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Are the SEC's Executive Clawback Suits Unconstitutional?
The American Lawyer
Are we seeing the start of a wave of executive compensation clawback lawsuits by the Securities and Exchange Commission?
The first case was filed April 2 against the former CEO and CFO of ArthroCare, an Austin, Tex.-based company that makes medical devices. (The complaint is here.) In this case, the SEC wants to claw back an unspecified amount of compensation from former CEO Michael Baker and former CFO Michael Gluk, even though the two aren't accused of wrongdoing. Instead, two former Arthro sales executives have been charged by the SEC with inflating revenue by channel stuffing.
The lawyers for the former ArthroCare executives blasted the SEC's action as unconstitutional. Jay Pomerantz of Fenwick & West, who represents former CEO Baker, asserted that the SEC is relying on "a flawed interpretation of the Sarbanes-Oxley Act." He added: "Such overreaching against an admittedly innocent person violates constitutional principles of fairness and due process." Jason Lewis of Locke Lord, who represents former CFO Gluck also maintained that the SEC's action "raises numerous constitutional and equitable concerns." He stated: " With its overreaching and broad interpretation of the Sarbanes-Oxley Act, the SEC is telling public companies and their officers that even being diligent and innocent of wrongdoing does not protect you from the SECs grasp. This certainly could not have been the intent behind the law and Mr. Gluk intends to vigorously defend himself against this unjust action.
In the Franklin Bank case, Nocella is represented by James Munisteri of Gardere Wynne Sewell. Munisteri told the Wall Street Journal that the SEC's complaint doesn't tell the whole story. "Conspicuously absent from the SEC's mischaracterization of events are many important facts that the SEC will not be able to ignore during a court proceeding," he said. Barrett Reasoner of Gibbs & Bruns, who represents McCann, pointed out that a class action against Nocella and and McCann stemming from the bank's failure was dismissed, and that ruling was upheld by the U.S. Court of Appeals for the Fifth Circuit. "Just as the class action claims were dimsissed, the SEC's claims similarly will not pass muster," Reasoner told the Litigation Daily.
This article originally appeared in The AmLaw Litigation Daily.