Periodically the Commission brings actions tied to senior executives abusing the perks of their offices by, for example, charging personal items to the company. Such abuses can result in a falsification of financial records as part of an effort to conceal the malfeasance. The actions may or may not result in the falsification of the firm’s filings, the executive certifications and result in internal control issues. The most recent action in this area includes charges in each of those areas. SEC v. Hug, Civil Action No. 1:19-cv-16290 (D. N. J. Filed August 2, 2019).
Gerard Hug and Kurt Steams are, respectively, the former CEO and CFO of SITO Mobile, Ltd. Each is also a defendant in the Commission’s action. The firm provides mobile data advertising platforms that allow clients to push mobile advertisements and coupons to consumers. Its shares are traded on the NASDAQ Capital Market.
The employment contract each executive executed with SITO specified that they were entitled to reimbursement for documented, reasonable business expenses incurred in the performance of their duties. Mr. Hug executed his agreement in 2011. Two years later Mr. Steams executed an agreement with a similar provision. These provisions were amplified by the employee handbook which specified that employees seeking reimbursement must receive supervisor approval and complete a Travel and Expense Reimbursement form attaching the supporting original receipts.
Despite these contractual provisions, and the dictates of the Handbook, Messrs. Hug and Steams abused the process, repeatedly presenting personal expenses as proper business items and then falsifying firm records to conceal the wrongful conduct. For example, over a two year period, beginning in 2014, Mr. Hug improperly charged over $100,000 in personal expenses to the company charge chard. Those included items such as over $7,000 for his birthday party and $4,000 for the party given to celebrate his child’s birthday.
Each month the SITO accounting group presented Mr. Hug with a spreadsheet detailing his expenses. The CEO repeatedly coded his personal charges as legitimate business expenses. In each instance Mr. Hug failed to note that the expenses were in fact personal and not related to any business activity.
Mr. Streams engaged in similar, wrongful conduct, over a three year period, beginning in 2014. For example, during that period he charged over $200,000 in personal expenses to a corporate account. Those items ranged from daily personal living expenses to expensive vacations. In 2015 the former CFO made over 800 personal charges for over $40,000 to a corporate debit card. The items included daily living expenses ranging from $0.99 to $390 such as purchases at fast food restaurants, drug stores, liquor stores, movie theaters and gas stations. Mr. Streams also used the corporate charge card to improperly pay for expensive personal trips such as one to Punta Cana in the Dominican Republic.
Mr. Streams was presented with a spreadsheet detailing his charges and expenses by the accounting department. He improperly coded the expenses and failed to present the requisite supporting documentation.
The actions of the two executives resulted in a series of false filings that were made with the Commission. Those included:
Proxy: Item 402 of Regulation S-K, applicable to Form 10-K, requires that “all plan and non-plan” compensation paid to executive officers be disclosed. Similarly, Item 8 of Schedule 14A requires that a proxy statement provide the Item 402 information if a vote is to be taken with respect to the election of directors. Here the unauthorized and improper charges were not disclosed as personal benefits or perquisites.
Annual report: The annual reports incorporated the proxy statements referenced above for fiscal years 2014 and 2015, materially understating compensation.
False certifications: The 2014 and 2015 annual reports included SOX certifications. Those certifications were false since they stated that to the knowledge of the executive the reports did not contain any untrue statement of a material fact.
The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 14(a). The action is pending. A separate administrative proceeding against the firm was resolved with the company consenting to the entry of a cease and desist order based on the reporting, internal controls, books and records and proxy statement provisions of the federal securities laws A penalty was not imposed based on the significant remediation and cooperation of the firm. In the Matter of SITO Mobile, Ltd., Adm. Proc. File No. 3-19311 (August 5, 2019). See Lit. Rel. No. 24551 (Aug. 5, 2019).