The SEC barred and fined a public company Chief Accounting Officer for approving undisclosed expense reimbursements for the company’s CEO. The CEO ultimately repaid the $11.285 worth of perquisites incurred over a 5-year period for personal items such as private aircraft usage, cosmetic surgery, cash for tips, medical expenses, charitable donations, and personal travel expenses. The SEC asserts that the CAO approved the expenses in violation of company policy and without appropriate backup documentation and then failed to disclose the reimbursements in the company proxy statements. The SEC charges the CAO with causing the company to file false reports.
OUR TAKE: We wrote on Friday that the SEC is looking to hold financial executives accountable (see https://cipperman.com/2017/11/17/sec-enforcement-division-targets-financial-executives/). In this case, the SEC doesn’t even allege that the CAO derived any personal benefit by approving his boss’s expenses. Regardless, the SEC holds him accountable for allowing wrongdoing to occur.
In its 2017 fiscal report, the SEC’s Enforcement Division cites individual accountability as one of its core enforcement principles. The report expresses the Enforcement Division’s view that “individual accountability more effectively deters wrongdoing.” Since Chairman Clayton took office, the SEC has charged an individual in more than 80% of standalone enforcement actions. The report notes that it can be more expensive to pursue individuals, but “that price is worth paying.” The report notes a modest decrease in filed enforcement actions and recoveries since 2016: 754 vs. 784 cases (excluding municipal cases) and $3.8 Million vs. $4 Million in total money ordered.
OUR TAKE: “Just because you’re paranoid doesn’t mean they aren’t after you.” (Joseph Heller) The data and the explanation imply that the SEC will prioritize prosecuting individuals, even if the money ordered is smaller than in institutional actions, because of the fear and deterrent effect. If financial executives need another reason to engage a best-in-class compliance program, how about protecting yourselves from a career-ending enforcement action?
A large hedge fund manager and its CEO agreed to pay over $413 Million in civil and criminal penalties to the SEC and the Justice Department in connection with bribing foreign officials to invest sovereign wealth funds into the respondents’ investment funds. The SEC asserts that the firm did not follow its own anti-corruption procedures by failing to conduct required enhanced due diligence when concerns were raised. Although the SEC does not accuse the CEO of knowing about the bribes, they fault him and the CFO for approving the transactions despite red flags and warnings. As part of the settlement, the firm must hire a dedicated CCO that does not have any other job at the company. The SEC and DoJ allege several violations of the Foreign Corrupt Practices Act, the Investment Advisers Act, and the Securities Exchange Act. The SEC’s Enforcement Director admonished: “Senior executives cannot turn a blind eye to the acts of their employees or agents when they became aware of suspicious transactions…”
OUR TAKE: As firms go global to attract assets, the risk management infrastructure to ensure compliance with the FCPA and other laws (including laws of the local jurisdiction) must follow.