Insurance Company Settles with SEC for Failing to Disclose Executive Perquisites

Practical Law Legal Update w-025-9340 (Approx. 5 pages)

Insurance Company Settles with SEC for Failing to Disclose Executive Perquisites

by Practical Law Employee Benefits & Executive Compensation

Failure to Report Perquisites and Personal Benefits

As discussed in the SEC's cease-and-desist order, in Argo's definitive proxy statements disclosing executive compensation paid for 2014 through 2018 (filed in 2015 through 2019), Argo disclosed a total of approximately $1.22 million worth of perquisites and personal benefits provided to its CEO, who also served as president and a member of Argo's board of directors (see Practice Notes, Executive Perquisites and Proxy Statements).

The disclosed perquisites and personal benefits averaged approximately $244,000 annually, and included:

401(k) plan and retirement contributions.
The imputed value of insurance coverage.
Supplemental executive retirement plan benefits.
Housing and home leave allowances.
Medical premiums.
Financial planning services.

However, these proxy statements failed to disclose over $5.3 million worth of additional perquisites and personal benefits provided to the CEO, understating that portion of his compensation by an annual average of over $1 million, or 400%. The undisclosed perquisites and personal benefits included:

Expenses associated with the personal use of corporate aircraft.
Rent and other housing costs.
Personal use of corporate automobiles.
Helicopter trips.
Other personal travel costs.
Use of a car service by family members.
Club and concierge service memberships.
Tickets and transportation to sporting, fashion, or other entertainment events.
Personal services provided by Argo employees.
Watercraft-related costs.

In February 2019, an Argo shareholder issued a press release alleging, among other things, that the CEO had misused Argo's assets, including through undisclosed personal usage of corporate aircraft. In April 2019, during a proxy contest with the same shareholder in connection with Argo's May 2019 annual shareholders' meeting, Argo filed a definitive proxy statement that failed to disclose over $1 million worth of perquisites, including over $230,000 related to the CEO's use of corporate aircraft.

Argo incorporated its definitive proxy statements into its annual reports from 2015 through 2019. From 2014 through 2018, Argo:

Incorrectly recorded payments for the benefit of, and reimbursements to, the CEO as business expenses, and not compensation so that its books, records, and accounts did not accurately and fairly reflect the disposition of its assets.
Failed to devise and maintain internal controls relating to payments for the benefit of, and reimbursements to, the CEO. For example, the company provided expense reimbursements to the CEO without requiring an adequate explanation of a business purpose for the expense, allowed the CEO to approve his own expense reimbursements, and lacked a mechanism to ensure the CEO paid for personal usage of corporate aircraft.

After receiving a subpoena from the SEC, Argo conducted an internal investigation in 2019. Following the investigation, the CEO resigned and agreed to reimburse Argo for certain perquisites and personal expenses, subject to an arbitration process for any items the CEO disputes.

Violations

By failing to fully disclose the CEO's perquisites and personal benefits in the proxy statements, Argo violated:

Section 14(a) of the Securities Exchange Act (Exchange Act), which governs the use of proxy statements, and Rules 14a-3 and 14a-9 thereunder:
- Rule 14a-3 requires disclosure of the information specified in Schedule 14A, including executive compensation disclosure under Item 402 of Regulation S-K, which requires disclosure of perquisites and personal benefits provided to named executive officers who receive at least $10,000 worth of such items in a given year; and
- Rule 14a-9 prohibits the use of proxy statements containing materially false or misleading statements or materially misleading omissions.
Rule 12b-20 under the Exchange Act, which requires that material information be included in SEC filings to ensure they are not misleading.
Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts, which accurately and fairly reflect their transactions and dispositions of their assets.
Section 13(b)(2)(B) of the Exchange Act, which requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to maintain accountability for assets.

By incorporating deficient proxy statements by reference in its annual reports from 2015 through 2019, Argo violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder.

Remedial Actions

Argo took numerous remedial actions, which the SEC considered in reaching a settlement, including:

Engaging outside counsel and an independent forensic accounting firm to conduct an investigation.
Engaging a third-party consultant to assist in reviewing and revising Argo's executive compensation process, policies, and controls.
Replacing its CEO.
Entering into an agreement to obtain repayments from the former CEO.
Implementing new internal controls and compliance policies and procedures concerning perquisites, airplane usage, expense reimbursement, travel, and charitable contributions.
Changing the composition of its board of directors.

Argo also shared the results of its internal investigation with the SEC.

Penalty

Without admitting or denying the SEC's findings, Argo consented to the SEC's cease-and-desist order. As part of its settlement, Argo:

Agrees to pay a $900,000 civil money penalty.
Undertakes to fully cooperate with SEC investigations, litigations, and other proceedings relating to this matter.

Practical Implications

Public companies should be mindful that the SEC continues to focus on executive compensation disclosure and perquisites (see Legal Updates, SEC Sanctions The Dow Chemical Company for Undisclosed Perquisites and SEC Announces Settlements with Nissan and Former CEO Regarding False Disclosures Relating to the Former CEO's Compensation). Failing to fully and accurately record and disclose executive perquisites and benefits can lead to significant civil penalties and the costs of complying with SEC and internal investigations.

For more information on executive compensation disclosure, including perquisites, see Executive and Director Compensation Disclosure Toolkit.

Insurance Company Settles with SEC for Failing to Disclose Executive Perquisites | Practical Law