In Cohen v. Viray, 2010 WL 3785243 (2d Cir. Sept. 30, 2010), the United States Court of Appeals for the Second Circuit held that no private right of action exists under Section 304 of the Sarbanes Oxley Act, 15 U.S.C. § 7243 (“Section 304”), to recover from chief executive officers (“CEOs”) and chief financial officers (“CFOs”) any bonus or similar compensation, or any profits realized from stock sales, they may have received during the twelve-month period prior to a restatement of company financial statements due to misconduct. The Second Circuit concluded further that because only the Securities & Exchange Commission (“SEC”) may enforce Section 304, a settlement agreement between a shareholder derivative plaintiff and a CEO and CFO may not purport to indemnify or release those senior corporate executives from liability under Section 304. This decision follows that of the Ninth Circuit on the question of whether a private right of action exists under Section 304.
The facts in Cohen were straightforward. DHB Industries, Inc. (“DHB”) is a manufacturer of body armor used by the military. In 2005, the price of DHB’s stock “plummeted” when it was revealed that the metal used in DHB’s body armor “contained an inferior material prone to rapid deterioration.” Thereafter, several shareholder derivative lawsuits were filed, each naming as defendants David H. Brooks (“Brooks”), DHB’s former Chairman and CEO, and Dawn M. Schlegel (“Schlegel”), DHB’s former CFO. The derivative suits were consolidated in the United States District Court for the Eastern District of New York. Plaintiff shareholders subsequently settled the lawsuit.
As part of the settlement agreement, plaintiff shareholders agreed to release Brooks and Schlegel “from any liability” under Section 304 and to “indemnify them against any liability” they might incur under Section 304. Another DHB shareholder, David Cohen, intervened and objected to the settlement, arguing that the “indemnification and relief provisions violate [the Sarbanes-Oxley Act] and public policy because Congress vested authority to exempt CEOs and CFOs from application of § 304(a) solely in the SEC, and did not grant such discretion to the public companies themselves, . . . and because the indemnification and release provisions would nullify the right and remedy that Congress expressly provided in the statute.” Subsequently, the United States objected as well, asserting that the derivative action settlement “(i) limited the remedies available to the government in pending...
