A major story last week was the settlement agreement between the SEC and the former CEO of CSK Auto Corporation.
The case had been closely followed as a test case of whether the SEC’s theory that the “misconduct” element of Section 304 — the “clawback” section — of the Sarbanes Oxley Act can be satisfied even if a CEO or CFO is not directly accused of any wrongdoing.
Section 304 requires the CEO or CFO to repay certain incentive compensation and stock sale proceeds to an issuer if the issuer is required to restate its financials due to misconduct, but isn’t clear whether the CEO or CFO must have engaged in the misconduct that led to the restatement, or if anyone’s misconduct will suffice. For years the SEC had only used Section 304 in cases where the CEO or CFO was alleged to have personally engaged in some wrongdoing. The CSK case, filed in 2009, was the first in which the SEC sought to clawback compensation of a CEO whom it admitted had nothing to do with the securities violations that led to the restatement — other than simply being the “captain of the ship” at the time the violations were taking place.
Since the case has settled, we still will not know how a court would view the SEC’s new, more aggressive interpretation of Section 304. Of the several so-called “innocent” executive clawback cases the SEC has brought recently under Section 304 (including two against former executives of Beazer Homes that were settled earlier this year), none has reached the trial stage.
The issue may soon become moot anyway, when the new clawback requirement under the Dodd-Frank Act takes effect in 2012. Unlike Section 304 of the Sarbanes Oxley Act, the Dodd-Frank clawback provision does not include a “misconduct” requirement.