Do You Know Where Your Sig Pages Are?

The SEC recently charged a sports supplements and nutrition company with committing a series of accounting and disclosure violations, including the failure to properly report perquisites provided to its executives, as well as the failure to maintain manually-signed signature pages of its electronic SEC filings. Denver-based MusclePharm Corp agreed to settle the charges, along with three current or former executives and the company’s former audit committee chair who were found to have been involved in various aspects of the company’s misconduct.

In this regard, an SEC investigation found that the company omitted or understated nearly a half-million dollars’ worth of perks conferred upon its executives, including approximately $244,000 paid to its chief executive officer for automobiles, apparel, meals, golf club memberships and his personal tax and legal services. The company also paid for perquisites of other executives that were not disclosed, including the medical costs of the birth of a child, eye surgery and personal golf club memberships. Even after the company began an internal review of undisclosed executive perks, it continued filing financial statements that failed to disclose private jet use, vehicles and golf club memberships for its executives.

Maybe more disconcerting, however, is the SEC’s charge that the company violated the requirements of Rule 302 of Regulation S-T, which requires that (1) a signatory to an electronic filing manually sign the signature page either before or at the time of the electronic filing; (2) the filer retain the original executed document for five years; and (3) that the filer provide the SEC staff with a copy of the document upon request. Apparently, the company failed to receive or maintain complete manually-signed sig pages prior to December 2012, and only had complete sig pages for 8 out of 23 filings subsequently. While the SEC may not have raised the Rule 302 violation by itself, the fact that the SEC included it as a separate count in this enforcement action suggests that the SEC may begin to scrutinize signature page retention in its investigations and include this claim where sig pages are found to be missing or incomplete.

Finally, the SEC also found that the company issued stock without a registration statement when it entered into transactions with third-parties who were willing to pay the company’s vendors in cash in exchange for shares of stock that the third-parties immediately sold into the market after counsel representing the company opined to the transfer agent that the shares could be issued without a restrictive legend. According to the SEC, no registration statement was filed for these transactions and no exemption from registration was available.