SEC Getting Serious About Related Party Transaction Disclosures

When Martha Stewart teamed up with Skechers to launch her own line of branded footwear last year, the partnership seemed to fit like your favorite pair of slip-on sneakers. “Martha’s style is all about blending form and function,” noted an article on her website announcing the lifestyle guru was joining her friend Snoop Dogg among Skechers celebrity spokespeople.

Is it a coincidence that the shoemaker has now run afoul of the Securities and Exchange Commission just one year after joining forces with the most famous insider-trading perpetrator in history? In fact, according to the SEC, the actions that landed Skechers in trouble started well before Stewart became one of the company’s endorsers. Earlier this month, the agency announced it had settled with the company over charges that Skechers failed “to disclose payments for the benefit of its executives and their immediate family members.” The commission traced the payments back to a period from 2019 to 2022 when Skechers allegedly fell short of its responsibility to report it was employing two relatives of executives. Additionally, the SEC said the company didn’t disclose a consulting agreement with “a person who shared a household with one of its executives.” On top of that, Skechers kept the public in the dark about the fact that two executives owed the company more than $120,000 for expenses that they were supposed to repay, according to the SEC.

“Disclosure of related person transactions provides important information for investors to evaluate the overall relationship between a company and its officers and directors,” commented Scott A. Thompson, an associate director of enforcement with the SEC, on the settlement.

Publicly traded companies must disclose information in their Form 10-K filings about transactions that involve certain individuals with ties to the companies. Specifically, if these “related persons” consist of companies’ directors, executive officers and their immediate family members. The term also applies to shareholders who own at least 5% of a company’s stock and their immediate family members.

The SEC has taken a vigorous approach in recent months to enforcing the requirement to disclose related person transactions. Issuers that have gotten into trouble lately for not disclosing them include Maxmius Inc. and SAE. In a high-profile example, the commission announced last year that it reached a settlement with Lyft Inc. over charges the rideshare company failed to disclose the involvement of one of its board members in a shareholder’s sale of more than $400 million of Lyft stock prior to its 2019 IPO.

The SEC said the Lyft board member set up the sale to an investment vehicle controlled by an investment adviser with ties to the director. The director then brokered a deal for another investor to buy the shares from the investment vehicle. As a result, the board member received compensation in the range of seven figures for setting up the transaction and did not disclose it to Lyft.

The Lyft case demonstrates that the SEC isn’t playing around about disclosing related party transactions. Notably, no payment was made between the rideshare company and the related party. Yet, the SEC still deemed Lyft to have benefited from the deal, which triggered the disclosure requirement.

If the SEC is willing to take such an expansive view of related party transactions, companies like Skechers involved in clear violations of the disclosure rule shouldn’t be surprised when the other shoe drops.

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