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Team P4
BRIAN BOSCO, et al.,
Petitioners,
v.
SECURITIES AND EXCHANGE COMMISSION,
Respondent.
On Writ of Certiorari To The
United States Court Of Appeals For The Fourteenth Circuit
BRIEF OF PETITIONERS
Counsel for Petitioners
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QUESTIONS PRESENTED
1. Whether SOX 302, promulgated as Rule 13a–14, provides the Securities and Exchange Commission with a cause of action against officers who had no knowledge of inaccuracies in the statements which they certified.
2. Whether the disgorgement remedy of SOX 304 requires personal misconduct by the chief executive officer and chief financial officer.
3. Whether the statute of limitations of 28 U.S.C. § 2642 applies to actions for disgorgement.
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TABLE OF CONTENTS
QUESTIONS PRESENTED ...................................................................................................................... i
TABLE OF CONTENTS ........................................................................................................................... ii
TABLE OF AUTHORITIES .................................................................................................................... iv
INTRODUCTION ...................................................................................................................................... 1
STATEMENT OF THE CASE ................................................................................................................. 2
SUMMARY OF ARGUMENT ................................................................................................................. 8
ARGUMENT ............................................................................................................................................... 9
I. THE SEC HAS NO CAUSE OF ACTION AGAINST BOSCO AND LEE ......................... 9
A. SOX 302 Contains a Scienter Element for CEOs and CFOs ................................... 9
B. Rule 13a–14 Cannot Contradict or Exceed SOX 302’s Scienter Requirement ................................................................................................................................................. 11
1. The proper interpretation of Rule 13a–14 contains a scienter element ........................................................................................................................................ 11
2. If Rule 13a–14 does not contain a scienter requirement, then it impermissibly contradicts SOX 302 ................................................................. 14
C. Bosco and Lee Did Not Violate SOX 302 Because They Had No Knowledge of the Certifications’ Inaccuracies ............................................................................ 15
II. THE DISGORGEMENT REMEDY OF SOX 304 REQUIRES PERSONAL MISCONDUCT .......................................................................................................................... 16
A. Strict Liability Under SOX 304 Violates Congressional Intent and Due Process................................................................................................................................ 17
B. The Language of SOX Does Not Plainly Express Whose Conduct Must Cause an Accounting Restatement ....................................................................................... 18
C. Forcing Bosco and Lee to Disgorge Monies Because of Prince’s Misdeeds is Antithesis to the Very Purposes of Sarbanes-Oxley .......................................... 19
III. THE STATUTE OF LIMITATIONS UNDER 28 U.S.C. § 2462 APPLIES TO THE MONIES PRINCE WAS ORDERED TO DISGORGE ...................................................... 21
A. The “Disgorgement” in This Case Was a Forfeiture Time-Barred by § 2462
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............................................................................................................................................... 21
B. The “Disgorgement” in this Case Was Punitive in Nature................................. 25
1. The IRS recognizes that disgorgement can be Punitive ........................... 26
2. The tablet bonus was not causally related .................................................... 27
3. Conrad’s bonus was not causally related ....................................................... 28
C. The Lower Court’s Ruling Permits Improper Seizures by the SEC ................ 28
D. Leaving SEC Disgorgement Actions Untethered to a Statute of Limitations Is Violative of Congress’s Purpose ........................................................................... 29
CONCLUSION ......................................................................................................................................... 30
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TABLE OF AUTHORITIES
CASES
Adams v. Woods, 2 Cranch 336 (1805) ......................................................................................... 33
Cent. Laborers' Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546 (5th Cir. 2007). ..................................................................................................................................................... 11
Chase Bank USA, N.A. v. McCoy, 562 U.S. 195 (2011) ....................................................... 16
Chevron, USA, Inc. v. Natural Res. Def. Counsel, Inc., 467 U.S. 837 (1984) ......... 17
Clark v. Martinez, 543 U.S. 371 (2005) .......................................................................................... 19
Desert Palace, Inc. v. Costa, 539 U.S. 90 (2003) ............................................................... 11, 12
Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469 (1992) .................................. 11, 12
Fin. Planning Ass'n v. SEC, 375 U.S. App. D.C. 389 (2007) ............................................ 17
Gabelli v. SEC, 133 S. Ct. 1216 (2013) .......................................................................................... 33
Garfield v. NDC Health Corp., 466 F.3d 1255 (11th Cir. 2006) ..................................... 12
Gompers v. Buck’s Stove & Range Co, 221 U.S. 418 (1911) ............................................ 29
In re AFC Enters., 224 F.R.D. 515 (N.D. Ga. 2004)................................................................ 21
In re Diebold Derivative Litigation, 2008 U.S. Dist. LEXIS 15747 (N.D. Ohio Feb. 29, 2008) ........................................................................................................................................................ 25
Ind. Elec. Workers' Pension Tr. Fund Ibew v. Shaw Grp., Inc., 537 F.3d 527 (5th Cir. 2008) ....................................................................................................................................................... 12
Jones v. Alfred H. Mayer Co., 392 U.S. 409 (1968) ................................................................ 11
Levine v. Diamanthuset, Inc., 950 F.2d 1478 (9th Cir. 1991) ......................................... 15
Morissette v. United States, 342 U.S. 246 (1952) .................................................................... 20
Perrin v. United States, 444 U.S. 37 (1979) .......................................................................... 12, 27
Ponce v. SEC, 345 F.3d 722 (9th Cir. 2003) ............................................................................... 15
Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010) .............................................................. 28, 30
SEC v. Bardman, 2017 U.S. Dist. LEXIS 18108 (N.D. Cal. Feb. 8, 2017) ............. 25
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SEC v. Blatt, 583 F.2 1325 (5th Cir. 1978) ................................................................................. 31
SEC v. Fehn, 97 F.3d 1276 (9th Cir. 1996) ................................................................................. 15
SEC v. Graham, 823 F.3d 1357(11th Cir. 2016) .............................................................. 26, 28
SEC v. Jasper, 678 F.3d 116 (9th Cir. 2012) ............................................................................. 25
SEC v. Jensen, 835 F.3d 1100 (9th Cir. 2016) .................................................................. 11, 13
SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016)...................................................................... 30
SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301 (2d Cir. 1971) ....................................... 27
Sommers v. Lewis, 2009 U.S. Dist. LEXIS 29776 (D. Or. Apr. 8, 2009) ................. 25
United States v. Mead Corp., 533 U.S. 218 (2001) .......................................................... 16, 17
United States v. Nat’l Broiler Mktg. Ass’n, 436 U.S. 816 (1978) .................................... 26
United States v. Nat’l Broiler Mktg. Ass’n, 550 F.2d 1380 (5th Cir. 1977) ............. 26
United States v. U.S. Bypsum Co., 438 U.S. 422 (1978) ..................................................... 20
United States v. Ursery, 518 U.S. 267 (1996) ............................................................................ 26
Wilson v. Garcia, 471 U.S. 261 (1985) ............................................................................................ 33
Wood v. Carpenter, 101 U.S. 135 (1879) ....................................................................................... 33
Zacharias v. SEC, 569 F.3d 458 (D.C. Cir. 2009) ................................................................... 30
STATUTES
15 U.S.C. § 7243 ........................................................................................................................................... 26
15 U.S.C.S. § 7241(a) ................................................................................................................... 12, 16, 17
15 U.S.C. § 78r(a) .................................................................................................................................. 15, 16
15 U.S.C.S. § 78j ........................................................................................................................................... 15
15 U.S.C.S. § 78m ........................................................................................................................................ 15
15 U.S.C.S. § 78o .......................................................................................................................................... 15
28 U.S.C. § 2462 .................................................................................................................................. passim
5 U.S.C. § 706(2) ........................................................................................................................................... 16
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OTHER AUTHORITIES
148 CONG REC H 5462, 5463 (2002) ................................................................................................. 11
C.C.A. 2016-19-008, 2016 IRS CCA LEXIS 38 (May 6, 2016) ................................ 27, 28
Disgorgement, BLACK’S LAW DICTIONARY (10th ed. 2014) ...................................................... 25
Forfeiture, OXFORD ENGLISH DICTIONARY (2d ed. 1989) ........................................................... 25
Forfeiture, WEBSTER’S THIRD NEW INT’L DICTIONARY (2002) ................................................... 24
I.R.C § 162(f) ..................................................................................................................................................... 32
Release No. 8124, 2002 WL 31720215, at *9 (Aug. 28, 2002 ................................. 12, 14
RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 51(4) (Am. Law
Inst. 2010) ..................................................................................................................................................... 27
S. REP. NO. 107-146 (2002) ............................................................................................................. 19, 20
Urska Velikonja, Public Compensation for Private Harm: Evidence From the
SEC’s Fair Fund Distributions, 67 STAN. L. REV. 331 (2015) ........................................ 24
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INTRODUCTION
Petitioners are two officers and a former agent of Burlingham, Inc., a
publicly traded company. This action arose due to the misconduct of Petitioner
Prince, who engaged in side deals for years with Burlingham’s business
partners. When the United Kingdom’s GDP experienced a slight decline in
March 2015, the conditions of Prince’s agreements compromised the integrity
of Burlingham’s very financial state.
Petitioners do not contest the SEC’s authority to regulate securities and
exchanges; they only insist that the SEC do so properly. In this case, the SEC
has supplemented its ordinary regulatory actions with baseless strict liability,
excessive penalties, and abusive measures. If these actions go unchecked by
this Court, the SEC will have successfully monopolized the legislation,
interpretation, enforcement, and judicial review of its administrative actions.
This presents a terrifying risk for future abuse of power which goes far beyond
the damages suffered by these Petitioners.
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STATEMENT OF THE CASE
Burlingham, Inc., founded in 1981, is a publicly held microchip
manufacturer. (Tr. R. at 1.) The company’s Communications Division expanded
into the smartphone microchip market in 2001. (Tr. R. at 1–2.) The following
year, Petitioner Ronald Prince became Burlingham’s executive vice president
and the overseer of the Communications Division. (Tr. R. at 2.)
Under Prince’s direction, the new smartphone business quickly became
Burlingham’s most profitable. (Tr. R. at 2.) In 2007, it occupied a forty-two
percent market share and brought in fifty-two percent of the company’s net
income. (Tr. R. at 2.) Prince was largely responsible for this success. (Tr. R. at
2.) He also expanded the business into the Chinese market, where sales were
increasing to meet rising demand in the United Kingdom (“UK”). (Tr. R. at 2.)
Prince’s compensation was not significantly tied to the success of the
smartphone business. (Tr. R. at 2.) In fact, three quarters of his income were
attributable to a discretionary bonus. (Tr. R. at 2.) This bonus was determined
at the end of each fiscal year by the board’s Compensation Committee. (Tr. R.
at 2–3.) Both Prince and Henrietta Conrad, the Communications Division’s only
other executive manager, expressed dissatisfaction with this compensation
system. (Tr. R. at 2.)
Due to frustration with the “inadequate” system’s unpredictability, and
out of concern for his family’s financial stability, Prince began in 2008 to
modify certain terms in purchase agreements with select Chinese smartphone
manufacturers. (Tr. R. at 2–3.) All of Burlingham’s purchase agreements
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contained force majeure provisions regarding the condition of the UK’s
smartphone market, but Prince’s new “side letters” gave unilateral termination
rights to the corresponding purchasers. (Tr. R. at 3.) Specifically, the
purchasers were able to terminate their Burlingham contracts upon a projected
two-percent decline in the UK’s GDP. (Tr. R. at 3.) The termination rights
existed for two years after a side letter’s effective date. (Tr. R. at 3.) Prince
received $25,000 for each side letter and an additional $50,000 upon activation
thereof. (Tr. R. at 3.)
Chief executive officer (“CEO”) Veronica Uchekwe, Burlingham’s auditors,
and Burlingham’s attorneys had no access to or awareness of these
agreements. (Tr. R. at 3.) Between January 2008 and January 2010, Prince
signed thirty side letters. (Tr. R. at 3.) The UK’s GDP did not deteriorate, and
each of these letters expired. (Tr. R. at 3.)
In March 2010, Burlingham entered into a major contract with a
computer tablet manufacturer. (Tr. R. at 3.) As a result of the enormous deal,
at the end of 2010, each officer of Burlingham, including Prince, received a
$45,000 bonus. (Tr. R. at 3.)
In 2011, Petitioner Brian Bosco succeeded Uchekwe as CEO and
selected Petitioner Jasmine Lee as the company’s new chief financial officer
(“CFO”). (Tr. R. at 3–4.) Bosco and Lee worked in tandem as hands-on
examiners of each division’s cash flow and cost structure. (Tr. R. at 4.)
Accordingly, in compliance with the Sarbanes-Oxley Act of 2002 (“SOX”), they
certified each financial statement that Burlingham filed with the Securities and
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Exchange Commission (“SEC”). (Tr. R. at 4.)
