Here’s something that my colleague John Jenkins wrote: If you’re looking for a primer on how not to implement disclosure controls & procedures surrounding the disclosure of executive perks and stock pledges, be sure to check out this settled enforcement proceeding that the SEC recently announced. This excerpt from the SEC’s press release summarizes the proceeding:
The Securities and Exchange Commission today announced that Texas-based oilfield services company ProPetro Holding Corp. and its founder and former CEO Dale Redman have agreed to settle charges that they failed to properly disclose some of Redman’s executive perks and two stock pledges.
The SEC’s order finds that Redman caused ProPetro to incur $380,594 worth of personal and travel expenses unrelated to the performance of his duties as CEO. He also failed to disclose to company personnel that he had pledged all of his ProPetro stock in two private real estate transactions. During the same period, ProPetro failed to properly disclose $47,591 in additional, authorized perks it paid to Redman. As a result of these failures, the company issued public filings that included material misstatements regarding executive perks and stock ownership, and failed to accurately record Redman’s perks in its books and records.
While the defendants neither admitted nor denied the allegations made by the SEC, they consented to a C&D and the former CEO agreed to pay a $195,046 penalty. But in order to understand the alleged shortcomings in the company’s disclosure controls & procedures surrounding perks and pledges, you need to check out what the SEC claimed in its Order Instituting Proceedings. Highlights include:
- The CEO had a 50% ownership interest in a company that owned an airplane that he used for business travel. It sent invoices to the company for his flights, which the CEO initialed for approval and passed on to the accounts payable supervisor in the same manner as all other vendor invoices.
- Despite a policy prohibiting personal use of company credit cards, the CEO and his family made over $125,000 of personal charges that were not reimbursed and were not disclosed in the company’s proxy statement.
- The CEO pledged stock without obtaining prior board authorization, and subsequently obtained board approval of a negative pledge arrangement with another bank that prohibited him from disposing of the stock. He did not inform the board of the earlier pledge, nor did the company disclose either pledge in its proxy statements for several years.
How did all of this (and more) get missed? Part of the answer appears to be a lax approach to handling D&O questionnaires. Here are paragraphs 24 & 25 from the SEC’s Order:
24. On January 27, 2017, approximately one week after the close on the loan for his first ranch with its associated stock pledge, Redman completed his “D&O Questionnaire” for the disclosures in the company’s Form S-1 Registration Statement. Redman completed and signed the 2017 D&O Questionnaire, but left the line item for pledged shares blank. In 2018, Redman did not complete a D&O Questionnaire at all. On January 21, 2019, Redman completed the D&O Questionnaire but did not submit Schedule B, “Security Ownership and Recent Transactions in Company Securities,” which should have described his ProPetro equity ownership including his stock pledges.
25. Redman also did not identify in his D&O Questionnaires any of his personal trips on the Aviation Co. Learjet, the personal charges he made on the corporate credit card, or the additional perquisites authorized by the company. In his 2017 D&O Questionnaire, Redman included some perquisites for his company car, but failed to include any of the additional perquisites detailed above. In 2018, Redman failed to complete a D&O Questionnaire. On January 21, 2019, although Redman included some perquisites in his D&O Questionnaire, he did not disclose the personal air travel, any of the personal credit card charges reimbursed by the company that year or the various previously authorized perquisites detailed above.
The good news for the company was that the SEC lauded its cooperation. The bad news for the company’s executives was that in order to get that pat on the back, the board replaced them with an entirely new management team.