MDC Partners stock dropped another 3% on Friday after stabilizing in midweek following a Tuesday plunge during which shares lost nearly one- third of its value.
At the closing bell Friday, MDC shares traded on the NASDAQ exchange settled at $20.32, down 2.96% for the day. For the week, the shares were down 29%, following the firm’s disclosure late Monday that the U.S. Securities and Exchange Commission has been investigating the company since October of last year.
The investigation has focused on a number of areas, including improperly expensed items over a six-year period by the firm’s CEO Miles Nadal. The company, which formed a special committee to look at expenses after the SEC came calling, said that Nadal has agreed to pay back the company $8.6 million for the red-flagged expenses — a payment that will be reflected in the company’s second-quarter results.
The investigation continues, and the company — highlighting it as a risk factor in its SEC form 10Q filed on Thursday — acknowledged that parts of it are in early stages, that it could be expanded and ultimately be quite costly, both in terms of fees paid to address the investigation, as well as potential and “substantial monetary sanctions,” or fines, imposed on the company by the commission.
The company highlighted other risks in its 10Q: “The ultimate outcome of the SEC’s investigation and amount of resources needed to resolve regulatory actions and requests is unpredictable and may remain unknown for a long period of time. The SEC may choose to expand the scope of its investigation or initiate an enforcement action to bring charges against the Company or one or more members of the Company’s management. In addition, the SEC, if an enforcement action is initiated, may impose substantial monetary sanctions.
"Our exposure under these matters will also include our indemnification obligations, to the extent we have any, to current and former officers and directors against losses incurred in connection with these matters, including reimbursement of legal fees. Although we maintain insurance for claims of this nature, our insurance coverage does not apply in all circumstances and may be denied or insufficient to cover the costs related to the SEC investigation. Moreover, adverse publicity associated with regulatory actions and investigations could decrease client demand for our partner agency’s services.
"As a result, the SEC investigation and any future lawsuits or investigations involving the Company or our officers or directors could have a material adverse effect on our business, reputation, financial condition, results of operations, liquidity and the trading price of the Company’s Class A shares.”
Indeed, other investigations are underway. Numerous law firms, including Pomerantz LLP, The Rosen Law Firm, Johnson & Weaver, Wolf Popper LLP, and Block & Leviton LLP, are launching inquiries into potential securities fraud by the Toronto-based holding company. The firms are taking their cue from MDC’s disclosure that the SEC has asked the company for documents related to trading in the stock by third parties.
While the investigation began with an SEC subpoena last October, MDC just disclosed the inquiry this week and analysts were curious about the timing of the disclosure. In answer to one question about timing on a conference call with analysts Monday company CFO David Doft replied: “We felt that based on the findings of the Special Committee, it was our duty to disclose to our investors where we are at right now. And as it continues, and again we do believe that is in the early stages and it could take some time as other items come up that need to be disclosed, we will disclose it.”