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Jan 13
2011

Two finance execs charged over CEO's perks

Posted by Stephen Taub in Securities and Exchange CommissionsecperquisitescomplianceCash

Stephen Taub

The Securities and Exchange Commission charged a Kansas company that manages government websites, as well as four current and former executives, including two finance executives, for failing to disclose more than $1.18 million in perquisites to the former chief executive officer.

The Commission alleges that NIC filed false and misleading proxy statements, annual reports and registration statements that failed to disclose Jeffrey Fraser's benefits and falsely represented he worked virtually for free from 2002 until 2005, and continued to materially understate the benefits Fraser received in 2006 and 2007.

The Commission also alleges that NIC's related party transactions disclosures for 2002 through 2005 were misleading in failing to disclose its payment of $1 million to fly and operate planes for Fraser.

NIC, Fraser, current CEO Harry Herington and former CFO Eric Bur agreed to settle the Commission's charges without admitting or denying the allegations against them.

The Commission's litigation continues against current CFO Stephen Kovzan, who chose not to settle at this time.

The Commission claims Fraser's undisclosed perquisites included over $4,000 per month to live in a ski lodge in Wyoming; monthly cash payments for purported rent for a Kansas house owned by an entity Fraser set up and controlled; vacations for Fraser, his girlfriend and his family; Fraser's flight training, hunting, spa, skiing and health club expenses; computers and electronics for Fraser and his family; a leased Lexus SUV; costs for Fraser to commute by private aircraft from his home in Wyoming to his office at NIC's Kansas headquarters; and other day-to-day living expenses such as groceries, liquor, tobacco, nutritional supplements, and clothing.

The regulator said Fraser did not have a personal credit card. Rather, he routinely charged living expenses on NIC credit cards and submitted expense vouchers falsely claiming personal items were business related in order to have NIC pay for these personal expenses. Fraser also sought reimbursement for certain expenses he had not incurred, the complaint states.

According to the SEC, Kovzan, who served as Chief Accounting Officer at the time, authorized NIC's payment of Fraser's personal expenses, and circumvented NIC's internal controls and policies that required the CEO to document the business purpose for his expenses and knew, or was reckless in not knowing, that Fraser's expenses were falsely characterized as business expenses in NIC's books and records.

The complaint asserts that Kovzan prepared, reviewed and/or signed NIC's proxy statements, annual reports, and registration statements that materially underreported Fraser's compensation and Kovzan made false representations to NIC's independent auditors.

The SEC also alleges that Bur permitted NIC to pay the expenses that Fraser submitted on his expense vouchers even though he was informed that Fraser was not submitting the required documentation.

Interestingly, the SEC says a finance department employee raised concerns to Bur that some of Fraser's expenses were not business related. Even so, Bur ignored Commission rules requiring the disclosure of executive perquisites, and signed, and/or certified NIC's public filings that failed to disclose Fraser's perquisites.

The SEC also noted that Herington, then Chief Operating Officer, was informed of problems with Fraser's expense reporting and failed to adequately address them.

NIC allegedly failed to correct Fraser's expense reporting problems even after a finance department employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower had complained to NIC and the company learned of the Commission's investigation of this matter in mid-2007.

"The majority of Fraser's perquisites were not repaid or disclosed, and NIC continued to make misleading public filings," according to the SEC. "NIC failed to disclose to investors in public filings that an internal review concluded Fraser had intentionally misclassified his expenses."

NIC agreed to settle the Commission's charges by paying a $500,000 civil penalty and hiring an independent consultant to recommend, if appropriate, improvements to policies, procedures, controls, and training relating to payment of expenses, handling of whistleblower complaints, and related party transactions.

Fraser agreed to pay nearly $1.2 million in disgorgement, $358,844 in prejudgment interest, and a $500,000 civil penalty, and consented to an order barring him from serving as an officer or director of a public company.

Herington agreed to pay a $200,000 civil penalty while Bur agreed to pay a $75,000 civil penalty. In addition, Bur agreed to resolve an anticipated administrative proceeding by consenting to a Commission order prohibiting him from appearing or practicing before the Commission as an accountant with a right to reapply after one year.

The SEC's complaint seeks a permanent injunction, disgorgement, civil penalties, prejudgment interest, and an officer and director bar against Kovzan.

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