SEC Perk Disclosure Enforcement Actions Continue

Argo’s proxy statements showed that the company paid the former CEO $1.22 million in perks over this five-year period, primarily consisting of a housing allowance, retirement contributions, and medical premiums. While Argo disclosed these customary benefits, it did not disclose additional expenses associated with the former CEO’s personal use of company planes, cars, and watercraft, club memberships, and the full rental cost for the former CEO’s Bermuda residence.

These payments were not disclosed because they were incorrectly recorded as business expenses instead of compensation, and they remained undetected for several years due to the inadequacies of Argo’s internal accounting controls. These inadequacies included providing reimbursements without requiring explanations of expenses, allowing the former CEO to approve his own reimbursements, and the failure to distinguish between personal and business air travel.

After receiving a subpoena from the SEC in June 2019, Argo conducted an internal investigation that ultimately resulted in the resignation of the former CEO. As part of its remediation efforts, Argo engaged outside counsel and an independent forensic accounting firm to assist in its investigation, implemented new internal controls and compliance procedures concerning perk and expense reimbursements, obtained repayments from the former CEO, and changed the composition of its Board of Directors. Notwithstanding these efforts, the SEC imposed a $900,000 civil penalty on Argo and the company must continue to fully cooperate with any further investigations or proceedings that the SEC may pursue.

The Trend Continues

This enforcement action is the latest in a series of actions in recent years relating to the disclosure of perks and executive benefits, demonstrating that these disclosures remain an area of high concern for the SEC and highlighting the importance of careful review to ensure compliance with SEC standards.

• As discussed in our previous client alert, in July 2018 Dow Chemical Company agreed to pay a $1.75 million penalty to settle charges related to inadequate disclosure of CEO perks in its proxy statements.
• Also in July 2018, the SEC reported that it reached a settlement with the former CEO of Energy XXI Ltd. in connection with inadequately disclosed executive perks that required him to pay a $180,000 penalty and barred him from service as an officer or director of a public company for five years. In its complaint, the SEC alleged that the former CEO submitted personal expenses of more than $1 million over a five-year period that were not disclosed in the company’s proxy statements, including $323,000 toward the cost of a private bar in the company’s executive office suite, $40,000 for a bottle of wine at a charity auction, and $43,000 for the use of company aircraft to attend a college football game.
• In August 2019, the SEC reached a settlement with SITO Mobile, Ltd. after finding that its former CEO and CFO used company credit and debit cards to pay for over $300,000 in personal expenses, including extravagant personal trips, birthday party celebrations, and weekend meals that were not disclosed in the company’s proxy statements. Due to the company’s significant remediation efforts, which included the resignation of the CEO and CFO and an overhaul of the company’s expense reimbursement policies, the SEC did not impose a monetary penalty in this instance.

In addition to these formal SEC actions, anecdotal evidence suggests that there has been a general increase in the SEC’s interest in examining and investigating executive perk disclosures.

These enforcement actions are an important reminder that the existence of a business purpose related to an executive’s job that supports a corporate tax deduction is insufficient to determine that a benefit does not need to be disclosed as a perk in a company’s proxy statements. There are many benefits that may be deductible for tax purposes but treated as perks or other personal benefits for proxy reporting purposes, such as home security or security while on a personal trip for a CEO, travel expenses by a CEO to attend board meetings of other companies, exercise equipment/executive physicals, and club memberships.

Next Steps
As a result of the above described increased SEC enforcement activity, it would be prudent for U.S. public companies to engage legal counsel to review their perk disclosure in their proxy statements in advance of the 2021 proxy season.

Attorneys on the Executive Compensation team at Pillsbury are equipped to audit perk disclosures as independent legal experts and to prepare a privileged report for the compensation committee of a company on the company’s perk disclosure practices and policies for a fixed fee. Contact an attorney in the Executive Compensation team to learn more about this service.