BUSINESS | AUGUST 7, 2010
Clawbacks Divide SEC
Aguilar Pushes Harder Line for Executives at Accused Firms
By KARA SCANNELL
A dispute over how to claw back pay from executives at companies accused of cooking the books is roiling the Securities and Exchange Commission.
Commissioner Luis Aguilar, a Democrat, has threatened not to vote on cases where he thinks the agency is too lax, people familiar with the matter said. That prompted the SEC to review its policies for the intermittently used enforcement tool.
"The SEC ought to use all the tools at its disposal to try to seek funds for deterrence," Mr. Aguilar said in an interview on Tuesday. "It's important for us to the extent possible to try to deter, and part of that means using tools Congress has given us."
The issue of clawbacks came up during the SEC's recent settlement with Dell Inc. and founder Michael Dell, people familiar with the matter said.
The SEC alleged Mr. Dell hid payments from Intel Corp. that allowed the company to inflate earnings. He agreed to pay a $4 million penalty to settle the case without admitting or denying wrongdoing, but didn't return any pay.
Mr. Aguilar initially objected to the Dell settlement, according to people familiar with the matter. It is unclear whether the penalty—considered high by historical standards for an individual—swayed Mr. Aguilar's vote or whether he removed himself from the case.
In the interview, Mr. Aguilar spoke generally about clawbacks and declined to discuss Dell or other specific cases.
A spokesman for the SEC declined to comment.
Section 304 of the 2002 Sarbanes-Oxley law gave the SEC the ability to seek reimbursement of compensation from the chief executive and chief financial officer of a company when it restates its financial statements because of misconduct.
Under the law, the SEC can seek the repayment of bonuses, stock options or profits from stock sales during a 12-month period following the first time the company issues information that has to be restated.
Last year, the SEC used the tool for the first time against an executive who wasn't accused of personal wrongdoing.
In that case the SEC sued Maynard Jenkins, the former chief executive of CSK Auto Corp., for $4 million in bonuses and stock sales. Mr. Jenkins is fighting the allegations.
SEC attorneys have been working on a more formal policy to guide them in such cases, people familiar with the matter said. They were seeking to tie the amount of the clawback to the period of wrongdoing, these people said.
Mr. Aguilar felt the emerging new policy wasn't stringent enough and told the SEC staff he would recuse himself from cases when he didn't agree with the enforcement staff's recommendations, the people said.
Amid the standoff, SEC enforcement chief Robert Khuzami has halted the initial policy and set up a committee to take another look at the matter, the people said.
Hammering out a policy acceptable to the five-member commission, which has split on recent high-profile cases, may be difficult.
The divisions worry some within the SEC because the absence of an agreement could affect cases in the pipeline, especially on close calls where Mr. Aguilar's vote might be necessary to go forward.
Mr. Aguilar's hard line on clawbacks was bolstered by the Dodd-Frank law, signed by President Obama on July 21. It says stock exchanges need to change listing standards to require companies to have clawback policies in place that go further than the Sarbanes-Oxley policy.
Section 954 of the law says that pay clawbacks should apply to any current or former employee and instructs companies to seek pay earned during the three-year period before a restatement "in excess of what would have been paid to the executive under the accounting restatement."
Since becoming a commissioner in late 2008, Mr. Aguilar has called for a tougher enforcement approach, including a rework of the agency's policy of seeking penalties against companies.
In a speech in May, Mr. Aguilar took up the issue of executive pay in the context of the SEC's lawsuit against Bank of America Corp. for failing to disclose to shareholders the size of bonuses paid to Merrill Lynch executives. The bank agreed to pay $150 million to settle the matter.
Mr. Aguilar said that penalty "pales" in comparison to the $5.8 billion in bonuses paid during the merger.
"Perhaps what should happen is that, when a corporation pays a penalty, the money should be required to come out of the budget and bonuses for the people or group who were the most responsible," he said.
Write to Kara Scannell at kara.scannell@wsj.com |
