CEO Perquisites and Disclosure: SEC v. NIC, Inc.

In SEC v. NIC, the SEC brought suit against NIC, Inc., a publicly traded technology services company, and several of the senior executive staff as a result of their failure to properly disclose CEO perquisites from 2002 to 2007 and for concealing the issue from the directors and shareholders of the company.  The SEC alleged that these actions violated the antifraud provisions. 

The SEC alleged that NIC failed to disclose over $1.18 million in compensation to the CEO, Jeffrey S. Fraser, misleading disclosures of third party transactions with Fraser-owned entities, violations of internal business policies and controls, and improper expense reporting.  The alleged amounts included payments for a ski lodge in Wyoming, vacations, hunting, spa, skiing and health club expenses,  commuting costs in a private aircraft, and other "day-to-day lving expenses". 

The SEC alleged that NIC failed to make appropriate disclosure even after receiving information from a finance department employee and a whistleblower.  As the SEC release described:

• NIC failed to correct Fraser's expense reporting problems even after a finance department employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower had complained to NIC and the company learned of the Commission's investigation of this matter in mid-2007. The majority of Fraser's perquisites were not repaid or disclosed, and NIC continued to make misleading public filings. NIC failed to disclose to investors in public filings that an internal review concluded Fraser had intentionally misclassified his expenses.

The SEC also charged a number of individuals with aiding and abetting the violations.  According to the SEC's allegations, one of the officers, Harry H. Herington, the COO at the time:

• was informed of problems with Fraser's expense reporting and failed to adequately address them. Herington received information showing that NIC was paying for some of Fraser's personal expenses, yet he reviewed and/or signed NIC's public filings that failed to disclose Fraser's perquisites.

The SEC also charged the Eric Bur, the former CFO.  According to the complaint:

• Defendant Eric J. Bur, NIC’s former Chief Financial Officer (“CFO”), had responsibility, along with NIC’s Chief Accounting Officer (“CAO”), for NIC’s internal controls, books and records, and disclosure of executive compensation in public filings. Bur aided and abetted NIC in its reporting, proxy, internal controls, and books and records violations. Bur permitted NIC to pay the expenses Fraser submitted on his expense vouchers even though Bur was informed that Fraser was not submitting receipts or documentation supporting a business purpose for his expenses as required by NIC’s policies.

NIC, Inc., Fraser, Herington, and Bur all settled with the SEC without admitting or denying the charges.    NIC paid a $500,000 civil penalty and committed to hiring independent consultants to assess its internal procedures, controls, and training systems.  Fraser paid $1,184,246 in disgorgement, $358,844 in interest, and a $500,000 civil penalty; he also agreed to an order barring him from serving as director or officer of a public company.  Herington paid a $200,000 civil penalty. Bur paid a $75,000 civil penalty and consented to an SEC order prohibiting him from appearing or practicing before the SEC as an accountant with the stipulation that he may apply after one year.

The SEC also brought a case against Stephen M. Kovzan, the former Chief Accounting Officer and current CFO of NIC.  According to the complaint:

• Kovzan had responsibility for implementing NIC's internal controls and policies and for ensuring that NIC's books, records, and accounts accurately reflected its transactions and disposition of assets. Beginning in at least 2002, Kovzan knew, or was reckless in not knowing, that Fraser's expenses were falsely characterized as business expenses in NIC's books and records, when those expenses should have been recorded and disclosed as compensation.  Kovzan also circumvented NIC's internal controls and policies by authorizing NIC's payment of Fraser's personal expenses that lacked documentation ofa business purpose. Kovzan's failure to exercise control over NIC's assets, report Fraser's misconduct to NIC's Audit Committee, and disclose Fraser's compensation in NIC's public filings violated NIC's internal controls and policies. Kovzan also made false representations to NIC's independent auditors and failed to inform the independent auditors of Fraser's expense reporting failures.

Kovzan, however, did not settled.  As a result, the case continues.  The Commission is seeking "a permanent injunction, disgorgement, civil penalties, prejudgment interest, and an officer and director bar".