The U.S. Securities and Exchange Commission came up empty-handed after a nearly three-week trial in federal court in Kansas when a jury rejected all 12 of the agency's claims against Stephen Kovzan, chief financial officer of NIC Inc.
The SEC in January 2011 charged Kovzan with securities fraud, violations of the Securities Exchange Act's books and records and internal controls provisions, and aiding and abetting NIC's alleged securities law violations. The agency sought monetary penalties, injunctive relief and a prohibition that would bar Kovzan from serving as an officer of a publicly traded company.
The jury was not persuaded, answering every question posed in a 15-page verdict form in Kovzan’s favor on Dec. 2. He was represented by a team of lawyers led by Dentons partner Stephen Hill, Jr. and Wilmer Cutler Pickering Hale and Dorr partner Andrew Weissman.
“Despite the long ordeal for our client and his family, he respected the jury system and wanted his day in court. The jury listened and reached the right verdict,” Hill said in an email. “I can't second guess the SEC's decision to go forward with their case against our client but as a former federal prosecutor I learned there are some cases you decide don't merit going to trial. This was one of those cases.” SEC spokesman John Nester said “We respect the jury’s decision.”
The loss comes on the heels of the agency’s defeat in October in an insider-trading case against billionaire Mark Cuban, owner of the NBA’s Dallas Mavericks.
A key issue in the SEC’s case against Kovzan was scienter—that is, did he engage in knowing deception or act recklessly? In a pre-trial brief, Kovzan’s lawyers argued that the SEC “has not even attempted to show that Mr. Kovzan knew he was engaging in fraud, on his own or in a scheme with others at NIC. Moreover, no reasonable juror could conclude from the evidence presented that Mr. Kovzan acted recklessly.”
According to the SEC complaint filed in U.S. District Court for the District of Kansas, Kovzan prepared and signed SEC filings that concealed the payment of more than $1.18 million to cover the personal expenses of the technology services company’s then-CEO.
The SEC said the expenses included vacations, spa treatments, clothing and commuting via a private plane, and that “those expenses should have been recorded and disclosed as compensation.”
The SEC also brought a separate case against the former CEO, Jeffery Fraser, the company and two other officers. That case was simultaneously filed and settled in January 2011 for $2.8 million.