THE SEC AND THE DUTIES OF OFFICERS AND DIRECTORS
The Commission filed four actions centered on million of dollars in undisclosed compensation and related party transactions by former InfoGROUP, Inc. (now infoUSA, Inc.) Chairman and CEO, Vinod Gupta. A settled action was filed against Mr. Gupta, SEC v. Gupta, Civil Action No. 8:10-cv-00100 (D. Neb. filed Mar. 15, 2010). Another was against the former chairman of the audit committee, Vasant Raval, SEC v. Raval, Civil Action No. 8:10-cv-00101 (D. Neb. Filed Mar. 15, 2010). A third case, which is in litigation, named the two former CFOs, Rajnish Das and Stormy Dean, SEC v. Das, Civil Action No. 8:10-cv-00102 (D. Neb. Filed Mar. 15, 2010). The company settled an administration proceeding, In the Matter of infoUSA Inc., Adm. Proc. No. 3-13815 (Mar. 15, 2010). The actions should serve as a warning not just to overreaching controlling shareholders, but to directors and officers who fail to fulfill their duties. See also Litig. Rel. 21451 (Mar. 15, 2010).
The case against Mr. Gupta alleges that he received approximately $9.5 million in unauthorized and undisclosed compensation over a four year period beginning in 2003. During that same period, the company also engaged in undisclosed related party transactions with two companies controlled by Mr. Gupta. Those transactions involved $9.3 million.
Defendant Gupta is the founder of InfoGROUP’s predecessor. That company went public in 1992. Mr. Gupta is the largest shareholder. Essentially, the complaint alleges that Mr. Gupta used the company as his personal piggy bank. He exempted himself from company policies for travel and entertainment which required a valid business purpose as well as proper documentation. The expenses he charged to the company included: personal jet travel for his family and friends; service for his yacht; payment of personal credit cards; costs for homes in California, Aspen, Hawaii and Washington, D.C.; expenses for personal employees; upkeep for twenty cars; membership dues for 28 clubs; premiums for two personal life insurance policies; and office space for two companies he controlled, Annapurna and Aspen Leasing. Although Mr. Gupta signed and certified the company annual reports during the period, none of these expenses were disclosed.
The undisclosed related party transactions were with Annapurna and Aspen Leasing. Those transactions included lease payments for the aircraft made to Annapurna and to the aircraft leading company as well as payments for the homes and yacht to that company and payments to Aspen Leasing for the fleet of automobiles. Portions of these transactions, according to the complaint, were structured to conceal. For example, Annapurna leased aircraft which in turn were leased to InfoGROUP. The payments by the company were split, part to Annapurna and part to the other company.
In early 2005, Mr. Gupta expressed interest in having the company acquire ORC. Before informing the board, Mr. Gupta purchased shares in ORC and then had InfoGROUP purchase shares. In June 2005, when the board approved pursuit of a deal with ORC, Mr. Gupta did not disclose the fact that he held a stake in the company. Later, when the board learned that he owned shares in ORC, it demanded that he turn over the profits from sales and the remaining shares to the company.
Mr. Gupta settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the antifraud, proxy and reporting provisions. He also agreed to the entry of an order directing him to pay disgorgement of about $4 million along with prejudgment interest and a civil penalty of approximately $2.2 million. The order will bar him from serving as an officer or director and place restrictions on his voting rights in company shares.
The action against Mr. Raval centers on his failure to carry out his duties as chairman of the audit committee. According to the complaint, in January 2005 as part of installing a new related party transaction policy, the board became aware of payments to Annapurna, including the monthly expenditures for several of the homes. Mr. Raval, as chairman of the audit committee, was directed to conduct an internal investigation.
Mr. Raval failed to take any meaningful action. In addition, he ignored other information about improper payments obtained from the internal auditor. Although Mr. Raval continued to receive similar information he did not take action.
The SEC’s complaint charged Mr. Raval with violations of the antifraud, proxy and reporting provisions. To resolve the case the defendant consented to the entry of a permanent injunction prohibiting future violations of each provision, agreed to pay a $50,000 civil penalty and to be barred from serving as an officer or director for five years.
The action against the two former company CFOs, Messrs. Das and Dean, is based on the same conduct. It alleges that the two men improperly approved expenses for Mr. Gupta despite the lack of proper documentation and a failure to comply with company policies. In addition, the two men were reckless in not knowing of the related party transactions. This case is in litigation.
Finally, the company agreed to settle in an administrative proceeding. That proceeding charged violations of the books, records and proxy provisions. It was resolved with the entry of a cease and desist order. The Commission considered the cooperation of the company in resolving the case. In what appears to be a continuing trend which should give guidance to others, the Commission detailed the efforts of the company which earned it cooperation credit. Those included replacing officers and directors, creating a new position of executive vice president for business conduct and general counsel, instituting mandatory director and executive officer training programs and hiring an independent compensation consultant and implementing new controls.