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U.S. Securities and Exchange Commission

U.S. Securities and Exchange Commission

Litigation Release No. 21809 / January 12, 2011

Accounting and Auditing Release No. 3229 / January 12, 2011

SEC v. NIC, Inc., Jeffrey S. Fraser, Harry H. Herington, and Eric J. Bur, Civil Action No. 2:11-CV-02016 (EFM) (D. Kansas Jan. 12, 2011)

SEC v. Stephen M. Kovzan, Civil Action No. 2:11-CV-02017(JWL) (D. Kansas Jan. 12, 2011)

SEC Charges NIC, Inc. and Four Current or Former Executives for Failing to Disclose CEO Perquisites

The Securities and Exchange Commission ("Commission") charged Kansas-based NIC Inc. ("NIC") which manages government websites, its former CEO Jeffery Fraser, current CEO Harry Herington, former CFO Eric Bur, and current CFO Stephen Kovzan with failing to disclose more than $1.18 million in perquisites to Fraser from at least 2002 to 2007.

The Commission alleges that NIC filed false and misleading proxy statements, annual reports and registration statements that failed to disclose Fraser's perquisites and falsely represented he worked virtually for free from 2002 until 2005, and continued to materially understate the perquisites Fraser received in 2006 and 2007. The Commission also alleges that NIC's related party transactions disclosures for 2002 through 2005 were misleading in failing to disclose its payment of $1 million to fly and operate planes for Fraser.

NIC, Fraser, Herington and Bur agreed to settle the Commission's charges without admitting or denying the allegations against them. The Commission's litigation continues against Kovzan.

The Commission's complaints, filed in federal court in the District of Kansas, contain the following additional allegations:

  • Fraser's undisclosed perquisites included over $4,000 per month to live in a ski lodge in Wyoming; monthly cash payments for purported rent for a Kansas house owned by an entity Fraser set up and controlled; vacations for Fraser, his girlfriend and his family; Fraser's flight training, hunting, spa, skiing and health club expenses; computers and electronics for Fraser and his family; a leased Lexus SUV; costs for Fraser to commute by private aircraft from his home in Wyoming to his office at NIC's Kansas headquarters; and other day-to-day living expenses such as groceries, liquor, tobacco, nutritional supplements, and clothing.

  • Fraser, who did not 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. Fraser also sought reimbursement for certain expenses he had not incurred.

  • Kovzan, then Chief Accounting Officer, authorized NIC's payment of Fraser's personal expenses, circumvented NIC's internal controls and policies that required the CEO to document the business purpose for his expenses and 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 and/or signed NIC's proxy statements, annual reports, and registration statements that materially underreported Fraser's compensation and Kovzan made false representations to NIC's independent auditors.

  • Bur 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 Commission's rules requiring the disclosure of executive perquisites, yet he reviewed, signed, and/or certified NIC's public filings that failed to disclose Fraser's perquisites.

  • Herington, then Chief Operating Officer, was informed of problems with Fraser's expense reporting and failed to adequately address them. Herington received information showing that NIC was paying for some of Fraser's personal expenses, yet he reviewed and/or signed NIC's public filings that failed to disclose Fraser's perquisites.

  • NIC failed to correct Fraser's expense reporting problems even after a finance department employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower had complained to NIC and the company learned of the Commission's investigation of this matter in mid-2007. The majority of Fraser's perquisites 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.

NIC agreed to settle the Commission's charges by paying a $500,000 civil penalty and hiring an independent consultant to recommend, if appropriate, improvements to policies, procedures, controls, and training relating to payment of expenses, handling of whistleblower complaints, and related party transactions. NIC consented to a final judgment enjoining it from violating Sections 17(a)(2) and (3) of the Securities Act of 1933 ("Securities Act"); Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 12b-20, 13a-1, 13a-11, 14a-3, and 14a-9.

Fraser agreed to pay $1,184,246 in disgorgement, $358,844 in prejudgment interest, and a $500,000 civil penalty, and consented to an order barring him from serving as an officer or director of a public company. Fraser consented to a final judgment enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9, and from aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20 and 13a-1.

Herington agreed to pay a $200,000 civil penalty and consented to a final judgment enjoining him from violating Sections 17(a)(2) and (3) of the Securities Act and Section 13(b)(5) of the Exchange Act, and aiding and abetting NIC's violations of Sections 13(a) and 14(a) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9.

Bur agreed to pay a $75,000 civil penalty and consented to a final judgment enjoining him from violating Exchange Act Rules 13a-14 and 13b2-1, and aiding and abetting NIC's violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a), and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. In addition, Bur agreed to resolve an anticipated administrative proceeding by consenting to a Commission order prohibiting him from appearing or practicing before the Commission as an accountant with a right to reapply after one year.

Kovzan is charged with violating Section 17(a) of the Securities Act, Section 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. The SEC's complaint seeks a permanent injunction, disgorgement, civil penalties, prejudgment interest, and an officer and director bar against Kovzan. The Commission's action against Kovzan is ongoing.

 

http://www.sec.gov/litigation/litreleases/2011/lr21809.htm


Modified: 01/12/2011