When Congress passed the Sarbanes-Oxley Act of 2002 (SOX), it included a clawback tool. Flowing out of the accounting scandals that led to SOX's creation, Section 304 provides that if a public company has to restate its financials as a result of misconduct, the company's CEO and CFO must reimburse the company for any incentive-based compensation or trading profits they made during the 12-month period in question.
Many public companies have incorporated similar clawback provisions into their bylaws--which may be one reason Section 304 gets little use. Still, in an October 2010 speech, SEC Commissioner Luis Aguilar called the SEC's historical failure to invoke the provision a "clear example where the Commission ignored a Congressional mandate set forth in Sarbanes-Oxley." Aguilar went on to outline the importance of Section 304 as an incentive for CEOs and CFOs "to be diligent in establishing an honest culture of reporting and in choosing the right people to work for them."
In Cohen v. Viray, the 2nd Circuit rejected the proposed settlement of a consolidated shareholder derivative action filed against former directors and officers of DHB Industries, since renamed Point Blank Solutions. The body armor company saw its stock price plummet following news its products were made of a material prone to rapid deterioration, which led to civil, SEC and DOJ actions. (In September, in the Eastern District of New York, the company's former CEO and COO were convicted of fraud, insider trading and obstructing an SEC investigation.)