Payback Time? The SEC Launches a Second 'Clawback' Case

Without accusing Ian McCarthy of fraud, the Securities & Exchange Commission cites Sarbanes-Oxley to recover money from the CEO of Beazer Homes USA

By Esmé E. Deprez

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Federal officials are stepping up their use of "clawbacks" to recover executive pay for company performances that proved illusory, filing their second case in four months against a company CEO who was not accused of individual misconduct.

The latest action was revealed in a Nov. 16 filing by Beazer Homes USA (BZH), which said that on Nov. 13 the U.S. Securities & Exchange Commission notified the company's CEO, Ian J. McCarthy, that it would recommend that a civil lawsuit be brought against him to recoup "certain incentive compensation and other amounts allegedly due" under Section 304 of the Sarbanes-Oxley Act of 2002. The notification, called a Wells notice, provides Beazer Homes an opportunity to refute the reasons set forth for such a recommendation—which the company said McCarthy plans to do. The company could not be reached for further comment. An SEC spokesperson declined to confirm the notification or offer comment.

In July, the SEC asked a court in Arizona to order Maynard L. Jenkins, former CEO of CSK Auto, to reimburse the company and its shareholders more than $4 million he received in bonuses and in profits from selling stock while the company engaged in alleged accounting fraud. (CSK became a subsidiary of O'Reilly Automotive (ORLY) in July, after the alleged conduct took place.) According to The Wall Street Journal, Jenkins is fighting the clawback. His attorneys argued in a filing in U.S. District Court in Phoenix that "The SEC's nonsensical view is that Mr. Jenkins must pay…for that misconduct by others because he was 'captain of the ship,' despite the fact that under its own view of the evidence, his crew was mutinous—deceiving him, and secretly circumventing the ship's controls."

The case against CSK is significant because it was "the first action seeking reimbursement under Section 304 from an individual who is not alleged to have otherwise violated the securities laws," the SEC said in a prepared statement. The SEC's complaint did not allege that Jenkins engaged in any fraudulent conduct. The same holds true for Beazer Homes' McCarthy, according to the company's statement, as the SEC did not "allege any lack of due care by Mr. McCarthy in connection with the Company's financial statements or other disclosures." The potential clawback stems from money McCarthy reaped when, the SEC alleges, Beazer Homes "fraudulently misstated its net income for the purpose of improperly managing its quarterly and annual earnings." Beazer Homes settled that action in September 2008 without admitting fault.

Crisis Fosters a Rage for Clawbacks

The cases represent a shift away from how the SEC has historically used the Sarbanes-Oxley Act, the 2002 statute put in place following the Enron and Worldcom accounting scandals. Previously the law was interpreted as allowing regulators to recoup incentive-based pay from top officials who have knowingly profited when their public company engaged in misconduct or misled investors.

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