The Securities and Exchange Commission recently filed a complaint in Federal Court in Texas against Michael A. Baker, the former Chief Executive Officer of ArthroCare Corporation (ArthroCare), and Michael T. Gluk, its former Chief Financial Officer, asserting claims under Section 304 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). In its complaint, the SEC is seeking to force Baker and Gluk to reimburse ArthroCare for incentive compensation they received during the 12-month periods immediately following ArthroCare’s release of financial statements that it later restated, as well as for the profits they obtained from their sales of company stock during these periods.
The Commission contends that Baker and Gluk were employed by ArthroCare in their respective capacities when two sales executives carried out a fraudulent scheme to overstate the company’s revenues in quarterly and annual statements in 2006, 2007 and the first quarter of 2008. The SEC does not allege any participation by Baker or Gluk in the fraudulent scheme, which involved overstating or prematurely recognizing revenue in order to meet particular quarter-end or year-end targets. The company eventually restated its financial statements for these time periods. The SEC alleges that Section 304(a) of Sarbanes-Oxley requires a chief executive officer (CEO) or chief financial officer (CFO) to forfeit incentive compensation and profits from the sale of company stock following the issuing of an accounting statement that is later restated due to material noncompliance with reporting requirements arising out of misconduct. Section 304(a) does not expressly state that the "misconduct" must be that of the CEO or CFO and the SEC contends that it is unnecessary for it to tie the alleged misconduct to the CEO or CFO in order to clawback funds from them.
The complaint is one of only a few such complaints, the first of which was filed in 2009, in which the SEC has sought reimbursement pursuant to Section 304 of Sarbanes-Oxley from a CEO or CFO who was not alleged to have taken part in the wrongdoing that resulted in the accounting restatement.
Securities and Exchange Commission v. Michael A. Baker and Michael T. Gluk, C.A. No. 1:12-cv-00285 (W.D.
