Risk & Compliance

Fat Cats and Fall Guys

When CEOs live large, CFOs risk paying a price.
Kimberly BlantonMarch 1, 2011

If your CEO is living high off the hog, it could be a real problem — for you.

Two recent cases brought by the Securities and Exchange Commission put CFOs in the crosshairs for alleged abuse of corporate perks by their bosses. The SEC argues in both cases that the CFOs failed to properly report or account for the expenses.

In one case, the SEC is charging Stephen Kovzan, CFO of NIC, a provider of e-government technology services, for failing to disclose that the company spent more than $1 million on perks for founder and CEO Jeffrey Fraser. That spending is said to have included $4,000 a month for a Wyoming ski lodge and lift tickets.

A similar case involves two former CFOs at InfoGroup (formerly known as InfoUSA) who are being charged in relation to $9.5 million in expenses for their CEO, including his honeymoon in South Africa and 28 country-club memberships.

What is notable about both cases is that the CEOs and other senior executives (including a former CFO in the NIC case and an audit-committee chair in the InfoGroup case) have settled, but the SEC continues to pursue the most recently departed CFOs. Kovzan is mounting a vigorous defense, saying the allegations are “without merit” in a statement released through his attorney. One of the former InfoGroup CFOs, Stormy Dean (a onetime gubernatorial candidate in Nebraska), has denied any wrongdoing, and his attorney has argued that the expenses served legitimate business ends. The other former CFO, Rajnish K. Das, did not return calls seeking comment.

“The SEC is making the point that CFOs need to take these obligations seriously,” said Jim Rollins, an attorney with Nelson Mullins Riley & Scarborough in Boston.

Paul Hodgson, senior research associate for GovernanceMetrics International, says these cases reflect a post-Enron reality, one in which stricter rules have stemmed most abuses pertaining to perks. Previous rules, he says, were “so woolly the lawyers could fudge it, [but today] most companies are probably disclosing everything they’re supposed to.”

But a fair amount of wiggle room appears to remain. Dean’s attorney, David Zisser, argues, for example, that while the CEO expenses involved in the InfoGroup case may appear to be personal, they were, in fact, “related to business.” Consider the $577,000 spent on 28 country-club memberships. SEC rules do not require such luxuries to be disclosed if they are “integral” to a CEO’s job. “Who’s going to believe someone joins 28 country clubs just for the golf and the club sandwiches?” Zisser says.

In both the NIC and InfoGroup cases, the SEC claims that CFOs ignored warnings from subordinates. NIC’s assistant controller became increasingly vocal about his concerns, according to the complaint, warning Kovzan that Fraser had “spent a crap load over the last three years…[and] now we’re spinning it or sticking [our] heads in the sand.” But Kovzan’s attorney, William McLucas, of WilmerHale in Washington, D.C., argues that the SEC’s complaint fails to take into account that Kovzan was the chief accounting officer, not the CFO, at the time the abuses allegedly took place. The government maintains he was responsible because he signed 10-K statements that concealed the perks.

The SEC’s ability to prosecute such cases got a boost from the passage of the Sarbanes-Oxley Act in 2002, and was further enhanced in 2006, when the agency drew a bright line between benefits that are part of a CEO’s compensation — laptops, BlackBerries, and trips to business meetings — and those that must be disclosed, such as aircraft and helicopter services, personal travel, personal housing, club memberships, and security services, among many others.