On Friday, the SEC announced settled charges against Vince McMahon, founder, controlling shareholder and former Executive Chair and CEO of World Wrestling Entertainment, for “knowingly circumventing WWE’s internal accounting controls,” making false or misleading statements to WWE’s auditor, and causing “WWE’s violations of the reporting and books and records provisions of the Exchange Act.” The SEC alleged that McMahon signed two settlement agreements relating to claims of sexual misconduct (as the WSJ framed it), one in 2019 and one in 2022, on behalf of himself and WWE but failed to disclose the existence of the agreements to “WWE’s Board of Directors, legal department, accountants, financial reporting personnel, or auditor.” Oops. The SEC charged that this omission “circumvented WWE’s system of internal accounting controls and caused material misstatements in WWE’s 2018 and 2021 financial statements,” leading WWE ultimately to issue financial restatements. McMahon agreed to pay a $400,000 civil penalty and to reimburse WWE just over $1.3 million pursuant to SOX 304(a), the SOX clawback provision. According to the Associate Regional Director in the SEC’s New York Regional Office, “[c]ompany executives cannot enter into material agreements on behalf of the company they serve and withhold that information from the company’s control functions and auditor.” (Even if—or maybe especially if—it involves hush money.)
Background. As described in the Order, in late 2018, a former independent contractor contacted McMahon and WWE—a “media and entertainment company” with shares that traded on the NYSE—alleging that “in 2005 McMahon assaulted her and derailed her career after she refused to engage in a sexual relationship with him” and seeking $18 million to resolve the claims. The parties settled in early 2019, with McMahon agreeing to pay $7.5 million over five years, in exchange for a waiver and confidentiality agreement for the benefit of McMahon and WWE. McMahon signed on his own and WWE’s behalf. His attorneys billed WWE about $23,000 for their work.
In addition, the Order alleges, from 2019 to 2022, “McMahon engaged in a personal relationship with a WWE employee,” but, in January 2022, told her to resign. A settlement agreement with the employee was signed by McMahon on his behalf and on behalf of WWE, under which McMahon would pay the employee $3 million over five years, in exchange for a release and nondisclosure agreement for the benefit of McMahon and WWE.
But, the Order alleges, McMahon failed to disclose these settlement agreements to “WWE’s legal and accounting departments, financial reporting personnel, Board, and the Board’s audit committee, as well as the Company’s outside auditor,” nor were the agreements recorded in WWE’s books and records. Rather, they were stored with McMahon’s attorney. The SEC charged that by “not disclosing the Settlement Agreements and related payments, McMahon circumvented WWE’s system of internal accounting controls.” These controls included, for example, review and analysis by the legal department of contracts between WWE and other parties, the record-keeping requirements in WWE’s Code of Business Conduct, the forwarding of contracts to the financial reporting group “to determine the appropriate accounting treatment in WWE’s financials,” and the summary of potential legal contingencies provided by the legal department to the Board, the auditors and the accounting and financial reporting groups to determine the appropriate disclosure and accounting in the financial statements. Not to mention the failure by McMahon to disclose the transactions as related-person transactions in his D&O questionnaires. The SEC charged that, as a result of these disclosure failures, “WWE and its auditor were not able to assess or advise as to the appropriate disclosures or accounting treatment for those claims, and WWE’s legal department and Board could not evaluate the disclosure implications or potential risk to the Company of the Agreements.”
And then, the SEC alleged, there were similar omissions in management rep letters to WWE’s auditors that McMahon signed in connection with WWE’s 2018 and 2021 Forms 10-K. At the time of signing each of these letters, the SEC charged, McMahon “knew, or was reckless in not knowing” that millions were due under these agreements and that WWE’s legal, accounting and financial reporting groups, Board, audit committee and auditor knew none of it. Among other things, these rep letters included statements such as “there are no transactions that have not been properly recorded and reflected in the financial statements” and that “there were no known actual or possible litigation and claims whose effects should be considered when preparing the financial statements that have not been disclosed and accounted for in accordance with [GAAP].”
While the obligations to pay under the agreements were McMahon’s, the SEC charged that the payments ”should have been recognized as expenses by the Company as of December 31, 2018 and as of December 31, 2021. WWE was a party to the Agreements, as evidenced by McMahon signing on behalf of the Company. In addition, WWE benefitted from the Settlement Agreements, receiving releases and avoiding reputational harm caused by allegations of misconduct by its CEO being made public.” Because these expenses were not recorded, the SEC alleged, WWE overstated its net income for the fourth quarters of 2018 and 2021 by approximately 22% and 4.9%, respectively. WWE also overstated its annual net income for 2018 and 2021 by approximately 8% and 1.7%, respectively. In addition, the SEC claimed that all the “Forms 10-Q filed by WWE for the periods ended March 31, 2019 to March 31, 2022 also misstated liabilities, paid in capital, and accumulated deficits in those periods” and failed to make related-party disclosures under GAAP. Similarly, as a result of McMahon’s failures to disclose the agreements, the SEC alleged, neither the agreements nor the expenses were recorded in WWE’s financial statements, or as related-party transactions in its SEC filings, and WWE’s books and records were inaccurate.
It was not until April 2022 that the Board became aware of the allegations against McMahon, leading the Board to hold a special meeting. McMahon denied the allegations, and the Board announced an investigation in June. In July, McMahon resigned as CEO and Chair, and, shortly thereafter, WWE filed a report with the SEC “disclosing that it had made a preliminary determination that approximately $14.6 million of unrecorded expenses paid or to be paid by McMahon from 2006 to 2022 should have been recorded as expenses in WWE’s consolidated financial statements.” As it turned out, the Order indicates, the unrecorded expenses related to settlement agreements with five women, not two, and all the agreements included releases of WWE. In August 2022, WWE filed an amended Form 10-K for 2021 and restated its consolidated financial statements for the years 2019, 2020, and 2021 and the unaudited financial statements for the first quarter of 2022. In WWE’s 2022 Form 10-K, WWE disclosed the payments made by McMahon in the Related-Party Note. The Order states that, “[d]uring the 12-month periods following filings containing financial results that WWE was required to restate, McMahon received incentive-based compensation and realized profits from the sale of WWE common stock.” Although WWE required McMahon to reimburse the Company for $64,497 related to his incentive-based compensation, the SEC maintained, “WWE did not claw back any profits from McMahon’s stock sales during the applicable periods.”
Violations. The SEC charged that McMahon violated Section 13(b)(5) of the Exchange Act (“knowingly circumventing or knowingly failing to implement a system of internal accounting controls”), Rule 13b2-2(a)(1) (materially false or misleading statement by an officer or director to an accountant in connection with an audit or SEC filing) and Exchange Act Rule 13b2-1 (falsifying or causing falsification of books and records). The SEC also charged that McMahon caused WWE to violate Section 13(b)(2)(A) of the Exchange Act (books and records), and caused WWE’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder (material misstatements and omissions in periodic reports). Finally, the SEC charged that McMahon violated SOX 304, “which requires the chief executive officer or chief financial officer of any issuer required to prepare an accounting restatement due to material noncompliance with the securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission of the financial document embodying such financial reporting requirement, and (2) any profits realized from the sale of securities of the issuer during that 12-month period.”
Without admitting or denying the SEC’s charges, McMahon agreed to pay a civil money penalty of $400,000 and to reimburse WWE or its successor for a total of $1,330,916 pursuant to SOX 304.
