Court Says Sarbanes-Oxley Allows “Clawbacks” of Executive’s Bonuses: No Misconduct Required by the Executive for Disgorgement Due to Restatements


The District Court of Arizona has just ruled (SEC v. Jenkins) that Section 304 of the Sarbanes-Oxley Act of 2002 gives the SEC the power to “clawback” certain executive compensation on behalf of the issuer even when the affected executive is not personally guilty of misconduct.

Section 304 of the Sarbanes-Oxley Act requires that “[i]f 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 [certain incentive-based and equity-based compensation as well as certain profits from the sale of the issuer’s securities].” While the SEC has filed a number of suits against executives under Section 304 of the Sarbanes-Oxley Act based upon the executive’s own misconduct, the current suit against Maynard Jenkins, former CEO of CSK Auto Corporation, is the first instance in which a court has recognized a Section 304 claim to compel reimbursement when a CEO or CFO has not been accused of any misconduct.

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