Bosco’s appointment as CEO extinguished Prince’s aspirations for that
same position. (Tr. R. at 4.) As a result, Prince decided once again to form
covert side letters with more Chinese companies. (Tr. R. at 4.) Between January
2014 and January 2015, he entered into eleven new agreements which
contained the same terms as before. (Tr. R. at 4.)
In October 2014, Bosco, Lee, and Prince all attended a technology
conference. (Tr. R. at 4.) There, the CEO of a major Japanese smartphone
manufacturer separately approached both Bosco and Lee to ask about “deal
sweeteners,” including termination rights, for his company’s contract with
Burlingham.1 (Tr. R. at 4.) Both Bosco and Lee brushed off the CEO. (Tr. R. at
4.) The pair soon realized that the CEO had individually approached both of
them, and with the same peculiar request. (Tr. R. at 4.) But there was no other
evidence or indicia of foul play, and they chose not to investigate further. (Tr.
R. at 4.)
Burlingham filed its original 10-K for fiscal year 2014 on New Year’s Day,
2015. (Tr. R. at 5.)
In March 2015, the UK GDP declined by 2.5% . (Tr. R. at 4.) This
activated the termination rights contained in Prince’s second wave of side
letters. (Tr. R. at 4.) Only five of the eleven side letter holders chose to exercise
1 The recipients of Prince’s side letters were all Chinese. (Tr. R. at 3, 4.) It
is therefore unclear whether the Japanese CEO had actual knowledge of Prince’s conduct or was simply seeking better contractual terms for his company. In either case, his interactions with Bosco and Lee were nothing more than arm’s-length negotiations between corporate officers.
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their termination rights; the remaining six contracts continued without effect.
(Tr. R. at 4–5.)
Bosco and Lee, who until this point had been wholly unaware of the side
letters, immediately began to investigate their validity. (Tr. R. at 5.) Bosco told
the chairman of the board about the letters and their potential consequences
for Burlingham. (Tr. R. at 5.) He then placed Prince on an indefinite leave of
absence. (Tr. R. at 5.) The next week, the board appointed a committee of
outside directors (the “Special Committee”) to investigate Prince’s conduct. (Tr.
R. at 5.) This Special Committee quickly discovered the kickback schemes of
2008, 2009, and 2014. (Tr. R. at 5.) Eventually, it determined that
Burlingham’s financial statements for 2014 were substantially effected. (Tr. R.
at 5.) The company chose to prepare and file a restated 10-K for fiscal year
2014.2 (Tr. R. at 5.)
The SEC filed suit against Prince, Bosco, and Lee in the District of
Fordham on January 1, 2016. (Tr. R. at 6.) It claimed that Prince had
defrauded Burlingham’s investors and violated Section 10(b) of the Securities
Exchange Act of 1934 (the “’34 Act”) by reporting millions of dollars in
unearned revenue. (Tr. R. at 6.) It sought disgorgement of Prince’s 2008, 2009,
and 2014 gains. (Tr. R. at 6.)
The SEC also asserted that Bosco and Lee were liable under Rule 13a–14
for their certification of Burlingham’s false and misleading financial statements
2 The parties have stipulated that this is the only restated filing at issue
in this case. (Tr. R. at 5 n.1.)
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for fiscal year 2014. (Tr. R. at 6.) It sought disgorgement under SOX 304 of
Bosco and Lee for the original 10-K filed on January 1, 2015. (Tr. R. at 6.)
Bosco and Lee filed for summary judgment in June. (Tr. R. at 6.) In
response, the SEC filed a cross-motion for summary judgment against them
and a simultaneous motion for summary judgment against Prince. (Tr. R. at 6.)
The district court granted the SEC’s cross-motion for summary judgment
against Bosco and Lee. (Tr. R. at 6.) It held that Rule 13a–14 provides a cause
of action against CEOs and CFOs for their certification of false financial
statements, even if they had no knowledge of the falsity. (Tr. R. at 6–7.) It also
held that an accounting restatement always triggers disgorgement of the CEO
and CFO under SOX 304, even if they did not participate in the original
misconduct. (Tr. R. at 7.) The court subsequently ordered Bosco and Lee to
disgorge $600,000 and $475,000 respectively.3 (Tr. R. at 7.)
The district court also granted the SEC’s motion for summary judgment
against Prince. (Tr. R. at 7.) It found that Prince was liable under Rule 10b–5
for his fraud scheme. (Tr. R. at 7.) It then held that disgorgement does not
constitute a “penalty” or “forfeiture” under 28 U.S.C. § 2462. (Tr. R. at 7.)
Accordingly, it found that the SEC’s request for disgorgement of Prince’s 2008
and 2009 gains was not barred by that statute of limitations. (Tr. R. at 7.) The
court subsequently ordered Prince to disgorge $1,770,000.4 (Tr. R. at 7.)
3 These amounts encompassed all bonuses, incentive-based
compensation, equity-based compensation, and profits from Burlingham securities sales during 2015. (Tr. R. at 7.)
4 This sum is the total of three distinct amounts: $1,025,000 from the
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Bosco, Prince, and Lee filed a timely appeal with the Fourteenth Circuit
Court of Appeals. (Tr. R. at 7.) A split court affirmed all three of the district
court’s holdings in January 2017. (Tr. R. at 21.) This Court granted certiorari
for all three issues on February 1.
side letters; $495,000 from all bonuses and discretionary compensation earned in 2008, 2009, and 2014; and $250,000 for Conrad’s bonuses from the relevant periods. (Tr. R. at 7.) As the grounds for reversal vary for each, these amounts will be discussed separately and in turn.
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SUMMARY OF ARGUMENT
Liability for certifiers without individual knowledge under Rule 13a–14
creates a dire situation for officers: any accounting error or auditing mistake,
whether discoverable or not, could lead to serious penalties for the officers. For
this reason, Congress included a scienter requirement in SOX 302 which
requires that certifications of regular reports be made “based on the officer’s
knowledge.” Rule 13a–14’s own meaning is either consistent with this statutory
intent or impermissibly contradicts it. As they had no knowledge of Prince’s
misconduct, no cause of action under Rule 13a–14 exists against Bosco and
Lee.
Likewise, SOX 304 requires personal misconduct by the CEO and CFO
for disgorgement to be possible. Though the statute’s facial language is
unclear, this is demonstrated by congressional intent and the constitutional
right to due process.
Lastly, disgorgement actions against wrongdoers are subject to the same
statute of limitations as other claims. “Forfeiture” and “disgorgement” are
interchangeable terms. Furthermore, the disgorgement pursued by the SEC
against Prince in this case was a punitive measure.
