Team R5

No. 17-132

__________________________

IN THE SUPREME COURT OF THE UNITED STATES

__________________________

BRIAN BOSCO; JASMINE LEE; RONALD PRINCE

V.

SECURITIES AND EXCHANGE COMMISSION

__________________________

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FOURTEENTH CIRCUIT

__________________________

BREIF FOR THE RESPONDENT

__________________________

Team R5

Counsel of Record for Respondent

Team R5

i

TABLE OF CONTENTS

TABLE OF CONTENTS………………………………………………………………………i

TABLE OF AUTHORITIES…………………………………………………………………iii

QUESTIONS PRESENTED………………………………………………………………….vi

STATEMENT OF THE CASE………………………………………………………………..1

STATEMENT OF THE FACTS………………………………………………………………2

SUMMARY OF THE ARGUMENT………………………………………………………….5

ARGUMENT…………………………………………………………………………………….7

I. ACTUAL KNOWLEDGE OF AN UNTRUE STATEMENT OF FACT CONTAINED IN A REPORT IS NOT REQUIRED TO SUSTAIN A CAUSE OF ACTION AGAINST A CEO OR CFO WHO CERTIFIES A FALSE FINANCIAL REPORT UNDER RULE 13A-14……………………………………7

A. Where an officer has knowledge that calls into question the fairness of

the financial condition or operational results presented in a statement, actual knowledge of a falsity is not required…………………7

B. Where an officer has knowledge that illustrates unaddressed

deficiencies in the internal compliance controls these officers must set and administer, actual knowledge of a false statement is not required……………………………………………………………………………..9

C. There is no scienter requirement for liability of false certifications

under Rule 13a-14……………………………………………………………...11

D. The legislative history, intent, and purpose of SOX support the imposition of liability for false certifications under Rule 13a-14 sans actual knowledge of falsity…………………………………………………….12

II. THE DISGORGEMENT REMEDY AUTHORIZED BY SOX 304 DOES NOT

REQUIRE PERSONAL MISCONDUCT ON THE PART OF THE CHIEF EXECUTIVE OFFICER OR CHIEF FINANCIAL OFFICER…………………..13

A. The statutory language of SOX 304 contains no requirement of

personal wrongdoing by the CEO or CFO………………………………….13

Team R5

ii

B. The legislative intent, history, and purpose of SOX 304 and the overall statutory scheme support the imposition of liability without personal misconduct by certifying officers…………………………………………….14

III. THE FIVE-YEAR STATUTE OF LIMITATIONS IN 28 U.S.C. §2462 DOES

NOT APPLY TO DISGORGEMENT CLAIMS............................................18

A. Disgorgement is not a civil penalty, forfeiture, or fine for the purposes of §2462……………………………………………………………………………18

B. The disgorgement order against Mr. Prince does not act as a civil

penalty, fine, or forfeiture……………………………………………………..24

C. There are strong policy considerations for construing 28 U.S.C. §2462 not to include disgorgement………………………………………………….25

CONCLUSION………………………………………………………………………………27

Team R5

iii

TABLE OF AUTHORITIES

Cases

Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)………………….........……....8

Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663 (1974)…………..…..23

E.I. Du Pont De Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924)……………..25

In re Am. Int'l Group, Inc., 965 A.2d 763, 802, 823 (Del.Ch. 2009)………….…..13

In Re Wsf Corp., Release No. 204 (May 8, 2002)……………………………………11

Johnson v. S.E.C., 87 F.3d 484, 488 (D.C. Cir. 1996)…………………….19, 21, 24

King v. Burwell, 135 S. Ct. 2480, 2483, 192 L. Ed. 2d 483 (2015)……………...13

Meeker v. Lehigh Valley R.R. Co., 236 U.S. 412, 243 (1915)………………………18

Ponce v. S.E.C., 345 F.3d 722, 728 (9th Cir. 2003)……………………………….…12

S.E.C. v. Baker, No. A-12-CA-285-SS, 2012 WL 5499497, at *6 (W.D. Tex. Nov.

13, 2012)………………………………………………………………………………………17

S.E.C. v. Bartek, 484 F. App'x 949 (5th Cir.2012)…………………………………...16

S.E.C. v. Bilzerian, 29 F.3d 699, 696 (D.C. Cir. 1994)………………………...19, 24

S.E.C. v. Cavanagh, 445 F.3d 105, 116 (2d Cir. 2006)……………………………..19

S.E.C. v. Colello, 139 F.3d 674, 676 (9th Cir. 1998)…………………………………16

S.E.C. v. Commonwealth Chem. Sec., 574 F.2d 90, 95 (1978)….…………….…19

S.E.C. v. Contorinis, 743 F.3d 296 (2nd Cir. 2014)……………………………..21, 24

S.E.C. v. DiBella, 409 F. Supp. 2d 122, 130 (D. Conn. 2006)…………………….16

S.E.C. v. e-Smart Techs., Inc., 82 F. Supp. 3d 97, 113 (D.D.C. 2015), appeal

dismissed (Oct. 27, 2015)……………………………………………………………..…..10

S.E.C. v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989)…18, 21, 22

Team R5

iv

S.E.C. v. Graham, 823 F.3d 1357 (11th Cir. 2016)………………………..21, 22, 23

S.E.C. v. Jenkins, 718 F. Supp. 2d 1070, 1077 (D. Ariz. 2010)…………………..12

S.E.C. v. Jensen 835 F.3d 1100, 1113 (9th Cir. 2016)…………………………..7,14

S.E.C. v. Kokesh, 834 F.3d 1158, 1166 ……………………………18, 21, 22, 23, 26

S.E.C. v. Life Partners Holdings, Inc., 71 F.Supp.3d 615, 618, 625 (W.D. Tex.

2014)………………………………………………………………………………………14, 17

S.E.C. v. Microtune, Inc., 783 F. Supp. 2d 867, 886–87 (N.D. Tex. 2011)….......16

S.E.C. v. Platforms Wireless Int’l Corp. 617 F.3d 1072, 1098 (9th Cir.

