Author/s:
NA Corporate & Securities Practice Group
In a case of first impression, the Securities and Exchange Commission filed a complaint in the US District Court for the District of Arizona against Maynard L. Jenkins, the former CEO and Chairman of CSK Auto Corporation. The complaint, filed on July 22, 2009, alleged that Jenkins was unlawfully compensated in amounts exceeding USD4 million while CSK was engaged in a convoluted scheme of fraudulent accounting conduct in violation of Section 304 of the Sarbanes Oxley Act of 2002 (the Act).
Section 304 of the Act, otherwise known as the "Clawback" provision, generally requires the chief executive officer and chief financial officer of an issuer to reimburse the company for bonuses, incentive or equity compensation received or profits realized on the sale of securities when the company restates its financial results due to misconduct.
Although this was the SEC's third enforcement action against CSK and other senior executives in connection with the alleged accounting misconduct, the case against Jenkins has received significant attention as it is the first case to-date under Section 304 of the Act seeking reimbursement from an individual not otherwise alleged to have violated the securities laws.
According to the SEC's complaint, CSK, one of the largest specialty retailers of automotive parts in the US, derived a significant portion of its income from vendor allowances from at least 2002-2004. The vendor allowances (generally used to provide retailers such as CSK with financial support to market the vendors' products), were vital to CSK's financial results. Unable to collect all of the vendor allowances it recognized, CSK allegedly engaged in a scheme to hide the uncollected amounts (instead of writing off such uncollectible receivables as required by GAAP), thereby overstating its pre-tax income by tens of millions of dollars each fiscal year.
As the chief executive officer of CSK, Jenkins signed the annual reports on Form 10-K and the accompanying Section 302 certifications containing the false financial statements for each of the fiscal years in question. The company was also required to restate its financial results as a result of its alleged misconduct. The first restatement failed to properly account for, and write-off, all known uncollected vendor accounts receivables, among other matters, thereby prolonging the allegedly fraudulent accounting scheme. Jenkins signed and certified the report containing the restatement. Upon discovering the irregularities, CSK's internal audit department commenced a special investigation which led to CSK ultimately restating its results a second time.
Significantly, the SEC did not accuse Jenkins of personal participation or knowledge of the fraud. Nevertheless, in its complaint, the SEC demands that Jenkins reimburse CSK the approximately USD4 million in bonus payments, incentive and equity-based compensation and profits from the sale of CSK stock Jenkins received during the time false financial information was reported. Jenkins retired in August 2007. To date, the Court has yet to rule on this matter.
This article is one of several that appear in
US Corporate Law Brief, September 2009.