Enforcement Again Brings Charges for Failure to Disclose Perks

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes Stealth Compensation Via Retirement Benefits by Lucian Bebchuk and Jesse M. Fried.

Failure to disclose executive perks continues to be a flashing target for SEC Enforcement. Just last year, there were two actions against companies for disclosure failures regarding perks—Hilton Worldwide Holdings Inc. (see this PubCo post) and Argo Group International Holdings, Ltd. (see this PubCo post). And earlier this year, Enforcement brought settled charges against Gulfport Energy Corporation and its former CEO, Michael G. Moore, for failure to disclose some of the perks provided to Moore (see this PubCo post). Now, the SEC has once again filed settled charges against a company, ProPetro Holding Corp., and its co-founder and former CEO, Dale Redman, for failure to properly disclose executive perks—including, once again, personal use of aircraft at the company’s expense—as well as two stock pledges. While the topic is not new, the different types of blunders and slip-ups—which seem to be unique to each case—can be instructive. In this case, the focus was—in addition to absence of a policy regarding personal travel reimbursement, inadequate internal controls around perks and failure to disclose paid personal travel expenses—an inadequate process for completion and review of D&O questionnaires.

As you know, Reg S-K Item 402 requires identification of all perquisites and personal benefits by type, and quantification of any perquisite or personal benefit that exceeds the greater of $25,000 or 10% of total perquisites. Item 403, which provides for inclusion of the beneficial ownership table, requires disclosure of the number of shares beneficially owned that are pledged as security, usually disclosed in a footnote to the table.

In ProPetro, the CEO had a 50% interest in a private aviation company that owned a Learjet, which the CEO used principally for business-related travel. The aircraft company would submit invoices monthly, which the CEO initialed to approve and then passed them on to accounting for payment. However, the SEC alleged, about 10% of that travel was personal travel that was not integrally and directly related to the performance of the CEO’s duties, amounting to over $250,000 in payments for use of the aircraft and pilot time. Interestingly, the company did disclose travel-related payments to the aviation company as related-person transactions. Notably, the SEC made a point of stating that ProPetro did not have a formal policy regarding approval and use of noncommercial aircraft or a process for reimbursement of private aviation expenses.


Questions of whether items are perks—that is, whether they are “integrally and directly related to the performance of the executive’s duties” or confer “a direct or indirect benefit that has a personal aspect”—can be often be thorny. Examples identified by the SEC in Release 33-8732a include

“club memberships not used exclusively for business entertainment purposes, personal financial or tax advice, personal travel using vehicles owned or leased by the company, personal travel otherwise financed by the company, personal use of other property owned or leased by the company, housing and other living expenses (including but not limited to relocation assistance and payments for the executive or director to stay at his or her personal residence), security provided at a personal residence or during personal travel, commuting expenses (whether or not for the company’s convenience or benefit), and discounts on the company’s products or services not generally available to employees on a non-discriminatory basis….For example, a company’s provision of helicopter service for an executive to commute to work from home is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis. As we have noted, business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”

In addition, although the company’s employee handbook prohibited use of company credit cards for items that were “inappropriate for company funds” and required documentation of credit card purchases, the SEC charged, both the CEO and his family members used his company credit cards for personal purchases that were not integrally and directly related to the performance of the CEO’s duties. All of these purchases, totaling almost $130,000, were paid for by the company, but not disclosed as perks. The company also paid for almost $50,000 in authorized perks, including charitable donations and event tickets, but, as a result of alleged “failures in the company’s internal accounting controls,” they were not recorded or disclosed as perks as required. In sum, the company failed to disclose just over $428,000 in CEO perks for 2017 and 2018.

The company also failed to disclose in the beneficial ownership table that the CEO had pledged his shares of the company as collateral for a real estate transaction. Contrary to the provisions of a shareholders’ agreement, the SEC alleged, the CEO did not obtain written consent from the company prior to the pledge. In a subsequent real estate transaction, the CEO again sought to pledge his shares as collateral, at that point also in contravention of a recently adopted insider trading policy that prohibited pledges. The second bank, seeking to perfect its security interest, advised the company about the pledge, which ultimately resulted in a board-approved transformation of the pledge into a negative pledge, under which the CEO agreed not to sell his shares as long as the loan was outstanding to the bank. The CEO did not, however, advise the board of the first pledge, and neither of these pledges was disclosed in the company’s SEC filings on a timely basis.

Next, as noted above, the SEC charged that there were serious problems related to D&O questionnaires. According to the SEC, in one year, the CEO “left the line item for pledged shares blank,” and in the next year, he did not even complete a D&O questionnaire. In the subsequent year, he did not fill out the security ownership schedule, where he should have disclosed pledges. In none of the questionnaires did the CEO identify any of his personal trips on the Learjet, the personal charges on the corporate credit card or the additional perquisites 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 he then used the information for disclosure purposes.

Needless to say, in the company’s proxy statements, the CEO’s perks were substantially “understated” and the pledges of the CEO’s stock were not disclosed. The proxy statement, however, was used to solicit votes and incorporated into the 10-K. The company also sold securities to the public, including through its IPO, and to its employees.

An independent investigation initiated by the company’s audit committee of other unrelated matters revealed improper expense reimbursements to senior management and the undisclosed CEO stock pledges. As a result, the CEO reimbursed the company for almost $350,000. A number of directors and members of senior management, including ultimately the CEO, resigned.

The SEC charged the CEO with securities fraud under Section 17(a)(3) of the Securities Act (which applies a negligence standard) and with violation of Exchange Act Rule 13b2-1, falsifying books and records. Both the company and the CEO were charged with violations of the proxy rules, Section 14(a) and Rules 14a-3 and 14a-9 of the Exchange Act, none of which requires a finding of scienter. In addition, the SEC charged that the company had violated, and that the CEO had caused the company to violate, Section 13(a) and Rules 13a-1 and 12b-20 as a result of inaccurate 10-Ks, Section 13(b)(2)(A) for inadequate books and records, and Section 13(b)(2)(B) for failure to devise and maintain an adequate system of internal accounting controls.

The CEO was required to pay a civil penalty of $195,046. There was no financial penalty imposed on the company, based on its cooperation with the SEC and the serious remedial efforts undertaken by the company, which included hiring a new management team, appointing several new directors and audit committee members, enhancing the D&O questionnaire process and developing new internal controls regarding, among other things expenses, credit cards, reimbursements and travel.

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