2010)…………………………………………………………………………………………...24

S.E.C. v. Texas Gulf Sulphur Co., 446 F.2d 1301 (2d Cir.1971)…………………..16

S.E.C. v. Wyly, 860 F.Supp.2d 275, 279 (S.D.N.Y 2012)………………………..…20

Riordan v. S.E.C., 627 F.3d 1230, 1234 (D.C. Cir. 2010)…………………….……18

Udall v. Tallman, 380 U.S. 1, 16 (1965)………………………………………………..12

United States v. Telluride Co., 146 F.3d 1241, 1246 (10th Cir. 1998)……….….20

Zacharias v. S.E.C., 569 F.3d 458 (D.C. Cir. 2009)…………………………….19, 24

Statutes

15 U.S.C. § 7241 (2016)…………………………………………………………….7, 9, 10

15 U.S.C. § 7243…………………………………………………………………………….15

15 U.S.C. § 78u(d)(1)……………………………………………………………………….14

15 U.S.C. § 7202(b)(1)……………………………………………………………………...14

18 U.S.C. § 1350…………………………………………………………………………….12

28 U.S.C. §2462…………………………………………………………………………..…18

Team R5

v

Other Authorities

Arnold & Porter Legislative History: Sarbanes–Oxley Act of 2002, P.L. 107–204,

116 Stat. 745, History 40–C,2002 WL 32054475 (July 10, 2002)……………….15

H.R. Rep. No. 107–414, at 12 (2002); S. 2673, 107th Cong. § 304 (2002)…….15

Restatement (Third) of Restitution and Unjust Enrichment § 51(4) (Am. Law.

Inst. 2010)…………………………………………………………………………………….19

S. Rep. No. 107-205 at 26, 2002 WL 1443523 (July 3, 2002)……………………16

Regulations

17 C.F.R. § 240.10b–5……………………………………………………………………..12

17 C.F.R. § 240.13a-14……………………………………………………………………...7

Team R5

vi

QUESTIONS PRESENTED

1. Whether a cause of action exists under rule 13a-14 against chief

executive officers and chief financial officers who certify false financial

statements without actual knowledge of an untrue statement within the

statement, and whether the reimbursement remedy authorized under

Section 304 for such certifications requires personal misconduct of the

certifying officers.

2. Whether the five-year statute of limitations authorized by 28 U.S.C.

§2462 applies to a disgorgement claim that acts only to remove illegally

obtained funds from an offender.

Team R5

1

STATEMENT OF THE CASE

On January 1, 2016, the Securities and Exchange Commission (“SEC”)

filed a civil action against Brian Bosco (“Bosco”), Jasmine Lee (“Lee”), and

Ronald Prince (“Prince”) in the United States District Court for the District of

Fordham (R. at 6). The SEC claimed that Prince had defrauded investors of

Burlingham, the petitioners’ company, in violation of Section 10(b) of the

Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §78j(b), and

Rule 10b-5 17, C.F.R. § 240.10b-5, and requested a disgorgement order for

gains acquired during the periods of January 2008 to January 2010 and

January 2014 to January 2015 (R. at 6). SEC also claimed that Bosco and Lee

certified false financial statements and that disgorgement was the appropriate

remedy under SOX 304 for the 10-K filing on January 1, 2015 (R. at 6).

In June 2016, Bosco and Lee filed a motion for summary judgment

under Rule 56 of the Federal Rules of Civil Procedure, and the SEC filed a

cross-motion for summary judgment against Bosco and Lee and

simultaneously filed a summary judgment against Prince (R. at 6). The District

Court denied Bosco and Lee’s motion and granted both of the SEC’s motions.

The Court ordered disgorgement orders of $600,000 for Bosco, $475,000 for

Lee, and $1,770,000 for Prince (R. at 7). All three petitioners filed a timely

appeal to the United States Court of Appeals for the Fourteenth Circuit. The

Court of Appeals affirmed all three of the decisions of the District Court (R. at

21). The Supreme Court of the United States granted the petitioners’ petition

for a writ of certiorari February 1, 2017.

Team R5

2

STATEMENT OF FACTS

Burlingham Inc. added smartphone microchips to their product lines in

2001. (R. at 1). This business was overseen by the Communications Division,

which was under the direct managerial responsibility of Ronald Prince, the

Executive Vice President as of 2002. (R. at 2). Smartphone microchips were the

company’s greatest generator of revenue and net income, contributing fifty-two

percent of the company’s net income in 2007, and garnering forty-two percent

market share. (R. at 2).

Burlingham’s atypical compensation system included a discretionary

component executives’ compensation, determined at the close of the fiscal year

based upon the company’s financial and operating results. (R. at 2). This

included the application, first on a consolidated basis and then to each

division, of a five-metric analysis of revenue, profit, market share, employee

retention, and acquired business integration. (R. at 2). For instance, in 2010 a

contract with a leading producer of computer tablets led to a $45,000 bonus

for each of Burlingham’s executive officers, including Prince. (R. at 3). Prince

complained to the only other executive manager of his division, Henrietta

Conrad, that his compensation was inadequate, and that his discretionary

component comprised seventy-five percent of his annual income. (R. at 2).

Prince was largely responsible for the smartphone business’ success, and

expansion into the market of Chinese manufacturers. (R. at 2). In January

2008 Prince began secretly offering two-year unilateral contract termination

rights to certain Chinese smartphone manufacturers, exercisable in the event

Team R5

3

of a projected decline of over two percent of the United Kingdom’s GDP. (R. at

3). Acting on behalf of the company, Prince was paid $25,000 at the signing of

each letter, with terms promising an additional $50,000 paid to Prince upon

exercising the termination. (R. at 3). Prince did not tell anyone about this or

make the letters available to Burlingham’s other officers, auditors or attorneys.

(R. at 3). Prince executed thirty such letters until pausing once “financially

comfortable” in February 2010, and all that had been issued at that point

ultimately expired before being exercised. (R. at 3).

