## Facts

- CSK Auto Corporation, a public auto-parts retailer, issued financial statements for fiscal years 2002–2004 that allegedly overstated pretax income due to improper accounting for vendor allowance receivables in a program called “Let’s Work Together.”
- Maynard L. Jenkins served as CSK’s CEO and board chair (1997–2007) and certified the misstated financial statements under federal securities laws.
- Between approximately May 2003 and May 2005, Jenkins received over $2 million in bonuses and other incentive- or equity-based compensation and realized over $2 million in profits from sales of CSK securities.
- CSK later issued two restatements: a 2004 restatement that did not fully correct the receivable overstatements and a 2007 restatement that again restated 2002–2004 results to correct prior overstatements.
- The SEC did not allege Jenkins participated in, directed, or knew of the accounting misconduct; the alleged scheme was attributed to other CSK officers.
- The SEC sued Jenkins under Sarbanes-Oxley Act § 304 (15 U.S.C. § 7243) seeking reimbursement to CSK of covered compensation and stock-sale profits received during the statutory 12-month periods following issuance of the misstated financials.

## Issues

1. Whether SOX § 304 requires the SEC to plead and prove personal misconduct by the CEO as a prerequisite to reimbursement.
2. Whether the SEC must plead the precise reimbursement amount and trace the compensation and stock-sale profits to particular accounting misstatements to state a § 304 claim.
3. Whether CSK’s later merger affected whether § 304 could be enforced based on conduct occurring while CSK was an issuer.

## Decision

- The court denied Jenkins’s Rule 12(b)(6) motion to dismiss.
- The court held SOX § 304 does not require allegations that the CEO personally engaged in misconduct; reimbursement may be triggered by the issuer’s misconduct leading to a restatement.
- The court held the SEC was not required at the pleading stage to specify the exact reimbursement amount or provide a dollar-by-dollar linkage to specific accounting errors.
- The court held the later merger did not defeat the claim because § 304’s applicability turns on the issuer’s status and events at the time of the misstatements, compensation, and restatement-triggering misconduct.

## Legal Principles

- SOX § 304 is triggered when an issuer must prepare an accounting restatement due to the issuer’s material noncompliance with financial reporting requirements “as a result of misconduct”; the statute’s text does not require misconduct by the CEO or CFO personally.
- When § 304 is triggered, the CEO and CFO may be required to reimburse the issuer for covered bonuses and other incentive- or equity-based compensation, and for profits from issuer securities sales, received within the 12 months following first issuance of the misstated financial statements.
- At the motion-to-dismiss stage, alleging covered compensation and stock-sale profits within the relevant period, along with issuer misconduct and a resulting restatement, is sufficient; precise reimbursement calculations are matters for later proof.
- A subsequent corporate transaction does not retroactively eliminate an issuer’s status for § 304 purposes or negate potential reimbursement obligations tied to the earlier period.

## Conclusion

The court allowed the SEC’s SOX § 304 clawback claim to proceed, ruling that reimbursement can be sought from a CEO after a restatement caused by issuer misconduct even without allegations that the CEO personally engaged in wrongdoing, and that detailed reimbursement calculations need not be pleaded to survive dismissal.


Sec. & Exch. Comm'n v. Jenkins, 718 F. Supp. 2d 1070 (D. Ariz. 2010)