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ARGUMENT
I. THE SEC HAS NO CAUSE OF ACTION AGAINST BOSCO AND LEE
Strict liability under Rule 13a–14 creates the same problem that can
exist with SOX in other contexts: “Under the [Respondent’s] interpretation of
Sarbanes-Oxley, scienter would be established in every case where there was
an accounting error or auditing mistake made by a publicly traded company.”
Cent. Laborers' Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 555
(5th Cir. 2007). Fortunately, there are compelling bases for construing Rule
13a–14 fairly and harmoniously with its surrounding statutes and regulations.
SOX 302 contains a scienter element in its express language. Rule 13a–14
therefore either reflects the same requirement or is impermissible and must be
struck.
A. SOX 302 Contains a Scienter Element for CEOs and CFOs
Rule 13a–14 is simply a promulgation of SOX 302. See United States SEC
v. Jensen, 835 F.3d 1100, 1112 (9th Cir. 2016) (“The rule was adopted in 2002,
as directed by Section 302 of the Sarbanes-Oxley Act.”). Therefore, it is
important to form an accurate understanding of SOX 302 before addressing the
purpose, meaning, or validity of Rule 13a–14.
Statutory interpretation begins with the text itself. Desert Palace, Inc. v.
Costa, 539 U.S. 90, 98 (2003); Estate of Cowart v. Nicklos Drilling Co., 505 U.S.
469, 475 (1992); Jones v. Alfred H. Mayer Co., 392 U.S. 409, 420, (1968). SOX
302 provides in pertinent part that:
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. . . The Commission shall, by rule, require . . . that the principal executive officer . . . and the principal financial officer . . . certify in each annual or quarterly report filed or submitted under either such section of such Act that--
(1) the signing officer has reviewed the report; (2) based on the officer's knowledge, the report does not contain
any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;
(3) based on such officer's knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report; . . .
15 U.S.C.S. § 7241(a) (emphasis added). “A fundamental canon of
statutory construction is that, unless otherwise defined, words will be
interpreted as taking their ordinary, contemporary, common meaning.” Perrin
v. United States, 444 U.S. 37, 42 (1979). The above statutory language clearly
and unambiguously explains that the officers’ certifications are to be “based on
the officer’s knowledge.” 15 U.S.C.S. § 7241(a). Accordingly, SOX 302 does not
thrust strict liability onto officers for untrue statements or omissions of which
they have no knowledge.
“[W]here, as here, the words of the statute are unambiguous, the judicial
inquiry is complete.” Desert Palace, Inc., 539 U.S. at 98 (internal quotation
omitted); Estate of Cowart, 505 U.S. at 475. But additional consideration of
relevant case law still supports the same position as the statute’s plain
meaning. See, e.g., Ind. Elec. Workers' Pension Tr. Fund Ibew v. Shaw Grp., Inc.,
537 F.3d 527, 545 (5th Cir. 2008) (citing Garfield v. NDC Health Corp., 466
F.3d 1255, 1266 (11th Cir. 2006)) (“[A] Sarbanes-Oxley certification, standing
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alone, is not indicative of scienter.”).
Furthermore, legislative intent obviates that the purpose of SOX 302 is to
punish bad actors who attempt to skirt liability — not dutiful officers like
Bosco and Lee:
“These requirements will ensure that executives will no longer be able to evade responsibility for the numbers that their companies put out. This requirement, combined with the tough criminal penalties established by the bill, will help to ensure that executives are held responsible if they seek to mislead and defraud investors.”
148 CONG REC H 5462, 5463 (2002). SOX 302’s scienter element is a
fundamental piece of Rule 13a–14’s foundation. The rule must be analyzed
with this understanding.
B. Rule 13a–14 Cannot Contradict or Exceed SOX 302’s Scienter Requirement
It is possible, and in fact proper, to interpret Rule 13a–14 in a way that is
consistent with SOX 302 and its scienter requirement. But if the lower court’s
characterization of Rule 13a–14 is valid, then the rule exceeds its statutory
authority and must be struck.
1. The proper interpretation of Rule 13a–14 contains a scienter element
The lower court cited Jensen’s “implicit truthfulness requirement” as
support for its conclusion that Rule 13a–14 contains no scienter element. See
SEC v. Jensen, 835 F.3d 1100, 1113 (9th Cir. 2016). But Jensen only stands
for the position that rote signature of a document is inadequate. In other
words, Rule 13a–14 establishes on its face that failure to certify at all is a
violation; Jensen merely establishes that a violation even with certification is
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possible. See id. at 1117 (Bea, J., concurring) (“I agree that the district court
erred to the extent it recognized a cause of action under Rule 13a-14 only for
the failure to file any certification at all.”).
The Jensen holding is not a strict liability requirement. In fact, in a
footnote to the “implicit truthfulness requirement” paragraph cited above, the
court expressly declined to reach the issue posed in the instant case — namely,
“the question of the mental state required for a violation of Rule 13a-14.” Id. at
1113 n.6 (majority opinion).
Fortunately, Judge Bea presented two compelling bases for the
resolution of this remaining issue.5 See id. at 1117–21 (Bea, J., concurring).
The first is a linguistic interpretation, and the second is a legal analysis.
There is an inherent definitional distinction between “inaccurate” and
“false.” Id. at 1117. Falsity by its plain meaning “embodies a mental element.”
Id. It is possible, therefore, for a certification to be scientifically false, even if no
human mind is present to generate falseness on its behalf. See id. (“Merriam-
Webster defines ‘false,’ as ‘intentionally untrue’ (e.g., ‘false testimony’), and as
‘intended or tending to mislead’ (e.g., ‘a false promise’)”).
Furthermore, the SEC’s official release in conjunction with Rule 13a–14
indicates that the rule contains a scienter element. See Release No. 8124, 2002
WL 31720215, at *9 (Aug. 28, 2002). The portion of the release which
addressed “liability for false certification” opined that an officer who provides a
5 The Jensen majority’s decision to reserve judgment should not be
construed as a disagreement with Judge Bea; its decision was, by declaration, only an exercise in judicial restraint. Jensen, 835 F.3d at 1113 n.6.
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false certification could “potentially” be subject to actions under Sections 13(a),
15(d), 10(b), and 18 of the Exchange Act. Id. As discussed below, each of these
statutory provisions contains a scienter requirement; because all of its bases
do, Rule 13a–14 itself does as well.
