One of the big issues surrounding Section 304 of the Sarbanes-Oxley Act—the compensation clawback provision—is whether it can be applied to top executives who weren’t themselves engaged in wrongdoing. The Securities and Exchange Commission has maintained that if a company restates its financials because of wrongdoing, the agency can seek the forfeiture of the bonuses and incentive compensation paid to the CEO and CFO during the entire year of the wrongdoing—even if the executives weren’t involved in the misdeeds themselves. And at least two district court rulings, including one last month, have upheld that view.
On Tuesday, the SEC announced the filing of another Section 304 clawback case, this time against Eric Ashman, the former CFO of TheStreet Inc., which runs the investment website TheStreet.com. In its
complaint against Ashman,
the SEC didn’t appear to apply a strict liability standard. Rather, the agency alleged that the ex-CFO caused TheStreet to report revenue before it had been earned, and ignored basic accounting rules.
But what’s interesting is that the SEC did not on Tuesday charge the former CEO of TheStreet, Thomas Clarke Jr., even though the agency theoretically could, under its strict liability view of Section 304. (We left a message for Clarke, who is now the CEO of Weiss Group LLC, but did not hear back.)
According to the SEC’s
the wrongdoing at TheStreet took place at a former subsidiary, Promotions.com. In February 2010, TheStreet restated its 10-K for 2008, disclosing that Promotions.com had overstated its operating income for the fiscal year by 152 percent by entering into sham transactions, among other things. Two former executives of Promotions.com–Gregg Alwine and David Barnett–were charged by the SEC on Tuesday with fabricating and backdating contracts and using other “crooked tactics.” They agreed to pay penalties of $130,000 and $120,000 respectively. (Lawyers for Alwine and Barnett could not be confirmed.)
In its press release, the SEC said that ex-CFO Ashman agreed to reimburse TheStreet $34,240 under the clawback provision. He also agreed to pay a $125,000 penalty, and to be barred from acting as a director or officer of a public company for three years. (Ashman’s lawyer could not be confirmed.)
“Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” Andrew Calamari, director of the SEC’s New York regional office, said in the agency’s complaint.
The SEC filed
against TheStreet itself, as well as
a consent agreement
in which employees of the company are permanently enjoined from violating several provisions of Section 13 of the Securities Exchange Act. The company was represented by Steven Glaser, a partner at Skadden, Arps, Slate, Meagher & Flom.
Current CEO Elisabeth DeMarse said in a press release: “TheStreet cooperated with the SEC over the course of its investigation, and we conducted our own comprehensive review in conjunction with the investigation. Upon learning of the irregularities, we promptly reported the matter to the SEC. Under the terms of the settlement, TheStreet is not required to pay any monetary penalties.”
The SEC’s decision to only seek clawback from TheStreet’s CFO—and not its CEO—stands in contrast to the agency’s actions in other cases. Last month, U.S. District Judge Sam Sparks in Austin held in
that the SEC can seek to clawback compensation paid to the CEO and CFO of ArthroCare Corporation, even though the two execs weren’t aware of the misconduct that caused a restatement of financial results. And in 2009, U.S. District Judge G. Murray Snow in Phoenix held in
that Maynard Jenkins, the former CEO of CSK Auto Inc., could likewise be subject to a clawback without a showing of individual wrongdoing.