Hey SEC – Clawback Those Stolen Bonuses

Section 304 of SarbOx states that CEOs and CFOs of companies that have to restate earnings because of financial “misconduct” must pay back the bonuses and incentive compensation that they received from their companies. Several attempts by private litigants to recoup compensation through Section 304 claims were quashed by courts that determined only the SEC could enforce the rule, yet the provision was never invoked by the SEC in the first four years of life under SarbOx… In the last six months, the SEC has cited the bonus forfeit clause of Section 304 three times in complaints filed against executives of companies that have booked restatements. “We have used it before and we will use it again as appropriate,” said SEC spokesman John Nester…

Then there’s Dell. In August, its audit committee completed a year-long investigation of accounting irregularities that resulted in restatements ranging from a hit of $91 million in 2003 to an increase of $30 million in 2006. According to an 8-K filing, the committee found numerous accounting adjustments to reserve accounts and accrued liabilities that “appear to have been motivated by the objective of attaining financial targets.”

In simpler terms: Executives were cooking the books to hit performance targets that resulted in bigger incentive payouts for them.
…The SEC may also be reluctant to enforce the clause. With more than 1,500 restatements made by public companies last year, according to proxy adviser Glass Lewis, enforcement action could open up a Pandora’s box of compensation clawback scenarios.

“In some ways, Section 304 is a nuclear bomb and its infrequent use reflects restraint on the part of prosecutors [and the SEC],” Mr. Russo said…