United States: "Airing Out The Denny Crane Room": Recent SEC Action Emphasizes Need For Effective Disclosure Controls And Procedures For Executive Perquisites

Last month, Energy XXI, Ltd. ("EXXI"), a publicly-traded oil and gas exploration company, saw its former Chief Executive Officer charged with various securities law violations by the Securities and Exchange Commission ("SEC"). The SEC seeks to have the CEO pay civil money penalties and be barred from any officer or director role with any issuer of registered securities.

From 2012 to 2016, "[the CEO] obtained undisclosed compensation and perquisites by submitting business expenses for payment that he knew or should have known were personal in nature and/or lacked documentation sufficient to establish a business purpose."1 This resulted in a failure by EXXI to disclose more than $1 million in compensation and perquisites in its executive compensation disclosures.2

Part of the CEO's problematic practices included charging to his corporate credit card over $1 million in expenses that were either personal in nature and/or lacked documentation sufficient to establish a business purpose. Among the $1 million, expenses included:

  • $40,000 toward a $160,000 bottle of wine purchased at a charity auction;
  • $36,000 on a shopping trip to a designer shoe boutique;
  • a $15,000 birthday party for a friend at the CEO's home;
  • $43,000 for use of the company aircraft to attend college football games;
  • a $15,000 donation to the private school attended by the CEO's daughter;
  • $17,000 in personal legal fees;
  • $323,000 to keep a company cigar and liquor lounge (the "Denny Crane Room"); and
  • $18,000 for first class tickets for the CEO and his family to fly to London to attend a board meeting.3

Other perquisites that EXXI provided to the CEO included club memberships, automobile leases, health insurance, and reimbursement of business and health care expenses.4 These facts serve as a cautionary tale for reporting companies and highlight the importance of effective disclosure controls and procedures for disclosing executive benefits, also known as perquisites.

Effective disclosure controls and procedures are important to ensure that information that needs to be disclosed under the rules of the Securities Exchange Act of 1934 (the "Exchange Act"), including information regarding executive compensation, is appropriately disclosed. The rule is straightforward – reporting companies are required to maintain disclosure controls and procedures designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, all within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures must also be designed to ensure that information required to be disclosed is accumulated and communicated to the issuer's management, as appropriate, to allow timely decisions regarding required disclosure. In other words, effective disclosure controls and procedures provide those who need to know with the bundle of information that they need to evaluate, and with enough time to appropriately evaluate whether or not disclosure is required.

So what should a director or corporate executive look for when evaluating, or developing for the first time, effective disclosure controls and procedures with respect to perquisites? There is no one-size-fits-all approach to effective disclosure controls and procedures, and the rules allow for flexibility in formulating the disclosure controls and procedures, but here are a few suggested practices:

First, it is important to identify benefits that could be considered perquisites. The factors to be considered when determining whether a benefit is a perquisite are:

  1. An item is not a perquisite if it is integrally and directly related to the performance of the executive's duties.
  2. Otherwise, an item is a perquisite if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.

The analysis begins with what is not a perquisite. The SEC uses this negative analysis because if an item is directly related and integral to the performance of an executive's duties, then the analysis ends – the item is not a perquisite. For example, a company phone or laptop computer is not a perquisite if the company believes that it is essential that the executive be accessible when out of the office.

However, the SEC does not intend to make the set of items that are integrally and directly related to the performance of the executive's duties broad. The concept of a benefit that is integrally and directly related to job performance is a narrow one. Thus, providing the use of a private aircraft for security purposes may provide a benefit to the company because it keeps management safe; however, any such personal use of the private aircraft will still generally be considered a perquisite.

Some things are commonly understood to be perquisites, such as personal use of a corporate jet and car allowances for personal usage. The categorization of some benefits is less clear, such as spousal attendance at a business dinner. An argument can be made that, under certain circumstances, a spouse's attendance is integrally and directly related to the performance of an executive's duties, which would prevent the expense from being categorized as a perquisite. On the other hand, there is an argument that the executive is at least receiving a benefit in the amount of the incremental cost of the spouse's attendance. The SEC intended not to make the analysis a bright-line test, for fear that it would be easily manipulated, but understanding the analysis above should allow management to correctly identify whether items are perquisites. Legal advisors will often have much more experience with perquisite disclosure, so it would be prudent for management to reach out to the company's legal advisors when there is doubt.

Second, director and officer questionnaires ("D&O questionnaires") should be provided to company management to assist with identification and appropriate disclosure of perquisites. D&O questionnaires are packets of questions used to query directors and officers about a wide variety of subjects that must be disclosed in periodic reports and other publicly filed documents, such as proxy statements. Among the subjects covered is executive compensation and perquisites. An effective questionnaire will ask the director or officer if he or she has received any benefit from the company, and will give examples to refresh his or her memory as to what benefits will qualify as perquisites. Each director and officer will submit his or her questionnaire to a designated reviewer, likely the company's general counsel or external counsel, for review. The D&O questionnaires should be provided to directors and officers well before the deadline for disclosure in order to give ample time to both the directors and officers to carefully consider and provide their answers, and also leave time for the reviewers to analyze the responses and prepare the appropriate disclosures.

Third, there are a number of other important considerations to remember when thinking about perquisites, besides disclosing them under securities laws. A company should consider that the value of perquisites is taken into account when determining "Named Executive Officer" ("NEO") status. Accordingly, the company should consider providing D&O questionnaires to officers that are just outside the most highly paid executives and educate these officers on perquisites. A company should also remember that the income tax rules for deductibility of benefits (or imposition of tax on the perquisite) are different than the determination of whether benefits must be disclosed in filings with the SEC. A company may be able to deduct all or part of a benefit provided to an executive as an "ordinary" or "necessary" business expense for income tax purposes, but still be required to disclose the benefit in a report pursuant to the Exchange Act. In any case, a company should consult their tax advisors.

With effective disclosure controls and procedures, a company will save themselves from unnecessary investigation and fines, but more importantly, keep the confidence of public investors.

*Seth Lemings is a summer associate at Sheppard Mullin.


1 S.E.C. v. Schiller, Case 4:18-cv-02433, p. 14 (filed on July 16, 2018).

2 Id.

3 Id. at 16.

4 Id. at 15.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2018, Seminar, San Francisco, United States

Please join us for Sheppard Mullin's Labor & Employment Law Update & Happy Hour Seminar Series.

28 Sep 2018, Other, Los Angeles, United States

Leaders today don't just have to worry about nefarious cybercriminals getting "inside" their firewalls; there's an entire ecosystem of SAAS partners, third party vendors and suppliers, and all the hardware from switches to POS terminals that need to be monitored.

9 Oct 2018, Other, Los Angeles, United States

Sheppard, Mullin, Richter & Hampton LLP has opened for business in Dallas to proudly serve the Texas business community.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions