The SEC is showing its muscle in Silicon Valley with a crackdown on bad behavior, starting with unicorn startup Zenefits and its former CEO Parker Conrad.
First noted on BuzzFeed, the human resources startup and Conrad have agreed to pay a combined nearly $1 million in fines to settle accusations made by the SEC that the company made “materially false and misleading statements and omissions” to investors over compliance with state insurance laws.
The company’s seen a revolving door of leadership since Conrad was kicked out of the CEO position last year and former COO David Sacks stepped in to fill the void. Sacks has since pulled back, allowing Jay Fulcher to take over as Zenefits’ new CEO.
Earlier, the company got itself into hot water under Conrad’s control for inadequate compliance procedures. Members of the company’s sales team were also not properly licensed as health insurance brokers.
“Although Zenefits recognized that it operated in a highly regulated industry, it did not take sufficient steps to ensure its growing workforce was properly licensed to sell insurance,” reads a press release from the SEC detailing the matter. “Unbeknownst to investors, the company allowed employees to use a computer script created by Conrad to enable them to spend less time on pre-licensing education than required by California law. Zenefits also allowed employees to sell insurance before they had taken and passed their licensing exams, and permitted some employees licensed in one state to sell insurance in other states where they weren’t licensed.”
Zenefits sells myriad HR cloud services to small and mid-size businesses. However, 90 percent of its revenue comes from the insurance side.
The mess caused a two-year legal cleanup and forced Conrad, who agreed to pay his part of the fine but did not have to admit findings that he or the company violated the federal securities laws over the matter, to resign.
Zenefits agreed to pay a $450,000 penalty, and Conrad agreed to pay $350,000 in disgorgement plus $23,692.39 in interest and a $160,000 penalty for a total of $533,692, according to the SEC.
“This settlement closes the chapter on a journey we began 18 months ago to transform Zenefits through new values and leadership. We are pleased that the SEC clearly acknowledged our cooperation, our extraordinary remedial efforts, and our commitment to compliance,” said Josh Stein, General Counsel at Zenefits. “We look forward to continuing the important work of helping companies thrive by taking better care of their employees.”
This is the first SEC case against a unicorn startup in Silicon Valley, but it likely won’t be the last.