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SEC Announces Settlements with Nissan and Former CEO Regarding False Disclosures Relating to the Former CEO's Compensation
Practical Law Legal Update w-022-1505 (Approx. 5 pages)
SEC Announces Settlements with Nissan and Former CEO Regarding False Disclosures Relating to the Former CEO's Compensation
by Practical Law Employee Benefits & Executive Compensation
| Published on 25 Sep 2019 • USA (National/Federal) |
The Securities and Exchange Commission (SEC) announced that it filed settled securities fraud charges against Nissan Motor Co., its former CEO Carlos Ghosn, and a former director related to financial disclosures that failed to disclose more than $140 million in compensation to be paid to the former CEO in retirement.
On September 23, 2019, the Securities and Exchange Commission (SEC) announced that it filed settled securities fraud charges against Nissan Motor Co. (Nissan), its former CEO Carlos Ghosn, and its former director Gregory Kelly for failing to disclose more than $140 million to be paid to Ghosn in retirement.
Nissan's common stock is listed on the Tokyo Stock Exchange. Nissan does not have securities registered with the SEC and does not file reports with the SEC, instead relying on the exemption contained in Rule 12g3-2(b) of the Securities Exchange Act of 1934 (Exchange Act).
SEC Findings
Ghosn was appointed CEO and Chairman of the Board of Nissan in 2001. In 2004, Nissan's board of directors delegated to Ghosn the authority to set his own compensation levels, as well as those of individual directors and other executives.
Over a nine-year period starting in 2009 and ending in 2018, Ghosn and Kelly engaged in a scheme to:
- Conceal more than $90 million of Ghosn's compensation from public disclosure.
- Change the calculation of Ghosn's pension allowance to provide more than $50 million in additional retirement benefits.
Specifically, each year over this period Ghosn used the authority granted him by the board to fix a total amount of compensation for himself that was partially disclosed and paid and partially undisclosed and unpaid. Ghosn, Kelly, and certain of Ghosn's subordinates attempted to structure the undisclosed and unpaid portion of Ghosn's compensation to be paid through various Nissan-related entities, including subsidiaries, without public disclosure. These plans were abandoned because of potential disclosure issues.
Thereafter, Ghosn, Kelly, and a senior employee in Nissan's Secretariat's Office (referred to in the Order as Nissan Employee 1) engaged in other schemes to surreptitiously deliver the undisclosed and unpaid compensation to Ghosn, including:
- Entering into secret contracts, that were countersigned by Nissan Employee 1, in the form of letter agreements with Nissan under which Ghosn would be paid his postponed remuneration as consultant fees. The letters were prepared on Ghosn's letterhead and specified Ghosn's fixed remuneration, his paid remuneration disclosed in prior years, and the remaining remuneration owed him by Nissan upon his retirement (two of them specified that Ghosn would be paid the full amount of the undisclosed compensation in the year following his retirement from the Nissan Board). The letters gave Ghosn the right to choose the currency in which the payments would be made (Japanese yen or US dollars).
- Executing backdated letters to grant Ghosn cash bonuses from Nissan's annual Long Term Incentive Plan (LTIP) in the amount of his compensation that had not been disclosed in Nissan's director compensation disclosures for the fiscal years 2009 - 2012. Like the secret contracts, the letters gave Ghosn the right to choose the currency in which the payments would be made. In connection with these letters, the Nissan CFO was falsely told that the LTIP awards were a grant to numerous Nissan participants.
- Changing the calculation of Ghosn's pension allowance, which allowed Ghosn's pension payments to be increased by $50 million. Specifically, Ghosn and his subordinates:
- decided that the pension formula for all other directors and the statutory auditors would remain the same, and would increase only for his own pension;
- increased the average annual remuneration on which his pension award was based; and
- changed the currency in which his pension would be paid, among other actions.
As a result of these actions, Nissan's annual securities reports for the fiscal years 2009 – 2017 materially understated the compensation awarded to Ghosn and Nissan's disclosure regarding the retirement allowance was false and misleading because it implied that the increase in retirement allowance impacted all of Nissan's directors and statutory auditors subject to the allowance.
The undisclosed compensation was never paid to Ghosn. Eventually, Ghosn stepped down from his CEO role and was removed from Nissan's board. Ghosn and Kelly were arrested by Japanese authorities in November 2018 for alleged financial crimes relating to the compensation schemes.
SEC Actions
The SEC:
- Commenced administrative proceedings against Nissan for violating Section 10(b) of the Exchange Act and its implementing regulation, SEC Rule 10b-5 (15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5). Section 10(b) of the Exchange Act and Rule 10b-5 prohibit fraud, including materially misleading statements or omissions, or use of manipulative and deceptive devices, in connection with the purchase or sale of securities. The SEC's Order imputes Ghosn's conduct, mental state, and liability to Nissan because his acts were undertaken within the scope of his employment, including the authority granted him by Nissan's board to set his and the other directors' compensation. Therefore, Nissan violated Section 10(b) of the Exchange Act and Rule 10b-5.
- Filed a complaint in the US District Court for the Southern District of New York against Ghosn and Kelly, alleging they:
- violated Section 10(b) of the Exchange Act and SEC Rule 10b-5; and
- aided and abetted Ghosn's and Nissan's violations of those anti-fraud provisions.
Settlements
Nissan settled the SEC's charges, agreeing to pay a $15 million civil penalty and to cease and desist from violating the anti-fraud provisions of the Exchange Act. Ghosn and Kelly settled the charges brought against them by the SEC by agreeing to be permanently enjoined from violating or aiding and abetting violations of the anti-fraud provisions of the securities laws. Ghosn also agreed to pay a $1 million civil penalty and will be subject to a 10-year officer and director bar. Kelly agreed to a $100,000 penalty, a five-year officer and director bar, and a five-year suspension from practicing or appearing before the SEC as an attorney. Nissan, Ghosn, and Kelly did not admit or deny the SEC's allegations and findings.
Practical Implications
Counsel to corporations and their executives should take note that the SEC viewed Ghosn's actions to be egregious enough to bring fraud charges even though:
- The $140 million in undisclosed compensation and retirement benefits was never actually paid out to Ghosn.
- Nissan does not have a class of securities registered with the SEC and does not file reports with the SEC.
Additionally, the actions undertaken by Ghosn required the assistance of others at Nissan, which underscores the importance of strong whistleblower protections within companies to identify and root out fraudulent activities.