SEC Charges Payment Processing Company and Former CEO for Overstating Key Operating Metric
Sept. 21, 2018
File No. 3-18819
September 21, 2018 - The Securities and Exchange Commission today entered an order finding that, over a three-year period, Heartland Payment Systems, LLC, and its former CEO, Robert O. Carr, overstated the significance of an operating metric as a meaningful indicator of future revenue growth.
According to the SEC's order, Heartland compensated its internal sales force, which sold payment processing services to retail merchants, based on an operating metric referred to by the company as New Margin Installed ("NMI"). NMI estimated the profit that each new merchant was expected to generate during its first year of processing payments through Heartland. In filings with the SEC and quarterly earnings calls with equity research analysts, Heartland described NMI as "new business" and a "leading indicator of future growth." The SEC's order found that, over a three-year period, Heartland's NMI metric was materially overstated because it included "change of ownership" merchant accounts that provided no net revenue growth, as well as the undisclosed addition of margin from the sale of products that were already included in Heartland's net revenue. According to the order, Heartland's overstatement of NMI caused research analysts to maintain and increase ratings for Heartland's common stock during this period. The SEC's order found that although Carr and Heartland had reason to know that Heartland's NMI number was overstated as a measure of future growth, they continued highlighting the company's increasing and record NMI in filings with the SEC and communications to the market.
The SEC's order found that Heartland violated the antifraud provisions contained in Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act"), and that Carr violated Section 17(a)(2) of the Securities Act. Without admitting or denying the SEC's findings, both Heartland and Carr have agreed to a cease-and-desist order. Heartland has agreed to pay a penalty of $2,160,000 and Carr has agreed to pay a penalty of $120,000.
The SEC's investigation was conducted by W. Bradley Ney, Heather A. Powell, and J. Ashley Ebersole in the SEC's Washington, D.C. office, and supervised by Melissa Robertson.