CLAW BACK: SEC STYLE

In an earlier blog post, we have discussed the Securities Exchange Commission’s (SEC) power to claw back compensation paid to executives by their companies under certain circumstances. The statutory basis of the claw back power against perceived wayward  executives is Section 304 of the Sarbanes-Oxley Act of 2002 (SOX).   We noted in that post that SOX made CEOs and CFOs of companies that are subject to any securities laws financial reporting requirements, liable for repayment of compensation or profits received based on financial misstatements that necessitated an accounting restatement.

Expanding Use of Claw Back

On August 30, 2011, the SEC announced its settlement with the former CFO of Beazer Homes USA, an Atlanta-based  homebuilding company.  Although the SEC did not personally charge the CFO with misconduct, the SEC is forcing him to reimburse his former company over $1.4 million in compensation that he received arising from fraudulent financial statements.  SEC Atlanta  Regional Director Rhea Kemble Dignam commented “O’Leary received substantial incentive compensation and stock sale profits while [the Beazer company] was misleading investors and fraudulently overstating its income.”

Abscence of Charge Not Enough

The CFO was vulnerable to the claw back even though it was the company’s chief accounting officer that was actually charged with
perpetrating the fraudulent overstatement of the company’s income.  The SEC stated in its press release:

“Section 304 requires reimbursement by some senior corporate executives of certain compensation and stock sale profits received while their companies were in material non-compliance with financial reporting requirements due to misconduct … [including] an individual who has not been personally charged with underlying misconduct or alleged to have otherwise violated the federal securities laws.”

Trust But Verify

What is the lesson to be learned from this case?  CEOs and CFOs must be ever vigilant in ensuring that the financial statements of their companies are not misleading or fraudulently prepared by employees.  They must treat their accounting employees, as President Ronald Reagan treated the Russians in  his nuclear missiles treaty: “Trust but verify.”  Even when they may not be personally charged  with wrongdoing, the SEC may hold still hold them personally responsible and   require them to disgorge their compensation.  Who said life was fair?

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