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Executive pay is under fire again. According to a recent district court decision in the Western District of Texas interpreting Section 304 of the Sarbanes-Oxley Act of 2002,1 chief executive officers and chief financial officers could lose their bonuses and other incentive compensation if their company is required to revise its financial statements as a result of misconduct, even when the executives did nothing improper. On Nov. 13, 2012, the court in SEC v. Baker, No. A-12-CA-285-SS, 2012, WL 5499497 (W.D. Tex. Nov. 13, 2012), agreed with the Securities and Exchange Commission’s view that Section 304 requires CEOs and CFOs to return bonuses and certain other compensation received in years in which the corporation restated its financials, even in the absence of misconduct by the executive. This decision and the SEC’s continued, aggressive enforcement of Section 304 against innocent CEOs and CFOs raises the stakes yet again for executives who fail to detect or prevent misconduct on their watch.

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