Brian Bosco took over as Chief Executive Officer (“CEO”) of Burlingham

in 2011. (R. at 3). He quickly promoted Jasmine Lee to Chief Financial Officer

(“CFO”). (R. at 3). The two were hands-on in managing the finances of each

division, as well as the company’s financial architecture. (R. at 4). Lee and

Bosco maintained internal controls in compliance with the Sarbanes-Oxley Act

of 2002 (“SOX”) and signed Burlingham’s financial statements filed with the

Securities and Exchange Commission (“SEC”). (R. at 4).

Prince issued eleven new side letters to Chinese smartphone

manufacturers between January 2014 and January 2015. (R. at 4). Bosco,

Lee, and Prince attended a technology conference in October 2014 where a

major Japanese smartphone manufacturer approached Bosco and Lee

individually, seeking to amend his contract in light of rumored “deal

sweeteners” such as the termination rights. (R. at 4). Bosco and Lee found this

concerning, and decided they should look into the inquiries. (R. at 4). However,

they ultimately did not, despite being in attendance with Prince who had direct

Team R5

4

managerial control over the implicated division. (R. at 2, 4). In March 2015, the

UK’s GDP declined by over two percent, triggering the termination rights, which

five of the eleven purchasers attempted to exercise. (R. at 4-5). Bosco and Lee

acted to determine the validity of the rights, and their effect on Burlingham’s

financial condition. (R. at 5). A Special Committee of outside directors found it

to substantially affect the company’s statements, requiring reclassification of

income items related to the Chinese microchip contracts. (R. at 5).

Team R5

5

SUMMARY OF THE ARGUMENT

Actual knowledge of a falsity is not required for certifications in

violation of Rule 13a-14. The obligation of CEOs and CFOs to sign financial

reports under Rule 13a-14 pursuant to SOX 302 certifies to more than a lack

of false facts contained within. It also represents that based upon the officers’

knowledge, and in light of the circumstances, the report does not contain

material omissions or unfairly represent the financial or operational results of

the company. Violations are therefore possible without actual knowledge of a

falsity contained within.

Furthermore, the signatures reaffirm the responsibility of these officers

to design and implement internal controls which would bring to their attention

all material facts affecting such financial standing. This responsibility may

stand as its own violation of Rule 13a-14 certifications if the officers do not

know of an actual falsity, but know that their internal controls are insufficient

to bring material facts to the surface. Even potential weaknesses in such

controls, or fraud potentially relating to them is certified to be appropriately

reported or included in the statements.

This control-setting responsibility is enforced by the imposition of

liability for a false statement in absence of the officer’s actual knowledge of

falsity. It justifies the SEC’s interpretation of Rule 13a-14 as not requiring

scienter, which precludes an actual knowledge requirement, and is due

deference in judicial interpretation of their administrative guideline.

Team R5

6

SOX 304 imposes the reimbursement of certain CEO and CFO

income without a requirement of any personal misconduct by those

officers. As the enforcement mechanism of the responsibility for implementing

internal controls which these officer bear under SOX 302, the remedy under

SOX 304 is not concerned with personal wrongdoing. There is no statutory

support for inferring such a requirement, and the legislative intent and history

of SOX indicate a considered decision not to include one. While SOX was

enacted to tighten financial reporting and responsibility laws, and imposition of

liability for personal misconduct of officers predates its passage, such a reading

would render the statute redundant, and not fulfill its stated purpose.

The five-year statute of limitations in 28 U.S.C. §2462 does not

apply to disgorgement orders. The statute only encompasses remedies that

are punitive in nature, as evinced by the terms “civil penalty, fine, or

forfeiture.” Disgorgement, which serves only to remove the gains from which an

offender was unjustly enriched, is not a punitive remedy. Therefore, it cannot

be considered a civil penalty, fine, or forfeiture for the purpose of this statute.

Though it is possible to utilize disgorgement in a way that, against the true

nature of the remedy, serves to punish, that was not the case for the

disgorgement order against Prince. Disgorgement simply requires Prince to give

up the funds that he never would have acquired had he obeyed the law, it does

not make him worse off than he was before the scheme occurred. Furthermore,

precedent requires and policy favors that statutes such as these be construed

to the benefit of the government.

Team R5

7

ARGUMENT

I. ACTUAL KNOWLEDGE OF AN UNTRUE STATEMENT OF FACT CONTAINED IN A REPORT IS NOT REQUIRED TO SUSTAIN A CAUSE OF ACTION AGAINST A CEO OR CFO WHO CERTIFIES A FALSE FINANCIAL REPORT UNDER RULE 13A-14.

SOX 302 directed the SEC to enact rules to implement the various

requirements and responsibilities for corporations’ financial reports. 15 U.S.C.

§ 7241 (2016). This includes the required signatures of an issuer’s CEO and

CFO on such filings, and what those signatures certify or attest to. Id.

Pursuant to that law, the SEC promulgated Rule 13a applying the

requirements to various specific reports, with Rule 13a-14 capturing the 10-K

forms in the instant case. 17 C.F.R. § 240.13a-14.

A. Where an officer has knowledge that calls into question the fairness of the financial condition or operational results presented in a statement, actual knowledge of a falsity is not required.

The signed certifications required by the principal operational and financial

officer of a company, in compliance with Rule 13a-14, attests to more than a

lack of material statement actually known to be false contained within.

Certification of financial statements also attests that the officer knows of no

omitted material facts which would make the statement misleading. 15 U.S.C.

§ 7241(a)(2). It asserts that based upon the officer’s knowledge the statement

fairly presents, in all material respects, the financial condition and results of

operations of the issuer. Id. at § 7241(a)(3). As the court in S.E.C. v. Jensen

held, “[i]t is not enough for CEOs and CFOs to sign their names to a document

certifying that SEC filings include no material misstatements or omissions

without a sufficient basis to believe that the certification is accurate.” 835 F.3d

Team R5

8

1100, 1113 (9th Cir. 2016). The instant case illustrates the violation of these

representations without actual knowledge of falsity of information within a

filing.

