SOX 304 clawback enforced against CFO not accused of misconduct

News Brief

By Cydney Posner

The SEC announced another settlement to recover bonus compensation and stock sale profits from a CFO under SOX 304, notwithstanding the absence of any charges of personal misconduct by the CFO.    As you may recall, the "clawback" provision  of SOX 304 provides for the forfeiture of certain bonuses and profits by a CEO and CFO when there is a restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws. In this instance, the SEC's complaint was against the former CFO of Beazer Homes USA, which had been charged with filing fraudulent financial statements.  The SEC recovered $1.4 million from the CFO, consisting of his entire fiscal year 2006 incentive bonus as well as  stock sale profits, after having already recovered, also under SOX 304, several million dollars from the CEO. In the early years after SOX was initially adopted, there was some question as to whether the SEC would even seek to enforce SOX 304 against non-perps.  Apparently, the book is now closed on that question: the SEC seems to be taking the broader view that, under SOX,  the CEO and CFO are required to "take affirmative steps to prevent fraudulent accounting schemes from occurring on their watch," and, if they receive substantial incentive compensation and stock sale profits while their company is misleading investors and committing accounting fraud, those amounts should be forfeited.

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Cydney Posner Special Counsel, San Francisco
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