An intriguing “op-ed” piece in today’s Wall Street Journal sheds light on an important recent action taken by the Securities and Exchange Commission in the ongoing and multifarious debate about the rights and wrongs of public company executive compensation.
The piece is well worth reading (Click here to see it). In it Russell G. Ryan, a securities lawyer and former assistant director of the SEC’s division of enforcement, takes issue with a July 22 lawsuit the watchdog agency filed against the former chief executive of CSK Auto Corp., demanding he return about $4 million in bonuses and stock sales profits. The $4 million was granted during a period the SEC says CSK was “committing accounting fraud,” even though the SEC explicitly does not allege the CEO himself engaged in fraud.
Writes Ryan: “Exploiting an ambiguously worded phrase in Sarbanes-Oxley, the agency has for the first time claimed that it may under the law ‘claw back’ – some might say confiscate – bonus money and stock sale proceeds from CEOs and CFOs even when it lacks evidence to charge them with wrongdoing.”
That argument certainly has some appeal. But obviously the current enforcement group at the SEC has a different view. Said Rosalind R. Tyson, director of the SEC’s Los Angeles Regional Office, in a July 22 press release: then-CSK Auto CEO Maynard L. Jenkins “was captain of the ship and profited during the time that CSK was misleading investors about the company’s financial health. The law requires Jenkins to return those proceeds to CSK.”
Said Robert Khuzami, director of the SEC’s Division of Enforcement, in that same release, “The costs of such misconduct need not be borne by shareholders alone.”
In March 2009, the SEC charged four other former CSK executives with securities fraud. In May 2009, the SEC settled an enforcement actrion against CSK for filing false financial statements for fiscal years 2002 through 2004.
Here’s one way to look at it, not in a technical legal sense, but perhaps as a reasonable analogy. It involves Bernard Madoff. When the Madoff scandal broke, many were probably startled to learn that Madoff investors fortunate enough to pull out their investments with their “profits” before the Ponzi scheme collapsed might well have to give back those profits. The reasoning, if I can summarize in layman’s terms, is that these weren’t true “profits,” but the result of fraud.
While you can imagine the chagrin of those seemingly fortunate early actors, it didn’t seem fair that they benefited at the expense of other investors. Neither investor group had anything to do with the fraud.
In the case of CSK, the CEO did benefit from what turned out to be a false set of numbers.
There’s a separate, difficult debate about how much a CEO of a large public company should be expected to know and ultimately be responsible for in his or her role. In other words, what exactly does it mean, to quote the SEC”s Tyson, to be “captain of the ship?”