The Securities and Exchange Commission recently filed a complaint in the U.S. District Court for the District of Arizona against Maynard Jenkins, former CEO of CSK Auto Corp. (CSK), alleging violations of section 304 of the Sarbanes Oxley Act of 2002 (SOX). Specifically, the SEC is seeking reimbursement for CSK and its shareholders of more than $4 million Jenkins received in bonuses and stock-sale profits while CSK was committing accounting fraud, requiring it to file two earnings restatements. There are, however, no allegations that Jenkins orchestrated or even participated in the fraud, apparently making this “the first action seeking reimbursement under the SOX ‘clawback’ provision (Section 304) from an individual who is not alleged to have otherwise violated the securities laws.”  

SOX Section 304(a) provides a mechanism to require CEOs and CFOs to reimburse an issuer for “any bonus or other incentive-based or equity-based compensation” as well as any “profits realized from the sale of securities of the issuer,” when an issuer is required to prepare a restatement of its publicly filed financial results “due to the material noncompliance of the issuer, as a result of misconduct.” The provision does not specify whether the subject executive must be involved in the “misconduct” in order to be forced to disgorge his or her bonuses, etc. The SEC has, until now, focused on executives who helped conduct the fraudulent schemes.  

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