THE SEC CONTINUES ITS STRICT LIABILITY APPROACH TO SOX 304

The Commission continues to pursue its strict liability policy regarding the application of Section 304 of the Sarbanes Oxley Act. Under that Section the CEO and CFO can be required to repay certain incentive based compensation they receive if there is a restatement of the financial statements as a result of misconduct. The Section does not require that the CEO or the CFO engage in the wrongful conduct. In recent actions the SEC has insisted on repayment of all incentive based compensation within the parameters of the statute. A similar but broader provision enforceable as part of the exchange listing standards was included in Dodd-Frank (here).

SEC v. O’Leary, Case No. 1:11-cv-2901 (N.D. Ga.) is the Commission’s most recent SOX 304 action. It is against James O’Leary, the former Chief Financial Officer of Beazer homes USA, Inc. In 2006 the then Chief Accounting Officer of the company orchestrated an accounting fraud at Beazer to meet earnings expectations. In May 2006 the company was required to restate its financial statements as a result of that fraud. Although Mr. O’Leary is not alleged to have been involved in the wrongful conduct, the Commission’s complaint demands the repayment of over $1.4 million he received after Beazer filed materially false financial statements during fiscal year 2006.

To settle the case Mr.’Leary agreed to reimburse Beazer $1,431,022 within 30 days of entry of the Court’s order approving the settlement. That amount represents the entire incentive bonus paid to Mr. O’Leary in fiscal 2006. It includes $1,024,764 in incentive compensation and $133,733 previously obtained from Beazer in exchange for all restricted stock units he received as additional incentive compensation for fiscal year 2006. It also includes $274,525 in stock sale profits.

Previously, the Commission settled a similar claim with Ian McCarthy, the former CEO of the company. SEC v. McCarthy, Case No. 1:11-CV-667 (N.D. Ga.). In that case Mr. McCarthy agreed to reimburse the company $6,479,281 in cash, 40,103 restricted stock units or their equivalent and 78,763 shares of restricted stock or their equivalent. This represented all the incentive based compensation Mr. McCarthy was paid for fiscal 2006.

The first litigated SOX 304 action brought against a CEO in which the SEC’s complaint admitted the person was not involved in the underlying conduct is SEC v. Jenkins, Case No. 2:09-cv-01510 (D. AZ.). In that case the Commission is seeking the repayment of certain incentive based compensation paid to Maynard Jenkins, the former CEO of CSK Auto. The case has been in litigation since it was filed on July 23, 2009. In July 2011 the Commission reportedly rejected a settlement proposed by the Enforcement Division in which less than half of the amount claimed in the complaint would have been repaid. A settlement conference is scheduled for later this month.