Failure To Disclose Perks Remains In The SEC Spotlight – Corporate/Commercial Law – United States – Mondaq News Alerts

Disclosure of executive perks is once again in the SEC
Enforcement spotlight. 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). Now, Enforcement has brought
settled charges against Gulfport Energy Corporation, a gas exploration
and production company that filed for Chapter 11 in November, and
its former CEO, Michael G. Moore, for failure to disclose some
of the perks provided to Moore as well as related-person
transactions involving Moore’s son. The case serves as a
reminder that the analysis of whether a benefit is a disclosable
perk can be complicated.

SideBar

As explained in Release 33-8732a, determining whether an item
is perk involves a two-step test:

• “An item is not a perquisite or
  personal benefit if it is integrally and directly related to the
  performance of the executive’s duties.
• Otherwise, an item is a perquisite or
  personal benefit if it confers a direct or indirect benefit that
  has a personal aspect, without regard to whether it may be provided
  for some business reason or for the convenience of the company,
  unless it is generally available on a non-discriminatory basis to
  all employees.”

While it may sound straightforward, application of the test can
be often be thorny: the “concept of a benefit that is
‘integrally and directly related’ to job performance is a
narrow one. The analysis draws a critical distinction between an
item that a company provides because the executive needs it to do
the job, making it integrally and directly related to the
performance of duties, and an item provided for some other reason,
even where that other reason can involve both company benefit and
personal benefit.” Examples identified by the
SEC 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.”

The Gulfport order alleges that, between 2014 and October 2018,
when he resigned, Moore used chartered aircraft, which were charged
to Gulfport for an aggregate of $650,000, for travel that the SEC
concluded was “not integrally and directly related to the
performance of his CEO duties.” The examples cited were trips
with his wife to attend a wine tasting weekend and a poker
tournament sponsored by a Gulfport supplier. It’s not hard to
imagine that Moore may have viewed his attendance at
supplier-sponsored events as work-related, but that doesn’t
mean that the trips were “integrally and directly related to
the performance of his duties,” at least from the perspective
of the SEC. The SEC also pointed out that personal use of a charter
aircraft (and company credit cards discussed below) were not
generally available on a non-discriminatory basis to all Gulfport
employees.

Although Gulfport did not have policies or procedures
specifically regarding aircraft use, it did have a code of ethics
and an employee handbook that required company assets to be used
only for legitimate business purposes. In addition, the handbook
prohibited employees from misrepresenting or omitting material
information about the company to others, including the
company’s independent auditors. Nevertheless, as a result of
the absence of policies and procedures, Gulfport did not review
Moore’s chartered aircraft usage to determine if his trips
involved perks, nor did Moore identify the charter flights as perks
in his annual D&O questionnaires. Consequently, Gulfport
improperly characterized Moore’s flight expenses as business
travel expenses, making the company’s books and records
inaccurate.

In addition, the Order charges that Moore used a Gulfport
corporate credit card for personal expenses, but did not pay the
charges on a timely basis. Although Moore was authorized to use the
credit card for business purposes, the card was not to be used for
personal purposes; in the event a personal charge was made, policy
required “immediate reimbursement.” In addition, while
Moore identified his personal charges for Gulfport on a monthly
basis, Gulfport regularly allowed him to defer repayment. As a
result, Gulfport regularly carried a related-person account
receivable from Moore for his corporate credit card use that
sometimes ballooned to over $300,000 without any payments over
eight months, thereby extending interest-free credit to Moore.
Moore did not disclose this perk or this related-person
indebtedness on his D&O questionnaires.

Gulfport also engaged Moore’s son’s company to perform
landscaping work for Gulfport, paying him $152,000 during 2015.
However, apparently to circumvent the $120,000 related-person
transaction disclosure threshold, the Order alleges that Moore
directed his son’s company to repay Gulfport approximately
$32,000, which amount Moore then paid his son’s company
personally. But that didn’t quite cut it, from the SEC’s
point of view. The SEC charged that “Moore’s son’s
company had in fact provided services and materials valued at
approximately $152,000 in 2015,” and Moore failed to disclose
the payments in his D&O questionnaire.

As a result of Moore’s failures to provide the information
above, the SEC alleged, Gulfport made material misstatements in its
annual reports and definitive proxy statements. For example, the
SEC concluded that “Moore’s perquisites were understated
in the Proxy Statements by 78% in FY 2014, 81% in FY 2015, 76% in
FY 2016, and 82% in FY 2017,” and the proxy statement omitted
disclosure of the related-person transactions regarding his credit
card use and his son’s company. In addition, Gulfport’s
inadequate internal accounting controls resulted in Gulfport’s
failure to accurately record Moore’s perquisites in its books
and records. Further, during this period, Gulfport and Moore
offered and sold Gulfport securities.

When Gulfport’s Board became aware of Moore’s perks, the
Audit Committee authorized an internal investigation into
Moore’s conduct. Gulfport disclosed the problems in its 10-Q,
along with Moore’s resignation, and undertook a series of
remedial steps.

The SEC found that Gulfport and Moore violated the proxy rules
(Exchange Act Section 14(a) and related rules), filed (or, in the
case of Moore, caused Gulfport to file) a materially misleading
Form 10-K (Exchange Act Section 13(a) and related rules), and
violated (or caused Gulfport to violate) the books and records
requirements (Exchange Act Section 13(b)(2)(A)). The SEC also found
that Gulfport failed to maintain adequate internal accounting
controls (Exchange Act Section 13(b)(2)(B)). In addition, the SEC
found that Moore (but apparently not Gulfport) violated the
antifraud provisions of Section 17(a)(3) of the Securities Act
(which requires no finding of scienter), and “violated
Exchange Act Rule 13b2-1, which prohibits any person from, directly
or indirectly, falsifying or causing to be falsified, any book,
record, or account subject to Section 13(b)(2)(A) of the Exchange
Act.” As a result of Gulfport’s “extensive remedial
efforts,” the SEC did not impose a civil penalty on Gulfport
and ordered only that it cease and desist from further violations.
Moore, however, was required to pay a civil penalty in the amount
of $88,248.

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