In January 2011, the Securities and Exchange Commission (SEC) charged NIC Inc., Jeffrey Fraser (the former Chief Executive Officer of NIC), Eric Bur (the former Chief Financial Officer of NIC), and Harry Herington (the former Chief Operating Officer and current Chief Executive Officer of NIC), with violations of the antifraud provisions of the Securities Act of 1933 and multiple violations of the Securities Exchange Act of 1934. The charges are primarily based on the Commission’s allegations that NIC repeatedly filed materially false and misleading proxy statements and annual reports that either omitted or materially understated a material portion of Fraser’s overall compensation, particularly substantial perquisites that were paid to him by NIC.
According to the SEC’s complaint, from 2002 to 2007, Fraser received perquisites totaling over $1.18 million, including: over $4,000 per month to live in a ski lodge in Wyoming; costs to commute by private aircraft from the ski lodge to his office at NIC’s headquarters in Kansas; monthly cash payments for purported rent for a Kansas house owned by an entity set up and controlled by Fraser; vacations; flight training, hunting, spa, skiing and health club expenses; computers and electronics; a leased luxury SUV; and other day-to-day living expenses including groceries, liquor, tobacco, nutritional supplements and clothing. Despite these lavish benefits, the SEC’s complaint states that prior to 2006, NIC’s public filings falsely represented that Fraser received an annual salary of $1, indicating that he worked, as the Commission puts it, “virtually for free.” Even after NIC began reporting certain perquisites paid to Fraser starting in 2006, the Commission alleges that the true amount of the benefits received was materially understated. In addition to the charges leveled at NIC, the Commission alleges Fraser, Bur and Herington -- all aware of the perquisites and the Commission’s rules regarding the disclosure of executive compensation -- aided and abetted NIC’s violations of the Exchange Act by not disclosing the perquisites.
Aside from the undisclosed perquisites, the Commission also alleges that Fraser falsely sought and obtained reimbursement from NIC for numerous other personal expenses. As with most companies, NIC maintains a Code of Business Conduct and Ethics to ensure full disclosure in SEC filings and to maintain control over its corporate assets. This Code of Conduct requires executives with business credit cards to use them solely for business expenses, to submit expense reimbursement vouchers and to provide evidence of business purpose for all such expenses. The Commission’s complaint states that Fraser regularly disregarded these policies by using his company-issued credit card for personal expenses and then failing to provide evidence of business purpose for many expenses that NIC subsequently reimbursed. Rather than comply with NIC’s policies, Fraser submitted monthly expense reimbursement vouchers claiming some credit card charges as personal expenses, but failing to identify many others. Even with respect to those charges Fraser identified as personal expenses, he avoided reimbursing NIC for some by offsetting them against claimed out-of-pocket expenses, which often matched, to the penny, the amount of personal expense identified on the credit card statement. Even after an internal review conducted by NIC’s audit committee with the aid of outside counsel concluded that Fraser had intentionally misclassified his expenses, the majority of the improper expenses and perquisites were not disclosed or repaid, nor was the finding of intentional misclassification disclosed when NIC announced the results of the internal review.
Based on NIC’s failure to accurately disclose Fraser’s compensation, the Commission brought its enforcement action against NIC, Fraser, Bur and Herington for filing false and misleading proxy statements, annual reports and registration statements. The Commission also charges that Fraser, Bur and Herington, all aware of the SEC’s rules regarding disclosure of executive compensation, aided and abetted NIC’s violations of the Exchange Act and the antifraud provisions of the Securities Act by engaging in the conduct described above. Fraser and Bur are both charged with violating the certification requirements of the Exchange Act in connection with their required certifications that NIC’s annual reports did not contain any untrue statements of material fact or omit to state a material fact necessary to make the statements made not misleading, and that each had evaluated NIC’s controls and procedures and concluded that they were effective -- despite being aware of material misstatements and omissions in the company’s public filings. The Commission also alleges that both Bur and Herington learned that Fraser was being reimbursed for personal expenses, yet failed to require him to provide evidence of a business purpose for the personal expenses and permitted NIC to reimburse those expenses, thereby causing NIC’s books and records to falsely characterize the personal expenses as business expenses in violation of the Exchange Act.
This enforcement action, while certainly presenting egregious facts and circumstances, should serve as a reminder to issuers during this proxy season to be sure their proxy statements, annual reports and other SEC filings disclose all elements of executive compensation completely and accurately. The proxy rules require an issuer to disclose in its proxy statement the total compensation of its top-ranking and highestpaid officers in order to provide investors with a clearer and more complete picture of the compensation earned by these officers. The rules require that all elements of compensation be disclosed, including, among others, salary, bonus, stock and option awards, and all other compensation, including perquisites, unless the aggregate amount of all perquisites is less than $10,000. Disclosure of perquisites aids investors in determining and comparing the total compensation of the highest-paid officers with other officers in the company and within the issuer’s industry.
While the rules seem straightforward, it can often be difficult to identify and quantify “perquisites” for the Commission’s purposes. The Commission has resisted requests to define perquisites in its rules, but did provide some guidance to issuers in its Adopting Release for the new rules related to Executive Compensation and Related Person Disclosure in 2006. Under that guidance, an item is generally not considered a perquisite if it is integrally and directly related to the performance of the officer’s duties. If the item, however, confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees, it qualifies as a perquisite.
In the end, it is important to remember that the issue in the NIC enforcement action is not that the perquisites that Fraser received, no matter how elaborate, violated the Exchange Act themselves, but rather that NIC failed to, and its officers failed to cause it to, accurately disclose those perquisites. Public companies should thoroughly review all elements of the compensation they provide their top officers to ensure full disclosure to their investors.