To find that an omission or representation is material “there must be a

substantial likelihood that the disclosure of the omitted fact would have been

viewed by the reasonable investor as having significantly altered the total mix

of information made available.” Basic Inc. v. Levinson, 485 U.S. 224, 231–32,

108 S.Ct. 978, 99 L.Ed.2d 194 (1988). A smartphone manufacturer directly

approached both the CEO Bosco and CFO Lee attempting to renegotiate his

contract in light of rumored “deal sweeteners.” A single manufacturer

attempting to renegotiate contracts seeking improper “deal sweeteners” has

potential impacts on their continued business relationship, and thus the

company’s finances. The fact that this manufacturer “heard” about these extra-

contractual agreements implies that business effects extending beyond one

client, either by the existence of side contracts or the mere rumor. The

materiality of this particular of this occurrence is clear given that the

smartphone business division implicated plays an incredibly significant role in

Burlingham’s overall business and financial position. (R. at 2).

Furthermore, Burlingham’s unique financial structure, which the CEO and

CFO were intimately familiar with, amplifies the possible financial impacts of

this instances, to such an extent that any reasonable investor would view as

significant to the overall information available. The potential liability of an

unknown number and nature of unilateral termination rights existing in the

Team R5

9

company’s most important business division is clearly relevant to the

company’s financial and operational results. For instance, profits reported

would likely need to be reduced in accounting for the potential exercise of these

termination rights. The accuracy of market share might be altered if the rights

were key to securing any of the business relationships. Burlingham’s

discretionary compensation system applies those results on a consolidated and

then divisional basis in determining compensation paid to each manager. In

this way, the risk of potential termination rights effects the bulk of

compensation paid to every Burlingham manager, creating an unavoidable

impact on financial standing. The consequences continue spiraling when one

considers that inflated managerial pay’s impact on employee retention, another

of the factors in determining compensation.

We respectfully argue that this Court has adequate basis to find that that as

a matter of law, Bosco and Lee made a false certification by the omission of a

material fact, and a material misrepresentation of the financial position based

upon their knowledge in the circumstances. In this way, without the actual

knowledge of a falsity contained within a statement, the certification violated

Rule 13a-14.

B. Where an officer has knowledge that illustrates unaddressed deficiencies in the internal compliance controls these officers must set and administer, actual knowledge of a false statement is not required.

Officers’ signatures on a financial statement also reaffirm their

responsibility for designing and maintaining internal controls that ensure all

material information is known to them, and indicates the officers have recently

Team R5

10

evaluated the effectiveness of such controls. 15 U.S.C. § 7241(a)(4). In S.E.C. v.

e-Smart Techs., Inc., the court stated that a CEO and CFO “bears special

responsibilities with respect to the company's internal controls” citing SOX 302

and Rule 13a-14, and failure of such responsibilities exists signing officer did

not “adopt policies and procedures to ensure that transactions were

appropriate and that improper or poorly documented transactions were quickly

remedied.” 82 F. Supp. 3d 97, 113 (D.D.C. 2015), appeal dismissed (Oct. 27,

2015). In that case, the finding of inadequate controls did not correspond with

the filings in which the officer certified such controls as adequate. Id. at 115.

However, in the instant case, Bosco and Lee recognized that “it would be good”

to look into the manufacturer’s query, but did not follow through in any

manner. Given that “deal-sweeteners” clearly carry a significant implication on

Burlingham’s financial and operational standing, this is a plain failure of the

officers’ responsibility for designing or maintaining controls. In this way, while

avoiding actual knowledge of a falsity within the statement itself, yet still made

a certification in violation of Rule 13a-14, after this deficiency was known to

them.

We do not ask this Court to hold that every discrepancy unknown to

signing officers automatically constitutes a violation based upon their control

responsibilities. Resolution of the instant case only requires finding a violation

on this basis where such compliance controls fall grossly short of their

purpose, if such controls can be said to exist at all. Despite agreeing that the

inquiry had worrisome implications, no action was taken by the two officers

Team R5

11

responsible for the financial reports of the company. Neither officer raised the

issue to the vice president with direct managerial control of the relevant

division, Prince, despite his presence at the conference at which the side

contracts were brought to the officers’ attention.1 (R. at 4).

An officer’s certification also indicates that they have disclosed to auditors

any known deficiencies or weaknesses in their compliance controls, fraud

relating to them, and have indicated in the report any factors significantly

affecting such controls in the report. 15 U.S.C. § 7241(a)(5). Uninvestigated

rumors of “deal sweeteners” seem directly in-line with the type of flawed

controls this requirement attempts to capture. No auditors were notified, and

the rumor is not reflected in the statements in any way.

C. There is no scienter requirement for liability of false certifications under Rule 13a-14.

The SEC has explicitly stated that Section 1(a), under which Rule 13a-14 is

promulgated, do not include an element of scienter. In Re Wsf Corp., Release

No. 204 (May 8, 2002) (“ Violations of Exchange Act Section 13(a) do not

require a finding of scienter.”). The interpretation of the agency tasked with

enforcing an administrative regulation is entitled to great deference from the

court. Udall v. Tallman, 380 U.S. 1, 16 (1965); Ponce v. S.E.C., 345 F.3d 722,

1 Though the lack of investigation into this rumor may be argued to constitute officer misconduct, and thus issuer misconduct, we believe such a finding to be unnecessary to trigger SOX 304, in light of the conceded misconduct of another Burlingham officer, Prince, as discussed in Section II infra.

Team R5

12

728 (9th Cir. 2003)(“[W]e give deference to an agency's construction of its own

regulations unless the interpretation is “unreasonable” or “plainly erroneous.”).

We respectfully argue that the SEC’s interpretation of a lack of requisite

scienter, which precludes a requirement for actual knowledge, deserves such

deference. The officers’ responsibility for compliance controls that would bring

all material financial information to their attention justifies the imposition of

liability when false statements result from such controls’ failure to do so.

Additionally, the SEC has the authority to exempt any individual from

reimbursement under SOX 304, which is the enforcement mechanism for Rule

13a-14 violations. 15 U.S.C. 7243(b).

D. The legislative history, intent, and purpose of SOX support the imposition of liability for false certifications under Rule 13a-14 sans actual knowledge of falsity.

