On August 30, 2011, the SEC announced a settlement with James O’Leary, former Chief Financial Offi cer of Beazer Homes USA, Inc., to recover $1,431,022 in cash representing his bonus compensation, incentive-based and equity-based compensation and stock sale profi ts received during the 12-month period after the issuance of Beazer’s quarterly and annual fi nancial statements for its 2006 fi scal year.15 The SEC’s settlement with Mr. O’Leary is subject to court approval. In 2008, Beazer had to restate its fi nancial statements for various years, including fi scal year 2006, due to a fraudulent earnings management scheme that artifi cially infl ated Beazer’s income (this scheme was allegedly orchestrated by Beazer’s Chief Accounting Offi cer, the litigation against whom is still ongoing).
The SEC reached the foregoing settlement under Section 304(a) of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which provides that the chief executive offi cer and chief fi nancial offi cer of a company must reimburse it for: (i) any bonus or other incentive-based or equity-based compensation received by that person from the company during the 12-month period following the fi rst public issuance or fi ling with the SEC (whichever fi rst occurs) of the fi nancial document embodying the fi nancial reporting requirement under the securities laws, which the company was in material non-compliance with due to misconduct and in connection with which the company had to prepare an accounting restatement; and (ii) any profi ts realized from the sale of securities of the company during that 12-month period.16 This clawback provision can be used by the SEC even if the CEO or CFO of the company is not personally charged with the underlying misconduct, which was the case in Mr. O’Leary’s settlement.
Executives should be aware that the Dodd-Frank Act expands the SEC’s clawback authority. The Dodd-Frank Act requires the SEC to issue rules directing national securities exchanges to prohibit the listing of any security of a company that does not adopt a policy providing for the recovery of any incentive-based compensation (including stock options) awarded to current or former executive offi cers during the three-year period prior to an accounting restatement resulting from material noncompliance of the issuer with fi nancial reporting requirements in excess of what would have been paid to the executive offi cer under the accounting restatement. The SEC plans to propose rules regarding the recovery of executive compensation under the Dodd-Frank Act by January 1, 2012 and adopt such rules in January – June 2012. Due to the expansive nature of the Dodd-Frank Act’s clawback provisions, there will likely be more clawback actions under the Dodd-Frank Act than we have seen to date under the Sarbanes-Oxley Act.