Exchange Act Sections 13(a) and 15(d) are reporting requirements for
issuers. See 15 U.S.C.S. § 78m; 15 U.S.C.S. § 78o. Therefore, an “aiding and
abetting” theory must be used to hold officers individually liable under these
statutes. Jensen, 835 F.3d at 1118–20. When such a theory is applied to either
statute, “actual knowledge” on the part of the officer is always a required
element. SEC v. Fehn, 97 F.3d 1276, 1288 (9th Cir. 1996); Levine v.
Diamanthuset, Inc., 950 F.2d 1478, 1483 (9th Cir. 1991). This requirement
applies to both private and SEC actions. Jensen, 835 F.3d at 1119 (citing Ponce
v. SEC, 345 F.3d 722, 734 (9th Cir. 2003)).
Exchange Act Sections 10(b) and 18 render officers directly liable for
securities fraud. See 15 U.S.C.S. § 78j; 15 U.S.C. § 78r(a). As with Sections
13(a) and 15(d), Section 10(b) requires the SEC to show that the misstatement
or omission was “made with scienter.” Fehn, 97 F.3d at 1289 (internal
quotations omitted). While mental culpability is not an overt element of a
Section 18 violation, the statute absolves an individual of liability if he can
“prove that he . . . had no knowledge that such statement was false or
misleading.” 15 U.S.C. § 78r(a). Therefore, like the other provisions, Section 18
also requires a determination by the factfinder “that the CEO or CFO had
knowledge of the falsity of a certification in order for the SEC to prevail on a
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claim for false certification.” Jensen, 835 F.3d at 1121.
The SEC has presented two conflicting opinions regarding Rule 13a–14.
Its stance in 2002, found in Release No. 8124, coupled the rule with four
others which contain scienter requirements. But its entirely opposite stance in
this case is that the rule contains no scienter requirement at all. The latter
position is merely a “post hoc rationalization,” generated for the Commission’s
immediate desires in this litigation; it therefore should be afforded no
deference. Chase Bank USA, N.A. v. McCoy, 562 U.S. 195, 208–09 (2011). The
former position controls and should be recognized as valid by this Court.
2. If Rule 13a–14 does not contain a scienter requirement, then it impermissibly contradicts SOX 302
“[A] reviewing court shall set aside agency action, findings, and
conclusions found to be ‘arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.’” United States v. Mead Corp., 533 U.S.
218, 229 (2001) (quoting 5 U.S.C. § 706(2)). If the lower court’s interpretation
of Rule 13a–14 is correct, then the rule is not in accordance with SOX 302 and
therefore must be struck.
Congress in SOX 302 instructed the SEC to require “by rule” that officers
certify reports. See 15 U.S.C.S. § 7241(a). This legislative delegation invites
what is commonly known as two-step Chevron analysis. United States v. Mead
Corp., 533 U.S. 218, 226–27 (2001); Fin. Planning Ass'n v. SEC, 375 U.S. App.
D.C. 389, 395 (2007). First, this Court must determine whether Congress has
spoken directly to the present issue, i.e. whether SOX 302 overtly basis the
certification in the officers’ knowledge. Chevron, USA, Inc. v. Natural Res. Def.
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Counsel, Inc., 467 U.S. 837, 842–43 (1984). Second, if the statute is “silent or
ambiguous” on the issue, the Court must determine whether the SEC’s rule “is
based on a permissible construction of the statute.” Id. at 843.
In this case, question two is not reached. As discussed above, SOX 302
clearly contains a knowledge requirement, which equates to a scienter element.
15 U.S.C.S. § 7241(a)(2)–(3). If this Court accepts the SEC’s assertion from the
course of this litigation as to the meaning of Rule 13a–14, then it is apparent
that the rule is “manifestly contrary” to the statute. Mead Corp., 533 U.S. at
227. Under such an understanding, the SEC has exceeded its authority by
promulgating the rule. Cf. Fin. Planning Ass’n, 375 U.S. App. D.C. at 395. The
rule therefore must be struck for contradicting SOX 302’s clear requirements.
C. Bosco and Lee Did Not Violate SOX 302 Because They Had No Knowledge of the Certifications’ Inaccuracies
It is hard to imagine a clearer instance of proper officer conduct than
what Bosco and Lee have exhibited at Burlingham. At no point did they
participate in, observe, or even have opportunity to become aware of Prince’s
misconduct.
Burlingham had no access to or awareness of Prince’s side letters. (Tr. R.
at 3.) The only slight indicia that something was amiss came from the Japanese
CEO’s unusual requests at the 2014 technology conference. (Tr. R. at 4.) But
even if this strange, yet benign, incident had prompted a full-blown
investigation by Bosco and Lee, there was nothing they could have done to
actually uncover the letters — only Prince and the opposite businesses
possessed them.
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Bosco and Lee were hands-on examiners who actively maintained
compliance with SOX. (Tr. R. at 4.) Absolute control is impossible, but this pair
of officers maintained exemplary control of internal compliance with Sarbanes-
Oxley. In fact, when the consequences of Prince’s misconduct arose, Bosco
immediately sounded the alarm and investigated. (Tr. R. at 5.) This is exactly
the response that officers should be encouraged to make when faced with a bad
acting agent.
In sum, it is apparent that Bosco and Lee had “sufficient basis to believe
that [their] certification[s were] accurate.” Jensen, 835 F.3d at 1113.
Accordingly, no cause of action against them exists under SOX 302 or Rule
13a–14.
II. THE DISGORGEMENT REMEDY OF SOX 304 REQUIRES PERSONAL MISCONDUCT
The lower court’s interpretation of SOX 304 brings into question the
statute’s constitutionality. It should instead be interpreted as requiring an
element of personal CEO and CFO misconduct. The statute’s language does not
clearly express whose conduct must trigger the disgorgement, but interpreting
the statute in a way that utilizes an employee’s misconduct to punish CEOs
and CFOs would defy the purposes which Sarbanes-Oxley was enacted to
further, and would contribute to a culture of silence whereby internal reporting
of fraudulent behavior would be discouraged.
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A. Strict Liability Under SOX 304 Violates Congressional Intent and Due Process
If affirmed, the lower court’s interpretation of SOX 304 would hold CEOs
and CFOs “strictly liable for any restatement filed to correct any filing in
material noncompliance with securities laws caused by any misconduct by any
officer, employee, or even outside agent of the company.” (Tr. R. at 27.) This
would render judicial oversight of the SEC’s SOX 304 actions virtually useless:
the Commission could, by showing only that anyone in the company committed
misconduct, win summary judgment and take damages from the innocent
officers.
This interpretation violates both congressional intent and due process.
