MDC Partners Falls Most on Record Amid SEC Inquiry on Expenses

'We are Committed to the Highest Standards of Corporate Governance,' MDC Says

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Miles Nadal.
Miles Nadal. Credit: Andrew Harrer/Bloomberg

MDC Partners slumped the most on record as the marketing firm said it is the subject of a Securities and Exchange Commission inquiry related to expenses incurred by its CEO as well as accounting, goodwill and trading of the company's stock by third parties.

The agency holding company's portfolio includes 72andSunny, CP&B, Assembly, Redscout, Laird & Partners, Vitro and Colle & McVoy.

MDC plunged as much as 36% to C$21.72 in Toronto, the biggest decline since at least 1988.

The New York-based company said in a statement it has been cooperating with the U.S. regulator's inquiry since October, and formed a special committee of independent directors to review expenses paid to CEO Miles Nadal and Nadal Management Ltd. from 2009 through 2014. The CEO has agreed to pay $8.6 million to MDC as a result of the review.

Mr. Nadal is MDC's eighth-largest shareholder, with a 3% stake, according to data compiled by Bloomberg.

"We are committed to the highest standards of corporate governance and transparency," the company said in an e-mailed statement. "In response to this situation we have taken a number of steps to strengthen our procedures and internal controls."

Alexandra Delanghe, a spokeswoman at MDC, said Mr. Nadal wouldn't be speaking with the media.

MDC said it added new policies related to private aircraft use, travel and entertainment. MDC's chief accounting officer, Michael Sabatino, was transferred to a new role working on special projects as of April 23, replaced by Chief Financial Officer David Doft.

Richard Tullo, director of research at Albert Fried & Co. in New York, said it may be too early to draw conclusions about MDC shares, even as he lowered his rating for the stock to market perform, the equivalent of a hold, from overweight, or a buy.

48 Hours
"I have a personal rule, call it a 48-hour rule, with regards to these blow-ups," Mr. Tullo said. "Obviously today is indicating it looks like it will be down forever. You don't know how it will turn out."

Analysts at BMO Capital Markets, RBC Capital Markets, Piper Jaffray and Evercore ISI also lowered their ratings for the stock, according to data compiled by Bloomberg.

"We cannot recommend the stock until we have visibility on the investigation," Daniel Salmon, analyst at BMO Capital Markets, said in a note.

MDC reported an operating loss of 52 cents a share in the first quarter, compared with a 17-cent loss in the same period a year ago. Revenue rose 10% to $302.2 million. The company also maintained its 2015 guidance.

Legal fees
The company incurred about $5.8 million in legal fees and other expenses related to the inquiry during the quarter ended March 31. MDC doesn't expect any impact to its previous financial statements as a result of the review and will recognize an $8.6 million gain in its next quarter.

Expenses charged to the company included travel, commuting, charitable donations, medical expenses and certain other expenses with incomplete information, the company said.

The SEC subpoena has requested documents from MDC related to the company's "goodwill and certain other accounting practices as well as information relating to trading in the company's securities by third parties," MDC said in the release. This aspect of the inquiry is "at an early stage," the company said.

~ Bloomberg News ~

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