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Wall Street Journal, July 22, 2009 article

 

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MANAGEMENT   |   JULY 22, 2009, 10:01 P.M. ET

SEC Orders Ex-CEO to Return Pay


The Securities and Exchange Commission for the first time Wednesday ordered an executive to return compensation awarded during years the company misstated financial results -- even though the executive himself wasn't accused of wrongdoing.

In a step that could have broader repercussions, the SEC told Maynard L. Jenkins, the former chief executive of CSK Auto Corp., to give the company back more than $4 million in bonuses and equity compensation he'd earned between 2002 and 2004. Those were years during which the Phoenix auto-parts retailer engaged in fraudulent accounting that boosted its pre-tax income by a total of $66 million, the SEC alleges. CSK restated its earnings for those years twice.

The civil action, filed in U.S. District Court in Arizona, represents the SEC's boldest test of the ``clawback'' provision of the 2002 Sarbanes-Oxley securities-reform law. That provision requires CEOs and chief financial officers to return incentive and equity compensation when companies restate results because of misconduct.

Critics say the provision is vague and poorly worded; it doesn't specify who must be involved in the misconduct. Most companies interpret the law to mean that executives have to be culpable themselves before they can be asked to return money. The SEC itself used the provision rarely, and only in cases where the agency also charged executives with other wrongdoing.

Mr. Jenkins' lawyer, John Spiegel of Munger, Tolles & Olson, said in a statement that the SEC was ``overreaching'' since the SEC has not charged Mr. Jenkins with any misconduct, or even knowing about the accounting problems.

Rosalind Tyson, regional director of the SEC's Los Angeles regional office, says CEOs must take responsibility for corporate-earnings statements, which they're required to certify. ``They should put their money where their mouths are,'' says Ms. Tyson.

O'Reilly Automotive Inc., which bought CSK in 2008, declined to comment on the action.

The new SEC stance comes amid intense criticism about big paydays for some executives whose firms later collapsed during the financial crisis. Congress in February adopted broader clawback provisions for companies that take federal bailout aid.

More companies are adopting clawback policies. Compensation data-tracker Equilar Inc. says 64% of Fortune 100 companies had clawback provisions last year, up from 42% in 2007. Most of those provisions apply only when executives are involved in misconduct.

The SEC action against Mr. Jenkins could set a dangerous precedent, says Steven J. Friedman, head of the executive-compensation practice at law firm Littler Mendelson.

``I think this is a wake-up call for companies to make sure they're very careful in how they report'' results, says Mr. Friedman. ``Clearly they understand that the SEC is now willing to take action.''

Write to Phred Dvorak at phred.dvorak@wsj.com

 

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