The SEC Doesn’t Love Secret Perks for Executives

If you find yourself as the CEO of a public company, you’ll probably find pluses and minuses.  You’ll have to work really hard, but it can be lucrative, too.  You can get paid a lot of money.  And your company can pay you whatever it wants.  But there is one catch: your company has to disclose all of your compensation to its investors.  If you take valuable things from the company that aren’t publicly disclosed, the SEC does not love that. 

Andrew Miller 

So try to avoid doing what the SEC says Andrew Miller did, which is “us[e] nearly $200,000 in corporate funds for personal perks that were not disclosed to investors [of Polycom Inc.]”  Specifically, in a complaint filed in the Northern District of California,

The SEC alleges that Andrew Miller created hundreds of false expense reports with bogus business descriptions for his personal use of company dollars to pay for meals, entertainment, and gifts.  Furthermore, he used Polycom funds to travel with his friends and girlfriend to luxurious international resorts while falsely claiming the trips were business-related site inspections in advance of company sales retreats.  Miller hid the costs by directing a travel agent to bury them in fake budget line items.  In 2012 alone, Miller charged Polycom for more than $115,000 in personal expenses despite publicly reporting that he received less than $35,000 in perks that year.

The SEC says these expenses included more than:

• $80,000 for personal travel and entertainment that Miller hid in falsified invoices or passed off as legitimate business expenses;

• $10,000 for clothing and accessories and more than $5,000 worth of spa gift cards that Miller falsely claimed to have given as gifts to customers and employees;

• $10,000 for tickets to professional baseball and football games that Miller falsely claimed to have attended with clients; and

• $5,000 for plants and a plant-watering service at Miller’s apartment that he falsely claimed were for the company’s San Francisco office.

The SEC’s complaint against Miller alleges that he violated the antifraud, proxy solicitation, periodic reporting, books and records and internal controls provisions of the federal securities laws, and that he falsely certified the accuracy of Polycom’s annual reports, which incorporated its proxy statements.  In particular, Item 402 of Regulation S-K also requires the disclosure of perks provided to executive officers by type if they amount to $10,000 in a given year. 

Polycom 

Perhaps more importantly, if you are a public company, do not let your CEO do this sort of (alleged) thing!  In addition to suing Miller, the Commission found in a settled administrative order that Polycom’s

internal controls over Miller’s expenses were inadequate.  For example, Polycom allowed Miller to approve his own expenses that were charged on his assistants’ credit cards, and the company allowed him to book and charge airline flights without providing any descriptions of their purpose.  As a result of Miller’s misconduct, Polycom’s proxy statements contained false compensation information and failed to accurately describe Miller’s perks as required.

The SEC charged Polycom with having inadequate internal controls and failing to report Miller’s perks to investors.  Polycom agreed to pay a $750,000 penalty to settle the matter without admitting or denying the facts alleged in the order. 

What to Do (and not do) 

Naturally, the SEC’s order didn’t come with an accompanying guide in how to avoid these internal controls problems in the first place.  But with a view toward not letting an executive do this sort of thing, a public company should have a standard process for approving business expenses, and scrutinize expense requests that draw red flags.  Specifically, do these things if nothing else: (1) Require a specific reason for each reimbursement request (see flights above).  My assistant has to remind me of this for mine every time, but it’s not onerous; it’s reasonable and necessary.  (2) Do not allow anyone to approve his own expenses (see P-card nonsense above).  (3) Give extra attention to extra-large expenses.  You needn’t comply yourself into bankruptcy, but if someone is buying over $10,000 in clothes, consider asking what and who they’re for.  It should be an easy answer to get.  If it’s not, you may have stumbled into a problem that needs fixing.