The SEC charged the former CEO of Silicon Valley-based technology firm Polycom Inc. with using nearly $200,000 in corporate funds for personal perks that were not disclosed to investors. It’s the second enforcement action in this area that I recall, the other one occurred in 2011 and is discussed here.
The complaint begins by alleging a fairly pedestrian scheme of submitting false expense reports for meals and such and claiming customers or others were in attendance, when actually it was friends and family and the like. Later the allegations turn more scandalous, describing in intimate detail $85,000 in trips to Bali, Indonesia and South Africa with the alleged perpetrators’ friends and wife and, in other cases, girlfriend. The trips were described as “site inspections” in advance of company sponsored events. The charges for the site inspections were allegedly buried in the event planning company’s invoices.
The complaint notes Polycom did not disclose activities such as the above in executive compensation disclosure. By year the omissions are not stunning in nature. According to the complaint, the compensation disclosures omitted approximately $15,435 in 2010; approximately $28,478 in 2011; approximately $115,683 in 2012; and approximately $30,474 in 2013. Nonetheless, this may lead many to scratch their head wondering why this is the best the SEC can come up with given the allegedly abusive nature of the conduct. The reason is the SEC only has authority to enforce its own rules in civil actions and not pursue other serious charges.
Among other things, the complaint alleges the CEO filed false certifications on Form 10-K, even though the proxy statements were filed after that date. Some refer to this as reverse incorporation by reference. The certifications in the Form 10-K attach automatically to the later filed proxy statement, because the 10-K incorporates the later filed proxy.
Polycom discovered the activities, an internal investigation was conducted and its audit committee confronted the CEO according to the SEC. As a result of the falsification of corporate records and his efforts to conceal the personal nature of his expenses, as alleged in the complaint, despite diligence, the SEC did not have reason to question the accuracy of Polycom’s statements about the CEO’s compensation or perks. On the other hand, the SEC alleged the CEO asserted his Fifth Amendment privilege against self-incrimination when asked questions about his expense report submissions, reimbursement by Polycom for personal charges, and Polycom’s executive compensation disclosures.
Polycom settled related allegations without omitting or denying the findings. The SEC order notes, among other things, that Polcom filed erroneous proxy statements and inaccurate annual reports, and that Polycom failed to implement adequate internal controls. According to the SEC Polycom incorrectly recorded the CEO’s personal charges as business expenses, and not compensation, and its books, records and accounts did not, in reasonable detail, accurately and fairly reflect its dispositions of assets.
Polycom agreed to cooperate in any and all investigations, litigations or other proceedings relating to or arising from the matters described in the SEC order. In addition it agreed to pay a civil money penalty in the amount of $750,000.