SEC Settlement Contains Rare Clawback Provisions For Individual Executives
On Friday, the U.S. Securities and Exchange Commission (“SEC”) announced a settlement with Computer Sciences Corp. (“CSC”) related to allegations of misleading investors and manipulating financial results regarding its $5.4 billion contract with the United Kingdom’s National Health Service (“NHS”). In a rare move, the $190 million fine included clawbacks of executive pay. These clawbacks underline a developing trend in SEC and other federal enforcement actions emphasizing individual accountability and individual culpability.
The SEC alleges that CSC’s project to build an electronic patient record system for the NHS experienced technical problems and delays almost from the start. As other contractors bowed out, CSC’s role expanded. While the contract initially had the potential to earn $5.4 billion in revenue for the company, those profits depended on CSC delivering products and services under specific timeframes and volumes, with steep penalties for missed deadlines. After software implementation delays caused CSC to fall behind in performing the contract in 2008, the company renegotiated an amended contract, effective April 2009.
But over the next two years, delays continued to plague CSC’s performance of the amended contract and the company repeatedly missed its deadlines. As its expected profit dwindled, rather than revise its projections downward and alert investors to the problems it was facing, former CEO Michael Laphen and former CFO Michael Mancuso allegedly failed to disclose these issues to investors – even going so far as to repeatedly make public statements that the company was meeting its targets and was on track to fully perform its obligations.
The SEC has also brought charges against former CSC finance executives Robert Sutcliffe, Edward Parker, and Chris Edwards concerning their alleged roles in the company’s accounting irregularities. After realizing CSC would lose money on the contract with the NHS because it could not meet its deadlines, Sutcliffe, a finance director overseeing the deal, allegedly avoided having to make large reductions in the company’s earnings in 2010 and 2011 by basing its accounting on terms it was negotiating with NHS rather than the actual terms it struck. Parker, serving as controller in Australia, allegedly overstated CSC’s earnings in the region by exploiting certain “cookie jar” reserves. And Edwards, a finance minister for CSC’s Nordic region, allegedly improperly recorded certain expenses as “prepaid assets” so as not to reduce the company’s earnings.
Under the terms of Friday’s settlement, Laphen has agreed to return $3.7 million in compensation to CSC and to pay a $750,000 penalty. Mancuso has agreed to return $369,100 in compensation and pay a $175,000 penalty. Under the terms of the settlement, CSC, Laphen, and Mancuso did not admit wrongdoing.