How much loyalty does one owe the Chief Executive of a company?  Enough to let the company pay him some $1.2 million for a wide range of personal expenditures over a 6-year period?   Enough to violate securities laws by not disclosing this long-running practice to investors?  Enough to take the fall?

The SEC charged Kansas-based NIC Inc., that manages government websites, and 4 current or former company executives with failing to disclose to investors more than $1.18 million in perks paid to former CEO Jeffrey Fraser, his girlfriend, and his family over a 6-year period, beginning 2002.  The company paid for Fraser to live in a Wyoming ski lodge and commute by private aircraft to his Kansas office.  It also paid for vacations, computers, day-to-day living expenses, and much more.  

Meanwhile, NIC and its executives falsely represented to investors that Fraser worked virtually for free from 2002 to 2005, and then continued to materially understate the perks that Fraser received in 2006 and 2007.  NIC's related party disclosures for 2002 through 2005 also were misleading.

"Accomplices in the Crime."   Current CEO Harry Herington and former CFO Eric Bur, along with NIC and Fraser agreed to pay a combined total of $2.8 million to settle SEC charges in the matter.  The fourth executive, current CFO Stephen Kovzan, is still under investigation. 

• Jeffrey Fraser ... who didn't have a personal credit card, routinely charged living expenses on NIC credit cards and submitted expense vouchers falsely claiming personal items were business-related in order to have NIC pay for these personal expenses. He also sought reimbursement for certain expenses he had not incurred.

• Stephen Kovzan ... who was then the company's Chief Accounting Officer, allegedly authorized NIC's payment of Fraser's personal expenses, circumventing NIC's internal controls and policies that required the CEO to document the business purpose for his expenses.  Kovzan knew, or was reckless in not knowing, that Fraser's expenses were falsely characterized as business expenses in NIC's books and records.  Kovzan prepared, reviewed or signed NIC's proxy statements, annual reports and registration statements that materially under-reported Fraser's compensation, and Kovzan made false representations to NIC's independent auditors.

• Eric Bur ... allegedly permitted NIC to pay the expenses that Fraser submitted on his expense vouchers even though he was informed that Fraser was not submitting the required documentation.  A finance department employee raised concerns to Bur that some of Fraser's expenses were not business-related.  Bur was aware of the SEC's rules requiring the disclosure of executive perks, yet he reviewed, signed or certified NIC's public filings that failed to disclose Fraser's perks.

• Harry Herington ... who was then COO, was informed of problems with Fraser's expense reporting and failed to adequately address them.  He received information showing that NIC was paying for some of Fraser's personal expenses, yet he reviewed or signed NIC's public filings that failed to disclose Fraser's perks.

•  NIC ...  failed to correct Fraser's expense reporting problems even after the Finance employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower complained to NIC and the company learned of the SEC's investigation of this matter in mid-2007.  The majority of Fraser's perks were not repaid or disclosed, and NIC continued to make misleading public filings. NIC failed to disclose to investors in public filings that an internal review concluded Fraser had intentionally misclassified his expenses.

SEC Staff Credits.   Lisa Deitch, Helaine Schwartz, Holly Pal and Gary Peters (SEC Enforcement) conducted the investigation.  Litigation against Kovzan will be led by Erica Williams.   [SEC PR 11-8, 1/12]