Hefty Fine For Not Meeting SEC Disclosure Requirements

Skechers U.S.A., Inc., a public-traded company received a hefty fine for not meeting SEC disclosure requirements. Skechers failed to disclose payments to executives’ immediate family members, and unreimbursed loans to executives and directors that qualified as personal expenses over the disclosure threshold.

According to an article by Cooley, the case serves as a good reminder about disclosure requirements under Reg S-K Item 404. The firm suggests beefing up due diligence and disclosure controls around related-person transactions. Skechers agreed to a $1.25 million civil penalty.

Item 404(a) requires a description of “related-person transactions” of more than $120,000 in which the company was or plans to be a participant, and in which any “related person had or will have a direct or indirect material interest.” Transactions that are currently proposed or occurred since the beginning of the company’s last fiscal year are covered.

A “related person” is defined as any director, board nominee, or executive officer of the company, and any of their immediate family broadly defined to include in-laws and step-relations. Employment of these persons is subject to required disclosure, “when the threshold for disclosure has been met, and the immediate family member has or will have a direct or indirect material interest.”

In a sidebar, Cooley goes into detail on SEC disclosure requirements, noting, for example, that reports must include the name of the related person, the basis on which the person is related, the related person’s interest in the transaction, the amount involved, the approximate dollar amount of the related person’s interest in the transaction, and any other information material to investors.

Cooley also describes the transactions that got Skechers into trouble, which included filing 10-Ks from 2018 through 2021 which incorporated by reference from the proxy statement the related-person transaction information that is required but omitted mandatory Item 404 disclosure.