Sarbanes-Oxley was enacted to tighten regulations in response to high-

profile securities fraud scandals. See Free Enter. Fund v. Pub. Co. Accounting

Oversight Bd., 561 U.S. 477, 484 (2010). Laws punishing the certification of a

known falsity by CEOs and CFOs exist independently of Rule 13a-14. See, e.g.,

15 U.S.C. 78u(d), 18 U.S.C. § 1350; 17 C.F.R. § 240.10b–5. Therefore, limiting

liability to such circumstances would not fulfill the statutory purpose, as well

as render liability for Rule 13(a)-14 infractions redundant. See S.E.C. v.

Jenkins, 718 F. Supp. 2d 1070, 1077 (D. Ariz. 2010).

Team R5

13

II. THE DISGORGEMENT REMEDY AUTHORIZED BY SOX 304 DOES NOT REQUIRE PERSONAL MISCONDUCT ON THE PART OF THE CHIEF EXECUTIVE OFFICER OR CHIEF FINANCIAL OFFICER.

The fundamental canon of statutory interpretation requires a reading which

plain and natural in context of the statutory scheme in which words appear.

King v. Burwell, 135 S. Ct. 2480, 2483, 192 L. Ed. 2d 483 (2015). If ambiguity

is present, statutory construction should be that which is permissible and

compatible with the rest of the law. Id.

A. The statutory language of SOX 304 contains no requirement of personal wrongdoing by the CEO or CFO.

The language of SOX 304 imposes the officers’ disgorgement when a

restatement is required “due to the material noncompliance of the issuer, as a

result of misconduct, with any financial reporting requirement under the

securities laws.” 15 U.S.C. § 7243(a) (2016). This plainly does not require the

misconduct to be on the part of these officers. A natural reading of the text

indicates that the misconduct be on the part of the issuer, in the instant case,

Burlingham. See S.E.C. v. Jenkins, 718 F. Supp. 2d 1070, 1074-75 (D. Ariz.

2010). A corporation acts through its officers and other agents, and is generally

liable for misconduct perpetrated in the scope of their employment. In re Am.

Int'l Group, Inc., 965 A.2d 763, 802, 823 (Del.Ch.2009). This interpretation was

endorsed in S.E.C. v. Jensen, holding that misconduct of any employee or

officer acting within the course and scope of their agency which results in

issuer non-compliance is sufficient for imposing SOX 304 liability on the

certifying officers. 835 F.3d 1100, 1123 (9th Cir. 2016). Under this reading,

Team R5

14

misconduct of the certifying officer is sufficient but not necessary to find

requisite issuer misconduct. Id.

In the absence of any language indicating a need for the officers’ personal

misconduct, the remaining alternative reading of the statute’s language would

impose liability for issuer non-compliance caused by any misconduct, even if

perpetrated by someone wholly unrelated to the issuer. This seems to be a less

natural and functional interpretation, as it presents an intrinsic trouble of

defining “misconduct” by an infinite universe of potential actors. For instance,

the theoretical actor was an individual not subject to securities laws, the

standard to apply to their “conduct” is a mystery. Moreover, no lower court has

utilized such a standard, and it has been implicitly rejected in the discussions

illustrating examples of potentially actionable issuer misconduct. See, e.g.,

S.E.C. v. Life Partners Holdings, Inc., 71 F.Supp.3d 615, 618, 625 (W.D. Tex.

2014). However, assuming this is the proper reading arguendo, it is still

reconcilable with the corporate responsibility goals SOX. Only the SEC can

bring claims under SOX 304. see 15 U.S.C. §§ 78u(d)(1), 7202(b)(1). SOX 304

also affords the SEC the authority to exempt any persons from reimbursement.

Id. § 7243(b). If the statute is read to reach the misconduct of non-issuers, this

discretion in enforcement could safeguard against outcomes which would be

unjust or illogical to the legislative intent of SOX.

While the “issuer misconduct” reading appears far stronger than the

potential “any misconduct” reading, both are permissible when given context.

Therefore, there is no occasion for which this court should find the need to

Team R5

15

impute a requirement of officer misconduct which is untethered to the

statutory language.

B. The legislative intent, history, and purpose of SOX 304 and the overall statutory scheme support the imposition of liability without personal misconduct by certifying officers.

The version of Sarbanes-Oxley proposed by the House of Representatives

included an explicit personal misconduct element for CEO and CFO liability for

false certifications, which was absent from the Senate version that did become

law. Compare H.R. Rep. No. 107–414, at 12 (2002); S. 2673, 107th Cong. § 304

(2002), and 15 U.S.C. § 7243. An amendment adding an analysis of officer

scienter of falsity, which would constitute personal misconduct, was

considered and never acted upon by Congress. See Arnold & Porter Legislative

History: Sarbanes–Oxley Act of 2002, P.L. 107–204, 116 Stat. 745, History 40–

C,2002 WL 32054475 (July 10, 2002). We respectively argue that this Court

should not infer such an element of where Congress has unambiguously and

repeatedly declined to do so.

i. The reimbursement remedy of SOX 304 does not punish the misconduct leading to non-compliance.

The language of SOX 304 provides for the “reimbursement” to the issuer

of certain additional types of compensation received by the CEO and CFO in

the twelve months preceding the issuance of a materially non-complying

financial statement. 15 U.S.C. § 7243(a). There are some judicial

characterizations, including the holding of the lower court in this case, of this

provision as a “disgorgement remedy.” (R. at 1, 6). Here we do not broach

discussion of the potential implications of this differing language. Looking to

Team R5

16

the precise statutory phrasing, there is no required officer connection to

misconduct, nor implication of an intent to punish misconduct.

