MDC Founder Miles Nadal Quits Amid SEC Investigation

Additional $2 million in questionable expenses recently identified

Just how bad are the findings of the SEC's investigation of MDC Partners' founder Miles Nadal? That's the question looming over the company after he quit unexpectedly this week, along with his former chief accounting officer, Michael Sabatino.

The advertising holding company—which includes several major shops such as Crispin Porter + Bogusky and 72andSunny—dropped a bombshell in its first-quarter earnings call in April, when CFO David Doft noted that on Oct. 5, 2014, the firm received a subpoena from the Securities and Exchange Commission requesting documents "relating to CEO expenses, the company's goodwill and certain other accounting practices, as well as trading in the company's securities by third parties." MDC execs had apparently sat on that information for six months before revealing it to investors.

MDC, which was created in 1980 as Multi Discipline Partners, said it has been fully cooperating with the SEC, as has Nadal, and in April the company believed the inquiries were then still at an early stage. MDC has not issued any updates about the pending investigation.

Scott Kauffman, who has been presiding director of MDC's board since 2012 and a board member for nine years, will replace Nadal as CEO. The Palo Alto, Calif.-based exec has been affiliated with media and technology companies throughout his career and in 2008 was named CEO of SourceForge, now called Geeknet, which owns and operates SourceForge.net, ThinkGeek, Slashdot, and Freshmeat, now Freecode.

In a statement, MDC said Nadal has agreed to repay all expenses that were requested to be repaid by a special committee of MDC's board, including an additional $1.88 million that was recently identified. The company added that in connection with his "retirement," Nadal is required under MDC incentive and retention agreements to repay $10.58 million in retention amounts received between 2012 and 2015. In addition, Nadal is not eligible for any compensation payments or severance.

Former MDC financial exec Sabatino has also agreed to repay the company $208,535 in cash bonus payments received between 2012 and 2014.

Nadal, who resides in the tax-free haven of Paradise Island in the Bahamas and is highly compensated at the money-losing company, had a reputation as a financial wheeler-dealer in his native Canada, where MDC was headquartered prior to relocating to New York.

The flamboyant self-made man, known for his 80-foot Lazzare motor cruiser, named Dare to Dream, drew criticism in Canada for his corporate governance practices. His ex-father-in-law served on his board, for instance, and occupied a role on key committees, and Nadal and other top company execs received interest-free loans from MDC. He also benefited from a dual-class share structure that awarded him almost half of the company's voting rights, despite the fact that he then owned just one-fifth of MDC's stock. Following tough media scrutiny, Nadal ended those practices and converted his multiple voting shares into common stock, without any extra compensation to him

Nadal, who started his career at the age of 12 with a summer camp photography business, has been a single-minded, focused entrepreneur, and MDC is an industry anomaly created very much in his vision. Unlike larger competitors, with multiple global networks, MDC has invested in smaller entrepreneurial boutiques like CP+B and Kirshenbaum Bond Senecal + Partners, which operate independently.

In recent years, speculation has centered on Nadal's interest in selling MDC, rumors that may now pick up steam.