Monday, April 14, 2014

No. 41: Phoenix Settles with the SEC and Begins Filing Its Delayed Financial Statements

The Securities and Exchange Commission (SEC) recently instituted cease-and-desist proceedings directed at The Phoenix Companies, Inc. (Phoenix) and PHL Variable Insurance Company (PHL), a wholly owned indirect subsidiary of Phoenix. The SEC subsequently received and accepted a settlement offer from the companies. Phoenix recently filed the first delayed statement pursuant to the agreement.

Background
On September 18, 2012, PHL said certain previously issued financial statements could no longer be relied upon and should be restated. The statements in question were audited statements for years ended December 31, 2011, 2010, and 2009, and unaudited statements for quarterly periods dating back to March 31, 2011.

On November 8, 2012, Phoenix made a similar announcement and warned that "[m]anagement will likely conclude that there are one or more material weaknesses" in its disclosure controls and procedures and internal controls over financial reporting. Phoenix also said it expected to file the restatements prior to filing of its 2012 10-K report in March 2013.

On March 15, 2013, Phoenix said it would not meet its previously announced timetable and would not timely file its 2012 10-K. Phoenix also said it "expects that it will continue to identify, assess for materiality and correct additional errors during the course of the Restatement, some of which may be material and adverse."

During the remainder of 2013—on April 24, May 31, June 28, August 15, October 15, and December 30—Phoenix made announcements relating to the reinstatement. None of the announcements specified a timetable.

On January 17, 2014, Phoenix said it expected to file its 2012 10-K by March 31, 2014. Phoenix also said it expected to become a timely filer with the filing of its 10-Q quarterly report for the second quarter of 2014. See my post No. 24 published January 23, 2014 for a discussion of Phoenix's January 17 announcement.

The Cease-and-Desist Order
On March 21, 2014, the SEC issued a cease-and-desist order directed at Phoenix and PHL. The SEC described how the companies had failed to file certain reports and thereby had violated requirements in the Securities Exchange Act of 1934 (Act). The companies consented to the entry of the order "without admitting or denying the findings [in the order], except as to the [SEC's] jurisdiction over them and the subject matter of these proceedings, which are admitted."

The order includes a chart, as of March 19, 2014, showing six delinquent filings of Phoenix and five delinquent filings of PHL. The order also includes a list of 15 undertakings—seven by Phoenix and eight by PHL. The order requires the companies to cease and desist from committing or causing any violations and any future violations of the Act, and to comply with the undertakings. The order requires Phoenix and PHL to pay civil monetary penalties of $375,000 each to the U.S. Treasury.

The order lists the delayed statements and the dates by which the companies have undertaken to file them. Here is a tabulation showing, for each company, each delayed statement and the date by which the company has undertaken to file it.

Phoenix's Delayed Statements Filing Deadlines
10-K 2012 Annual March 31, 2014
10-Q 2012 Third Quarter April 15, 2014
10-K 2013 Annual June 4, 2014
10-Q 2013 First Quarter July 15, 2014
10-Q 2014 First Quarter July 15, 2014
10-Q 2013 Second Quarter August 11, 2014
10-Q 2013 Third Quarter November 10, 2014
       
PHL's Delayed Statements Filing Deadlines
10-K 2012 Annual April 15, 2014
10-Q 2012 Third Quarter April 30, 2014
10-K 2013 Annual July 3, 2014
10-Q 2013 First Quarter August 4, 2014
10-Q 2014 First Quarter August 4, 2014
10-Q 2013 Second Quarter September 8, 2014
10-Q 2014 Second Quarter September 8, 2014
10-Q 2014 Third Quarter November 14, 2014

Filing of the 10-K for 2012
The first deadline in the above tabulation is March 31, 2014, on which Phoenix undertook to file its delayed 10-K report for the year ended December 31, 2012. On Tuesday morning, April 1, 2014, before the market opened, Phoenix filed its 312-page 10-K for 2012.

Phoenix disclosed the impact of the restatement on income from continuing operations in 2011 and 2010, net income attributable to Phoenix in 2011 and 2010, and stockholders' equity as of December 31, 2011. Income from continuing operations in 2011 was $30.1 million as previously reported and minus $9.6 million as restated. Income from continuing operations in 2010 was minus $24.6 million as previously reported and minus $31.3 million as restated. Net income attributable to Phoenix in 2011 was $8.1 million as previously reported and minus $30.7 million as restated. Net income attributable to Phoenix in 2010 was minus $12.6 million as previously reported and minus $34.4 million as restated. Stockholders' equity as of December 31, 2011 was $1,126.2 million as previously reported and $695.7 million as restated. The company also made this statement on internal controls:
As a result of the errors discussed above, management identified material weaknesses in our internal control over financial reporting. As a result, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2012. Further, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were not effective as of December 31, 2012. These material weaknesses have not been fully remediated as of the filing date of this report.
PricewaterhouseCoopers LLP (PwC) is Phoenix's independent registered public accounting firm. PwC's March 31, 2014 report to the company's board of directors and stockholders goes into detail concerning the company's internal controls.

Executive Compensation
For many years I published in The Insurance Forum tabulations of executive compensation. Because Phoenix did not make SEC filings during 2013, I was not able to show 2012 data for Phoenix in the SEC section of my July 2013 issue. Here is the total compensation for 2012 for the Phoenix executives shown in the recently filed 10-K for 2012:

James D. Wehr
$2,931,694
Philip K. Polkinghorn
2,138,768
Edward W. Cassidy
1,336,003
Christopher M. Wilkos
1,280,088
Bonnie J. Malley
1,155,362
Peter A. Hofmann
974,684
John T. Mulrain
781,835

Wehr is president and chief executive officer. Polkinghorn, who left the company effective October 31, 2012, was senior executive vice president, business development. Cassidy is executive vice president, distribution. Wilkos is executive vice president and chief investment officer. Malley is executive vice president, chief financial officer, and treasurer. Hofmann is executive vice president, strategy and business development. Mulrain is executive vice president, general counsel, and secretary.

General Observations
Phoenix has finally filed its 10-K report for 2012. It remains to be seen whether Phoenix and PHL will meet the other filing deadlines to which the companies have agreed.

I am offering, as a complimentary PDF, a package consisting of the SEC's cease-and-desist order and PwC's report. Send an e-mail to jmbelth@gmail.com and ask for the Phoenix package.

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