Instead, the Senate report on this provision contains clear indications that the

goal of SOX 304 is to prevent “management benefitting from unsound financial

statements.” S. Rep. No. 107-205 at 26, 2002 WL 1443523 (July 3, 2002). The

remedy was also intended to broaden relief beyond pre-existing laws for

disgorging profits “as a result of the violation” to what is necessary for

mitigating harm suffered by investors. Id. at 27. It is not a novel proposition

that courts may do so in the absence of personal wrongdoing. “[A]mple

authority supports the proposition that the broad equitable powers of the

federal courts can be employed to recover ill-gotten gains for the benefit of the

victims of wrongdoing, whether held by the original wrongdoer or by one who

has received the proceeds after the wrong.” S.E.C. v. Colello, 139 F.3d 674, 676

(9th Cir. 1998); but see S.E.C. v. Microtune, Inc., 783 F. Supp. 2d 867, 886–87

(N.D. Tex. 2011), aff'd sub nom. S.E.C. v. Bartek, 484 F. App'x 949 (5th Cir.

2012) (finding that “Section 304 contains no personal wrongdoing element…

Section 304 does not require that the officer's gains be “ill-gotten”).

Furthermore, disgorgement of an officer’s profits stemming from his own

wrongdoing predates the passage of SOX. See, e.g., S.E.C. v. DiBella, 409 F.

Supp. 2d 122, 130 (D. Conn. 2006); S.E.C. v. Texas Gulf Sulphur Co., 446 F.2d

1301 (2d Cir.1971). To limit SOX 304 reimbursement to instances of personal

misconduct would thus be to choose an interpretation rendering SOX 304

redundant and ineffectual to its legislative purpose of strengthening securities

Team R5

17

laws. See Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477,

484 (2010).

ii. Imposing liability upon the CEO and CFO for the issuer’s non-compliance due to issuer misconduct enforces officers’ duty to maintain internal controls for compliance with securities laws.

The duty imposed upon corporate officers to establish and maintain controls

ensuring compliance with securities laws is enforced by the SOX 304

reimbursement provision. See S.E.C. v. Life Partners Holdings, Inc., 71 F. Supp.

3d 615, 625 (W.D. Tex. 2014) (describing SOX 304 as an enforcement tool for

“important disclosure and control-related duties” of the corporate officers).

Such a duty is meaningless without an enforcement mechanism. While failure

to reasonably enact such internal controls may itself rise officer and thus

issuer “misconduct,” we do not believe such cyclical reasoning necessary given

the purpose and architecture of the SOX. Lower courts have recognized the

interaction between officer SOX 302 control duties and the SOX 304 remedy as

a considered element of the statutory scheme, justifying the lack of a personal

misconduct element. See S.E.C. v. Baker, No. A-12-CA-285-SS, 2012 WL

5499497, at *6 (W.D. Tex. Nov. 13, 2012) ( “The absence of any requirement of

personal misconduct is in furtherance of that purpose: it ensures corporate

officers cannot simply keep their own hands clean, but must instead be vigilant

in ensuring there are adequate controls to prevent misdeeds by underlings.”).

Team R5

18

III. THE COURT OF APPEALS WAS CORRECT IN HOLDING THAT THE FIVE-YEAR STATUTE OF LIMITATIONS IN 28 U.S.C. §2462 DOES NOT APPLY TO SEC DISGORGEMENT CLAIMS.

The five-year limitation in 28 U.S.C. §2462 applies to “any civil fine,

penalty, or forfeiture, pecuniary or otherwise” that the government seeks to

bring against a defendant. Mr. Prince asserts that the statute of limitations

applies to the disgorgement order in his case. The Court of Appeals was correct

in holding that it does not. Disgorgement by definition is not a civil penalty,

forfeiture, or fine for the purposes of §2462, nor was it applied in such a

manner in this case. Additionally, statutes of limitations sought to be imposed

against the government, such as §2462, are to be interpreted in favor of the

government because of the strong public policy considerations. Those

considerations, such as deterring securities violations, are present here, and

should way in favor of the government.

A. Disgorgement is not a civil penalty, forfeiture, or fine for the purposes of §2462.

As the Circuit Court opinions correctly stated, Congress intended for §2462

to apply to actions that are punitive. See S.E.C. v. Kokesh, 834 F.3d 1158, 1166

(both fine and penalty are punitive, forfeiture should be read alongside them to

infer that it is also punitive); (R. at 20, 23); see also Meeker v. Lehigh Valley

R.R. Co., 236 U.S. 412, 243 (1915). Disgorgement is not punitive and cannot be

considered a fine, penalty, or forfeiture for the purposes of §2462. Riordan v.

S.E.C., 627 F.3d 1230, 1234 (D.C. Cir. 2010).

Team R5

19

i. Disgorgement by definition is not punishment.

Disgorgement in its proper form is not punishment. S.E.C. v. Kokesh, 834

F.3d 1158, 1164 (10th Cir. 2016); see also S.E.C. v. First City Fin. Corp., 890

F.2d 1215, 1231 (D.C. Cir. 1989) (“The remedy may well be a key to the SEC’s

efforts… but disgorgement may not be used punitively.”); Restatement (Third)

of Restitution and Unjust Enrichment § 51(4) (Am. Law. Inst. 2010) (The

purpose of disgorgement is to “eliminate profit from wrongdoing while avoiding,

so far as possible, the imposition of penalty.”) (emphasis added). Indeed,

disgorgement has traditionally been viewed as an equitable remedy and not

punitive one. See S.E.C. v. Commonwealth Chem. Sec., 574 F.2d 90, 95 (1978)

(disgorgement of profits is an equitable remedy that prevents unjust

enrichment); S.E.C. v. Bilzerian, 29 F.3d 699, 696 (D.C. Cir. 1994) (holding that

the disgorgement order was “remedial in nature” and thus did not constitute

punishment or subject the defendant to double jeopardy).

What distinguishes disgorgement from punishment is the substantive

difference between remedying a situation back to its original state, and

penalizing an individual beyond their original state. In a disgorgement order,

there is a direct relationship between the amount disgorged and the amount

illegally obtained, which it does not exceed. S.E.C. v. Cavanagh, 445 F.3d 105,

116 (2d Cir. 2006). The end result is that the defendant is returned to the

status quo ante, they are deprived of the profits they never would have gotten

had they obeyed the law. Zacharias v. S.E.C., 569 F.3d 458 (D.C. Cir. 2009).

