Jury Finds Against SEC

Jury Finds Against SEC

 The SEC suffered another trial loss when a Kansas jury returned a verdict against the agency in an enforcement action brought against former NIC, Inc. CFO Stephen Kovzan, SEC v. Kovzan, Civil Action No. 2:11-cv-02017 (D. Ka. Filed Jan. 12, 2011).

The action centered largely on the characterization of a number of expenses company founder, board member and CEO Jeffery Fraser claimed business expenses booked by the company. Specifically, the claims against Mr. Kovzan, and in a parallel complaint filed against the company and three of its officers, alleged that from 2002 through 2005 Mr. Fraser falsely claimed that he worked essentially for free while charging many of his expenses to the company. Those included items such as $4,000 per month to live in a ski lodge in Wyoming andmonthly cash payments for rent on a home owned by an entity he controlled, travel costs, and other perquisites. These, and other perquisites not reported as income by the company, totaled over $1 million, according to the Commission.

Mr. Kovzan, Chief Accounting Officer, authorized the payments and knew, or was reckless in not knowing, that they circumvented company policy, according to the complaint. The false reporting in Commission filings continued even after a whistleblower complaint and the initiation of the SEC’s investigation. The Commission’s complaint alleged violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) and Securities Act Section 17(a).

Motions for summary judgment on various expense categories by both parties were denied with the Court concluding that there were disputes of fact requiring resolution by the jury. For example, the SEC claimed that “commuting expenses for travel between Mr. Fraser’s Wyoming home and company headquarters in Kansas was a form of remuneration requiring disclosure.” This issue hinges in large part on the definition of commuting, according to the Court. Neither party offered an appropriate definition. The resolution of this issue, largely based on a standard dictionary definition, involves “the factual determination whether particular travel constitutes ‘commuting’ [and] could include consideration of the extent to which an executive’s choice of residence is related to his job, and thus the extent to which the executive’s choice of residence is a matter of mere personal convenience or desire,” the Court concluded. This is a question for the jury.

Similarly, the Court rejected defendant’s request for summary judgment on the SEC’s claims based on payments for Mr. Fraser’s residences in Wyoming and Kansas City. Characterizing the issue here as whether “this expense was directly related to performance of Mr. Fraser’s job,” the Court concluded that it is a factual issues which must be resolved by the jury.

Finally, the Court also refused to grant summary judgment on a category of “other” expenses. While the defendant claimed that the Commission could not establish its claims here, the Court noted that the “most striking such evidence [offered by the Commission] is that NIC in fact required Mr. Fraser to reimburse NIC for more than $280,000 in expenses that could not be supported as business expenses under NIC’s policies.” While Mr. Kovzan argued that the company utilized a different standard in making that determination than the one relied on by the Commission, “the fact that NIC at least found such violations of its policies provides evidence from which a jury could conclude that the expenses at issue were not proper business expenses” the Court concluded. Thus, again the question is one for the jury.

The jury did in fact resolve the disputes of fact which precluded the Court from granting summary judgment. The jury found against the SEC on each claim.

Prior to trial, and at the time the complaints were filed, NIC and three of its officers settled. SEC v. NIC, Inc., Civil Action No. 2:11-CV-02016 (D. Ka. Filed Jan. 12, 2011). NIC consented to the entry of an injunction prohibiting future violations of the Sections cited in the complaint. The company agreed to hire an independent consultant to recommend new policies. Mr. Fraser settled, consenting to the entry of a substantially similar injunction and agreeing to pay disgorgement in the amount of $1,184,246 along with prejudgment interest and a $500,000 civil penalty. Mr. Fraser also agreed to the entry of an officer director bar.

Former CFO Harry Herington also settled, consenting to the entry of an injunction on similar terms and agreeing to pay a civil penalty of $200,000. In addition, Mr. Herington agreed to the entry of an order in an anticipated administrative proceeding which will prohibit him from practicing before the Commission as an accountant with a right to reapply after one year. Finally, former CFO Eric Bur settled, consenting to the entry of an injunction prohibiting future violations of Exchange Act Rules 13a-14 and 13b-1 and aiding and abetting NIC’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) and the related rules. He also resolved an anticipated administrative proceeding by consenting to the entry of an order prohibiting him from appearing or practicing before the Commission as an accountant with a right to reapply after one year.

 For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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