Comments about SEC v. Thor Industries: The Allegations and the Remedies

The SEC's recent action against Thor Industries can be found here: Litigation Release  / Complaint.

In pertinent part, pursuant to the allegations in the litigation release and in the Complaint, Thor and its subsidiaries lacked reporting, recording keeping and internal controls, including the failure to segregate duties, which allegedly permitted an officer to perpetuate fraud.  At the time, Thor was also subject to a prior 1999 cease and desist order that prohibited violations of the book, records and internal control requirement.  In other words, in 1999 Thor represented that it would fix the internal control deficiencies and that they would not occur again.  The alleged improprieties in the current situation appear to have been material to Thor but qualitatively and quantitatively.

As stated in the litigation release, to settle the current action "the SEC and Thor agreed as follows:  "Without admitting or denying the allegations in the complaint, Thor has consented to the entry of a final judgment: (1) requiring it to comply with the 1999 cease-and-desist Order; (2) permanently enjoining it from violating Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; (3) ordering it to pay a $1 million penalty pursuant to Exchange Act Section 21(d)(3) for violating the 1999 Order; and (4) ordering it to hire an independent consultant to review and evaluate certain of its internal controls and record-keeping policies and procedures."

It needs to be acknowledged that the allegations against Thor are just that, allegations.  Nevertheless, the allegations in the SEC's Complaint, as far as they go, are fairly detailed.  It appears that Thor and its various subsidiaries were significantly run as separate operations.  The subsidiaries lacked sufficient internal controls, as did Thor itself and to oversee the subsidiaries.

Thor's stock is traded on the New York Stock Exchange.

As I view the action and the remedy, Thor paid a fairly hefty penalty to have the SEC agree for a second time that the company needs to get its internal controls and record keeping in order, which appears to be a pretty good outcome for Thor.  Not much different than after the 1999 Order.

Here are at least some of the unresolved issues.  But I am sure that many of my governance, risk, internal audit, and compliance friends could come up with additional issues and suggested remedies.  The SEC does not discuss the actions or inactions of many of the people who were involved or arguably should have been involved in or aware of the circumstances that occurred.  I am not saying that these other people were culpable or liable, or even that the SEC should have brought an action against them-just that the SEC should have discussed the facts of what allegedly occurred in greater detail, and then at least adjusted the non-monetary remedy accordingly.  Thor is required to have an internal audit function.  Its financials are audited annually, and reviewed quarterly by its outside auditor.  Thor's board assesses and manages risks, pursuant to Thor's website.  And, of course, Thor has executive officers, a board, and an audit committee.  Thor's website contains the usual corporate, governance, ethics policy, and board information and representations.  I just find the current remedies to be significantly deficient and lacking in detail.  One clearly needs to ask how all of this managed to happen, and who did what and did not do what, and then design and implement actual changes from top to bottom seriously and reasonably calculated to prevent a third reoccurrence and restore faith.  Where were internal audit and the outside auditor?  Where were the board and the audit committee?  Where were the relevant executive officers, the CEO?  Was there any anonymous reporting?  Wasn't a concerted corrective effort to made after the 1999 Order?  Is there a compliance and ethics officer or function?  As stated, the SEC's allegations are just that, allegations, and I am sure that Thor would have presented credible and perhaps even winning defense arguments if the case had proceeded onward; however, in settlement a case like this presents an opportunity for the company and for the SEC to remedy the current situation and to provide guidance to people at other listed companies.  

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