The U.S. District Court for the Northern District of California denied a financial officer’s motion to dismiss a Sarbanes-Oxley Section 304(a) clawback claim for material overstatements made in Logitech International’s 10-K filing, but dismissed the same claim based on a Form 8-K and attached press release. Because the latter statements are not filed in compliance with GAAP, they did not fall within the statute (SEC v. Bardman, February 8, 2017, Tigar, J.).
In an action against technology manufacturer Logitech and its financial officers alleging fraudulent overstatement of operating income, false representation of accounting compliance, and misrepresentations of material facts, the SEC claimed that the CFO failed to reimburse Logitech for bonuses and equity-based compensation tied to material misstatements in Forms 8-K and 10-K, on which the officer signed off. Sarbanes-Oxley Section 304(a) requires that officers reimburse the company for such amounts. The CFO moved to dismiss under FRCP 9(b) for failing to allege circumstances surrounding the fraud with specificity and for failure to state a claim under FRCP 12(b)(6) and 8(a).
In April 2011, the company issued a press release concerning its financial results for fiscal year ending March 31, 2011. Shortly thereafter the CFO signed off on a Form 8-K filing which included the press release. The SEC claimed that the press release failed to properly account for devaluation of certain inventory after poor sales, resulting in a $30.7 million overstatement of annual operating income (27%). The SEC further alleged that the CFO-certified Form 10-K filed shortly thereafter also made material misstatements from which the CFO profited by earning inflated equity compensation and bonuses. Logitech voluntarily filed a restated Form 10-K in 2014.
Estoppel argument rejected. The CFO argued that the SEC was estopped from bringing a SOX 304 claim based on a press release because the SEC took a contradictory position in a previous case. But that case was clearly distinguishable because the facts of that case took place pre-2003, when companies were not required to give their press releases to the SEC.
SOX 304 clawback. The CFO pointed to out-of-circuit rulings to support his argument that an issuer must be compelled or ordered to prepare a financial restatement before liability can attach under SOX 304. But the court found it reasonable to infer that even voluntary restatements are prepared to comply with securities laws. Thus the SEC sufficiently alleged that Logitech’s 10-K triggered the SOX 304 disgorgement.
Form 8-K need not be restated. The court agreed with the CFO’s argument that Form 8-K cannot trigger disgorgement under SOX 304 because it does not fall within the scope of the statute. Specifically, Logitech’s material noncompliance with Item 2.02 in the 8-K did not directly "cause or result in" the company’s later accounting restatement. Only GAAP-compliant statements must be restated and Form 8-K is not required to conform to GAAP. Neither the press release nor the Form 8-K could form the basis of a SOX 304 claim because any material noncompliance therein could not cause or require Logitech to issue an accounting restatement.
Because the misconduct reflected in the press release furnished to the SEC on Form 8-K could not cause a restatement to be filed within the meaning of SOX 304, those statements could not trigger SOX 304 earnings disgorgement from the CFO.
SEC’s concession. The SEC argued that since the same alleged misconduct resulted in material noncompliance on both the 8-K and the 10-K, both forms should be allowed to compel disgorgement. But Logitech restated its Form 10-K, not Form 8-K, to come into compliance with securities laws. At oral argument the SEC conceded that not every materially noncompliant 8-K could trigger an accounting restatement and agreed that, had the 10-K corrected the financial misstatements in the press release attached to the 8-K, no restatement would have been required.
The case is No. 16-cv-02023.
Attorneys: Paul W. Kisslinger for the SEC. Emily Victoria Griffen (Shearman & Sterling) for Erik K. Bardman.
Companies: Logitech International, SA
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