Published on:

Accounting Fraud and Legal Consequences of the Sarbanes-Oxley Act “Clawback” Provision

top.lawyers.arrive.mag.2011.jpgThe Securities and Exchange Commission (“SEC”) just announced this week that it reached a settlement with Maynard L. Jenkins, the former chief executive officer and chairman of CSK Auto Corporation, for violating the Sarbanes-Oxley Act (“SOX”). Jenkins has agreed to give back $2.8 million he received from the company in bonus compensation and stock profits while the company was engaged in accounting fraud.

The accounting fraud occurred during fiscal years 2002 through 2004, during which time CSK filed two restatements pertaining to its accounts receivables. Thereafter, the SEC brought charges against 4 former CSK executives for accounting fraud and against the company for submitting false financial statements. The company settled the charges but the litigation against the four executives is still pending. The SEC never brought any charges against Jenkins for the accounting fraud or alleged that he even knew about it.

Pursuant to Section 304 of the SOX, the SEC brought suit in 2009 against Jenkins compelling him to return his bonuses, incentive based compensation and stock sale profits to the company. Their charge against him was that he had not returned any bonus compensation he had received during the time period that the fraudulent conduct occurred. The SEC alleged that he had violated the “clawback” provision of the SOX by not reimbursing the company. The “clawback” provision allows the SEC to recover the money

Section 304 of SOX provides the following:

If any issuer is required to prepare an accounting restatement due to material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer shall reimburse the issuer for:

1. any bonus or other incentive-based or equity based compensation received by that officer form the issuer during the 12 month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and 2. any profits from the sale of the issuer’s securities by that officer during this 12 month period.

15 U.S.C. § 7243(a).

The Director of the SEC’s Division of Enforcement, Robert Khuzami, stated that “CEO’s should know that they can be deprived of bonuses or stock profits they received while accounting fraud was occurring on their watch.”

This outcome of this case is significant for all chairmen, CEO’s and senior officers because it’s the first SEC clawback case where the CEO was not charged with any wrongdoing. Even if you are not charged or even if you didn’t know that your company engaged in material noncompliance regarding its financial reporting requirements and is found to be guilty of fraud or wrongdoing, you may be required to reimburse the company for any bonuses and stock profits you might have gained during the accounting period in question. If you think you might be a victim under the clawback provision, call our Attorneys at Villanueva & Sanchala at (800) 893-9645 to help you determine your best course of action.

Disclaimer: 

Thank you for visiting our Blog. This blog provides general information and thoughts about various employment law issues primarily in the New York Tri-State area and occasionally in other areas. You are welcome to read the posts. However, do not construe any content on this blog as legal advice or the creation of an attorney-client relationship. Again, we provide the content only for informational purposes. You should not make decisions based information on our blog since the application of the law depends on the facts and each situation may be different. In addition, the law in most jurisdictions is different and changes constantly and we make no representations that any information on our blog has been updated. The Blog should not be used as a substitute for competent legal advice from an experienced employment law attorney in your state or jurisdiction.

Sources:

Press Release, U.S. Securities and Exchange Commission
SEC Settles Section 304 ‘Clawback’ Case Against Maynard Jenkins . . . Again, Compliance Week