Team R5

20

The aim of punishment, however, is not to return the wrongdoer to their

original state. On the contrary, in order to give effect to their purpose,

punishments must do more. See Johnson v. S.E.C., 87 F.3d 484, 488 (D.C. Cir.

1996) (the court defined the term penalty as used in §2462 as “a form of

punishment imposed by the government…which goes beyond remedying the

damage caused to the harmed parties by the defendant’s action.”); United

States v. Telluride Co., 146 F.3d 1241, 1246 (10th Cir. 1998) (“we interpret

penalty for the purposes of §2462 as a sanction or punishment imposed for

violating a public law which goes beyond compensation for the injury caused

by the defendant”).

Furthermore, punishment and disgorgement are distinct because the

former is defendant focused, whereas the latter is victim or injury focused. In

other words, disgorgement is not about guilt or innocence. In S.E.C. v. Wyly,

860 F.Supp.2d 275, 279 (S.D.N.Y 2012), the court kept a disgorgement order

intact even though the offender was deceased, so that it would apply to his

estate. The court reasoned that disgorgement was not a penalty but instead a

way to “restore the defendant, or his estate, to the position he or it would have

been absent any wrongdoing.” Id., at 283. In that case, it did not matter that

the guilty party had deceased, or that the party subject to disgorgement was

innocent, because the purpose was to prevent a wrongdoer or “an innocent

party” from “keeping ill-gotten gains.” Id., at 279. While the government does

not advance to punish people who are innocent, the government does not let

them keep money that was illegally obtained. Disgorgement, unlike

Team R5

21

punishment, is often applied so as to affect individuals who were not involved

in the wrongdoing. See S.E.C. v. Contorinis, 743 F.3d 296 (2nd Cir. 2014).

ii. The potential to use disgorgement punitively or otherwise as a deterrent does not make it a punitive remedy.

The mere capacity to use disgorgement in a way that is punitive does not

make it a punitive remedy. Almost every form of relief, including those that

undoubtedly are not punitive, can be ordered in a way that acts as a

punishment for the offender. Injunctions, for example, are generally not

regarded as penalties, see S.E.C. v. Graham, 823 F.3d 1357 (11th Cir. 2016)

(finding that injunctions are not penalties within the meaning of §2462), but

have in rare cases been used in a punitive manner. In Johnson, the court

determined that an SEC injunction in the form of a suspension effectively acted

as a penalty under §2462. Johnson, 87 F.3d at 488. But the court in Kokesh

commenting on the injunction Johnson, explained that there is a “qualitative

difference between a disciplinary suspension and being ordered to comply with

the law”. Kokesh, 834 F.3d, at 1163. They then held that the injunction in

their case was not punitive like the one in Johnson, reasoning that injunctions

as they are properly used are not penalties. See id., at 1162 (“we fail to see how

an order to obey the law is a penalty”). Ultimately, the SEC injunction order in

Johnson was a rare case where a non-punitive remedy was used as a

punishment, but that does not make injunctions a punishment in general.

Likewise, the potential to use disgorgement as punishment, for example by

disgorging in heavy excess of the amount illegally obtained, does not make

Team R5

22

disgorgement a punishment and in fact runs contrary to the ordinary

constitution of the remedy. See Bilzerian, 29 F.3d at 696 (the defendant did not

present the rare case where disgorgement is extremely disproportionate to the

amount of illicit gains and thus it was not punishment.)

Furthermore, while disgorgement and punishment both serve deterrent

functions, that does not mean that disgorgement is punitive. Disgorgement can

serve a deterrent function without being punitive. In First City Financial Corp.,

the court held that disgorgement “may well be a key to the SEC’s efforts to

deter others from violating securities laws, but disgorgement may not be used

punitively.” First City Financial Corp., 890 F.2d, at 1231. Moreover,

disgorgement can be considered a deterrent to the extent that it sends a

message to potential offenders that their endeavors will not be fruitful and thus

their effort might be better spent elsewhere, but it does not deter with the force

or determination of punishment. See Kokesh, 834 F.3d, at 1164 (“disgorgement

serves a deterrent purpose, but it does so only by depriving the wrongdoer of

the benefits of wrongdoing”). Finally, there are other non-punitive remedies

that can serve a deterrent purpose as well. See Graham, 823 F.3d at 1361

(injunctions are forward looking and prevent future violations). .

iii. Disgorgement is not civil forfeiture for the purposes of §2462.

It is necessary to address in greater depth that disgorgement is different

than civil forfeiture in light of the circuit split on the issue created by Graham

and Kokesh. See Kokesh, 834 F.3d at 1165. The distinction between

Team R5

23

disgorgement and the other two remedies in §2462, penalty and fine, has not

been as contentiously debated. See Graham, 823 F.3d at 1363 (only arguing

that disgorgement is the same as forfeiture).

Disgorgement and forfeiture are distinct remedies with meaningful

differences. First, the traditional meaning of forfeiture is incompatible with that

of disgorgement. Forfeiture has typically been used to describe the government

seizing the assets of those involved in crimes or wrongdoing. Kokesh, 834 F.3d

at 1165-1166; Graham, 823 F.3d at 1363. Thus, there is a basic, bare-boned

similarity to disgorgement in that both remedies involve taking something

away. But, as the court explains in Kokesh, the key difference is that with

forfeiture, the amount or value taken away does not need to be equivalent to

the amount illegally acquired. Kokesh, 834 F.3d at 1166. Forfeiture, as it is

traditionally understood, is punitive. Id. The Court cites an example from

Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663, 94, S.Ct. 2080, 40

L.Ed.2d 452 (1974) of a yacht owner whose yacht is seized after authorities find

marijuana on board. Id. The yacht confiscation provides a perfect illustration

of how the causal relationship characteristic of disgorgement is not present in

cases of forfeiture. In the case of forfeiture, the man’s yacht is seized because

he used it as a part of wrongdoing. The result is that he is worse off than he

was before the wrongdoing, when he had a yacht. In the case of disgorgement

where he bought the yacht with ill-gotten funds, he would then lose the yacht

when those funds are disgorged, but he would be no worse off than he was

before the wrongdoing, when he did not have a yacht.

