TheCorporateCounsel.net

Providing practical guidance
since 1975.

January 14, 2025

“Do Not Cross the Boss”

Don’t cross the boss” can be decent advice, depending on the type of boss you have. At the SEC, though, who is the boss right now?

On one hand, Gary Gensler is still in charge for one more week – and he had a certain view on the SEC’s priorities and how to accomplish them. On the other hand, while it’s too early to make solid predictions, Paul Atkins has been tapped to lead the Commission and has made a lot of public comments about easing companies’ regulatory burdens, and he could also transform the enforcement environment. At least one former SEC official thinks things could get a little less treacherous for companies, and that he’ll encourage the Enforcement Division to focus more on individual wrongdoers.

The anticipated shift probably adds a wrinkle to in-process enforcement actions. The SEC’s newsroom has announced a number of settlements over the past few weeks, but of course the one the SEC announced last week with Vince McMahon – former WWE CEO and Linda McMahon’s legal spouse – caught my eye. Yes, celebrity gossip is what drew me in, but the nerdy securities law issues are what kept me reading till the very end.

The gist of the SEC’s findings, which Vinny Mac neither admits nor denies, is that he entered into two hush money agreements under which he, individually, paid a total of $10.5 million. However, the Mac Attack also signed the agreements on behalf of the company, which also benefitted from releases of claims. He didn’t inform WWE’s board, legal department, accountants, financial reporting personnel, or auditor, about the agreements. So, nobody considered whether those transactions needed to be accounted for or disclosed by the company. According to the SEC’s order, that was a problem:

McMahon’s failure to disclose the Agreements caused material misstatements in WWE’s 2018 and 2021 annual reports and certain quarterly reports. Because the payments required by the 2019 agreement were not recorded, even though the amounts were paid or to be paid by McMahon, WWE overstated its 2018 net income by approximately 8% for the year and approximately 22% for the fourth quarter of 2018. Similarly, because the payments required by the 2022 agreement were not recorded, WWE overstated its 2021 net income and the net income for the fourth quarter of 2021 by approximately 1.7% and 4.9%, respectively. In addition, these Agreements should have been disclosed as related party transactions. The subsequent payments were also not reflected in the books and records of the Company.

Quoting again from the order, here’s why this caused a restatement:

Although McMahon was obligated to pay all amounts owed, the payments under the Settlement Agreements should have been recognized as expenses by the Company as of December 31, 2018 and as of December 31, 2021. WWE was a party to the Agreements, as evidenced by McMahon signing on behalf of the Company. In addition, WWE benefitted from the Settlement Agreements, receiving releases and avoiding reputational harm caused by allegations of misconduct by its CEO being made public.

As noted above, not only was there a restatement issue, but because the CEO, Chairman and principal stockholder agreed to make the payments on behalf of the Company, the SEC said that in addition to recording the expense, WWE was also required to disclose the transactions and the subsequent payments when made as related party transactions under GAAP.

But wait, there’s more! After the agreements came to light and the board investigated and identified the restatement triggers, it clawed back incentive compensation payments that McMahon received during the 12-month periods following filings containing the financial statement periods that the company was required to restate. That takes care of one aspect of the required Sarbanes-Oxley clawback (in this case, the smaller part dollar-wise). What the company did not do was claw back profits received from stock sales during the applicable period. The SEC is not one to let any prong of a SOX 304 clawback slip by, so it brought a claim for that too.

Like I said, this order has something for everyone. The SEC brought claims under various provisions. The press release summarizes:

McMahon consented to the entry of the SEC’s order finding that he violated the Securities Exchange Act by knowingly circumventing WWE’s internal accounting controls and that he directly or indirectly made or caused to be made false or misleading statements to WWE’s auditor. The order also finds that McMahon caused WWE’s violations of the reporting and books and records provisions of the Exchange Act. Without admitting or denying the SEC’s findings, McMahon agreed to cease-and-desist from violating those provisions, pay a $400,000 civil penalty, and reimburse WWE $1,330,915.90 pursuant to Section 304(a) of the Sarbanes-Oxley Act.

That penalty seemed relatively light to me, but maybe it’s reasonable under the circumstances. Not only are enforcement priorities an open question, but I can certainly see how a person who’s not well-versed in accounting literature would assume that payments they made individually wouldn’t affect the company’s financials or disclosures. Actually, though, a similar scenario is described right in a Staff Accounting Q&A. I guess that’s why you’d want to run your agreements by the accountants and lawyers.

Liz Dunshee