The SEC charged former Hertz CEO and Chairman Mark Frissora with aiding and abetting the company in its filing of inaccurate financial statements and disclosures. Frissora agreed to settle the charges and repay Hertz nearly $2 million in incentive-based compensation. Frissora did not admit or deny the allegations.
Select portions of the SEC complaint are discussed below.
Inaccurate Earnings Guidance
According to the SEC complaint, In late September 2013, Hertz’s internal analysis projected the company’s 2013 earnings results at $1.72 per share, below the earnings per share forecast of $1.78 to $1.88 per share Hertz had announced in February 2013.
On September 26, 2013, Hertz issued a press release and publicly filed a slide deck revising the company’s prior earnings guidance. The new guidance reduced Hertz’s projected 2013 earnings to a range ten cents lower than the prior guidance: $1.68 to $1.78 per share.
Over the next two weeks, Frissora learned that new internal analyses and data forecasted Hertz’s earnings performance to fall below the low end of the revised guidance range.
Frissora then led an initiative to try to enable the Company to “claw” its way back to its previously projected earnings performance.
By the end of October 2013, Frissora learned that, despite certain identified savings (often through reduced expenses) from that initiative, a Hertz internal estimate for 2013 still projected earnings per share at $1.66, two cents below the low end of the revised guidance range.
That month, Frissora directed subordinates to determine why Hertz’s internal estimates of earnings-per-share had changed so quickly.
One analysis Frissora received determined that the September 2013 revision had been flawed in part and that methodological errors had occurred.
With Frissora’s approval, Hertz filed a Form 8-K report on November 5, 2013, which reaffirmed Hertz’s guidance range of $1.68 to $1.78 earnings per share.
Also, on November 5, 2013, Frissora held an earnings call. 68. On the call, an analyst asked Frissora about Hertz’s reaffirmation of its earnings guidance range. The analyst sought clarification as to whether the company might be “tracking at the low end of guidance” or whether there is something “that maybe you can talk about in the call that maybe upside to where you thought?”
Frissora responded: Yes, we gave you a balanced message, and every comment was weighted, so the best thing I can tell you is it is what it is. What I gave you [the earnings range] is – there’s no conservative. There’s no aggression. It’s kind of where we see the lay of the land right now.
In early 2014, Hertz reported actual 2013 earnings of $1.63 per share.
Hertz’s Failure to Adequately Disclose Its Extension of Planned Holding Periods
During the second through fourth quarters of 2013, Frissora caused Hertz to extend the planned holding periods for a significant portion of its U.S. rental car fleet without properly disclosing the change and its positive short-term and potentially negative long-term financial impact.
Prior to this period, most of the cars in Hertz’s U.S. rental fleet had planned holding periods of 20 months. In other words, Hertz had estimated that it would maintain these cars in its rental fleet for 20 months before replacing them.
During the second through fourth quarters of 2013, Frissora decided to extend the planned holding periods for a large part of Hertz’s U.S. car rental fleet to either 24 or 30 months.
Frissora’s extensions resulted in Hertz’s having longer planned holding periods for portions of its rental fleet than those of many other major car rental companies.
For Hertz, these extended holding periods had a short-term accounting benefit: the extensions spread out the required depreciation expense Hertz would incur on its cars over a longer time period, thus lowering the depreciation expense overall for each quarter.
At the same time, extended holding periods had long-term business risks, including that older cars were likely to require more costly maintenance and could negatively impact Hertz’s premium brand.
Under the Financial Account Standards Board (“FASB”) Accounting Standards, which Hertz was required to comply with in order to have its financial statements accord with GAAP, a reporting company during the relevant time should have disclosed this type of planned holding period extension to investors in the company’s financial statements.
Specifically, FASB Accounting Standards Codification Topic 250-10-50-4, provides in relevant part that a company must disclose the effect on net income of a change in an accounting estimate that affects several future periods, such as a change in service lives for depreciable assets. That standard further requires that, if a change in an estimate does not have a material effect in the period of the estimate change but is reasonably certain to have a material effect in later periods, the company’s financial statements for the period in which the estimate change occurred must describe that estimate change.
In 2013, Hertz did not adequately disclose its decision to extend the planned holding periods for substantial portions of its fleet.
On July 29, 2013, Frissora held an earnings conference call with analysts who covered Hertz Holdings’ stock. At the time, Hertz had already extended holding periods on many of its top models.
When an analyst asked Frissora on the call how long the company was planning to hold its cars and “if that assumption has changed relative to the beginning of the year,” Frissora answered: “I don’t think there has been any assumption changes. I think we’re in pretty good shape on length, in terms of how long we’re holding cars.”
This earnings call was followed by a series of Hertz filings, signed and/or certified by Frissora. On August 2, 2013, Hertz Holdings and Hertz Corp. filed, respectively, the Hertz Holdings Q2 2013 10-Q and the Hertz Corp. Q2 2013 10-Q (together, the “Hertz Q2 2013 10-Qs”).
On November 7, 2013, Hertz Holdings and Hertz Corp. filed, respectively, the Hertz Holdings Q3 2013 10-Q and the Hertz Corp. Q3 2013 10-Q (together, the “Hertz Q3 2013 10-Qs”).
The Hertz Q2 2013 10-Qs and the Hertz Q3 2013 10-Qs failed to disclose the holding period extensions and their impact on depreciation.
In March 2014, Hertz filed the Hertz 2013 10-Ks, which claimed that “our approximate average holding period for a rental car was eighteen months in the United States.”
During 2013, the weighted average of all planned holding periods across Hertz’s U.S. fleet had increased from 21 to almost 25 months.
Hertz’s statement about the 18-month average failed to explain that Hertz had calculated that average by using the age of the cars Hertz had disposed of—not from the planned holding periods that Hertz had extended for portions of the fleet.
The MD&A portion of the same Form 10-Ks made some references to longer holding periods—generally listing “extended holding periods” as one of several factors causing an increase in maintenance costs and stating that the “holding periods” for Hertz’s cars ranged from 4 to 36 months, a broader range than the 4 to 28 months disclosed in its Form 10-K for the prior year. But the 10-Ks failed to disclose that Hertz had made a business decision to extend planned holding periods or the scale of the shift to longer planned holding periods.
In late 2014, after Frissora had left Hertz, Hertz’s new management reverted back to shorter planned holding periods.