For only the third time, the Securities and Exchange Commission has brought charges against a company for violating non-GAAP metrics disclosure rules.
MDC Partners, an advertising and marketing agency, is accused of failing to give GAAP metrics equal or greater prominence to non-GAAP metrics in its earnings releases and presenting a non-GAAP financial measure inconsistently from period to period.
According to the SEC’s order, MDC Partners regularly reported a metric called “organic revenue growth” that represented the company’s growth in revenue excluding the effects of two reconciling items: acquisitions and foreign exchange impacts. But from the second quarter of 2012 to year-end 2013, MDC Partners incorporated a third reconciling item into its calculation without informing investors of the change, which resulted in higher “organic revenue growth” results.
MDC did not disclose in earnings releases or filings on Forms 10-Q and 10-K the existence of the third reconciling item.
MDC’s violation of the prominence requirement occurred from February 2013 through April 2014. The SEC says MDC “repeatedly emphasized non-GAAP financial measures such as EBITDA, EBITDA margin, and free cash flow without giving equal or greater prominence to the comparable GAAP measures.” The violations occurred even though MDC had received a warning letter from the SEC In November 2012.
“The reason these [non-GAAP] rules are in place is so investors can compare non-GAAP financial measures to those consistently defined under GAAP requirements,” said G. Jeffrey Boujoukos, director of the SEC’s Philadelphia regional office. “The lack of equal or greater prominence for GAAP measures is a practice that we will continue to focus upon.”
The SEC did not bring any charges against MDC executives, unlike the two previous cases involving non-GAAP financial measures.
In the most recent prior case, in Sept. 2016, the SEC charged the former CFO and former chief accounting officer of a real estate investment trust with manipulating the calculation of “adjusted funds from operations,” a non-GAAP measure the company used when providing earnings guidance.
The only case prior to that was in 2009 against a provider of identity and data protection solutions and its former CEO and CFO. That case — which included charges of backdating stock options — accused the defendants of purposely misclassifying recurring expenses as non-recurring expenses to exclude them from non-GAAP earnings results.
The SEC’s charges against MDC included charges that the company had failed to disclose perks given to the company’s CEO, such as private aircraft usage, club memberships, cosmetic surgery, and sports car expenses. But those charges were unrelated to the non-GAAP disclosure violations.
The CEO, Miles S. Nadal, later resigned and returned $11.285 million worth of perks, personal expense reimbursements, and other items of value improperly received from 2009 to 2014.
MDC Partners paid a $1.5 million penalty to settle all the charges. It consented to the SEC’s cease-and-desist order without admitting or denying the findings.