Software services startup Zenefits and its co-founder and former CEO Parker Conrad have been charged with a fine of nearly $1 million by the U.S Securities and Exchange Commission, for allegedly misleading their investors about their employees being properly licensed to sell insurance. After an internal investigation, Conrad was forced to resign.
The penalty is being split between Zenefits and Parker Conrad. In order to settle this penalty, Zenefits will be paying $450,000 and Conrad will be paying nearly $533,000 which includes penalties, interest, and “disgorgement”. Disgorgement is when a court orders someone to give up profits obtained by what it deems to be unethical or illegal acts.
“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.”
The four-year-old startup was one of the fastest growing in 2013. The company recently rebranded its business to a new revenue model. It used to help small businesses find insurance quotes, but last month they started providing software that sells benefits to insurance companies.
According to findings by SEC, Zenefits made “false and misleading statements and omissions” related to compliance with insurance regulations in California, Washington, and other states to raise funds from investors. Last year, the company admitted its employees sold health insurance without proper licensing. As a concession to investors, Zenefits slashed its valuation from $4.5 billion to $2 billion. In return, the investors agreed not to sue the company.
“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.”
As of now there is no clarity as to whether Conrad may face future litigation over the macro program.