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SEC Says Failure to Disclose Perks is Fraud

By | January 13, 2011

The SEC charged a Kansas-based company that manages government websites and four current or former company executives with failing to disclose to investors more than $1.18 million in perks paid to the former CEO over a six-year period.

The SEC alleges that NIC Inc.’s public filings failed to disclose that the company footed the bill for wide-ranging perks enjoyed by former CEO Jeffrey Fraser, his girlfriend, and his family — including vacations, computers, and day-to-day personal living expenses.  NIC failed to disclose that it paid thousands of dollars per month for Fraser to live in a Wyoming ski lodge and commute by private aircraft to his office at NIC’s Kansas headquarters.  Meanwhile, NIC and its executives falsely represented to investors that Fraser worked virtually for free from 2002 to 2005, and then continued to materially understate the perks that Fraser received in 2006 and 2007.  NIC’s related party disclosures for 2002 through 2005 also were misleading.

NIC, Fraser, current CEO Harry Herington and former CFO Eric Bur agreed to pay a combined $2.8 million to settle the SEC’s charges against them without admitting or denying the allegations.  The SEC’s litigation continues against NIC’s current CFO Stephen Kovzan.

Among the alleged undisclosed perks for Fraser outlined in the SEC’s complaints filed in federal court in the District of Kansas:

  • More than $4,000 per month to live in a ski lodge in Wyoming.
  • Costs to commute by private aircraft from his home in Wyoming to his office at NIC’s Kansas headquarters.
  • 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, skiing, spa and health club expenses.
  • Computers and electronics for Fraser and his family.
  • A leased Lexus SUV.
  • Other day-to-day living expenses for Fraser, such as groceries, liquor, tobacco, nutritional supplements, and clothing.

The SEC’s complaints allege that Fraser, who did not have a personal credit card, 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 SEC alleges that Kovzan, who was then the company’s Chief Accounting Officer, authorized NIC’s payment of Fraser’s personal expenses, circumventing NIC’s internal controls and policies that required the CEO to document the business purpose for his expenses.  Kovzan allegedly knew, or was reckless in not knowing, that Fraser’s expenses were falsely characterized as business expenses in NIC’s books and records.  Kovzan prepared, reviewed or signed NIC’s proxy statements, annual reports and registration statements that materially underreported Fraser’s compensation, and Kovzan allegedly made false representations to NIC’s independent auditors.

The SEC alleges that Bur, who was then NIC’s Chief Financial Officer, 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. A finance department employee raised concerns to Bur that some of Fraser’s expenses were not business-related.  Bur was aware of the SEC’s rules requiring the disclosure of executive perks, yet he reviewed, signed or certified NIC’s public filings that failed to disclose Fraser’s perks.

The SEC alleges that Herington, who was then NIC’s Chief Operating Officer, was informed of problems with Fraser’s expense reporting and failed to adequately address them.  Herington received information showing that NIC was paying for some of Fraser’s personal expenses, yet he reviewed or signed NIC’s public filings that failed to disclose Fraser’s perks.

According to the SEC’s complaints, NIC failed to correct Fraser’s expense reporting problems even after the finance department employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower complained to NIC and the company learned of the SEC’s investigation of this matter in mid-2007.  The majority of Fraser’s perks were not repaid or disclosed, and NIC continued to make misleading public filings.  NIC failed to disclose to investors in public filings that an internal review concluded Fraser had intentionally misclassified his expenses.

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Contact Anne Cotter for more information.