On Feb. 2, 2021, the Securities and Exchange Commission (SEC) issued a cease-and-desist order settling charges against the former CEO and CFO of WageWorks Inc. (WageWorks, or the Company), stemming from the Company’s restatement of financial results, in which the SEC invoked a rarely used provision of the Sarbanes-Oxley Act to obtain reimbursement of incentive-based compensation earned by the executives.
Section 304 of the Sarbanes-Oxley Act of 2002 (SOX 304) permits the SEC to order the disgorgement of bonuses and incentive-based compensation earned by the CEO and CFO in the year following the filing of any financial statement that the issuer is required to restate because of misconduct, and the reimbursement of those funds to the issuer. The provision provides:
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-- (1) 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 (2) any profits realized from the sale of securities of the issuer during that 12-month period.
Personal Liability Not Required
Although SOX 304 would seem to be a powerful weapon for regulators, the SEC has not often utilized the provision. In the years immediately following its enactment, the SEC limited its use of the SOX 304 clawback provision, invoking it only against individuals otherwise accused of violating the securities laws. In 2009, however, the SEC for the first time sought reimbursement under SOX 304 from a CEO who the agency conceded was not personally liable for the conduct requiring the company to issue financial restatements. That case then squarely presented the question as to whether Section 304 requires the CEO or CFO to himself or herself have engaged in, or be liable for, the misconduct that caused the company’s improper financial reporting requiring subsequent restatement. The district court in Jenkins sided with the SEC, concluding that SOX 304 does not contain a personal liability requirement and that it is the issuer’s misconduct that triggers the provision. Thereafter, in 2016, in S.E.C. v. Jensen, the Ninth Circuit similarly held that CEOs and CFOs need not have personally engaged in misconduct necessitating an accounting restatement to be liable for the clawback of bonuses and other incentive-based compensation under SOX 304. The court observed that disgorgement under the provision “is merited to prevent corporate officers from profiting from the proceeds of misconduct, whether it is their own misconduct or the misconduct of the companies they are paid to run.” Some other courts have come out the same way, but the case law is sparse and the issue not often litigated, and could come up again in other circuits.
Against this backdrop, the SEC’s recent enforcement action against the former CEO and CFO of WageWorks Inc., a California based provider of employee benefits services, in which the SEC invoked SOX 304, offers interesting facts.
The SEC alleged the executives made false and misleading statements to Company accountants and the Company’s outside auditor concerning revenue due under a contract with a large public-sector client. Under the contract, entered into on March 1, 2016, WageWorks was to provide flexible spending account benefits servicing to certain public-sector employees, and would assume full responsibility for servicing the accounts by Sept. 1, 2016. In the period between March 1 and Sept. 1, which the contract referred to as “Base Year 1,” WageWorks was to undertake development and transition work. The SEC alleges that during this period, the executives learned that the client had advised WageWorks that it would not pay for work performed during Base Year 1, but never communicated this fact to the Company’s accountants or outside auditor, and never disclosed that the client had rejected a certified claim the Company submitted concerning the payments. The SEC alleges this caused the Company to record $3.6 million in revenue under the contract from Base Year 1 in its second and third quarters and year-end SEC filings for 2016, which, in light of the client’s position, the SEC maintains “was not realizable or reasonably assured” and therefore was improperly recognized under Generally Accepted Accounting Principles.
In January 2018, Company management notified its internal accountants and auditor that the client rejected WageWorks’ certified claim for the Base Year 1 payments. Following an investigation, on March 18, 2019, the Company restated its financial results for the second and third quarters and year-end for 2016, reversing the revenue from the Base Year 1 period of the contract. In the months following the restatement, both executives left the Company. The SEC charged that during the 12 months following the periods the Company was required to restate, both received incentive-based bonuses and the CEO realized profits from the sale of Company stock, and that neither executive had reimbursed the Company for these amounts.
As part of the settled charges, the CEO agreed to reimburse nearly $2 million and the CFO agreed to reimburse $257,590 in incentive compensation. These reimbursements are in addition to civil money penalties they agreed to pay.
