Failure to disclose leadership benefits continues to be a flashing target for SEC enforcement. Just last year, two lawsuits were brought against companies for failure to disclose benefits: Hilton Worldwide Holdings Inc. (see this article on PubCo) and Argo Group International Holdings, Ltd. (see this article on PubCo). And earlier this year, Enforcement filed a lawsuit against Gulfport Energy Corporation and its former CEO, Michael G. Moore, for failing to disclose some of the benefits provided to Moore (see this PubCo article). Now the SEC has again filed settled charges against a company, ProPetro Holding Corp., and its co-founder and former CEO, Dale Redman, for failing to properly disclose management benefits, including, again , the personal use of planes at the expense of the company, as well as two pledges of shares. While the topic is not new, the different types of errors and slips, which seem to be unique to each case, can be instructive. In this case, the focus was – in addition to the lack of a policy regarding reimbursement for personal travel, inadequate internal controls over benefits, and the failure to disclose paid personal travel expenses – an inadequate process. to complete and review D&O questionnaires.
As you know, Section 402 of Reg SK requires the identification of all perquisites and personal benefits by type, and the quantification of any perquisites or personal benefits that exceed the greater of $ 25,000 or 10% of total indirect benefits. Item 403, which provides for the inclusion of the table of beneficial owners, requires disclosure of the number of shares held as beneficial owners which are pledged as collateral, usually disclosed in a footnote to the table.
In ProPetro, the CEO had a 50% stake in a private aviation company that owned a Learjet, which he used primarily for business travel. The airline would submit invoices monthly, which the CEO would initial to approve, and then forward them to accounting for payment. However, according to the SEC, around 10% of those trips were personal trips that were not fully and directly related to the performance of the CEO’s duties, amounting to over $ 250,000 in payments for the use of the CEO. the plane and the pilot’s time. Interestingly, the company disclosed the travel-related payments to the airline as related party transactions. Notably, the SEC insisted on declaring that ProPetro did not have a formal policy regarding the approval and use of non-commercial aircraft or a process for reimbursing private aviation expenses.
Additionally, although the company’s employee handbook prohibits the use of company credit cards for items “unsuitable for company funds” and requires documentation of credit card purchases , the SEC accused both the CEO and members of his family used his corporate credit cards for personal purchases that were not fully and directly related to the performance of CEO duties. All of these purchases, totaling nearly $ 130,000, were paid for by the company, but were not disclosed as benefits. The company also paid nearly $ 50,000 in authorized benefits, including charitable donations and event tickets, but, due to alleged “failings in the company’s internal accounting controls”, they didn’t. have not been registered or disclosed as benefits as required. In summary, the company did not disclose just over $ 428,000 in CEO benefits for 2017 and 2018.
The company also failed to disclose in the table of beneficial owners that the CEO had pledged his shares in the company as collateral for a real estate transaction. Unlike the provisions of a shareholders’ agreement, according to the SEC, the CEO did not obtain the written consent of the company prior to the pledge. In a subsequent real estate transaction, the CEO again sought to pledge his shares as collateral, also in violation of a recently enacted insider trading policy that prohibited pledges. The second bank, seeking to perfect its security, advised the company on the pledge, which ultimately resulted in a board-approved transformation of the pledge into a negative pledge, under which the CEO committed to not to sell its shares until the loan was in arrears with the bank. The CEO, however, did not notify the board of directors of the first engagement, and none of those commitments were timely disclosed in the documents filed with the SEC.
Then, as noted above, the SEC blamed serious problems with D&O questionnaires. According to the SEC, over the course of a year, the CEO “left the line blank for pledged shares” and the following year he didn’t even complete a D&O questionnaire. The following year, he did not complete the title ownership table, where he should have disclosed the pledges. In none of the questionnaires did the CEO identify any of his personal journeys on the Learjet, personal charges on the company credit card, or additional perks discussed above that were authorized by the company. The SEC notes that the company did not have a formal policy regarding D&O questionnaires; rather, the GC was responsible for ensuring that they were completed, and then used the information for disclosure.
Needless to say, in the company’s proxy statements, the CEO’s benefits were significantly “understated” and the CEO’s pledges of action were not disclosed. The proxy statement, however, was used to solicit votes and incorporated into the 10-K. The company has also sold securities to the public, in particular as part of its initial public offering, and to its employees.
An independent investigation initiated by the company’s audit committee into other unrelated matters revealed inappropriate expense reimbursements to senior management and the CEO’s undisclosed pledges of action. As a result, the CEO reimbursed the company nearly $ 350,000. A number of directors and senior management, ultimately including the CEO, have resigned.
The SEC charged the CEO with securities fraud under Section 17 (a) (3) of the Securities Act (which applies a standard of negligence) and violating rule 13b2-1 of the Exchange Act , falsification of books and registers. The company and the CEO have both been charged with violations of the proxy rules, section 14 (a) and rules 14a-3 and 14a-9 of the Exchange Act, neither of which requires a finding of scienter . In addition, the SEC accused the company of violating, and that the CEO caused the company to violate Section 13 (a) and Rules 13a-1 and 12b-20 due to inaccurate 10-K, Section 13 (b) (2) (A) for inadequate books and records, and Section 13 (b) (2) (B) for failure to design and maintain an adequate system of internal accounting controls.
The CEO had to pay a civil fine of $ 195,046. No financial sanctions were imposed on the company, based on its cooperation with the SEC and the serious remedial efforts undertaken by the company, which included the hiring of a new management team, the appointment of several new directors and members of the audit committee, improving the D&O questionnaire process and developing new internal controls concerning, among other things, expenses, credit cards, reimbursements and travel.