Updates to our Terms of Use

We are updating our Terms of Use. Please carefully review the updated Terms before proceeding to our website.

Wednesday, June 19, 2024 | Back issues
Courthouse News Service Courthouse News Service

SEC Can Eye Executive Bonuses After Fraud

AUSTIN, Texas (CN) - Two executives may have to return their bonuses and equity-based compensation despite having dodged personal securities fraud liability, a federal judge ruled.

ArthroCare CEO Michael Baker and CFO Michael Gluk presided over the medical device maker and signed the filings that enabled two senior vice presidents to defraud investors of $400 million, according to the Securities and Exchange Commission.

John Raffle and David Applegate, the former vice presidents, were arrested in August and charged with one count of conspiracy to commit wire, mail and securities fraud; four counts of wire fraud; eight counts of mail fraud; and three counts of securities fraud. Though the criminal case remains pending, a civil suit led to agreed judgments for the SEC.

Though the SEC did not charge Baker and Gluk in the ArthroCare securities scam, the commission sued for reimbursement of the cash bonuses, incentives and equity-based compensation that they received.

The Sarbanes-Oxley Act allows the SEC to seek such reimbursement from the corporate officers on behalf of ArthroCare, the commission claims.

U.S. District Judge Sam Sparks refused to dismiss the action against the officers on Tuesday.

"For reasons best known to the SEC, the commission has been historically reluctant to utilize § 304 in the ten years since Sarbanes-Oxley was enacted," Sparks wrote. "However, a sword does not cease to be a sword, even though it may languish in the scabbard, and likewise, federal agencies have discretion in when and how to carry out regulatory enforcement actions."

The fact that the SEC did not accuse Baker and Gluk of wrongfully contributing to the securities scam sets the case apart from most previous applications of Section 304 of the act, according to the 21-page order.

"Apparently, the SEC has decided to adopt a more aggressive interpretation of the reach of § 304, as was earlier recommended by an SEC senior counsel," Sparks wrote.

The disputed section of the act "ensures corporate officers cannot simply keep their own hands clean, but must instead be vigilant in ensuring there are adequate controls to prevent misdeeds by underlings," the decision states.

Baker and Gluk failed to show the court that the SEC had misconstrued Section 304, that the law was unconstitutional or that they can find relief under the Civil Asset Forfeiture Reform Act (CAFRA).

"Apologists for the extraordinarily high compensation given to corporate officers have long-justified such pay by asserting CEOs take 'great risks,' and so deserve great rewards," Sparks concluded. "For years, this has been a vacuous saw, because corporate law, and private measures such as wide-spread indemnification of officers by their employers, and the provision of directors & officers insurance, have ensured any 'risks' taken by these fearless captains of industry almost never impact their personal finances. In enacting § 304 of Sarbanes-Oxley, Congress determined to put a modest measure of real risk back into the equation. This was a policy decision, and while its fairness or wisdom can be debated, its legal effect cannot. Section 304 creates a powerful incentive for CEOs and CFOs to take their corporate responsibilities very seriously indeed. The court finds the SEC's interpretation of § 304 is both correct, and does not offend the Constitution. Nor is CAFRA applicable. Therefore, the SEC has stated a claim for which relief can be granted."

Categories / Uncategorized

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.