In what appears to be the first time in a reported securities class action decision, a court has addressed the issue of whether private investors can seek to disgorge personal profits from the CEO and CFO under Section 304 of Sarbanes-Oxley. In the Qwest action, Judge Robert E. Blackburn (D. Colo.) took a look at the provision, which could force the two execs to pay back “any bonus or other incentive-based or equity-based compensation” earned “during the 12-month period following the first public issuance” of a “accounting restatement” made “as a result of misconduct.”
Qwest’s CFO, Robin Szeliga, argued that Plaintiff “does not have standing to assert a claim under § 304 because the statute provides only for reimbursement to the issuer which, in this case, is Qwest.” Judge Blackburn agreed, holding that Plaintiff “is not entitled to the reimbursement required by the statute” because he “is not asserting derivative claims on behalf of Qwest.” Therefore, Plaintiff “does not have standing to assert a claim against” the CFO under § 304 and it “should be dismissed.”
Plaintiffs probably shouldn’t feel too bad though. First, they just negotiated a $400 million partial settlement. And second, the other two reported decisions on Sarbanes 304 are both derivative actions, and both courts ruled that Plaintiffs had no authority to bring 304 claims as the statute does not provide them with a private right of action. Guess the SEC is going to have to enforce 304. Remains to be seen if they are ever going to get serious about it though.
You can read In re Qwest, issued September 12, 2005, at 387 F. Supp. 2d 1130.
Nugget: “Qwest restated its GAAP revenues for this period from $ 40.674 billion to 37.8 billion, an overstatement of $ 2.874 billion, and its losses from $ 4.802 billion to $ 30.290 billion, an understatement of $ 25.488 billion.”