The September/October issue of The Pomerantz Monitor reports on the first “clawback” action brought by the SEC for violation of Section 304 of the Sarbanes-Oxley Act. Section 304 of SOX provides that if a company is required to restate its financial results because of “misconduct,” the CEO and the CFO “shall reimburse” the company for any bonus or other incentive-based compensation received during the year following the issuance of the erroneous financial statement. This provision was obviously designed to deprive the two principal officers of any benefit they derived from reporting inflated financial results, such as achieving a certain level of earnings or revenues. If those benchmarks were not really achieved, the two chief officers should not keep benefits that they received under false pretenses.
Frustratingly, courts have held that there is no private right of action for shareholders to “claw back” these overpayments. Because companies are typically loath to invoke this remedy and the SEC has done nothing to enforce it, Section 304 has been a right without a remedy. Making matters worse, without any caselaw, no one really knows whether the misconduct that must occur in order to trigger the clawback has to be committed personally by the CEO or CFO.
This issue may soon be clarified. On July 22, 2009 the SEC brought the first action under SOX’s clawback provision to recover compensation, and it does not even accuse the defendant of committing any misconduct. The SEC enforcement action charges Maynard L. Jenkins, the former CEO of CSK Auto, with receiving over $4 million in bonuses and profits on the sale of stock within one year of CSK’s issuance of false and misleading financial results for 2002-04. The SEC concedes that the actual accounting fraud was committed by other CSK officials, who were sued earlier.
There is no requirement in Section 304 that the CEO or the CFO from whom the reimbursement is sought have any involvement in the events that necessitated the restatement. Indeed, the statute doesn’t require any showing of wrongdoing or fault at all by these individuals.
On September 15, 2009, Jenkins filed a motion to dismiss the SEC’s high-profile case against him, stating that the SEC “is attempting to impose a Draconian penalty on an admittedly innocent person.”
To be continued . . .
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