All the focus on COVID-19 disclosures notwithstanding, the SEC has not taken its collective eyes off the basics. This Order discusses settled charges against Argo Group International Holdings, Ltd. related to its failure to disclose in its proxy statements-for five years-millions in personal expenses and perks paid to its CEO, such as personal use of corporate aircraft and cars, "personal services provided by Argo employees and watercraft-related costs." Not to mention that the CEO was able to approve his own expense reports. According to the press release, Enforcement continues "to focus on whether companies are fully disclosing compensation paid to their top executives and have appropriate internal controls in place to ensure that shareholders receive information to which they are entitled."
Argo is an international underwriter of specialty insurance and reinsurance products, organized under the laws of Bermuda with significant operations in the United States. In proxy statements filed in 2015 through 2019, Argo disclosed perks paid to its CEO aggregating approximately $1.22 million, consisting primarily of 401(k) and retirement contributions, the imputed value of insurance coverage, SERPs, housing and home leave allowances, medical premiums and financial planning services. Omitted from the disclosure were over $5.3 million worth of additional perks and personal benefits provided to the CEO, including expenses associated with personal use of corporate aircraft and cars, rent and other housing costs, helicopter trips and other personal travel costs, use of a car service by family members, club and concierge service memberships, tickets and transportation to sporting, fashion or other entertainment events, personal services provided by Argo employees and watercraft-related costs. As alleged by the SEC, these perks were "incorrectly recorded" in the company's books and records as business expenses, not compensation.
SideBar
Questions of whether items are perks-that is, whether they are "integrally and directly related to the performance of the executive's duties" or "confers a direct or indirect benefit that has a personal aspect"-can be often be thorny. Examples identified by the SEC in Release 33-8732a include
"club memberships not used exclusively for business entertainment purposes, personal financial or tax advice, personal travel using vehicles owned or leased by the company, personal travel otherwise financed by the company, personal use of other property owned or leased by the company, housing and other living expenses (including but not limited to relocation assistance and payments for the executive or director to stay at his or her personal residence), security provided at a personal residence or during personal travel, commuting expenses (whether or not for the company's convenience or benefit), and discounts on the company's products or services not generally available to employees on a non-discriminatory basis..For example, a company's provision of helicopter service for an executive to commute to work from home is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis. As we have noted, business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job."
Even after a shareholder issued a press release in 2019 alleging misuse of Argo assets by the CEO, including undisclosed personal use of corporate aircraft, the company still filed a proxy statement that failed to disclose over $1 million worth of perks, including over $230,000 related to the CEO's personal use of corporate aircraft.
Argo was alleged to have had ineffective internal controls, including providing expense reimbursements to the CEO without requiring an adequate explanation of the business purpose for the expense, allowing the CEO to approve his own expense reimbursements, and the absence of any mechanism to ensure payment by the CEO for personal usage of corporate aircraft.
The company was charged with violations of the reporting and proxy solicitation provisions of the Exchange Act, as well as the rules related to books and records and internal controls. Among other things, the company was required to pay $900,000, to cease and desist from this conduct, and to produce documents and make witnesses available. The SEC took into account the company's cooperation with SEC, including Argo's sharing of the results of its internal investigation with the SEC. In addition, the SEC considered a long litany of remedial acts, including engagement of outside counsel, an independent forensic accounting firm and a third-party consultant, replacing its CEO and entering into an agreement to obtain repayment from the former CEO, implementing new internal controls and compliance policies and procedures concerning perks, airplane usage, expense reimbursement, travel and charitable contributions, and changing the composition of the Board.
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