The SEC continues to focus on accounting and disclosure violations, including in the area of executive perks disclosure in corporate proxy statements. In the past year, the SEC brought two enforcement cases against executives and companies for failure to fully disclose executive perks. In one of the matters, the SEC took the unusual and provocative step of suing the company’s audit committee chair because he “had reason to know” that the perks had not been fully disclosed in the company’s SEC filings. Taken together, these two actions are a harbinger of the SEC’s intensifying scrutiny of executive compensation disclosures.
Under Rule 14a-3 of the Securities Exchange Act of 1934, companies with Section 12 registered securities must provide proxy statements that include executive compensation disclosures in accordance with Item 402 of Regulation S-K prior to shareholder meetings. In turn, Item 402 requires disclosure of the total value of any executive perks which exceed $10,000 in a given year. The failure to disclose such executive perks may violate Rule 14a-9 which prohibits corporations from issuing proxy statements containing materially false or misleading statements or omissions.
On March 31, 2015, the SEC filed a fraud complaint against Andrew Miller, the former CEO of San Jose-based company, Polycom, Inc. (“Polycom”), for failure to disclose almost $190,000 in executive perks in its proxy statements. In what the SEC called an “expense abuse scheme,” Miller allegedly described extravagant personal expenses, like trips to Bali with guests, as legitimate company expenses. The SEC further alleges that Miller directed that personal or other expenses be buried in other budget items. The SEC is litigating its case against Miller in federal court, and Miller resigned from Polycom in July 2013.
The SEC also charged Polycom in a separate order that included allegations that the company violated the internal controls provisions of the securities laws by allowing Miller to self-approve certain of his own falsified expenses, book and charge travel without valid business descriptions, and issue company purchasing cards to himself and his assistants to charge his certain personal expenses. The SEC order found that Polycom violated the proxy disclosure rules by failing to report the perks detailed in the complaint against Miller, notwithstanding the fact that there was no allegation that anyone at the company knew about the fraudulently obtained perks. Polycom paid $750,000 to settle all charges.
Just a few months later, the SEC brought and settled charges against MusclePharm Corporation (“MusclePharm”), several of its executives, and its former audit committee chair for failure to disclose nearly $500,000 in executive perks, including meals, private cars, golf memberships, and other lavish personal expenses. MusclePharm, a sports nutrition and supplement company, settled these charges and the company and individuals each paid a civil penalty. Notably, MusclePharm was also required to hire an independent consultant for one year to review expense reporting and recommend proper financial disclosure policies.
The Bottom Line: As highlighted by Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, “[e]xecutive compensation is material information for investors, and companies must ensure that perks it pays for executives are properly recorded and disclosed in public filings.” Companies should consider that highly visible perks provided to executives -- such as use of the company jet, club memberships, and the like -- will receive extra scrutiny by the SEC and thus warrant additional consideration both in approving and disclosing the perks. Boards and compliance personnel of public corporations need to ensure that their companies have proper controls to approve and account for the value of perks, and that the proxy disclosure rules are then scrupulously followed.
