The Securities and Exchange Commission this week announced an enforcement action that, for the first time, employs the clawback provision of the Sarbanes-Oxley Act of 2002 (SOX) against a corporate officer not otherwise accused of wrongdoing.

The complaint, filed July 22, 2009, demonstrates that the SEC continues to increase and expand its enforcement focus, including by employing seldom-used—or, as in this case, unprecedented—statutory and regulatory authority.

The complaint was filed against the former CEO of CSK Auto Corporation, demanding the return of more than $4 million the former CEO received in bonuses and company stock sales. According to the SEC, CSK twice was required to restate its financials because of overstated vendor allowances. Although CSK's former CEO is not directly implicated in the conduct that led to the restatements, the SEC contends that Section 304 of SOX entitles it to recover money the former CEO earned while CSK "was engage[d] in wrongdoing."

Section 304 provides the following:

1. Additional Compensation Prior to Noncompliance With Commission Financial Reporting Requirements. If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for

  • any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement;
  • and any profits realized from the sale of securities of the issuer during that 12-month period.

2. Commission Exemption Authority. The Commission may exempt any person from the application of subsection (a), as it deems necessary and appropriate.

For more information on this complaint or SEC enforcement action in general, please contact Justin P. Klein, 215.864.8606 or kleinj@ballardspahr.com, or John C. Grugan, 215.864.8226 or gruganj@ballardspahr.com.


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