Soon after taking office, North Carolina Gov. Pat McCrory and U.S. Rep. Mark Sanford of South Carolina accepted six-figure stock payouts from an online mortgage broker – a move that experts say raises ethical if not legal concerns.
The two Republicans were directors at Tree.com, the Charlotte-based corporate parent of the website LendingTree. As board members, they were entitled to large chunks of restricted company stock if they held their positions long enough. Both resigned after their election victories, which would have rendered their unvested stock worthless had the board not taken special action to provide them early payouts.
McCrory and Sanford deny they did anything improper by accepting the payments from Tree.com, which were not fully described in their ethics statements. The payouts’ timing and total value are only being revealed now, as the result of an Associated Press investigation into the company’s financial records and interviews with Tree.com officials.
Early vesting of restricted shares for departing directors is not unheard of in the corporate world.
However, more than a dozen securities lawyers and ethics experts told The Associated Press that such stock payouts are uncommon for elected officials and raise significant concerns. These experts gave differing opinions about whether laws were broken.
But “there is no question (this) raises a host of red flags for prosecutors and regulators,” said Jacob Frenkel, who handled corruption cases as a federal prosecutor and served as senior counsel in the Securities and Exchange Commission’s Division of Enforcement.
The AP began investigating McCrory’s financial dealings and potential conflicts of interest in February, after a massive coal ash spill at a Duke Energy facility in North Carolina. AP reported that McCrory, a Duke retiree, held stock in the company as his administration made key regulatory decisions involving his former employer. Those decisions are now the subject of a federal criminal investigation.
Payouts kept under wraps
In the months after receiving his $171,071 payout of stock from Tree.com, McCrory appointed the state’s banking director and a majority of the banking commissioners who regulate mortgage brokers.
Some of Tree.com’s payments to McCrory and Sanford weren’t publicly disclosed until May 2014, when the company filed its 2013 year-end proxy statement with the U.S. Securities and Exchange Commission. Other details – such as the fact that Sanford received his $108,539 in Tree.com stock after taking office in Congress – have never been made public until now.
McCrory declined requests for an interview. In a written statement McCrory spokesman Josh Ellis said the governor fully complied with state law and “continues to uphold high ethical standards.”
Sanford declined to answer any specific questions about the Tree.com stock. He wrote in an email to the AP that the company went “the extra mile in their adherence to top-notch business practices, ethics and documentation.”
But Sanford didn’t fully disclose his retroactive vesting of stock, and the payout could violate a prohibition on members of Congress accepting gifts exceeding $350 from nonfamily members, said Washington University Law School professor Kathleen Clark, an expert on congressional ethics rules.
“My attitude toward a company may be one thing if I own $100,000 worth of stock in a company. It may be another thing if a company just essentially gifted me another $100,000,” Clark said. “I might be especially warm toward that company – especially solicitous of that company’s regulatory concerns if they allowed these units to vest when they weren’t required to allow them.”
McCrory faces questions
McCrory joined the Tree.com board in January 2009, two months after losing his first campaign for governor and nearly a year before ending his last term as Charlotte’s mayor. Like all board directors, he was awarded restricted company stock as a performance and retention bonus, which vested in annual installments as long as he stayed on the board.
In December 2012, after McCrory won election as governor, reporters questioned whether it was appropriate for him to stay on the boards of Tree.com and another company, Kewaunee Scientific. A spokesman for McCrory said he was working on the issue leading up to the inauguration.
While no North Carolina law bars elected officials from being on corporate boards while in office, they are prohibited from taking official actions that might benefit their personal holdings.
Records show McCrory resigned from Kewaunee’s board Jan. 5, 2013, the day he was sworn in. Tree.com records show that he filed his resignation as director on Jan. 4, 2013, but made it effective Jan. 31, 2013 – the day after the next board meeting and 26 days after his swearing-in.
That Jan. 30, the board voted to accelerate the vesting of McCrory’s 10,063 restricted shares of Tree.com stock, valued on that date at $171,071, even though thousands of the shares were not due to vest for another 16 months.
Without the board’s action, the shares would have expired, making them worthless. Tree.com founder and Chief Executive Officer Doug Lebda told the AP in an interview that the decision to accelerate the vesting of the shares for retiring board members is standard practice at the company.
SEC records show three high-ranking Tree.com executives forfeited their restricted shares by leaving their positions before they vested, but McCrory was the first director to depart early. Last month, after the AP began asking the company questions, two other departing directors received accelerated vesting.
McCrory also was paid $4,375 in directors’ fees for his board service in January 2013, the records show, although McCrory spokesman Ellis said the governor did not participate in the board meeting for which he was paid. That is a relatively standard practice for corporate boards.
Tree.com declined to provide AP copies of the board minutes.
Lebda, who has given thousands to McCrory’s and Sanford’s political campaigns, said he had asked McCrory to delay his resignation to give them time to find another independent director.
But records show McCrory’s seat remained vacant for more than a year after his resignation. Company spokeswoman Megan Grueling later clarified that Lebda had asked McCrory to stay to give them time to shift committee assignments to meet SEC requirements.
Payments exceeded salary
Even after McCrory’s departure, Tree.com paid its directors a special $1 per share cash dividend on any unvested stock they held at the end of the prior year, giving the governor another $10,063 on April 12, 2013, according to the SEC records.
