A settled enforcement action offers a sharp warning for public companies: proper disclosure of executive perks still matters.
Kansas-based NIC Inc. is the latest reminder that executive perquisites can cost companies far more than their face value. In addition to potentially angering shareholders, extra frills for executives can land a company in hot water with the Securities and Exchange Commission if they aren't properly disclosed.
The SEC charged the company, which manages government websites, and four of its current and former executives for hiding more than $1.18 million in perks paid to its former CEO, his family and his girlfriend from 2002 to 2007. Without admitting or denying the allegations, NIC, its former CEO Jeffrey Fraser, current CEO Harry Herington and former CFO Eric Bur agreed to pay a combined $2.8 million to settle the charges.
“We have determined that it is in the best interests of the company to settle this matter so that we can continue to concentrate our full attention and energy on the bright future we see for NIC,” Herington said in a statement.
The SEC alleges that, among other things, NIC and Fraser failed to disclose Fraser's perquisites and falsely represented in its SEC filings that Fraser worked virtually for free until 2005. According to the complaint, the company was footing the bill for vacations, computers, and personal living expenses, including a Wyoming ski lodge and Fraser's commute by private aircraft to his office at NIC's Kansas headquarters. The SEC alleges that NIC's related party disclosures for 2002 through 2005 were misleading and Fraser's perks were also understated in NIC's 2006 and 2007 public filings.
According to the SEC's complaints, NIC failed to correct Fraser's expense reporting problems even after the finance department employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower complained to NIC and the company learned of the SEC's investigation of this matter in mid-2007. The majority of Fraser's perks were not repaid or disclosed, and NIC continued to make misleading public filings. NIC failed to disclose to investors in public filings that an internal review concluded Fraser had intentionally misclassified his expenses.
NIC agreed to pay a $500,000 penalty. Herington agreed to pay $200,000. The company and Herington consented to a permanent injunction against future violations of federal securities laws and SEC rules. NIC also agreed to hire an independent consultant to recommend improvements to its policies, procedures, controls and training related to payment of expenses, handling of whistleblower complaints, and disclosure of perquisites and related party transactions.
Fraser agreed to pay $1.18 million in disgorgement, a $500,000 penalty, prejudgment interest, and consented to an order barring him from serving as an officer or director of a public company. Bur agreed to pay a $75,000 penalty and consented to a judgment enjoining him from violating SEC rules and aiding and abetting NIC's violations. He also consented to an SEC order barring him from practicing before the SEC as an accountant with a right to reapply after one year.
Related SEC charges against NIC's current CFO Stephen Kovzan, which seek a permanent injunction, disgorgement, penalties, prejudgment interest, and an officer-and-director bar, are still pending. Kovzan “intends to vigorously defend himself against those charges because he believes they are without merit,” according to the company's Jan. 12 8-K filing. A company spokeswoman confirmed that Kovzan continues to perform his role as CFO.
The sanctions reflect the severity of the violations, says Edward Smith, a partner in the law firm Chadbourne & Parke. “SEC enforcement action related to the disclosure of perks and personal benefits have been few and far between,” he says. “The actions they have brought in this area have involved egregious situations.”
For instance, the SEC entered a settled cease-and-desist order against General Electric in 2004 for inadequate disclosure about post-retirement benefits paid to former CEO Jack Welsh GE –SEC brought enforcement action. In 2005, the Commission settled charges against Tyson Foods and former CEO Donald Tyson for disclosure failures related to perks and personal benefits paid to Tyson and other family members.
While the disclosure of perks and benefits and related party transactions are often the subject of SEC staff comments, Smith says the staff typically issues a comment directing the company to fix its disclosure in future filings. In cases where the disclosure is deemed inadequate, the staff may require the company to amend the disclosure in an 8-K.