When choosing between alternative interpretations of a statute, this Court
should rest “on the reasonable presumption that Congress did not intend the
alternative which raises serious constitutional doubts.” Clark v. Martinez, 543
U.S. 371, 381 (2005). For example, when interpreting Sherman Act criminal
antitrust provisions, this Court has refused to construe the Act as mandating a
regime of strict liability. “‘[Mere] omission . . . of intent [in the statute] will not
be construed as eliminating that element from the crimes denounced’; instead
Congress will be presumed to have legislated against the background of our
traditional legal concepts which render intent a critical factor.” United States v.
U.S. Bypsum Co., 438 U.S. 422, 437 (1978) (quoting Morissette v. United States,
342 U.S. 246, 263 (1952)).
We recognize Congress’s intent with SOX 304 and urge this Court to
interpret the statute in a way that furthers its purpose as a workable rule
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aimed at deterring officer misconduct. Liability for officers who are negligent in
their duties would serve congressional intent; strict liability does not.
B. The Language of SOX Does Not Plainly Express Whose Conduct Must Cause an Accounting Restatement
Congress easily could have included the word “issuer” before the word
“misconduct” in SOX 304, which would have clearly conveyed that no
requirement of scienter on behalf of the CEO or CFO to trigger disgorgement.
But Congress chose not to do so.
In SOX 302, Congress commanded the SEC to implement rules requiring
CEOs and CFOs to certify that the officers have read the quarterly or annual
reports and that “based on such officer's knowledge,” the reports included no
untrue statements of material fact and fairly represent the financial condition
of the company. It defies reason to conclude that Congress wanted officers to
certify “based on their knowledge” the accuracy of these reports, but then
decided that in the case of a restatement, no scienter requirement would be
necessary to require the officers to reimburse the issuer. Such an
interpretation eclipses the reason for SOX 302’s existence.
Additionally, the plain language of SOX 304 indicates that the “purpose
of the Act is to punish ‘misconduct,’ not the mere decision to restate financial
reports.” In re AFC Enters., 224 F.R.D. 515, 521 (N.D. Ga. 2004). If the Act’s
intent is punitive, “it is irrational to apply it to officers who have not engaged in
any misconduct.” (Tr. R. at 27).
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C. Forcing Bosco and Lee to Disgorge Monies Because of Prince’s Misdeeds is Contrary to the Very Purposes of Sarbanes-Oxley
Affirming the lower court’s holding would force CEOs and CFOs to
constantly patrol their subordinate’s actions, fearing that they could be liable
for any misconduct at any time, regardless of how hard they work to comply
with Sarbanes-Oxley’s requirements. Direct liability already exists for
wrongdoers; this satisfies Congress’ intent to create legislation “to prevent and
punish corporate and criminal fraud, protect the victims of such fraud,
preserve evidence of such fraud, and hold wrongdoers accountable for their
actions.” S. REP. NO. 107-146, at 2 (2002). Even if Bosco and Lee had
uncovered Prince’s misdeeds and attempted to rectify them, the lower court
would still hold them liable to disgorge their profits resulting from Prince’s
misconduct. This sort of rationale would nullify any incentive for officers to
self-report discovered misdeeds resulting in a restatement.
The side letters Prince entered into between January 2014 and January
2015 were not discoverable by Burlingham’s CEO and CFO; they existed only
between Prince and a new group of Chinese smartphone manufactures.
Assuming arguendo that Bosco and Lee could have put together the strange
approach of a Japanese smartphone manufacturer discussing “deal sweeteners
such as unilateral termination rights” and concluded that Prince was engaging
with side letters containing unilateral termination rights with Chinese
manufacturers, that would have occurred in October 2014 or shortly
thereafter. Thus, a restatement would have been required for the first three
quarters of 2014. Even in this scenario, Bosco and Lee would still be liable for
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disgorgement under the Fourteenth Circuit’s interpretation of SOX 304. When
the five Chinese manufactures did attempt to exercise their termination rights
in early 2015, Bosco and Lee immediately acted in an effort to get to the bottom
of this scheme. (Tr. R. at 5.) Nothing that Bosco and Lee did should be
construed as warranting an interpretation that holds them liable for the
misdeeds of Prince.
The Sarbanes-Oxley Act was enacted in an environment where “the
regulators, the victims of fraud, and the corporate whistleblowers were faced
with daunting challenges to punish the wrongdoers and protect the victims’
rights.” S. REP. NO. 107-146, at 6 (2002). An investigation into the aftermath of
Enron’s cover-up “expose[d] a culture, supported by law, that discourage
employees from reporting fraudulent behavior . . . . This ‘corporate code of
silence’ not only hampers investigations, but also creates a climate where
ongoing wrongdoing can occur with virtual impunity.” S. REP. NO. 107-146, at 5
(2002). The lower court’s interpretation would actually enhance the likelihood
of companies entering a “corporate code of silence” and discouraging employees
from reporting fraudulent behavior.
It is in light of the underlying reasons for enacting the Sarbanes-Oxley
Act that the provision of SOX 304 should be interpreted. It was not Congress’s
intent to punish CEOs and CFOs for the misdeeds of company employees, but
rather to encourage them to establish internal auditing systems aimed at
curbing the excesses of the Enron-era “Wild West’ attitude which valued profit
over honesty.” S. REP. NO. 107-146, at 3 (2002).
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III. THE STATUTE OF LIMITATIONS UNDER 28 U.S.C. § 2462 APPLIES TO THE DISGORGEMENT ACTION AGAINST PRINCE
The District Court ordered Prince to divest $1,770,000 as a result of his
wrongdoing. (Tr. R. at 7.) A substantial amount of that total was earned
between January 2008 and January 2010, more than five years prior to the
initiation of these proceedings. (Tr. R. at 7.) $45,000 of this amount was a
bonus Prince received that was not causally related to his wrongdoing.
$250,000 of this amount was profits earned by a separate individual during the
relevant periods. (Tr. R. at 7.)
Under 28 U.S.C. § 2462, “an action, suit or proceeding for the
enforcement of any civil fine, penalty, or forfeiture” must commence within five
years from the date of accrual (emphasis added). Though not by its express
language, this statute of limitations bars this aged “disgorgement” action as
well.
The lower court conducted a cursory examination of the disgorgement
remedy applied here and concluded that it did not constitute a “penalty” or
“forfeiture” under § 2462. The court failed to adequately investigate the actual
character of the remedy ordered in this case. In doing so, it erred in finding the
SECs disgorgement of Prince was not punitive or a form of forfeiture.
