The Problem With Perks – SEC Cracks Down on Disclosure of Executive Compensation

businessman hiding face behind sign dollar symbolThere’s no question that corporate executives enjoy certain perks. They come with the job, right?

The government can’t outlaw corporate perks, but the SEC has cracked down on the proper disclosure of them. It recently sued the former CEO of video-conferencing company Polycom, Inc. for his failure to disclose approximately $190,000 of perks that he used to pay for clothes, gifts, luxury travel and lavish entertainment packages over several years. He charged them as business expenses.

It is a cautionary tale for any corporate executive as well as those involved in drafting compensation disclosure statements for public companies. The company also faced a small penalty for filing incorrect disclosures.

This is a fairly minor case, yet the SEC sought penalties against the company for weak internal controls and is seeking fairly substantial penalties against the executive,  including an officer and director bar, disgorgement and civil penalties. Add to those suggested penalties the public shaming element of filing a complaint, and it strikes me as overkill.

The SEC, I’m sure, would view the case as “making a point.” Indeed, Enforcement Director Andrew Ceresney said:

CEOs are stewards of corporate assets and must be held to the highest standard of honesty and integrity. We will not hesitate to charge executives with fraud when they allegedly use a public company as a personal expense account and hide it from investors.

What Happened

Polycom, Inc. is a video-conferencing company. If you’ve made a conference call from one of those three-prong speakerphones, then you have used its products (and likely its services).

Andrew M. Miller had been the CEO of Polycom since 2010. In July 2013, he resigned as CEO, amid allegations of problems with expense reimbursements.

On March 31, 2015, the SEC filed a complaint against him for securities fraud, filing false and misleading proxy reports and falsifying books and records to circumvent internal controls.

The Reported Compensation

According to the information in the SEC’s complaint, Mr. Miller’s 2010 income was more than $4 million. In 2011, it was $5 million, and in 2012, it was $7.3 million.

Polycom also reported to its shareholders that Mr. Miller received an additional $250,000 in perks over those three years. However the SEC’s complaint alleges that Polycom failed to report an additional $190,000 in perks that Mr. Miller had concealed.

Where Did the Money Go?

The SEC contends that a large amount of the concealed perks went into Mr. Miller’s wardrobe. It alleges that he used his company credit card to buy thousands of dollars worth of clothing, including high end dress shirts, designer ties, and sunglasses that he reported were retirement gifts for outgoing Polycom employees.

In addition, Mr. Miller allegedly spent thousands more on decadent meals and transportation for his family and girlfriend. He would hire limousines to shuttle his guests to four-star restaurants, and the government took the time to allege that he would order the cars to wait outside the restaurant until everyone finished their meals. The SEC’s complaint alleges that he hid some of these expenses by falsely claiming that the limo services were for his meals with clients.

The SEC even goes to the trouble to allege that Mr. Miller’s scheme included plants. According to the complaint, Mr. Miller asked one of his assistants to buy thousands of dollars of plants, instructing her to break the purchases up into transactions of no more than $250 and have them delivered to his residence in San Francisco. The assistant was reimbursed for the plants, as Miller had assured her that he would take the plants to Polycom’s new office. Nevertheless, the plants allegedly never left his San Francisco home.

jack nicholsonThese kinds of petty allegations always bring to mind the final scene in A Few Good Men when Jack Nicholson mocks Tom Cruise’s line of questioning:

Now, are these the questions I was really called here to answer? Phone calls and foot lockers? Please tell me that you have something more, Lieutenant. These two Marines are on trial for their lives. Please tell me their lawyer hasn’t pinned their hopes to a phone bill.

Are these really the kinds of allegations that we want the SEC to spend its time investigating? They seem intended more to embarrass Mr. Miller than to allege serious wrongdoing.

Domestic and International Travel

According to the SEC, in the two years before Mr. Miller’s resignation, he secured improper reimbursement for 11 entirely personal round trip flights and 40 more personal flights that were secretly tacked on to business trips.

In addition, Mr. Miller purportedly used Polycom’s “CEO Circle” incentive program to hide several other trips and expenses. Through the CEO Circle program, Polycom would send its top performing salespeople on week-long retreats at exotic resorts.

The complaint alleges that Mr. Miller positioned himself to perform a “site inspection” of the 2012 retreat, which was to take place in Bali, Indonesia. He used Polycom’s funds to set up a nine-day trip for himself and several friends, including his girlfriend. The group was given access to all the activities the CEO Circle recipients would enjoy (nightly entertainment and sightseeing around the island) in addition to two “free days” on the island. He then returned to Bali for the 2012 CEO Circle event as the event’s host with his girlfriend once again in tow. There, the pair enjoyed thousands of dollars in spa treatments and side trips on Polycom’s dime.

Investigation and Confrontation

The complaint doesn’t allege exactly how the company found out about the supposed problems but alleges that after an “internal investigation,” the Audit Committee confronted Mr. Miller with specific instances where he used company funds for his own benefit.

The complaint states that Mr. Miller admitted the wrongdoing, alleging that:

 Indeed, prior to his resignation on July 19, 2013, when confronted by Polycom’s Audit Committee about his scheme, Miller admitted that he had used company funds for his personal expenses, that he had submitted false expense reports, and that his conduct was inappropriate.

After Mr. Miller admitted to as much, the SEC began its own investigation. He has apparently taken the Fifth Amendment during the SEC’s investigation.

The Company’s Slap on the Wrist

Polycom took a classic approach to the problem. When it learned of possible issues, it apparently hired outside counsel to conduct an internal investigation. In March 2015, the SEC settled with Polycom for $750,000 for its internal control failures, as well as false filings.

From what I can tell, this seems to be an appropriate penalty and one that Polycom likely paid with little concern. The internal audit department has probably stepped up its review of expense reimbursements, too.

It’s Mr. Miller who will pay the real price here.

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