January 19, 2017

The (Not Quite) First Non-GAAP Enforcement Case! (& a Perk Case to Boot)

Yesterday, the SEC sanctioned MDC Partners for violating Reg G & Item 10(e) of Reg S-K in connection with its use of non-GAAP financial measures. Some people are calling this the first non-GAAP enforcement case – but that’s not quite right. There aren’t many, but this isn’t the first non-GAAP case. In fact, this isn’t even the first non-GAAP case since the new CDIs!

Here’s an excerpt from the SEC’s order:

Despite agreeing to comply with non-GAAP financial measure disclosure rules in December 2012 correspondence with the Commission’s Division of Corporation Finance, MDCA continued to violate those rules for six quarters by failing to afford equal or greater prominence to GAAP measures in earnings release presentations containing non-GAAP financial measures. Furthermore, for seven quarters between mid-2012 and early-2014, MDCA did not reconcile “organic revenue growth,” which as calculated by MDCA was a non-GAAP financial measure, to GAAP revenue.

In addition, the SEC announced that the company agreed to pay a $1.5 million penalty to settle charges that it failed to disclose certain perks enjoyed by its then-CEO. In April 2015, the company disclosed that the SEC was investigating its CEO’s expenses & the company’s accounting practices.

The SEC’s order says that the company disclosed a $500k annual perk allowance for its CEO – but didn’t disclose millions of dollars in additional perks. These included private aircraft usage, club memberships, cosmetic surgery, yacht and sports car expenses, jewelry, charitable donations, pet care, & personal travel expenses. The CEO resigned in July 2015 and returned $11.3 million worth of perks, personal expense reimbursements, and other items of value improperly received over a 5-year period. We’ll be posting memos regarding this case in our “Non-GAAP Disclosures” Practice Area.

Update: Francine McKenna tipped us off to this MarketWatch article, which notes that the earlier post-CDI non-GAAP enforcement case also resulted in a criminal indictment.

Internal Controls: GM Sanctioned for Deficiencies Related to Ignition Switch Recall

Yesterday was a busy day for the SEC’s Division of Enforcement.  The SEC announced that General Motors agreed to pay a $1 million penalty to settle charges that deficient internal accounting controls prevented it from properly assessing the potential financial statement impact of a defective ignition switch found in some vehicles.

According to the SEC’s order, ASC 450 requires companies dealing with potential loss contingencies – such as GM’s potential recall – to assess the likelihood of whether the potential recall will occur & provide an estimate of the loss or range of loss, or provide a statement that such an estimate cannot be made. In GM’s case, shortcomings in its controls prevented that from happening:

The SEC’s order finds that the company’s internal investigation involving the defective ignition switch wasn’t brought to the attention of its accountants until November 2013 even though other General Motors personnel understood in the spring of 2012 that there was a safety issue at hand.  Therefore, during at least an 18-month period, accountants at General Motors did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch

The GM proceeding is the second involving internal controls this month.  Last week, the SEC announced that L3 Communications agreed to pay a $1.6 million penalty to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Proxy Access: Is NYC Comptroller Graduating to Submitting Candidates?
– Shareholder Proposals: GHG Emissions Excludable
– Shareholder Proposals: “Bringing in the Vote” Disclosure
– Climate Change Chart: How Mutual Funds Vote
– SEC Comment Letters: Top Issues in 2016

John Jenkins