Section 304 of the Sarbanes-Oxley Act of 2002 provides that a company’s CEO and CFO must disgorge certain bonuses, equity-based compensation, and trading profits if the company is required “to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws.” Although Congress did not create an express private right of action in the statute, recent securities class actions and derivative suits often include a tag-along Section 304 claim.
As reported by The 10b-5 Daily, at least one court has found in a derivative case that the legislation did not create a private right of action and dismissed the claim. Courts that are inclined to do the same thing in a securities class action, however, may choose to rely on the plain language of the statute. In In re Qwest Communications Int’l, Inc. Sec. Litig., 387 F. Supp. 2d 1130 (D. Col. 2005), the court found that Section 304 expressly requires an officer to “reimburse the issuer.” Under these circumstances, Qwest’s investors did not have standing to bring the claim because they were “not entitled to the relief authorized by the statute.”
Holding: Motion to dismiss Section 304 claim granted.