Yesterday, the SEC announced settled fraud charges under Rule 10b-5 against Nissan, its former CEO Carlos Ghosn, and Gregory Kelly, a former director, related to the failure to disclose over $140 million to be paid to Ghosn in retirement. (Here is the SEC’s Order and the complaint against Ghosn and Kelly filed in the SDNY.) Of course, you may be aware that Ghosn and the former director have been arrested by Japanese authorities and are awaiting trial, so these SEC charges were probably not the biggest glitch in their career paths. Nevertheless, the SEC’s action does stand as a warning that the SEC remains on the lookout for efforts to hide or disguise compensation from required public disclosure, especially where CEO discretion regarding compensation is largely unconstrained.
Nissan trades primarily on the Tokyo Stock Exchange, does not have a class of securities registered with the SEC or file reports with the SEC. However, Nissan-sponsored ADRs trade OTC in the U.S., relying on the Rule 12g3-2(b) exemption, under which Nissan publishes on its website English versions of its Japanese securities filings, which are reviewed and relied on by U.S. investors. The exemption requires the English translations to include information that is material to an investment decision regarding the company’s securities, such as the grant of options or the payment of other comp to directors or officers, and transactions with directors, officers or principal security holders, to the extent required to be disclosed by the company’s domestic disclosure laws.
Under Japanese law, beginning in 2010, companies were required to disclose the total compensation to each individual officer and director if it equaled or exceeded ¥100 million. The total comp awarded to Ghosn—to whom the Board had delegated the authority to set the amount of individual director and executive comp, including his own compensation, within certain aggregate limits—exceeded that threshold during the relevant nine-year period. Although the Board’s delegation of authority contemplated consultation with Nissan’s representative directors, the Order states that, in practice, there was no oversight.
Prior to 2009, Ghosn received the amount of comp he awarded to himself, but, according to the Order, Ghosn became concerned about potential blowback regarding the size of his comp under the new disclosure law. As a result, he first lobbied to kill the legislation, and failing that, developed a scheme to conceal more than 50% of the comp that he awarded to himself. For example, for 2010, about $11 million of Ghosn’s comp was publicly disclosed, while about $9 million was concealed. Both Ghosn and Kelly reviewed Nissan’s annual reports that failed to disclose the additional comp.
Originally, according to the Order, Ghosn sought to structure his undisclosed comp to receive about $90 million on a current basis through certain Nissan-related companies. But after disclosure issues surfaced, Ghosn sought instead to postpone payment until after his retirement and guarantee those payments through backdated LTIP grants and through secret letter agreements to pay the postponed remuneration in future years as “consultant fees.” Those agreements also included currency protection provisions benefiting Ghosn. Ghosn and his subordinates were also alleged to have made misleading statements regarding machinations to provide Ghosn more than $50 million of additional pension benefit.
There are lots of details in the Order and Complaint describing the efforts of Ghosn, with the assistance of Kelly and other subordinates, to architect these schemes. For example, when it was determined that booking LTIP grants of that size would necessitate approval by the CFO, the Order states that the CFO was falsely told that the LTIP awards were broad-based grants not primarily designated for Ghosn. According to the Order, Ghosn also claimed that the estimated value of a prior fixed pension amount had been miscalculated and insisted on an alternative calculation (described by one employee as a “contrived construction”) that inflated the value by $29 million. The auditors were then allegedly misled to believe that the increase reflected only correction of an error and the CFO was misled to believe that the additional funds would benefit, not just Ghosn, but a number of directors and others. Ghosn also had the currency applicable to his retirement payments changed, using an outdated more favorable exchange rate, resulting in an additional $22 million increase in the value of his own pension allowance. Interestingly, as it turns out, Ghosn has never actually been paid the additional undisclosed $140 million.
The Order concluded that, as a result of this misconduct, Nissan’s annual securities reports for the relevant periods contained materially false and misleading information in violation of Exchange Act Section 10(b) and Rule 10b-5. Those securities reports included officer and director comp information required by Japanese law, translated by Nissan into English and posted on Nissan’s website as required by the exemption.
The SEC noted Nissan’s “substantial cooperation” and various remedial actions taken by Nissan, such as appointing an independent compensation committee, a majority-independent audit committee, a majority-independent board and an independent board chair. However, the SEC determined that Nissan was liable for Ghosn’s acts under traditional principles of respondeat superior, as Ghosn’s acts were within the scope of his employment (particularly in light of Nissan’s specific delegation of authority to Ghosn) and Ghosn’s “misleading statements, devices, schemes and artifices to defraud were material and evidenced a high degree of scienter.” Nissan was ordered to cease and desist and to pay a penalty of $15 million.
To settle the charges against them, Ghosn and Kelly (who was determined in the Order to have aided and abetted Ghosn) “agreed to be permanently enjoined from violating or aiding and abetting violations of the anti-fraud provisions. Ghosn also agreed to a $1 million civil penalty and a 10-year officer and director bar. Kelly agreed to a $100,000 penalty, a five-year officer and director bar and a five-year suspension from practicing or appearing before the Commission as an attorney. Nissan, Ghosn, and Kelly settled without admitting or denying the SEC’s allegations and findings.”