Another SEC Clawback Settlement

Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, John F. Savarese, David A. Katz, and David B. Anders.

On November 15, 2011, the SEC announced a settlement in which it “clawed back” incentive based compensation from a former CEO who was not accused of any wrongdoing.  The result, however, may send mixed signals.  On the one hand, the SEC’s ability to achieve this result in a no-fault clawback case may very well encourage the SEC staff to continue to enforce this remedy, even in cases where the CEO or CFO has no personal responsibility for misconduct.  On the other hand, the settlement of $2.8 million was less than the $4 million that the SEC originally sought to recover from the former CEO.

The case, SEC v. Jenkins, No. CV 09-1510, involved Maynard L. Jenkins, the former CEO of CSK Auto Corporation.  Although civil and criminal charges were brought against four other CSK Auto executives, the SEC did not charge Jenkins with any wrongdoing in connection with the accounting fraud that occurred at CSK.  Nevertheless, relying on Section 304 of Sarbanes-Oxley, the SEC filed a complaint seeking to claw back $4 million of incentive compensation that Jenkins received during the period of the fraud.  Jenkins moved to dismiss the complaint, but that motion was denied in June 2010.  (See our memo, “Sarbanes-Oxley Clawback Developments”, June 16, 2010.)

Reportedly, a settlement between the SEC and Jenkins was first reached in March 2011, as the parties reported to the court that a tentative settlement had been reached.  According to published reports, the initial settlement was for less than half of the $4 million amount the SEC initially sought from Jenkins.  Press reports at the time asserted that the SEC Commissioners rejected that settlement.  Since that time, the SEC reached settlements in two other “innocent” clawback cases, with the former CEO and CFO of Beazer Homes.  Thus, the Jenkins settlement is the third time that the SEC has succeeded in using Section 304 to claw back incentive compensation from a CEO or CFO who was not alleged to have engaged in misconduct.

It remains unclear how far the SEC will go in this area.  The SEC has plainly shown a willingness to pursue no-fault clawback cases in some instances, as these settlements reflect.  The SEC, however, has never publicly articulated the criteria that it employs to determine when it will bring a no-fault clawback case.  Finally, the SEC’s willingness to compromise in Jenkins and the legal challenges that are available in this area, which have not yet been fully tested, show that there may be grounds to resist the SEC should it continue to pursue these types of cases where the executive at issue is not alleged to have participated in the fraudulent misconduct.

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