Melissa Hodgman, Associate Director in the SEC's Division of Enforcement, emphasized the importance of companies ensuring that controls are in place to guarantee compliance with Rule 10b5-1. "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," stated Hodgman. "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 $25 million penalty serves as a significant financial repercussion for Charter Communications Inc., underlining the SEC's commitment to enforcing internal accounting control requirements in the realm of stock buybacks.

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