A. The Disgorgement in This Case Is Synonymous with Forfeiture and Time-Barred by § 2462
The SEC argues that what they have done to Prince is not barred by the
statute of limitations, because they have “disgorged” his monies, and that what
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they have done is distinct from “forfeiture”, which is included in the remedies
time-barred by § 2462. This semantic game is an attempt to subvert judicial
oversight, run roughshod over congressional intent, and contradict black-letter
law. The SEC should not be allowed to claim disgorgement has a distinct legal
meaning from forfeiture, and then pursue remedial actions that surpass their
own definition of disgorgement.
In reality, disgorgement and forfeiture are interchangeable words. Many
courts have construed SOX 304 as the authorization of a “disgorgement”
action. See, e.g., SEC v. Bardman, 2017 U.S. Dist. LEXIS 18108, 12 (N.D. Cal.
Feb. 8, 2017) (holding that misconduct reflected in a press release furnished to
the SEC didn’t “cause the filing of a restatement within the meaning of SOX
304, and so the 8-K does not trigger a 12-month earnings disgorgement
period”); SEC v. Jensen, 835 F.3d 1100, 1104 (9th Cir. 2016) (stating that SOX
304 authorizes a “disgorgement remedy”); SEC v. Jasper, 678 F.3d 116, 1130
(9th Cir. 2012) (calling “the reimbursement provision of SOX 304 . . . an
equitable disgorgement remedy”); Sommers v. Lewis, 2009 U.S. Dist. LEXIS
29776, at *26 (D. Or. Apr. 8, 2009) (dismissing “a claim for disgorgement under
section 304 of the Sarbanes-Oxley Act” because SOX 304 doesn’t allow for
private cause of action); In re Diebold Derivative Litigation, 2008 U.S. Dist.
LEXIS 15747, 5 (N.D. Ohio Feb. 29, 2008) (holding no private action was
allowed by “the disgorgement action under SOX § 304”). In this case, the lower
court even concluded, “[r]egarding the SEC’s SOX 304 claim, we also uphold
the District Court’s decision ordering disgorgement of Bosco’s and Lee’s
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bonuses and profits.” (Tr. R. at 12.) But the title itself of SOX 304 uses a
different word than “disgorgement”:
15 U.S.C. § 7243. It is apparent that Congress, judges, and practitioners
use the words “disgorgement” and “forfeiture” interchangeably. Even the
Supreme Court has done so: “Forfeitures serve a variety of purposes, but are
designed primarily to confiscate property used in violation of the law, and to
require disgorgement of the fruits of illegal conduct.” United States v. Ursery,
518 U.S. 267, 284 (1996). This lends great credence to the position that
disgorgement actions fall under the ambit of § 2462. In the words of the
Eleventh Circuit, “for the purposes of § 2462 forfeiture and disgorgement are
effectively synonyms.” SEC v. Graham, 823 F.3d 1357, 1363 (11th Cir. 2016).
The SEC would like a very paltry legal difference to be read into the
definitions of these words. This would allow it to pursue a remedy analogous to
forfeiture, but without having to be burdened by the statute of limitations. The
lower court’s decision allows the SEC to sidestep the statute of limitations by
manufacturing “distinct legal meanings” between disgorgement and forfeiture.
Forfeiture and disgorgement, like other words in statutes, “should be
given their ordinary, popular meaning unless Congress clearly meant the words
in some technical sense.” United States v. Nat’l Broiler Mktg. Ass’n, 550 F.2d
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1380, 1386 (5th Cir. 1977), aff’d, 436 U.S. 816 (1978). It was not until 1971
that a federal appellate court even recognized “that the SEC had equitable
power to ‘require corporate insiders who traded on material nonpublic
information to disgorge their illegal trading profits.” Urska Velikonja, Public
Compensation for Private Harm: Evidence From the SEC’s Fair Fund
Distributions, 67 STAN. L. REV. 331, 340 (2015) (citing SEC v. Texas Gulf Sulphur
Co., 446 F.2d 1301, 1307–08 (2d Cir. 1971)). Additionally, “until 1990 the SEC
had no express authority to order securities violators to pay disgorgement.”
Velikonja, supra at 340. It is not conceivable that Congress, when it codified §
2462 in 1948, “clearly” meant the word “forfeiture” to be used in a technical
sense which excluded “disgorgement” because disgorgement was not even a
remedy available in government enforcement actions at the time.
Forfeiture has been defined as “the divesting of the ownership of a
particular property of a person on account of the breach of a legal duty and
without any compensation to him” and “the fact of losing or becoming liable to
deprivation of (an estate, goods, life, an office, right, etc.) in consequence of a
crime, offence, or breach of engagement.” Forfeiture, WEBSTER’S THIRD NEW INT’L
DICTIONARY (2002); Forfeiture, OXFORD ENGLISH DICTIONARY (2d ed. 1989). These
two definitions combine to “illustrate that forfeiture occurs when a person is
forced to turn over money or property because of a crime or wrongdoing.”
Graham, 823 F.3d at 1363. There is no meaningful difference between these
definitions of “forfeiture” and the definition of “disgorgement”: “the act of giving
up something (such as profits illegally obtained) on demand or by legal
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compulsion.” Disgorgement, BLACK’S LAW DICTIONARY (10th ed. 2014).
Furthermore, a disgorgement is a kind of forfeiture covered by § 2462
when the disgorged funds only “fill the Federal Government’s coffers.” Riordan
v. SEC, 627 F.3d 1230, 1234 n.1 (D.C. Cir. 2010). In the case at bar, “Prince’s
disgorgement require[d] him to surrender profits to the SEC, rather than being
returned to Burlingham.” (Tr. R. at 22.)
The lower court allowed the SEC to “label its requested relief as
something other than a penalty or forfeiture, regardless of its punitive effect.”
(Tr. R. at 28). The majority handpicked its canon of constructions to support its
decision: it interpreted the statute according to meanings given to “forfeiture”
in the 1790s and the meanings given to penalties in common, contemporary
parlance.
B. The “Disgorgement” in this Case Was Punitive in Nature
This Court must not look at the label the SEC applies to its relief, “but
rather [at] its character and purpose.” (Tr. R. at 28.) If the lower court is correct
in holding that disgorgement and forfeiture have distinct legal meanings, then
under its own reasoning, the remedy ordered against Prince in the case at bar
cannot be considered disgorgement — it was a punitive forfeiture. The remedy
ordered in this case does not fit into the narrow definition the majority
attributes to disgorgement. “The majority states that disgorgement only
includes direct proceeds from wrongdoing,” but then asserts that the SEC can
order disgorgement for amounts not causally related to wrongdoing, and
amounts not attributable to the defendants wrongdoing. (Tr. R. at 30.)
