Are we seeing the start of a wave of executive compensation clawback lawsuits by the Securities and Exchange Commission?
As Kevin LaCroix pointed out in his D&O Diary blog, last week the SEC filed two lawsuits to recoup compensation from former top executives of two companies. These actions are the latest examples of the SEC’s increased use of Section 304 of Sarbanes-Oxley, which has been interpreted to allow the SEC to recover incentive compensation paid to top executives at companies that restate their earnings as a result of wrongdoing, even if the executives aren’t the ones accused of the misdeeds.
The first case was filed April 2 against the former CEO and CFO of ArthroCare, an Austin, Tex.-based company that makes medical devices. (The complaint is here.) In this case, the SEC wants to claw back an unspecified amount of compensation from former CEO Michael Baker and former CFO Michael Gluk, even though the two aren’t accused of wrongdoing. Instead, two former Arthro sales executives have been charged by the SEC with inflating revenue by channel stuffing.
The second case, filed on Friday, targets former leaders of the failed Franklin Bank of Houston: former CEO Anthony Nocella and former CFO Russell McCann. In contrast to the ArthroCare case, these two men are accused of wrongdoing in that they allegedly misrepresented the bank’s underperforming loans. (That complaint is here.)
Both cases were filed by the SEC’s Forth Worth office.
Section 304 of the Sarbanes-Oxley Act states that if a company has restated its financials because of misconduct, then the CEO or CFO must reimburse incentive compensation to the company. In 2009 a federal court ruled for the first time that this provision can be used against executives who aren’t charged with misconduct. That case was brought against Maynard Jenkins, the former CEO of CSK Auto Corporation. Last January the SEC used Section 304′s strict liability provisions to claw back $450,000 in compensation from the former CEO of Symmetry Medical Inc., and $185,000 from its chief financial officer, who were not themselves charged with wrongdoing. (You can read our article about that case here.)
