This Is What SARBOX Is For . . . Beazer
I meant to get to this yesterday, but travel plans got in the way:
Those regular Sarbox bashers forget that it is all about keeping management honest when it comes to accounting.
The penalties for restated earnings is that management forfeits bonuses and stock options during the period in question.
That is precisely what took place with Ian J. McCarthy (President and Chief Executive Officer of Beazer Homes), who received a Wells notice (a recommendation of civil action) from the SEC:
“The Securities and Exchange Commission may move to claw back a portion of the compensation Beazer Homes USA paid its chief executive during a period for which the company later restated earnings.
Such a move would mark the first time the agency has tried to claw back pay from a sitting CEO who wasn’t alleged to have participated in a corporate fraud . . . In recent months it has sued at least two former executives for back pay even though they weren’t implicated in wrongdoing, a sign the agency is using the tactic more aggressively.
The SEC is relying on a provision of the Sarbanes-Oxley Act that lets the government try to recover incentive-based compensation from senior executives when their company is accused of reporting inaccurate financial data. Sarbanes-Oxley, enacted in 2002 in response to the meltdown of Enron Corp. and other high-profile accounting scandals, was an attempt to penalize companies for misleading investors.
Let’s clarify this so anyone can follow it: If you get a bonus based on earnings, and those earnings are fraudulent, you ust disgorge the bonuses back to S/Hs even if you had nothing to do with the fraud.
Recall Beazer settled accounting charges last year, and was forced to restate earnings going back to 2000. After understateding earnings in years 2000-05, they overstated them in 2006-07.
The comp amounts in question are sizable:
“During that period, Mr. McCarthy received millions of dollars in compensation and bonuses. For the fiscal year ended Sept. 30, 2005, Mr. McCarthy’s pay topped $10 million, including a salary of $1.13 million and a bonus worth more than $7.6 million, according to the SEC. Last year, his total pay was $7.9 million, most of which was from stock and option awards.”
While some are seeking to portray this as controversial, it is not. Yes, it is true that Mr. McCarthy did not commit fraud. But it is also true that due to the restatement, hid did not actually earn these performance bonuses.
Hence, the deserved clawback . . .
>
Source:
SEC Fixes Eye on Pay Of CEO At Beazer
DAWN WOTAPKA And MARK MAREMONT
WSJ, NOVEMBER 17, 2009
http://online.wsj.com/article/SB20001424052748704431804574539631426818194.html
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November 18th, 2009 at 5:14 am
He obviously does not contribute much too lobbyists or political parties. Unfortunately, while this is the law, everyone of these announcements make me sick. It’s like busting the kid on the street corner selling a joing, when a few miles down the road is the crack house everyone in town knows about.
You can almost smell the mentality in the abministration, this reminds me of Obie’s big speech when they were able to save 30 million dollars in some program, lol, while they spent a billion on stimulus.
Govt. Manager too employee, “How many case files do you have?”
“Oh, a few hundred.”
“What’s the status?”
“Moving forward, but slowly. No one is around during Thanksgiving and I still have 3 weeks of vacation too take in December. I’m going to hit it hard come January.”
“Hmmmm. We need one for the win column for the year. Check around the office and see who we can send a letter out too without causing a shit storm. Okay.”
“No problem. I’m sure out of 10,000 case files we can find one before the end of the month.”
“That’s the attitude. Enjoy the holidays.”
November 18th, 2009 at 7:14 am
Yes, probably a lot of noise, and might not end up in much overall, but at least its a step forward towards alignment of interests, instead of more steps backwards or in the wrong direction.
November 18th, 2009 at 7:41 am
The laws are in place but nobody has enforced them or even attempted to enforce them. The lack or enforcement has in effect neutered the potential deterrent effect.
Has anyone been indicted based on Sarbox enforcement?
November 18th, 2009 at 7:47 am
Haven’t the big banks being fudging their numbers?
November 18th, 2009 at 7:49 am
been, not being.
November 18th, 2009 at 8:10 am
It’s not fear of punishment that deters; it’s the certainty of punishment that deters.
November 18th, 2009 at 8:14 am
There is going to be good money made by the accountants and lawyers for the home builders as they restate earnings, then post huge losses and then carry back those losses to file for refunds of federal taxes paid during the boom (the gov’t recently expanded the carryback period to 5 years).
Good for the builders, but not such a good deal for the taxpayer.
November 18th, 2009 at 8:57 am
it’s only money-
the CEO should be thankful
November 18th, 2009 at 9:16 am
The lack or enforcement has in effect neutered the potential deterrent effect.
It’s not fear of punishment that deters; it’s the certainty of punishment that deters.
This is a major problem for Republicans. During the cowboy Bush era, very little enforcement or prosecution was done. The bad guys got away with bad things because they did not see much risk of prosecution. So what make us think they are any different today? If anything their actions to maintain the status quo show that they, not only have not changed, but also they do not even comprehend the need to change.
And the jury is out on whether or not the Democrats are much different. They apparently don’t want to take actions against their guys either.
Chris Dodd’s mortgage bribe? (what else can you call getting an artificially low mortgage rate but a bribe? It is absolutely no different than being handed cash in an envelop)
Stephen Friedman’s insider trading scandal with Goldman Sach’s stock? (He quietly resigns from the NYFed and enjoys his $5 million gain.)
At this point it can only be concluded that both sides of the aisle are crooked and corrupt. The only difference is they dance with different partners.
And where is the MSM? Since their favorites are presently at the dance, they choose to look the other way. Boy that is integrity for you. All except for Huffington that is who I am admiring more every day. The lady has principles. Maybe she should run for President.