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The lower court made the blanket statement that because disgorgement
is often considered an equitable remedy, and equitable remedies are not
punitive, that what the SEC did to Prince does not fall within the reach of §
2462. In order to buttress this holding, the court relied on the reasoning of the
Tenth Circuit’s SEC v. Kokesh, which held that disgorgements are not
penalties because they are remedial and preventative. According to Kokesh,
rather than inflicting punishment, disgorgement “eliminates profit from
wrongdoing while avoiding, so far as possible, the imposition of a penalty.” 834
F.3d 1158, 1164 (10th Cir. 2016) (citing RESTATEMENT (THIRD) OF RESTITUTION
AND UNJUST ENRICHMENT § 51(4) (Am. Law Inst. 2010)).
The court majority then used circular reasoning, while forgetting to look
into the character of the remedy sought to conclude that “[b]ecause
disgorgements are remedial and penalties are not, disgorgements are not
penalties,” and thus, the disgorgement ordered here could not possibly be
punitive. (Tr. R. at 17.) However, because the Restatement’s definition of
disgorgement includes the avoidance of the imposition of a penalty, that does
not mean what the SEC did here avoided the imposition of a penalty. In fact,
what the SEC ordered here was punitive in nature.
1. The IRS recognizes that disgorgement can be Punitive
Another government agency considers certain orders of disgorgement as
punitive in nature or a form of “fine or penalty.” In 2016, the Internal Revenue
Service prohibited a deduction for an amount paid as disgorgement to the SEC
because I.R.C § 162(f) disallows deductions for “any fine or similar penalty paid
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to a government for a violation of any law.” The IRS posited, “disgorgement can
be primarily punitive for tax purposes in some cases, where it serves primarily
to prevent wrongdoers from profiting from their illegal conduct and deters
subsequent illegal conduct.” C.C.A. 2016-19-008, 2016 IRS CCA LEXIS 38, 17
(May 6, 2016). The IRS also reasoned that disgorgement can serve as a direct
substitute for a civil penalty when it reduced the amount of the penalty
otherwise imposed. It concluded by determining that when the purpose of the
disgorgement is not to compensate the Government or some non-governmental
party for its specific losses, the disgorgement payment is “primarily punitive.”
C.C.A. 2016-19-008, 2016 IRS CCA LEXIS 38, 19 (May 6, 2016).
2. The tablet bonus was not causally related
In Riordan v. SEC, the D.C. Circuit Court of Appeals held that § 2462 did
not apply to an SEC disgorgement order because disgorgement orders were not
penalties, at least so long as the disgorged amount was causally related to
wrongdoing. 627 F.3d 1230, 1234 (D.C. Cir. 2010); see also Zacharias v. SEC,
569 F.3d 458, 472 (D.C. Cir. 2009) (“In theory, a disgorgement order might
amount to a penalty if it was not ‘causally related to the wrongdoing’ at issue.”).
Prince ceased his first round of signing side letters in January 2010. (Tr. R. at
3.) Subsequently, Burlingham entered into a large contract with a leading
computer tablet producer in March 2010. (Tr. R. at 3.) As a result of this
contract, Burlingham gave each executive officer, including Prince, a $45,000
bonus. The SEC disgorged this $45,000 bonus. Because Prince had signed his
final side letter in January 2010, his entrance into side agreements was not
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“causally related” to the $45,000 bonus he received in March 2010.
3. Conrad’s bonus was not causally related
The Fifth Circuit has held that “disgorgement extends only to the amount
with interest by which the defendant profited from his wrongdoing. Any further
sum would constitute a penalty assessment. SEC v. Blatt, 583 F.2 1325, 1335
(5th Cir. 1978). In the case at bar, Prince was ordered to disgorge $250,000
representing the total amount of bonuses that his subordinate Conrad earned
during the relevant periods. (Tr. R. at 7). The majority argues, “disgorgement
plays a significant role in preventing unjust enrichment,” (Tr. R. at 18), thus
ordering Prince to disgorge Conrad’s gains cannot be punitive. However, “[T]he
purpose of unjust enrichment is served by disgorging the ill-gotten gains by a
wrongdoer.” (Tr. R. at 22) (Lovejoy, C.J., concurring). Conrad was not a
wrongdoer. Thus, by ordering Prince to disgorge the money earned by another
individual not accused of wrongdoing, “the purpose of unjust enrichment” is
not served.
C. The Lower Court’s Ruling Permits Improper Seizures by the SEC
The amounts addressed in this argument may be only a fraction of the
funds at issue in this case, but they represent the quandary in which the SEC
finds itself. If disgorgement is distinct from penalties and forfeitures, then
under § 2462 the SEC is limited here to ordering only non-punitive
disgorgement of profits. If the SEC can include amounts not causally related to
wrongdoing, and amounts not attributable to the defendant’s wrongdoing, then
disgorgement must be considered a punitive forfeiture and falls under § 2462.
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The Fourteenth Circuit, by allowing this quasi-restorative activity by the
SEC sets a tragic precedent for the SEC’s future quasi-prosecution actions. The
majority has simultaneously ruled that scienter is not required for
disgorgement actions under SOX 304 actions, and that nothing done here
constitutes remedies time-barred by § 2462. If left unchecked, the SEC will be
able to seize, extract, and keep funds which are not causally connected to any
wrongdoing, regardless of the time elapsed since the wrongdoing occurred. This
is a singing example of the risks inherent in allowing the agency to define, and
enact its authority on its own terms. In the present case, the SEC has
wrongfully extracted money from Prince that is not causally connected to his
misconduct, and some that is not attributable to the wrongdoing of Prince.
These funds were taken in violation of § 2642 and must be returned.
D. Leaving SEC Disgorgement Actions Untethered to a Statute of Limitations Is Violative of Congress’s Purpose
Statutes of limitations are bedrock instruments in maintaining a well-
ordered legal system. They provide “security and stability to human affairs”
Wood v. Carpenter, 101 U.S. 135, 139 (1879), and are “vital to the welfare of
[our] society.” Id. (affirming the Fourteenth Circuit majority holding that
disgorgement does not fall within § 2462’s reach would result in no statute of
limitations).
Exposing defendants to an indefinite amount of time for which the SEC
can bring disgorgement action against them would be “utterly repugnant to the
genius of our laws.” See Gabelli v. SEC, 133 S. Ct. 1216, 1223 (2013) (quoting
Adams v. Woods, 2 Cranch 336, 442 (1805)). It is settled doctrine within our