By George Wilson
"It's like déjà vu all over again."
Lawrence Peter "Yogi" Berra (May 12, 1925 – September 22, 2015)
Have you been wondering about current focus areas in the SEC’s Enforcement Division? In our last post we explored one such area, channel stuffing and the related failure to disclose MD&A known trends. On September 30, 2020, the SEC brought the latest in a series of cases dealing with failure to appropriately disclose executive perks. This is clearly another focus area for enforcement.
These cases usually involve not using the appropriate tests to identify perks and the related failure to disclose these perks to shareholders in the proxy solicitation process and related Form 10-K disclosures. This is a quote from the SEC’s September 30, 2020 press release:
“Hilton failed to disclose approximately $1.7 million worth of travel-related perquisites and personal benefits it provided to executive officers from 2015 through 2018. The perquisites included the CEO’s personal use of Hilton’s corporate aircraft and executive officers’ hotel stays. The order finds that Hilton failed to appropriately apply the SEC’s compensation disclosure rules to its system for identifying, tracking and calculating perquisites.”
In July 2018, the SEC brought a very similar case against Dow Chemical. In that case approximately $3 million in perks were not appropriately evaluated and disclosed. Dow failed to use the appropriate test to evaluate items for disclosure as perks. This test states:
An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
Otherwise an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non- discriminatory basis to all employees.
Dow was required to hire a consultant to review the company’s policies and procedures and take appropriate corrective action to assure such disclosure were proper in the future and also paid a penalty of $1,750,000.
In a similar case announced on June 4, 2020, this one involving Argo Group International Holdings, the SEC stated in their press release:
“The SEC’s order finds that in its proxy statements for 2014 through 2018, Argo disclosed that it had provided a total of approximately $1.2 million in perquisites and personal benefits, chiefly retirement and financial planning benefits, to its then CEO. According to the order, Argo failed to disclose over $5.3 million it had paid on the CEO’s behalf, including in filings for 2018 after a shareholder issued a press release alleging undisclosed perks to the CEO. The order finds that the perks Argo paid for, but did not disclose, included personal use of corporate aircraft, helicopter trips and other personal travel, housing costs, transportation for family members, personal services, club memberships, and tickets and transportation to entertainment events. The order finds that, as a result, Argo understated perks and personal benefits paid to the CEO over this period by more than $1 million per year, or 400%. The CEO resigned from that position in November 2019.”
In December 2017, the SEC enforced against Provectus, stating in the related press release that:
“Provectus lacked sufficient controls surrounding the reporting and disclosure of travel and entertainment expenses submitted by its executives. The order further finds that Provectus’ former CEO, Dr. H. Craig Dees, obtained millions of dollars from the company using limited, fabricated, or non-existent expense documentation, and that these unauthorized perks and benefits were not disclosed to investors. Provectus’ former CFO, Peter R. Culpepper, also allegedly obtained $199,194 in unauthorized and undisclosed perks and benefits.”
In one last case to highlight, on September 8, 2015, the SEC enforced against MusclePharm Corporation for a number of issues including, as described in the related press release:
“that MusclePharm omitted or understated nearly a half-million dollars’ worth of perks bestowed upon its executives, including approximately $244,000 paid to CEO Brad Pyatt related to automobiles, apparel, meals, golf club memberships, and his personal tax and legal services. Even after the company began an internal review of undisclosed executive perks and then-audit committee chair Donald Prosser became directly involved in the process, MusclePharm continued filing financial statements that failed to disclose private jet use, vehicles, and golf club memberships for its executives.“
Seems like there is a recurring theme in all of this and a related heads-up to be sure all perks are appropriately identified and disclosed!
As always, your thoughts and comments are welcome!