SEC Seeks to “Clawback” Benefits from an “Innocent” CEO


For the first time, the Securities and Exchange Commission is seeking to enforce a provision of the 2002 Sarbanes-Oxley Act, enacted in the wake of the Enron and WorldCom scandals, which provides that any CEO or CFO shall pay back any bonuses or incentive-based compensation whenever the company is required to prepare an accounting restatement necessitated by misconduct ? but not necessarily the CEO’s or CFO’s own misconduct.

The plain language of the statute does not require that a CEO or CFO personally engage in any misconduct in order for the claw back provision to be triggered. The statute does not expressly say so, but the SEC contends that it has the right to enforce the statute on behalf of the company, based on a provision giving the SEC authority to exempt any person from the application of the statute.

The articles says that pursuing such cases is a new priority for the SEC, pointing out that enforcement chief Robert Khuzami called it “a powerful enforcement tool, and one that corporate executives should understand Congress has authorized the SEC to use in appropriate circumstances.”

“A lot of eyes should be on this case,” Frederic Firestone, who served as an SEC associate director of enforcement before becoming a partner at McDermott, Will & Emery in Washington, D.C. earlier this year, was quoted as saying.

The article notes further that the Senate’s new financial-overhaul bill would require that public companies claw back three years of bonuses from officers after an accounting restatement, apparently whether or not misconduct is involved.

The SEC’s target in this first case is Maynard L. Jenkins, former chief executive of auto-parts retailer CSK Auto Inc., who stands to pay back $4.1 million in stock-option gains and bonuses because others at CSK cooked the books. CSK operated brands including Checker Auto Parts.

Jenkins’ lawyers contend that the SEC’s “vicarious strict liability” interpretation of the statute is wrong because Jenkins is innocent and no one has said otherwise. While the SEC’s stated position is that innocence is no defense under the terms of the statute, there is also an undercurrent ? mentioned in the article ? that “executives, innocent or not, shouldn’t enjoy performance-based bonuses when the performance is shown to be a sham.”

The article quoted SEC attorney Donald Searles as saying: “[W]hen I take the depositions of CSK’s compensation committee members and ask them: ‘Had you known CSK had a loss instead of a profit, what type of a reward would you have given to Mr. Jenkins at CEO?’ And I am quite confident the answer to that question will be ‘none.’ ”

There may also be another undercurrent. Jenkins has never been charged with anything in this matter. It is fair to say, however, that there is a fairly widespread belief that books are not cooked without the knowledge and at least tacit approval of the boss.

The SEC points out that Jenkins, as Chairman and CEO, was responsible for the management of the company and the supervision of the wrongdoers, that he signed the fraudulent reports stating that they were true and accurate to the best of his knowledge, that his company had to file not one but two restatements for the same fraud because the first restatement was inaccurate and a cover-up, and that during his 10-years employment Jenkins received over $15 million in compensation.

What was Jenkins doing during this time? How innocent could a CEO be with fraud going on under his nose for years?

Jenkins filed a motion to dismiss, which the court denied earlier this month.

Civil and criminal charges are reportedly pending against the individuals Jenkins blames for the fraud, and the company has already settled charges.
The Jenkins case is Securities and Exchange Commission v. Maynard L. Jenkins, Case No. CV-09-01510-PHX-GMS, United States District Court, District of Arizona.