After the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books.
Under the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission was encouraged to hit executives where it hurts - in the wallet - if they certified financial results that turned out to be, in a word, bogus.
SarbOx was supposed to keep managers honest. They would have to hand back incentive pay like bonuses, even if they didn't fudge the accounts themselves.
That, anyway, was the idea. The record suggests a bark decidedly worse than its bite. The S.E.C. brought its first case under Section 304 of SarbOx in 2007. Since then, it has filed cases demanding that only 31 executives at only 20 companies return some pay.
In 2007 and 2008, most of the cases involved shenanigans with stock options and produced some big recoveries. In the wake of the financial crisis, the dollars recouped have amounted to an asterisk. Since the beginning of 2009, the S.E.C. has pursued 18 executives at 10 companies. So far, it has recovered a total of $12.2 million from nine former executives at five. The other cases are pending.
"It seems like a dormant enforcement tool," Jack T. Ciesielski, president of R. G. Associates and editor of The Analyst's Accounting Observer, says of the SarbOx provision. "It was supposed to be a deterrent, but it's only really a deterrent if they use it."
How assiduously the S.E.C. enforces this aspect of Sarbanes-Oxley is important. Only the S.E.C. can bring cases under Section 304. Companies can't. Nor, it appears, can shareholders. In 2009, the Court of Appeals for the Ninth Circuit ruled that there was no private cause of action for violations of Section 304.
Half the companies pursued by the S.E.C. during the past three years have been small and relatively obscure.
For example, the commission sued executives at SpongeTech Delivery Systems (2008 revenue: $5.6 million), contending that the company had booked $4.6 million in phony sales that year. NutraCea, a maker of dietary supplements with 2008 sales of $35 million, was sued along with Bradley D. Edson, its former chief executive, over what the S.E.C. called its recording of $2.6 million in false revenue. An executive at Isilon Systems, a data storage company, was pursued because, the S.E.C. maintained, the company had inflated sales by $4.8 million during 2007.
No money has been recovered in the SpongeTech or Isilon matters, which are still pending. Mr. Edson, who could not be reached for comment, returned his 2008 bonus of $350,000.
In all cases when executives have returned money, they have neither admitted nor denied allegations.
The S.E.C. typically recovers more money from executives at bigger companies. But top executives are rarely compelled to return all their incentive pay.
In a case brought last year against Navistar, for example, the S.E.C. contended that the company had overstated its income by $137 million from 2001 through 2005. Daniel C. Ustian, who is Navistar's chief executive and who was not charged with wrongdoing, returned common stock worth $1.32 million. He had received $2.2 million in incentive pay and restricted stock during the time that the S.E.C. says Navistar inflated its accounting. A company spokeswoman said Mr. Ustian would not comment.
Robert C. Lannert, Navistar's former chief financial officer, who also was not charged, gave back stock worth $1.05 million. His incentive pay consisted of only $828,555 during the years that the S.E.C. said the company misstated its results. He didn't return a phone call seeking comment.
ANOTHER case brought by the S.E.C. last year involved Diebold, a maker of automated teller machines. Contending that Diebold had overstated its results by $127 million between 2002 and 2007, the commission sued to recover money from three former executives. Walden W. O'Dell, who is a former C.E.O. and who was not charged, repaid $470,000 in cash, and 30,000 Diebold shares and 85,000 stock options. During the years that the S.E.C. alleged that results were overstated, he received bonuses totaling $1.9 million, in addition to restricted stock worth $261,000 and 295,000 stock options. Mr. O'Dell didn't return a message seeking comment. The cases against the other Diebold executives are pending. A company spokesman said it had settled with regulators and declined to comment further.
But perhaps the most troubling clawback case brought by the S.E.C. involved New Century Financial, now defunct, which was one of the most aggressive mortgage lenders during the home loan mania. Michael J. Missal, a partner at the law firm K&L Gates in Washington, and the bankruptcy examiner hired to investigate New Century, uncovered seven types of accounting irregularities that, he said, fattened pay for the company's top executives in 2005 and 2006. During those years, he found, Brad A. Morrice, the company's former chief executive, collected at least $2.9 million in incentive pay.
The S.E.C. accused New Century of a much narrower group of accounting irregularities. It recovered only $542,000 from Mr. Morrice. Asked about this last week, Mr. Missal said: "I found many serious violations in the investigation and laid them out as clearly as possible with all the supporting information."
A spokesman for the S.E.C. declined to comment. Mr. Morrice couldn't be reached.
It's possible that the S.E.C. is starting to rev up in this area. One recent case, involving Beazer Homes and two former executives - Ian McCarthy, a former C.E.O., and James O'Leary, a former chief financial officer - generated almost $8 million in cash and approximately 119,000 Beazer shares and stock units.
The S.E.C. accused Beazer of fraudulently misstating its results at times between 2000 and 2007. In 2006, the S.E.C. said, the company overstated its operating income by 8.2 percent. Beazer settled the case, without admitting or denying the allegations.
The S.E.C. didn't charge Mr. McCarthy or Mr. O'Leary with misconduct. The cash and stock that the executives returned amounted to roughly one year's worth of their total incentive compensation. Mr. McCarthy couldn't be reached for comment, and a lawyer for Mr. O'Leary didn't return a phone call.
Still, the record on the clawbacks issue is enough to make you wonder whether the S.E.C. is doing all it can on this front.
"The trick is to create deterrents and accountability in the system," says Harvey Goldschmid, a former S.E.C. commissioner who is a professor at Columbia Law School. "You don't do it if you're soft on individuals."