Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP 15 | SEC Demands Stronger Disclosure Controls in Recent Enforcement Actions its concerns surrounding cybersecurity incidents, albeit on a smaller scale. In May of 2022, six months before the FTX bankruptcy shook crypto markets, the SEC announced a $5.5 million settlement order with technology company NVIDIA. 8 The SEC found the company's Form 10-Qs for two quarters in 2018 to be misleading because they reported material year-over- year increases in revenue from the sale of graphics processing units (GPUs) in the gaming market without mentioning that many customers bought these GPUs not for gaming purposes but for cryptomining. NVIDIA had, however, disclosed cryptomining as an important factor for GPU revenues it reported elsewhere in the Form 10-Qs, under a specialized market platform separate from gaming revenue. The SEC found that the absence of a similar reference to the impact of cryptomining in the MD&A section discussing gaming revenue gave the misimpression that the year-over- year growth in the company's gaming revenue was not meaningfully impacted by cryptomining. The SEC attributed this to a failure to maintain adequate disclosure controls: sales personnel saw cryptomining as a significant factor in year-over-year gaming revenue growth, but, the SEC alleged, there was no corresponding process to feed that information into NVIDIA's quarterly reports. Monitoring Director Independence. In January 2022, the SEC settled charges against NYSE-listed Leaf Group, including allegedly failing to maintain adequate disclosure controls to identify and analyze potential director independence issues for disclosure. 9 The company had averted a contested director election through, among other things, the appointment of a new independent director. A few months later, however, the new director became the CFO of another public company on whose board and compensation committee Leaf's CEO also served. This created a compensation committee interlock that rendered the new director no longer independent under NYSE standards. But due to allegedly inadequate disclosure controls to determine the independence of directors, Leaf continued to refer to that director as "independent" for another eight months, including in its proxy statement and several SEC filings. The company agreed to a $325,000 penalty—which may reflect credit for the company's cooperation with the SEC's investigation, notably highlighted in the order. Tracking Perquisites. In August 2021, National Beverage Corp. agreed to pay a $481,920 penalty to settle charges with the SEC for alleged violations of the proxy disclosure and perquisite reporting rules and, separately, for failing to maintain adequate disclosure controls relating to perquisites. 10 Determining whether a benefit provided to an executive constitutes a perquisite involves assessing whether it is "integrally and directly related to the performance of the executive's duties." According to the SEC, National Beverage's CEO traveled frequently on the company's private aircraft or on charter flights paid for by the company, but the company did not track or analyze whether his flights were in fact integrally and directly related to his job duties as CEO or reportable as perquisites. The SEC also found that the company did not train employees tasked with drafting the executive compensation disclosures to adequately identify perquisites. As a result, the company reported no executive officer perquisites other than a car allowance, when, according to the SEC, the CEO had taken nearly $750,000 in perquisite flights during the period at issue. Tracking Non-GAAP Measures. In March 2023, DXC Technology Company, an IT services company, agreed to an $8 million penalty to settle charges that it made misleading non-GAAP disclosures and, separately, had insufficient disclosure controls concerning non-GAAP measures. 11 DXC's non-GAAP earnings excluded costs related to integration planning, financing, and advisory fees associated with the merger that formed DXC, other acquisitions, and the spin-off of a business. The SEC alleged that, in doing so, the company had misclassified tens of millions of dollars as excludable from this non-GAAP measure when they did not in fact meet the company's own criteria for exclusion. The SEC attributed this misclassification to the absence of a non-GAAP policy that would have provided clear guidance to relevant personnel about the process to follow or robust procedures for checking the accuracy of the classification. According to the SEC, the company's financial planning function appeared to assume that controllership would review the 8 In re NVIDIA Corp., Admin. Proc. No. 3-20844, https://www.sec.gov/files/litigation/admin/2022/33-11060.pdf (May 6, 2022). 9 In re Leaf Group Ltd., Admin. Proc. No. 3-20696, https://www.sec. gov/files/litigation/admin/2022/34-93929.pdf (Jan. 7, 2022). 10 In re National Beverage Corp., Admin. Proc. No. 3-20451, https:// www.sec.gov/files/litigation/admin/2021/34-92560.pdf (Aug. 4, 2021). 11 In re DXC Technology Company, Admin. Proc. No. 3-21342, https:// www.sec.gov/litigation/admin/2023/33-11166.pdf (March 14, 2023).