The staff of the Securities and Exchange Commission (SEC) plans to recommend that the federal agency sue Ian McCarthy, CEO of Beazer Homes USA, to collect past bonuses, incentive compensation and profit from stock sales he received when the company's accounting was in noncompliance.
Beazer disclosed the so-called "Wells notice," which is a letter from the SEC announcing its intention to bring enforcement action, on Monday, saying that McCarthy intends to submit documents in his defense to the SEC staff. Those documents will be included in the staff's recommendation to the five-member commission, which has the power to approve or reject the staff's recommendation to take legal action.
A company spokesperson declined to comment beyond the disclosure filing.
Under Sarbanes-Oxley law, if a company is required to restate its accounting due to "material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and other financial officer of the issuer shall" pay back the company any bonuses, incentives, or stock profits made that year.
Beazer restated its accounting for a number of years after an internal investigation revealed the company had used "cookie jar accounting" to set aside profits made from 2000 to 2005 when the company was outperforming estimates to be pulled out later when the company's sales began to slump to smooth the peaks and valleys of its earnings.
The SEC takes a dim view of the process because it doesn't give investors an accurate picture of how well or poorly the company is performing.
The company fired its chief accounting officer at the time and set about the considerable task of restating its earnings during those years. In September 2008, Beazer settled with the SEC. Because it had been cooperative and moved swiftly to investigate and remediate the situation, there was no monetary penalty, and the company was not required to admit or deny any wrongdoing under the settlement.
While the company was off the hook, the government is prosecuting the company's former chief accounting officer. The current move to penalize McCarthy for the company's accounting irregularities now, long after it appeared the issue was settled, seems to come from a recent case in which the SEC sued the CEO of another company. That case determined that the SEC doesn't need to allege that the executive is guilty to invoke the Sarbanes-Oxley provision.
In the Beazer notice of the SEC filing Monday, it said that the SEC staff is not alleging that McCarthy exercised "any lack of due care" in its recommendation.