By Amanda E. Preston

Casting a blind eye may help executives sleep better at night, but it may also cost them half a million dollars. On February 10, 2015, the Securities and Exchange Commission (SEC) announced that it had entered into a settlement with William Slater and Peter Williams III, two former chief financial officers of Saba Software, Inc. (Saba). Slater and Williams agreed to return $336,375 and $141,992, respectively,  in bonuses and stock sale profits they received while the Silicon Valley software company was committing accounting fraud. Last year, the SEC worked out a similar settlement with former Chief Executive Office Babak “Bobby” Yazdani, in which he agreed to hand back $2.5 million.

While Slater, Williams, and Yazdani were not personally charged with the company’s misconduct, Section 304 of the Sarbanes-Oxley Act still requires the executives to reimburse the company for monetary perks received during the commission of the fraud. Saba was discovered to have filed financial statements which overstated its pre-tax earnings and misrepresented its revenue recognition practices. Specific allegations included claims that the company’s professional-services managers directed consultants in its Indian subsidiary to fabricate time records in order to meet quarterly revenue and margin goals.

The SEC’s clawback provision, expanded by Section 954 of the Dodd-Frank Act, applies to current and former executive officers, and is triggered by any accounting restatement due to material non-compliance with financial reporting laws. The provision allows the SEC to pursue the recovery of incentive compensation greater than what would have been paid to the officer under the accounting restatement. The SEC first exercised this new clawback authority in July 2009 when it went after the former CEO of CSK Auto Corporation. The case, SEC v. Jenkins, settled for $2.8 million.

Lawyers for Slater expressed their regret at the SEC’s decision to clawback profits from the Saba executives, claiming that his lack of knowledge about the company’s misconduct, and the SEC’s failure to allege any wrongdoing on his part, made “the demand for disgorgement . . . unjust.” But the SEC doesn’t see it that way, stating that even the innocent executive has “an obligation to return their bonuses and stock sale profits to the company for the benefit of the shareholders who were misled.”