SEC fines and sanctions executive for misstatement of executive compensation

May 16, 2017

Securities Law Alert

Author(s): Daniel McAvoy, Kelly D. Babson, Vincent Cesare

On May 11, 2017, the former head of MDC Partners, Inc. (MDCA), a NASDAQ-traded marketing firm, entered into a settlement with the Securities and Exchange Commission (SEC) to pay a $5.5 million fine arising from a years-long pattern of executive compensation disclosure violations. While MDCA already agreed to pay a $1.5 million SEC settlement earlier this year[1] in relation to these violations and cooperated with the SEC in its investigation, this most recent order pertains to its former President, CEO and Chairman, as an individual.

Companies registered under the Securities Act of 1933 or Securities Exchange Act of 1934, as amended (Exchange Act) are required to report certain executive compensation in accordance with Item 402 of Regulation S-K.[2] While salary, bonus, stock options and other more traditional benefits often comprise a large proportion of this reported compensation, perquisites (or “perks”) also need to be disclosed.[3]

The former CEO led MDCA for nearly three decades. During the latter part of his tenure, he received $11,285,000 worth of perquisites, personal expense reimbursements and other items of value. He sought and obtained reimbursement for a substantial portion of these perquisites as business expenses, causing MDCA to fail to properly disclose to its shareholders the full amount of executive compensation.[4] More than $7 million of the former executive’s perquisite compensation was not reported on MDCA’s proxy statements during this period. In turn, these proxy statements containing understated executive compensation disclosures were incorporated by reference into annual reports and registration statements that were signed by the former executive in his capacity as the Chairman, Chief Executive Officer and President of MDCA.

These purported business expenses included private aircraft usage, cosmetic surgery, yacht and sports car-related expenses, jewelry, pet care, club memberships and medical expenses for the former executive’s family members. While the proxy statements disclosed an annual $500,000 perquisite allowance, approximately $1.88 million worth of additional perquisites annually were misleadingly categorized, remaining hidden from shareholder scrutiny.[5] The falsely reported executive compensation data also tainted the proxy statements upon which his election as director and “say on pay” shareholder approval of his executive compensation were largely founded.[6] Further, this incorrect reporting incorporated into MDCA’s registration statements constituted securities fraud on the sale of securities. The incorporation of this false financial data into MDCA’s SEC reports caused a cascade of violations during the twilight of his tenure with the firm, perhaps contributing to a plummeting of MDCA’s stock prices. The repetition and nature of the violations suggest that the former executive either knew of the violations or was reckless in remaining unaware of them, subjecting him to personal liability in addition to the penalties levied on MDCA and the over $10.5 million he had already previously disgorged to the firm after its own internal investigations.

The SEC previously levied fines, remedial action and other penalties against MDCA for misleading its shareholders and potential shareholders via inaccurate financial disclosures due to this undisclosed executive compensation. Rather than confine its punishment to the corporate entity, the SEC also pursued enforcement against the individual who received the undisclosed compensation. Ultimately, the SEC determined that the former CEO violated numerous provisions of securities laws, including under Section 14(a) of the Exchange Act (pertaining to misleading disclosures in proxy statements), Rule 10b-5 under the Exchange Act (prohibiting material misstatements and omissions in connection with the offer or sale of a security), Section 13(a) of the Exchange Act (relating to certification of annual reports by the issuer’s principal executive officer) and Rule 12b-20 under the Exchange Act (which requires additional disclosure to make required statements, in light of the circumstances under which they are made, not misleading). Under the settlement with the SEC, the former CEO agreed to pay $1.85 million in disgorgement, plus $150,000 in interest, and a $3.5 million penalty. He also agreed to a five-year bar on serving as a director or officer of a public company.

This serves as a reminder that the SEC may punish both an organization and its executives for fraudulent behavior harmful to investors, particularly where the executive’s behavior is egregious. This settlement also highlights the SEC’s focus on ensuring that reporting companies have sufficient internal controls and disclosure controls in place to reasonably detect and prevent financial fraud. Further, this becomes even more important with the advent of certain “bad actor” disqualifications under the Securities Act. For example, under many circumstances an issuer would not be permitted to issue securities under Rule 506, the most commonly used private placement exemption, if the firm or its executives have admitted to securities law violations such as those involved in this situation.

  1. Securities Act of 1933, Release No. 10283 (January 18, 2017), available at
  2. 17 C.F.R. 229.402(c)(2)(ix)(A).
  3. Id.
  4. Securities Exchange Act of 1934, Release No. 80652 (May 11, 2017), available at
  5. Id.
  6. Id.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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