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HEADLINE NEWS:
It's An SEC Option Practice Focus Sarbanes-Oxley's Disgorgement Section Creates No Private Claim
Staff Writer – Legal Times
Securities Mosaic. November 21, 2005
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EXCERPT: Section 304 of the Sarbanes-Oxley Act -- which requires chief executive and financial officers to reimburse their company for incentive-based compensation and stock trading profits received during the 12 months before an announcement of an accounting restatement resulting from "misconduct" -- constitutes one of the statute's more puzzling provisions. One major issue has been whether Section 304 creates an implied private right of action. On Sept. 27, inNeer v. Pelino, U.S. District Judge Stewart Dalzell of the Eastern District of Pennsylvania ruled, in a matter of first impression, that Section 304 does not provide a right of action for shareholders derivatively against the corporate officers. By extension, the logic of Dalzell's decision should also preclude suits by the corporation itself. Dalzell concluded that the statutory language and context of Section 304, as well as its legislative history, indicate that Congress intended for the section to be enforced only by the Securities and Exchange Commission. In reaching this conclusion, Dalzell had to grapple with some thorny issues of statutory interpretation arising from Sarbanes-Oxley. He had to reconcile statutory provisions that may or may not have been envisioned as an integrated piece of legislation. Plus he delved into murky legislative history that provided only limited guidance about Congress' intent. While some finer points of Dalzell's analysis may be open to debate, his conclusion is sound: Nothing in Sarbanes-Oxley affirmatively evinces a congressional intent to create a private right of action. The unusual circumstances under which the Sarbanes-Oxley Act was passed are well known. In July 2002, in the wake of the WorldCom scandal, there was strong public pressure for quick action to address perceived corporate abuses. Despite significant differences between the House and Senate versions of the corporate-reform legislation, a House-Senate conference committee agreed on a final bill in little less than a week. The legislation was enacted shortly thereafter. The House-Senate conference report that accompanied the final version of the bill contained no substantive comment on the law. In these circumstances it is difficult to imagine that members of Congress had much time or inclination to consider carefully how the provisions of the statute should interact with one another. Section 304 is one of numerous new remedial provisions created by Sarbanes-Oxley. |
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