Failing to Disclose CEO Perks Can Be Expensive

Failing to Disclose CEO Perks Can Be Expensive

While not all companies can afford private jets or fancy yachts, many still provide their top management with certain “perks.” As highlighted by a recent enforcement action brought by the Securities and Exchange Commission (SEC), public companies that fail to properly disclose executive compensation or “CEO perks” may face costly fines and other legal repercussions.

Rules Governing Disclosure of Executive Compensation

Item 402 of Regulation S-K requires publicly-traded companies to disclose the total value of all perquisites and other personal benefits provided to named executive officers (including CEOs) who receive at least $10,000 worth of such items in a given year. Item 402 of Regulation S-K also requires corporates disclosure of all perquisites and personal benefits by type and specific identification of any perquisite or personal benefit that exceeds the greater of $25,000 or 10 percent of the total perquisites.

Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange in contravention of SEC rules and regulations. Rule 14a-3 prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from soliciting proxies without furnishing proxy statements containing the information specified in Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation S-K. In addition, Rule 14a-9 prohibits the use of proxy statements containing materially false or misleading statements or materially misleading omissions.

Fines for Corporate Disclosure Failures

MDC Partners and its former Chairman and Chief Executive Officer, Miles S. Nadal, recently paid millions of dollars to resolve SEC charges related to disclosure failures. According to the SEC, for several years, MDC failed to disclose significant amounts of compensation paid to Nadal in the form of a wide range of perquisites and personal benefits.

From 2009 through 2014, Nadal improperly received $11.285 million worth of perquisites, personal expense reimbursements and other items of value that were not disclosed in MDC’s proxy statements. Perks that were not properly disclosed included private aircraft usage, cosmetic surgery, yacht-and-sports-car-related expenses, jewelry, cash for tips and gratuities, medical expenses for Nadal, family members and others, charitable donations in Nadal’s name, pet care, vacation and personal travel expenses, and club memberships.

As detailed in the SEC’s order, MDC incorrectly recorded payments for the benefit of, and reimbursements to, Nadal as business expenses, and not compensation. As a result, its books, records, and accounts did not, in reasonable detail, accurately and fairly reflect its disposition of assets.

“Perks paid to corporate executives should be properly disclosed so that investors can make informed decisions,” said G. Jeffrey Boujoukos, Director of the SEC’s Philadelphia Regional Office.  “Nadal improperly received and failed to disclose millions of dollars in compensation.”

To resolve the SEC charges, MDC previously paid $1.5 million. Nadal recently agreed to pay $5.5 million to settle the separate charges against him. He is also barred from serving as an officer or director of a public company for five years. Nadal previously returned $11.285 million to the company and resigned from his position.