Last week, the U.S. Securities and Exchange Commission (“SEC”) brought enforcement actions against a company and its former CEO for failure to adequately disclose certain compensation and related party transactions. The move is a stark reminder of the costs of failing to build adequate internal procedures to ensure both that company policies are adequately developed, implemented, and enforced and that potentially disclosable information is provided to, and vetted by, counsel when preparing proxy materials and other SEC filings. Moreover, it highlights the SEC’s continued focus on the disclosure of executive perquisites. It is also a clear example of the potential benefits of expeditious remediation and cooperation with the SEC’s Enforcement Division – in this matter, the Company was not required to pay any civil penalty for its admitted violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the ’34 Act, although the CEO was required to disgorge nearly $100,000 as a fine.
On February 24, 2021, the SEC simultaneously released two cease and desist orders, one with Gulfport Energy Corporation (“Gulfport”), an Oklahoma City oil and gas company that is traded on the OTC Markets Group Inc.’s Pink Open Market and filed for Chapter 11 bankruptcy in November 2020, and the other with Gulfport’s former CEO, Michael G. Moore (“Moore”) (collectively the “Orders”). According to the stipulated facts set forth in the Orders, between 2014 and 2018, Gulfport (a) incurred $650,000 in expenses for chartered aircraft that were “not integrally and directly related to the performance of the CEO’s duties”; (b) permitted Moore to use a corporate credit card for personal expenses that he did not repay in a timely way, resulting in Gulfport extending to Moore interest-free credit; and (c) paid Moore’s son nearly $125,000 to provide landscape services, a related-party transaction.
None of these transactions were disclosed in the Company’s annual proxy statements, as required by Item 402 of Regulation S-K (which requires disclosure of perquisites and other personal benefits exceeding $10,000 in any given year) or Form 10-K and Schedule 14A (which require disclosure of certain related party transactions).
The Orders explain that while Moore was CEO, the Company did not have any polices or procedures governing the use of chartered aircraft, but did have a Code of Business Conduct that required that “all Company assets should be used for legitimate business purposes only” and an Employee Handbook that provided that Company resources should not be used for personal purposes. Nonetheless, Moore chartered an aircraft on numerous occasions where the trips were not “integrally and directly related” to his duties. Two examples are highlighted in the Orders: a wine tasting weekend in Napa sponsored by a Gulfport supplier and a poker tournament in Las Vegas, also sponsored by a Gulfport supplier, both of which Moore and his wife attended. While these trips were known to Gulfport finance personnel who processed the payments, no one ever reviewed the individual trips to ascertain whether there was an integral business purpose to each flight; this step was not taken because Gulfport lacked policies and procedures governing chartered flights. Moreover, Moore did not disclose these flights in his annual D&O Questionnaire, the document used by Gulfport – and nearly every public company – to uncover potentially disclosable personal benefits and perquisites. Moore’s failure to provide the relevant information resulted in (a) inaccurate books and records because his flights were improperly characterized as business travel and (b) an undercount of the value of his total compensation, and related misrepresentation in Gulfport’s 14(a) and 10K.
The SEC also acted regarding Moore’s use of the company credit card. Gulfport corporate policy stated that Gulfport-issued credit cards were not to be used for any personal charges and required “immediate reimbursement” in the event a personal expense was charged to the card. Despite these company policies, Moore charged significant personal expenses – hundreds of thousands of dollars – to the company-issued card. Moore regularly and promptly identified these charges as personal expenses, but Gulfport finance personnel did not require him to make prompt reimbursement, despite company policy. Instead, Gulfport paid these credit card bills in full and then kept an open receivable owed by Moore and the balance would be repaid at the end of each fiscal year. In 2017, by example, the receivable totaled $336,000 by year-end. As highlighted by the SEC, this interest-free loan was of significant value to Moore because if he had used a personal card and deferred payments to year end, he would have incurred significant interest expense. Moore never disclosed the benefits on his D&O Questionnaires. Compounding the problem – Gulfport’s CFO at the time was aware of the extension of interest free credit and did nothing to prevent it nor ensure that it was disclosed to the Board or shareholders.
Finally, the Orders explain that a company run by Moore’s son provided $152,000 in services to Gulfportin a single year. Before that year ended, Moore had his son’s company reimburse Gulfport $32,000, reducing the total sum paid below the threshold for disclosure required by the D&O Questionnaire. Moore then personally paid his son $32,000 to make him whole. These transactions were not disclosed on the D&O Questionnaire and, therefore, did not make it into the Company’s proxy and other required SEC filings.
Moore’s abuses of Gulfport assets was first brought to the Board’s attention through an internal whistleblower and the Audit Committee launched an investigation. Upon completion of the investigation, the Company publicly disclosed its findings that (a) Moore’s use of chartered aircraft had not been properly identified, quantified, and disclosed and (b) Moore had made unauthorized personal charges to the Company credit card resulting in an interest free loan being extended to Moore. Moore tendered his resignation and his successor promptly remediated the identified issues by:
- Replacing the CFO, Controller, General Counsel, and external disclosure counsel;
- Developing a new internal audit program and hiring a new director of internal audit;
- Developing a new enterprise risk program and hiring a new risk manager;
- Adopting new policies and procedures regarding travel and chartered aircraft;
- Implementing employee training regarding existing and new policies;
- Enhancing D&O Questionnaires;
- Adopting new related party transaction tracking procedures; and
- Improving procedures for reporting executive officer travel and expense reports to the Audit Committee.
As noted above, the SEC did not impose any financial penalty on Gulfport, giving them full cooperation and remediation credit. While not mentioned in the Orders, the lack of a penalty could also be tied to Gulfport’s bankrupt debtor status. Moore was not given similar treatment. First, he was ordered to pay a fine of $88,248. Second, in addition to violations of Section 13 and 14, he was charged with a violation of Section 17(a), the statute that makes it “unlawful in the offer or sale of securities, to engage in any transaction, practice, or course of business which operations or would operate as a fraud or deceit upon the purchaser.” He was not, however, barred from serving as an officer or director of a public company in the future.
Please contact Alexis Coll-Very, Lynda Galligan, or any member of the Goodwin team if you have questions about whether your company’s policies and procedures, or lack thereof, pose a risk that disclosable transactions and compensation will be missed.
Lynda T. GalliganPartnerCo-Chair, Business Law Department