In the cease-and-desist order, the SEC reiterated its position that “Section 304 does not require that a chief executive officer or chief financial officer engage in misconduct to trigger the reimbursement requirement,” and the SEC’s charges against both men did not include fraud. Instead, the SEC charged the executives with, among other things, violating Section 17(a) of the Securities Act, which does not require a showing of scienter and which can be proved by a showing of negligence. Indeed, despite recounting seemingly significant impropriety, the SEC itself acknowledged that the executives “believed that WageWorks was entitled to payment for the Base Year 1 period.”
One reason perhaps for the paucity of Section 304 cases is that restatements themselves have declined in frequency. Given the potential in a new administration for increased focus on alleged accounting irregularities and the dislocations of the pandemic, it remains to be seen whether the markets may experience an increase in restatements and whether senior executives may be confronted with an increased threat of SOX 304 charges.
 HealthEquity acquired WageWorks Inc. in August 2019.
 Reimbursement under Section 304 may only be pursued by the SEC, as most courts agree the provision does not contain a private right of action. See Cohen v. Viray, 622 F.3d 188, 194 (2d Cir. 2010); In re Digimarc Corp. Derivative Litig., 549 F.3d 1223, 1233 (9th Cir. 2008).
 15 U.S.C. § 7243(a).
 See S.E.C. v. Baker, No. A-12-CA-285-SS, 2012 WL 5499497, at *3 (W.D. Tex. Nov. 13, 2012) (observing that “[f]or reasons best known to the SEC, the Commission has been historically reluctant to utilize § 304 in the ten years since Sarbanes-Oxley was enacted,” but commenting that “a sword does not cease to be a sword, even though it may languish in the scabbard, and likewise, federal agencies have discretion in when and how to carry out regulatory enforcement actions”).
 Securities & Exchange Comm’n, Press Release: SEC Seeks Return of $4 Million in Bonuses and Stock Sale Profits From Former CEO of CSK Auto Corp. Enforcement Action Is First Solely Under “Clawback” Provision of Sarbanes-Oxley Act, July 22, 2009.
 S.E.C. v. Jenkins, 718 F. Supp. 2d 1070 (D. Ariz. 2010).
 Id. at 1074 (holding that “the text and structure of Section 304 require only the misconduct of the issuer, but do not necessarily require the specific misconduct of the issuer’s CEO or CFO.”).
 835 F.3d 1100 (9th Cir. 2016).
 Id. at 1116.
 See S.E.C. v. Life Partners Holdings, Inc., 854 F.3d 765, 789 (5th Cir. 2017) (holding that company’s misconduct triggered reimbursement under SOX 304); S.E.C. v. ITT Educ. Servs., Inc., 303 F. Supp. 3d 746, 788 (S.D. Ind. 2018) (“The proper focus when analyzing a § 304 claim under SOX is misconduct by the issuer . . . and not the personal misconduct of the CEO or CFO.”) (quotation marks omitted); Baker, 2012 WL 5499497, at *6 (holding that “reimbursement is required without any showing of wrongdoing by the CEO or CFO.”); see also S.E.C. v. Microtune, Inc., 783 F. Supp. 2d 867, 886 (N.D. Tex. 2011), aff’d sub nom. S.E.C. v. Bartek, 484 F. App’x 949 (5th Cir. 2012) (In analyzing whether Section 304 reimbursement constitutes disgorgement or a penalty, observing that “Section 304 contains no personal wrongdoing element, in contrast to disgorgement, that would require scienter or misconduct on behalf of the officers in order to trigger reimbursement.”).
 In the Matter of Joseph Jackson & Colm Callan, Respondents, Release No. 4202 (Feb. 2, 2021).
 Maria L. Murphy, Report: 2019 restatements at 19-year low; revenue still top issue, Compliance Week, Sept. 8, 2020, available at https://www.complianceweek.com/accounting-and-auditing/report-2019-restatements-at-19-year-low-revenue-still-top-issue/29421.article (reporting that companies filed a total of 484 restatements in 2019, a 19-year low, and that of those, companies filed 85 reissuance restatements, the lowest number since 2005).