Risk & Compliance

Nutrition Firm Charged with Not Disclosing Perks

Two former CFOs are among four executives charged along with the company.
Katie Kuehner-HebertSeptember 8, 2015

The Securities and Exchange Commission on Tuesday charged MusclePharm with not disclosing nearly a $500,000 worth of perks bestowed upon its executives, as well as other accounting and disclosure violations.

The Denver-based sports supplements and nutrition company failed to disclose roughly $244,000 in perks for chief executive Brad Pyatt related to automobiles, apparel, meals, golf club memberships, and personal tax and legal services. Even after the company began an internal review of undisclosed executive perks and then-audit committee chair Donald Prosser became directly involved in the process, MusclePharm continued filing financial statements that failed to disclose executive perks.

“Executive compensation is material information for investors, and companies must ensure that perks it pays for executives are properly recorded and disclosed in public filings,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in a press release.  “Prosser, MusclePharm’s audit committee chair, subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired, resulting in an incorrect disclosure.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Among other accounting and disclosure violations outlined in the SEC’s charges against MusclePharm, Prosser, Pyatt, and former chief financial officers L. Gary Davis and Lawrence Meer:

  • Failing to disclose related-party transactions with a major customer and to implement sufficient policies to identify and disclose related-party transactions.
  • Failing to disclose bankruptcies related to two executive officers, and stating erroneously that no members of the board of directors or other executives had been involved in any bankruptcy proceedings.
  • Improperly accounting for advertising and promotion-related costs and consequently overstating revenue.
  • Failing to disclose continuing sponsorship commitments for which the company eventually made payments totaling $6.9 million.
  • Understating its rent expense by failing to disclose $100,000 related to an aircraft lease agreement.
  • Failing to implement internal accounting controls for perks and other areas where it committed accounting and disclosure violations.

The SEC also found that MusclePharm issued stock without a registration statement when it entered into numerous transactions with third parties that agreed in exchange for company shares to pay cash to the company’s vendors. MusclePharm owed vendors approximately $1.1 million in outstanding invoices and was short on funds to pay them.

MusclePharm and the four charged individuals settled ircases without admitting or denying the SEC’s findings. MusclePharm agreed to pay a $700,000 penalty and hire an independent monitor for one year, among other undertakings. Pyatt agreed to pay a $150,000 penalty, and Prosser and Davis each agreed to pay $30,000 penalties. Meer and Davis agreed to be suspended from practicing as an accountant on behalf of any SEC-regulated entities, with the right to reapply after three and two years, respectively.