I have blogged on this issue previously, so I wanted to update readers on a two more lawsuits recently filed by the SEC under SOX Section 304 - both by the SEC’s Fort Worth, Texas office. In SEC v. Michael A. Baker and Michal T. Gluk, the SEC sued to recover the bonuses and stock profits earned by two former executives during a period that an accounting fraud was taking place at their company, despite the fact that the executives were not involved in the fraud.
Both in the complaint and the release announcing its filing of the lawsuit, the SEC emphasized that the defendants, the former CEO and CFO of surgical products manufacturer ArthroCare Corp., were not charged personally with misconduct.
“The Commission does not allege that Baker and Gluk participated in the wrongful conduct. Defendants, however, have not reimbursed ArthroCare for the SOX 304 compensation and stock sale profits they received during this time period, as the law requires them to do.”
Nonetheless, the SEC’s complaint asserts that SOX Section 304 requires the two former executives to reimburse their company for bonuses and stock profits received for 2006, 2007, and the first quarter of 2008, during which ArthroCare filed fraudulent financial statements.
In SEC v. Anthony J. Nocella and J. Russell Mccann, filed in the United States District Court for the Southern District of Texas, Houston Division, at least the executives are alleged to have “engaged in a disclosure and accounting fraud that misled investors about Franklin’s financial condition and concealed the extent of its exposure to loan delinquencies” (although a class action lawsuit making that same allegation was dismissed). The SEC’s complaint seeks an order requiring the former executives “to repay Franklin for the bonuses they received during the time period of the misconduct and Franklin’s materially misstated financial results, as required by Section 304 of the Sarbanes-Oxley Act” among other things.
In a "The American Lawyer" article, defense counsel in both cases promise to challenge the constitutionality of the SEC’s interpretation of Section 304.
Just think how interesting this area will be if and when the SEC eventually issues proposed and final rules under Dodd-Frank Act Section 954!