Content of Penalty:
he Securities and Exchange Commission today charged the former CEO of Energy XXI Ltd. with hiding more than $10 million in personal loans that he obtained from company vendors and a candidate for Energy XXI’s board. At the time of the alleged misconduct, Energy XXI was NASDAQ-listed and one of the largest oil and gas producers on the Gulf of Mexico shelf.
According to the SEC’s complaint, CEO John D. Schiller Jr. maintained an extravagant lifestyle by using a highly leveraged margin account secured by his Energy XXI stock. The complaint alleges that in 2014, when faced with significant margin calls, Schiller extracted more than $7.5 million in undisclosed personal loans from company vendors in exchange for business contracts with Energy XXI.
Schiller also is alleged to have obtained a $3 million loan from Norman Louie, a portfolio manager at Energy XXI’s largest shareholder Mount Kellett Capital Management LP. Louie was appointed to Energy XXI’s board just weeks later. The SEC alleges that Schiller did not disclose the vendor loans or the Louie loan to Energy XXI.
“Executives of public companies have a duty to act in the best interests of investors,” said Anita B. Bandy, an Assistant Director in the SEC’s Division of Enforcement. “Secret backroom deals for the benefit of corporate insiders violate those duties and deprive investors of important information.”
The complaint also alleges Schiller received undisclosed compensation and perks in the form of lavish social events, first-class travel, a shopping spree, donations to Schiller-preferred charities, legal expenses for personal matters, and an office bar stocked with high-end liquor and cigars. As a result, Energy XXI failed to report at least $1 million in excess compensation in its executive compensation disclosures over a five-year period.
Schiller consented, without admitting or denying the SEC’s charges, to a permanent injunction that enjoins him from violating anti-fraud and reporting provisions of the federal securities laws, imposes a $180,000 penalty, and bars him from serving as an officer or director of a public company for five years.
The SEC also charged Louie for his role in hiding his loan to Schiller, and Mount Kellett is charged with failing to disclose its activist plan to place Louie on Energy XXI’s board. Louie and Mount Kellett consented, without admitting or denying the findings, to an SEC order that they cease and desist from committing or causing any violations or any future violations of certain reporting and disclosure provisions of the federal securities laws. Louie must pay a $100,000 penalty and Mount Kellett, which is an SEC-registered investment adviser, must pay a $160,000 penalty.