Recently, the SEC announced settled charges against Skechers U.S.A., Inc., a public footwear company traded on the NYSE, for allegedly failing to disclose payments to executives’ immediate family members and loans to executives and directors that represented unreimbursed personal expenses in excess of the disclosure threshold. In the settlement, Skechers agreed to pay a $1.25 million civil penalty. According to an SEC Associate Director of Enforcement, “[d]isclosure of related person transactions provides important information for investors to evaluate the overall relationship between a company and its officers and directors….Today’s action is a reminder that companies should take appropriate measures to ensure proper disclosure of such transactions.” This case serves as a good reminder, especially during proxy season, about the need to disclose, under Reg S-K Item 404, related-person transactions that involve significant unreimbursed personal expenses or family members who may be performing work for the company. Companies may want to beef up their due diligence processes and disclosure controls around these types of transactions.
Form 10-K requires public companies to provide the information required by Reg S-K Item 404. Item 404(a) requires a description of “related-person transactions,” that is, transactions in excess of $120,000 in which the company was or is to be a participant and any “related person had or will have a direct or indirect material interest.” The company must report all related-person transactions since the beginning of the company’s last fiscal year or that are currently proposed. A “related person” includes any director (or nominee) or executive officer of the company and any immediate family members of the directors (or nominees) or executive officers. “[I]mmediate family members” include any “child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such director, executive officer or nominee for director, and any person (other than a tenant or employee) sharing the household of such director, executive officer or nominee for director.” In addition, “disclosure of related-person transactions ‘involving the employment of immediate family members’ is required ‘when the threshold for disclosure has been met and the immediate family member has or will have a direct or indirect material interest.’”
In addition, with regard to any related-person transaction, companies are required to disclose the name of the related person, the basis on which the person is a related person, the related person’s interest in the transaction, the amount involved in the transaction and the approximate dollar amount of the related person’s interest in the transaction, and any other information that is material to investors. With respect to indebtedness, companies must disclose as the amount involved in the transaction “the largest aggregate amount of principal outstanding during the period for which disclosure is provided, the amount thereof outstanding as of the latest practicable date, the amount of principal paid during the periods for which disclosure is provided, the amount of interest paid during the period for which disclosure is provided, and the rate or amount of interest payable on the indebtedness.”
As described in the Order, for each of fiscal years 2018 through 2021, the Company filed a Form 10-K that incorporated by reference from the proxy statement the related-person transaction information required by Item 404. However, in each Form 10-K and proxy statement, the SEC alleged, the Company omitted mandatory Item 404 disclosure. More specifically, according to the SEC, in each of the Company’s fiscal 2018 and 2019 Forms 10-K, the Company failed to disclose “that a person sharing the same household as a director and executive officer of Skechers, in 2018 [and in 2019], had received $210,000 in compensation as an independent contractor of the company.” Similarly, in the Form 10-K for fiscal 2020, the Company “failed to disclose that a sibling-in-law of an executive officer and director of Skechers, in 2020, had received $213,645 in compensation while serving as a non-executive employee of the company.” And again, in the Form 10-K for 2021, the Company “failed to disclose that, in 2021, a sibling-in-law of an executive officer and director of Skechers had received $155,419 in compensation and a sibling of a different executive officer and director of Skechers had received $486,790 in compensation, while both served as non-executive employees of the company.”
In addition, according to the SEC, in each of the years above, the Company failed to disclose loans from the Company to one or more executive officers and directors in excess of $120,000. The loans related to personal expenses paid by Skechers but not yet reimbursed by the related person. The Order charges that one executive officer and director owed Skechers in excess of $120,000 in each of four years, and another executive officer and director owed Skechers in excess of $120,000 in each of two years.
The SEC found that Skechers violated Sections 13(a) and 14(a) under the Exchange Act and Rules 13a-1 and 14a-3 thereunder related to annual reports and proxy statements. Skechers was required to pay a civil money penalty in the amount of $1.25 million.
