The Securities and Exchange Commission on Thursday charged Mark Frissora, the former chief executive officer of car rental service Hertz, with aiding and abetting the company in its filing of inaccurate financial statements and disclosures.
The SEC’s complaint, filed in federal district court in New Jersey, charges Frissora with violating Section 304 of the Sarbanes-Oxley Act by failing to reimburse Hertz for the requisite amount of incentive-based compensation he received. Without admitting or denying the allegations, Frissora agreed to settle the charges and repay Hertz nearly $2 million in incentive-based compensation. The settlement, which is pending court approval, also includes a $200,000 civil penalty.
The SEC’s complaint alleges that as Hertz’s financial results fell short of its forecasts throughout 2013, Frissora pressured subordinates to “find money” through reanalyzing reserve accounts. “In response to these general requests and the financial pressures on Hertz, various Hertz finance and business personnel used inappropriate accounting methodologies that rendered the company’s financial reports materially inaccurate,” the complaint states.
Also during 2013, Frissora allegedly led Hertz to hold cars in its U.S. car rental fleet for longer periods of time before replacing them. “Because the planned holding periods factored into Hertz’s calculation of the depreciation of its car rental assets, the planned holding period extensions lowered Hertz’s expenses in the short-term,” the complaint stated. “Hertz did not adequately disclose its decision to extend the holding periods to investors.”
The complaint also describes how, in early November 2013, “after Hertz staff had scrutinized reserve accounts in prior quarters, Hertz’s senior management team, led by Frissora, pressed for opportunities to ’lower the reserve’ in parts of the U.S. rental car business to try to increase Hertz’s earnings for 2013.” Hertz staff revised certain reserve methodologies, yielding $3 million in savings, “but several of the methodology changes did not satisfy GAAP, were not based on historical experience, and were not reviewed with Hertz’s auditor,” the complaint stated.
The SEC faulted Hertz’s former controller, Jatindar Kapur, for “knowingly or recklessly” approving these accounting methodology changes. Kapur settled a related matter with the SEC regarding his individual liability in December 2019.
In December 2018, Hertz paid $16 million to settle related fraud and other charges brought by the SEC.
Hertz revised its financial results in 2014 and restated them in July 2015, reducing its previously reported pretax income by $235 million.
“Investors are entitled to accurate and reliable disclosures of material information about a company’s financial condition,” said Marc Berger, director of the SEC’s New York Regional Office, in a press release. “We are committed to holding corporate executives accountable when their actions deprive investors of such information.”
Hertz filed a complaint last year in U.S. District Court in New Jersey against Frissora, former Chief Financial Officer Elyse Douglas, and former Executive Vice President and General Counsel John Jeffrey Zimmerman. In that case, Hertz argued the clawback policies contained in its compensation agreements entitled it to recover compensation that was paid based on financial results that had to be restated as a result of mismanagement.
According to Hertz, Frissora’s management style led to an “inconsistent and inappropriate” tone at the top of the organization, where a “pressurized operating environment” led to an inappropriate emphasis on meeting internal budgets, business plans, and estimates. That led to inappropriate accounting decisions and failures to disclose critical information, the complaint stated. While Hertz attributed the overall tone to Frissora, it faulted Douglas and Zimmerman for not tempering it.
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