McCrory’s total take of $185,509 from Tree.com in 2013 far exceeded the $139,590 salary he earned as governor that year.
During his four years on the Tree.com board, records show McCrory received more than $600,000 in director’s fees, dividends and stocks.
“I can tell you he added 10 times more value than any of the compensation he received,” Lebda said of McCrory. “He gave us insight and guidance. He was worth it.”
North Carolina officials are required to disclose their business dealings and their sources of compensation on annual ethics forms. Knowingly providing false information or concealing sources of income is potentially punishable by removal from office and up to eight months in prison.
On his forms covering 2012, McCrory listed Tree.com stock holdings of more than $10,000. But, though he was on the company’s board for that entire year, he omitted his “business association” with the company and the potential conflict of interest caused by the state banking commission’s licensing of its LendingTree subsidiary.
On his forms covering 2013, McCrory didn’t disclose his $14,438 in fees and cash dividends from Tree.com. The forms specifically ask officials to include stock dividends and fees exceeding $5,000.
In a statement, Ellis said that under state law, the governor wasn’t required to disclose his cash compensation from Tree.com because he had disclosed his company stock holdings earlier on the form. As for the other omissions, Ellis said the instructions on the ethics forms were unclear.
Records kept private
McCrory has been reluctant to reveal his business dealings. As a candidate, McCrory refused to release his tax returns or reveal the companies he consulted for at the Charlotte law and lobbying practice where he worked before taking office. Records show two of the firm’s lobbyists represented Tree.com.
McCrory also rebuffed calls earlier this year to disclose the full value of Duke Energy stock he owned after the Dan River coal ash spill.
Frenkel, now in private practice in Washington, D.C., said it was “troubling” that McCrory delayed his resignation from Tree.com, because he had a duty as both a company director and as a state official to avoid any appearance of conflict of interest. In his 30 years as a securities lawyer, Frenkel said, he had not seen a similar case where early vesting was granted to an elected official.
“You would think that upon election, he would have said: ‘OK. I’m submitting my resignation effective Dec. 31, which is before I’m sworn in,’ ” Frenkel said.
Despite his Tree.com payments, McCrory did not recuse himself from naming the state banking director in the weeks before receiving his special dividend, or from naming eight commissioners to the regulatory agency 18 days later. In addition to licensing mortgage brokers, the commission investigates complaints, which are kept secret under state law unless they result in discipline.
North Carolina’s banking regulators won’t comment on whether LendingTree faces any such complaints in its home state, but records show the company has had issues with regulators elsewhere.
The company paid $3 million to South Carolina in 2012 after regulators said it failed to tell customers it was being paid by the lenders it recommended as having the best mortgage rates.
Tree.com also told the SEC that it has been negotiating to settle “various alleged violations” of state and federal laws with Massachusetts in a case that may be joined by up to 34 other states. N.C. Commissioner of Banks Ray Grace said he could not comment on whether his state is among those considering a settlement with Tree.com.
Tree.com also recently disclosed it is cooperating with a Federal Trade Commission investigation of whether “unnamed corporations” are engaging in deceptive or unfair practices in the “advertising, marketing, sale or servicing of loans and related products.” Tree.com said “no specific wrongdoing by the company is alleged.”
Sanford: Retroactive vesting
Sanford joined the Tree.com board in April 2012 after finishing his term as South Carolina governor in a cloud of ethics questions. He had been forced to pay $74,000 to settle 37 state ethics charges, including using taxpayer funds to pay for flights to Argentina to visit his mistress.
As director, he was issued 5,518 restricted stock shares that would have vested in two equal installments in June 2013 and June 2014. But Sanford returned to politics before then, winning a special election to Congress, which prohibits its members from being paid to serve on corporate boards.
Sanford resigned from Tree.com’s board effective May 16, 2013, the day after he was sworn in. Under the company’s compensation program, Sanford’s unvested shares were to become worthless at the time of his resignation.
Then, on June 19 – a month after Sanford took office – the company’s board voted to retroactively vest his $108,539 in restricted shares, Grueling told the AP.
No disclosure needed?
The retroactive payment was proper because Sanford’s fellow directors weren’t able to meet before his “unexpected” resignation, Grueling said. And because he was no longer a director at the time of the vote, she said the company wasn’t required to disclose the transaction to the SEC or shareholders.
Grueling said the company consulted with the SEC about the transaction. Judith Burns, an SEC spokeswoman, said she couldn’t comment. On his ethics forms, Sanford disclosed owning stock in Tree.com that vested in 2013 and being paid director’s fees “earned prior to being sworn in.”
But his filings do not make clear that his 5,518 restricted shares vested after he left the company and after he was sworn in to Congress. Members of Congress are required to disclose each “purchase, sale, or exchange” involving securities valued in excess of $1,000. Tom Rust, the chief counsel and staff director of the U.S. House Ethics Committee, said he could not comment about whether Sanford properly disclosed his receipt of the Tree.com shares.
All told, Sanford cleared $239,159 in stock, director’s fees and special dividends in his 13 months with Tree.com, records show. Since then, Sanford has voted on financial regulations in Congress, where rank-and-file members are paid an annual salary of $174,000.