(CN) – The 2nd Circuit on Thursday overturned a $35.2 million shareholder settlement against body-armor maker DHB Industries, because the settlement improperly released the company’s former CEO and CFO of liability under the Sarbanes-Oxley Act.
Shareholders sued DHB and various executives in 2005, after news surfaced that the company’s body armor contained inferior material that deteriorated quickly.
DHB officers agreed to settle the claims, but only if shareholders released former CEO David H. Brooks and former CFO Dawn M. Schlegel from any liability under the Sarbanes-Oxley Act.
When U.S. District Judge Joanna Seybert approved the settlement, the government objected, arguing that only the Securities and Exchange Commission has the authority to “exempt” executives from Sarbanes-Oxley requirements.
The three-judge panel in Manhattan agreed.
Writing for the court, Judge Peter Hall said the settlement attempted an “end run” around the SEC’s exclusive authority, “flying in the face of Congress’s efforts to make high-ranking corporate officers of public companies directly responsible for their actions that have caused material noncompliance with financial reporting requirements.”
Earlier this month, a New York jury convicted Brooks and DHB’s former chief operating officer, Sandra Hatfield, of inside trading and committing a $185 million fraud by inflating corporate earnings and profit margins.
In October 2007, Schlegel pleaded guilty to conspiracy to commit securities fraud and tax fraud.
The 2nd Circuit vacated the settlement and remanded, saying the district court will need to “reexamine” the fairness and adequacy of any revised settlement.