The share price of MDC Partners, the holding company that includes Crispin Porter + Bogusky and 72andSunny, has plummeted this morning on news of an SEC investigation into the CEO's expenses.
MDC dropped a bombshell yesterday in its after-market first-quarter earnings call, when the CFO noted that on Oct. 5, 2014, it 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".
Raising eyebrows is why MDC has been sitting on such a big piece of investor information for the past six months and chose to only disclose it now.
As a result, Bahamas-based MDC chief Miles Nadal "voluntarily" agreed to pay back the company $8.6 million for reimbursed medical expenses, travel and commuting costs, charitable and other unspecified expenses which "lacked appropriate substantiation over the six year period from 2009 to 2014," CFO David Doft told investors on the call, according to a transcript from Seeking Alpha.
MDC said it has been fully cooperating with the SEC, as has Nadal, and the company believes "the inquiries are at an early stage," according to Doft.
One apparent executive casualty so far: Last week, company chief accounting officer Michael Sabatino was moved into a new role at MDC where he will work on "special projects" while Doft assumes the additional role as principal accounting officer.
This morning, MDC's stock, in heavy volume, dived by more than a third to around $19, after closing at $28 yesterday. It closed today at just over $20, with more than 4.4 million shares changing hands compared to average daily volume of 223,000.
In MDC's newly-released proxy for its upcoming annual shareholders' meeting on June 4th, the company reported that Nadal earned total compensation of nearly $17 million in 2014, down from almost $21 million in 2013. Last year's whopping payout for Nadal was the highest among holding company CEOs, including those at MDC's huge competitors like WPP, Omnicom and Interpublic. New details about Nadal's hefty 2014 paycheck come as the company's operating loss broadened to $32 million in the first quarter, from $8.8 million in the year-earlier period.
Following the SEC subpoena, MDC created a special committee of independent directors looking into the review of perks and payments to CEO Nadal and Nadal Management Limited. Because of that, the company incurred legal and other costs of $5.8 million in the first quarter, on top of the $1.2 million expense included in its fourth-quarter results. MDC added that it expects to recognize a one-time gain of $8.6 million in the second quarter, relating to the reimbursement of those amounts which were previously expensed through the company's profit and loss statement.
In addition to the reimbursement put forward by the special committee, the company is implementing "remedial steps" to improve internal controls. Among them: Adoption of a new private aircraft usage policy coupled with a new travel and entertainment policy and the hiring of two new senior execs, including an svp of internal controls and compliance and a director of compliance and risk management who will be responsible for managing internal controls, reviewing monthly expense reports and ensuring compliance with the new policies. (Both those execs will not report to Nadal, but to MDC's audit committee.)
On the investor call, when JPMorgan's Avi Steiner asked why MDC has waited so long to go public with the explosive news, Doft deflected: "Since October, the company has been actively cooperating with the production of documents for review by the SEC, formed a Special Committee of Independent Directors to review certain matters. That review was just concluded in time with this earnings report and given the findings, we felt that it was appropriate to disclose at this time."
In the first quarter, MDC reported revenue rose 10 percent to $302 million, with organic revenue increasing 7 percent.