On August 30, 2011, the SEC announced it had settled a case with James O’Leary, the former CFO of Beazer Homes USA under Section 304 of the Sarbanes-Oxley Act. Section 304’s "clawback" provision requires the reimbursement of compensation from executives under certain circumstances when their companies were in material non-compliance of financial reporting requirements due to misconduct. In Mr. O’Leary’s case, although he was not charged with any misconduct, he has agreed to reimburse $1.4 million he received after fraudulent financial statements were filed.
In May 2008, Beazer Homes filed accounting restatements for the fiscal year 2006. By September of that year, the company had settled an SEC enforcement action for misconduct related to the original financial statements for 2006. The company also entered into a Deferred Prosecution Agreement to resolve a criminal investigation regarding the matter.
According to the SEC’s Complaint against Mr. O’Leary, this misconduct was "orchestrated by Beazer’s Senior Vice President and Chief Accounting Officer Michael T. Rand … to satisfy analysts’ quarterly and annual earnings expectations." The Commission filed an enforcement action against Mr. Rand in July 2009, which is still pending.
Although the SEC does not contend that Mr. O’Leary participated in the misconduct, he made certain required certifications pursuant to Section 302 of the Sarbanes-Oxley Act in Beazer Home’s quarterly and annual reports concerning the accuracy of the company’s financial reports, the strength of its internal controls, and the lack of fraud during fiscal year 2006. Under Section 304, Mr. O’Leary is required to reimburse Beazer Homes for certain compensation he received during the 12-month period following the issuance of Beazer Home’s quarterly and annual financial statements for its fiscal year 2006, which included his bonuses and equity-based compensation, as well as the profits he received from selling the company stock he received pursuant to stock options.
The settlement for $1.4 million is awaiting the Court’s approval. It appears that in Mr. O’Leary’s case that the Commission itself approved of the settlement, which appears to be the first such clawback settlement since July 2011, when the SEC rejected the settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint in the case against Maynard Jenkins, the former chief executive officer of CSK Auto Corporation (as discussed here).
Kevin LaCroix of the D&O Diary Blog provides further analysis of the case and Section 304 in his blog posting here.