The Securities and Exchange Commission today charged a sports supplements and nutrition company with committing a series of accounting and disclosure violations, including the failure to properly report perks provided to its executives as compensation.
Denver-based MusclePharm Corporation agreed to settle the charges along with three current or former executives and the company’s former audit committee chair who were found to have been involved in various aspects of the company’s misconduct.
An SEC investigation found that MusclePharm omitted or understated nearly a half-million dollars’ worth of perks bestowed upon its executives, including approximately $244,000 paid to CEO Brad Pyatt related to automobiles, apparel, meals, golf club memberships, and his personal tax and legal services. Even after the company began an internal review of undisclosed executive perks and then-audit committee chair Donald Prosser became directly involved in the process, MusclePharm continued filing financial statements that failed to disclose private jet use, vehicles, and golf club memberships for its executives.
“Executive compensation is material information for investors, and companies must ensure that perks it pays for executives are properly recorded and disclosed in public filings,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Prosser, MusclePharm’s audit committee chair, subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired, resulting in an incorrect disclosure.”
Among other accounting and disclosure violations outlined in the SEC’s orders instituting settled administrative proceedings against MusclePharm, Prosser, Pyatt, and former chief financial officers L. Gary Davis and Lawrence Meer:
- MusclePharm failed to disclose related party transactions with a major customer and failed to implement sufficient policies to identify and disclose related party transactions.
- MusclePharm failed to disclose bankruptcies related to two executive officers, and misstated that no members of the board of directors or other executives had been involved in any bankruptcy proceedings.
- MusclePharm improperly accounted for advertising and promotional related costs and consequently overstated its revenue.
- MusclePharm failed to disclose continuing sponsorship commitments for which the company eventually made payments totaling $6.9 million.
- MusclePharm understated its rent expense by failing to disclose $100,000 related to an aircraft lease agreement.
- MusclePharm failed to implement internal accounting controls for perks and other areas where it committed accounting and disclosure violations.
The SEC’s orders also find that MusclePharm issued stock without a registration statement when it entered into numerous transactions with third parties that agreed in exchange for company shares to pay cash to MusclePharm vendors. MusclePharm owed vendors approximately $1.1 million in outstanding invoices and was short on funds to pay them.
MusclePharm and the four individuals settled the cases without admitting or denying the SEC’s findings. MusclePharm agreed to pay a $700,000 penalty and hire an independent monitor for one year among other undertakings. Pyatt agreed to pay a $150,000 penalty, and Prosser and Davis each agreed to pay $30,000 penalties. Meer and Davis agreed to be suspended from practicing as an accountant on behalf of any SEC-regulated entities with a right to reapply after three and two years, respectively.
The SEC’s continuing investigation is being conducted by Kimberly L. Frederick, Michael F. D’Angelo, and Mary S. Brady. The case is being supervised by Thomas J. Krysa, and litigation assistance is being provided by Dugan Bliss and Gregory Kasper.