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Former CEO Fights SEC's Bid to Claw Back $4 Million Under SOX
Motion by the defense notes that the SEC has not alleged that the ex-CEO did anything wrong
The National Law Journal
September 18, 2009
The U.S. Securities and Exchange Commission's attempt to claw back more than $4 million in compensation from the former chief executive officer of an Arizona automobile parts retailer raises "constitutional questions of the gravest magnitude," the defense argues in a motion to dismiss filed on Tuesday.
On July 22, the SEC brought suit against Maynard L. Jenkins, 67, former chief executive officer of the defunct CSK Auto Corp., seeking reimbursement on behalf of shareholders under the Sarbanes-Oxley Act. Jenkins, who had signed many of the company's financial documents, earned more than $4 million in bonuses and stock sales for a period during which CSK twice was forced to restate its accounting due to alleged misconduct related to vendor allowances.
"In short, the SEC openly proposes for the first time to wield the statue as a means to inflict punishment on innocent executives," Jenkins' counsel said in the motion, filed in the U.S. District Court of the District of Arizona.
In the motion, the defense argues that the SEC's interpretation of Section 304 of the Sarbanes-Oxley Act is unprecedented and conflicts with previous cases the commission has brought against corporate executives under the statute. Historically, the SEC has wielded Section 304 against executives who were alleged to have been participants in an accounting fraud.
Section 304 requires chief executive officers and chief financial officers to "reimburse" the company for certain bonus payments and stock sales if "as a result of misconduct" the company was required to issue an accounting restatement, the motion argues.
"The SEC's nonsensical view is that Mr. Jenkins must pay (literally and figuratively) for that misconduct by others because he was the '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 motion says.
Jenkins' lawyer, John Spiegel, a partner at Munger, Tolles & Olson in Los Angeles, declined to comment.
The defense motion notes that the SEC has not alleged that Jenkins did anything wrong. Neither is the commission attempting to disgorge monies tied to the alleged wrongdoing outlined in its charges brought in March against four other CSK executives. In fact, those charges suggest that Jenkins was a victim, rather than the perpetrator, of the alleged fraud at CSK, in which the other executives misled him, the motion says.
Three of those four executives have been criminally charged or have pleaded guilty to criminal charges.
The motion argues that the SEC's interpretation of Section 304 conflicts with legal precedent and the intent of Congress. Under the SEC's interpretation, Section 304 would "deprive [Jenkins] of due process of law," the motion continues. In any event, Section 304 doesn't apply because CSK, which was acquired in 2008 by O'Reilly Automotive Inc., is no longer an issuer of public securities, the motion concludes.
SEC spokesman John Heine said he had no immediate comment. "We are reviewing the motion," he said.