November 18th, 2009 at 9:23 am
So the SEC thinks that Ian McCarthy may be a Thief. Why do they give a recommendation for civil action? Isn’t theft of these amounts a felony? Shouldn’t Ian McCarthy be investigated as if he were a common criminal (only he wears cufflinks and women’s under-dainties*).
In related news, the world continues to cruuuuuuhuuhhh mmmmmemmemm behuuuuullllll!
Housing Starts in U.S. Unexpectedly Plunge 11%
http://www.bloomberg.com/apps/news?pid=20601087&sid=ad6MwbnU8CWY&pos=1
*I heard or read a rumor about Ian McCarthy and possible cross-dressing proclivities.
November 18th, 2009 at 9:30 am
What the SEC presumably thinks is irrelevant and McCarthy has not been accused of a crime: He was CEO when earnings were overstated, he received additional compensation based on those earnings which the law now requires he pay back. That is all.
November 18th, 2009 at 9:30 am
Now, see, that cross-dressing rumor is what really makes the news these days! Just another corporate scandal or CEO being slapped on the wrist? Boring. Old white guys who like to dress up like old white gals, now THAT’S entertainment for the masses :D!!
November 18th, 2009 at 9:33 am
Mr. Ritholtz, you’re pulling at straws.
It is a law that hurts people who are working honestly: how many other companies did not restate their earnings and yet are penalized with all these compliance costs and useless red tape?
How do you like stop-and-go traffic? Stop-and-go traffic on a manual shift car while going uphill… That is how it is like trying to comply with Sarbox and yet be productive in your business.
Ultimately, all the Sarbox costs are being paid by the shareholders in added costs deducted from the company’s earnings and by the customers in higher prices.
Where is the article that you published yesterday about the horrible job the Fed has done in keeping the purchasing power of the USD, Mr. “Regular Fed Basher”?
Why do you still put that much faith in yet another government agency?
Sarbox = CPA full employment act, an useless bureaucracy like the Fed.
November 18th, 2009 at 9:42 am
What happened to all of the traders who used to kibbitz during the day on TBP? Have they all moved on?
November 18th, 2009 at 9:54 am
RW-
Thanks for the clarification.
http://www.sox-online.com/act_section_802.html
(a) IN GENERAL- Chapter 73 of title 18, United States Code, is amended by adding at the end the following:`Sec. 1519. Destruction, alteration, or falsification of records in Federal investigations and bankruptcy. `Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.`Sec. 1520. Destruction of corporate audit records
November 18th, 2009 at 9:57 am
Good point Barry, but there’s a further justification as well. Remember that SOX was passed after Enron and Worldcom executives got before Congress and claimed they had no idea what was going on with the accounting – that it just wasn’t their job. SOX was supposed to make it their job, by making them personally liable in case of fraud. In effect, part of a CEO’s job is now supposed to be to ensure fraud doesn’t occur on their watch – whether through sufficient internal controls or direct personal oversight or whatever. The argument “I didn’t have anything to do with it” doesn’t fly.
November 18th, 2009 at 10:27 am
This application of SARBOX, if it in fact comes to fruition, is a good thing. Clawback earnings-based compensation to shareholders! But SARBOX adds many other layers of bureacratic and regulatory requirements which are not productive. It is an overly-blunt instrument, which on the whole is ye t another lawyer full-employment act.
November 18th, 2009 at 10:48 am
SOX, lol, shareholders pay for huge insurance policies for ceo’s, cfo’s, etc. so they are not liable
November 18th, 2009 at 1:56 pm
Let me understand this correctly. A company (in this case BZH) restates earnings for the past 7 years and the CEO is unaware and is not implicated in a crime? 7 years of manipulating earnings implies that it was a corporate strategy; if it was a corporate strategy that means the C-Level execs. agreed to it, at least implicitly. If note, than the C-Level execs. were incompetent (i.e. misleading investors in believing that they knew what they were doing.) It seems as though SOX is an excuse not prosecute the CEO (& other execs.) as opposed to being an effective tool to protect the small guy investor.
BR, I’m surprised that you are using this case as support for SOX. As a regular basher of this silly piece of legislation it is another mark against it because this time it is being used to protect a potential perpetrator of fraud (and by what seems to be the SEC desire not pursue criminal action this may be the case.) SOX is garbage, the half millennium old common law concept of fraud is not garbage however. As opposed to more regulation (when indeed we should have less), maybe the enforcement of existing laws would be more effective and less costly.
Also, 53% of BZH stock (as of the most recent reporting) was held by institutions (and only a minority of that group seems to be index funds.) What are the chances that percentage was higher in the bubble days? Once again, the great fraudsters known as institutional money managers & mutual funds go unmolested.
By the way, how can massive restatements not be “a lack of due care”?
Regards,
TDL
November 18th, 2009 at 2:04 pm
A quick follow up. Below is a link to the SEC charge against the former CAO of BZH. The manipulation alleged should, at some point, been identified by the CFO and/or the CEO.
Regards,
TDL
http://sec.gov/litigation/litreleases/2009/lr21114.htm
November 18th, 2009 at 2:53 pm
You want to finish the criminal before the civil because facts established at trial on the criminal side can stand up on the civil side but not vice versa. But as we know now, the SEC has a habit of only pursuing civil actions, unless you’re Mark Cuban.
The SEC sucks. They really do. Go take a look at the SDNY judge’s denial of the proposed SEC-BoA settlement agreement from a couple of months ago for more stuff to give you a migraine.
November 19th, 2009 at 9:23 am
I remain constantly mystified: whey aren’t shareholders–the board–the ones demanding these bonus clawbacks?