Team R5

24

Furthermore, since the forfeiture of the yacht is punishment and the

disgorgement of the funds used to buy it is not, the court in Kokesh was

correct in finding that §2462 refers to punitive forfeiture. See id. (“Congress

was contemplating the meaning of forfeiture in [the] historical sense” in drafting

§2462). Though one could interpret the definitions and of disgorgement and

forfeiture to overlap or appear similar, see Graham, 823 F.3d at 1363

(comparing the Black’s Law Dictionary definitions), for the purposes of §2462,

forfeiture is meant in the punitive sense, and disgorgement is not a synonym

for, nor a subset of, punitive forfeiture. Thus, the argument in Graham that

“disgorgement…can be considered a subset of forfeiture,” and, since “forfeiture

includes disgorgement, §2462 applies to disgorgement,” does not account for

the fact that §2462 is for punitive remedies. Id. at 1364. Disgorgement is not a

punishment, and thus cannot be considered forfeiture within the meaning of

§2462, as has been held by multiple other circuits. Kokesh, 834 F.3d at 1165.

B. In this case, the disgorgement order against Mr. Prince does not act as a civil penalty, fine, or forfeiture. A non-punitive remedy such as disgorgement, when used in an

anomalous way, could act as a punishment. See Bilzerian, 29 F.3d at 696

(finding that there could be a rare disgorgement case where amount disgorged

greatly exceeds wrongdoing); Johnson, 87 F.3d at 488 (finding that an SEC

injunction acted as a penalty). However, that is not the case here.

The disgorgement order is not punishing Prince, it is depriving him of the

money that he and his beneficiary never should have received in the first place.

Team R5

25

Had Prince refrained from committing fraud at his company, he would not be

in possession of the $1,520,000 he acquired through discretionary

compensation and execution of the side letters, nor would Conrad be in

possession of the $250,000 she received in bonuses during that time. (R. at 7).

The effect of the disgorgement order is to bring them back to the status quo

ante, not to punish him for a past wrong. See Zacharias, 569 F.3d at 471. If

Mr. Prince were deprived of more than he had wrongfully taken, then the

disgorgement order would be punitive, and he would fit the rare exception

noted in Bilzerian, 29 F.3d at 696. Furthermore, such a disproportion would

need to be vast to count as punishment. See Zacharias, 569 F.3d at 473

(“disgorgement need only be a reasonable approximation of the profits causally

connected to the violation”).

Finally, the fact that some of the money disgorged came from Conrad does

not make the disgorgement order punitive. Disgorgement acts to prevent

unjust enrichment. It does not matter whether the person in possession of

funds they should possess is innocent, they should not be allowed to keep

funds of which they were unjustly enriched. See Kokesh, 834 F.3d at 1164-

1165 (“there is nothing punitive about requiring a wrongdoer to pay for all of

the funds he caused to be improperly diverted to others as well as himself”);

S.E.C. v. Platforms Wireless Int’l Corp. 617 F.3d 1072, 1098 (9th Cir. 2010) (“a

person who controls the distribution of illegally obtained funds is liable for the

funds he or she dissipated as well as the funds he or she retained”). The policy

implications of a contrary holding are overt. See Contorinis, 743 F.3d at 304-

Team R5

26

307 (allowing third parties to benefit from illegal activity permits wrongdoers to

unjustly enrich their affiliates and possibly evade liability by operating through

third parties).

C. There are strong policy considerations for construing 28 U.S.C. §2462 not to include disgorgement.

28 U.S.C. §2462 should be interpreted in the government’s favor. The

courts have long held that statutes of limitation that affect the government’s

ability to protect the public should be construed in favor of the government.

See E.I. Du Pont De Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924) (“statutes

of limitation sought to be applied to bar rights of the government, must receive

strict construction in favor of the government”). In particular, the courts have

upheld this principle as applied to 28 U.S.C. §2462. See Telluride Co., 146

F.3d; see also Kokesh, 834 F.3d, at 1162. Here too, the courts should interpret

§2462 in the government’s favor in considerations of “public policy”. Id.

Permitting disgorgement past the five-year period does not offend the purpose

of the statute, and prohibiting disgorgement sets a dangerous precedent.

In Gabelli v. S.E.C., 133 S.Ct. 1216, 1223 (2013), the Supreme Court

cited Chief Justice John Marshall’s long accepted principle that “it would be

utterly repugnant to the genius of our laws if action for penalties could be

brought at any distance of time.” (internal quotation marks omitted). Allowing

disgorgement after the five-year statute of limitations, however, does not offend

this principle because disgorgement is not an action for penalty. The purpose

for §2462 is that the citizens will not indefinitely be in reach of the

Team R5

27

government’s great hand, but surely this does not mean that a wrongdoer can

forever keep what he has stolen, so long as makes it past the five-year finish

line undetected. Disgorgement simply removes the funds that they never

should have obtained. Removing those funds, regardless of how long after they

were obtained, would never amount to punishment. As the Court in Kokesh

explained, “we fail to see how an order to obey the law is a penalty.” Kokesh,

834 F.3d at 1162. While there is sound reasoning behind immunizing citizens

from punishment after enough time has elapsed, the reasoning does not extend

to immunizing them from disgorgement or restitution for unjust enrichment.

CONCLUSION

For the reasons stated, the Respondent respectfully request that this

Court uphold the decisions of the United States Court of Appeals for the

Fourteenth Circuit and affirm that a cause of action exists when CEOs and

CFOs certify false financial statements, even where they do not have actual

knowledge of the falsity, and that personal misconduct is not required to

trigger a disgorgement remedy authorized by SOX 304.

The Respondent also requests that this Court uphold the decision of the

Court of Appeals in finding that disgorgement is not barred by the five-year

statute of limitations in 28 U.S.C. §2462 because it is not a punitive remedy in

general or as ordered.

Respectfully Submitted

_______________/s/

Team R5

28

Team R5

Counsel of Record for Respondent