Former Fast-Food Chain CEO Settles Charges for Disclosure Violations
Commentary by Ilan T. Graff and Steven Lofchie
The former CEO of a multinational fast-food chain settled SEC charges for failing to disclose materially relevant information during an internal investigation that resulted in his termination. The company also settled charges for failing to provide certain disclosures with respect to the CEO's termination compensation.
According to the SEC Order, the company terminated the CEO for violating the company's conduct standards. The SEC stated that during the company's internal investigation, the CEO withheld information that would have revealed additional conduct violations. As part of the separation agreement, the company exercised its discretion to treat the CEO's termination as "without cause" in order to preserve equity-based compensation. The SEC stated that the CEO would not have received the compensation had the company listed misconduct as the cause for termination, and further, that the company failed to disclose the use of its discretion. The company filed a Form 8-K and publicly stated in a press release that the CEO had been terminated without cause. After discovering the additional misconduct via anonymous tip, the company sued the CEO to recover part of the compensation that was paid out from the separation agreement, eventually settling and dismissing the lawsuit.
The SEC determined that the company violated Exchange Act Section 14(a) ("Proxies") and Exchange Act Rule 14a-3 ("Information to be furnished to security holders"). The company's former CEO was found to have violated Exchange Act Section 10(b) ("Regulation of the Use of manipulative and deceptive devices"), Exchange Act Section 13(a) ("Periodical and other reports"), Exchange Act Rule 10b-5 ("Employment of manipulative and deceptive devices"), Rule 12b-20 ("Additional information"), Rule 13a-11 ("Current reports on Form 8-K") and Securities Act Section 17(a)(1)-(3) ("Fraudulent interstate transactions").
To settle the charges, the CEO agreed to (i) cease and desist, (ii) a five-year ban from serving as an officer or director of any SEC-registered issuer, (iii) a civil monetary penalty of $400,000 and (iv) disgorgement and prejudgment interest of $52,728,069. The company also agreed to cease and desist from any further violations of applicable securities laws. When determining the applicable penalties, the SEC considered the company's "substantial cooperation" and remedial efforts throughout its investigation, as well as its efforts to recover value for shareholders by suing for the return of the former CEO's compensation.
Commentary
The SEC's emphasis on the company's efforts to recover compensation as a mitigating factor are consistent with its recently adopted rule ("Listing Standards for Recovery of Erroneously Awarded Compensation"). The rule mandates that public companies announce and disclose policies providing for the recovery of incentive-based compensation awarded based on misstated financials. The DOJ also recently highlighted a company's clawback of compensation linked to misconduct as an important factor in assessing remediation.
Commentary
It has long been the case in the broker-dealer industry that a firm cannot materially soften the published reason for its discharge of an employee or conceal the reason why the employee decided to leave. The requirement to be truthful is often not easily married with the desire not to be unduly harsh. Public issuers may now need to learn to walk that tightrope. Issuers should also be mindful that employees may seek redress for assertions that the employees believe are incorrect.