SEC Continues to Use Sarbanes-Oxley to Claw Back Incentive Compensation


Background: SEC v. O'Leary

On August 30, 2011, the Securities and Exchange Commission (SEC) announced a settlement with James O'Leary, the former chief financial officer of Beazer Homes USA, to recover approximately $1.4 million in cash bonuses, incentive and equity-based compensation, and profits from his sale of Beazer stock during the period of time that the SEC alleged an individual at Beazer—but not O'Leary—was committing "accounting misconduct."1 The SEC's complaint alleged that Beazer engaged in accounting misconduct by (i) artificially establishing and maintaining certain reserve accounts and (ii) recognizing revenue and income from a sale-leaseback arrangement in a manner that was not compliant with generally accepted accounting principles (GAAP). The SEC's complaint further alleged that this accounting misconduct was reflected in Beazer's 2006 financial statements filed with the SEC. Beazer was required to file accounting restatements of its 2006 financial statements.

The SEC's complaint did not allege that O'Leary participated in the misconduct, but rather pursued the action against O'Leary under Section 304 of the Sarbanes-Oxley Act of 2002. Section 304 provides that the chief executive officer (CEO) and chief financial officer (CFO) shall reimburse a company for any bonus or other incentive-based or equity-based compensation as well as any profits from company stock sales received in the 12-month period following the filing of a financial report that is materially non-compliant with financial reporting requirements due to company misconduct, and that requires the company to prepare an accounting restatement.

This is the fourth enforcement action arising from Beazer's alleged misconduct in its financial reporting. In March 2011, the SEC also pursued an action under Section 304 against Beazer's then-CEO, Ian McCarthy. The SEC entered into a settlement with McCarthy that required him to reimburse Beazer with approximately $6.5 million for certain compensation and stock profits he had received during the periods covering the misstatements.2 The SEC also settled an enforcement action with Beazer in late 2008.3 Litigation proceedings stemming from charges that the SEC brought against Beazer's former chief accounting officer are still ongoing.4

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