An Executive ’ s Guide to Defeating the SOX 304 Clawback ( Part I )

BY MICHAEL SPAFFORD, NEIL TORPEY, AMY CARPENTER-HOLMES AND JOANNE JOSEPH R ecent investigations and scandals have directed attention to the behavior of individual corporate executives. The common reaction to misconduct is to look to the people at the top; like it or not, corporate management is expected to accept responsibility and make appropriate amends if something goes wrong. Making amends may include paying back any incentive-based bonuses or profits from stock sales that benefitted from inflated financial reporting. Not surprisingly, the Securities and Exchange Commission (SEC) increasingly has focused on executives whose compensation benefitted from inflated numbers, whether the executives were involved in the underlying misconduct or not. Section 304 of the Sarbanes-Oxley Act (also known as ‘‘SOX’’) grants the SEC the discretion to claw back the incentive-based compensation and stock sales of chief executive officers (CEO) and chief financial officers (CFO) after a restatement resulting from corporate misdeeds. See Sarbanes–Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745. In this article, we examine possible arguments and responses to an SEC investigation of alleged SOX 304 violations. In our next article, we will discuss the SEC’s burden of proof in litigation and possible defenses to a SOX 304 proceeding.