TRANSCRIPT OF THE RECORD 2017 IRVING R. KAUFMAN MEMORIAL SECURITIES LAW MOOT COURT COMPETITION

Transcription

1 TRANSCRIPT OF THE RECORD 2017 IRVING R. KAUFMAN MEMORIAL SECURITIES LAW MOOT COURT COMPETITION THE MOOT COURT BOARD Fordham University School of Law 150 West 62nd Street New York, New York Vi Thaitran Kaufman Editor Maria Brusco Marc Klepner Lauren Mastronardi Brinkley Rowe Anna Schuler William Tevlin Associate Editors Vincent Cappucci Matthew Hershkowitz Katherine Peluso Committee Members Edited By: Talia Fiano Editor-in-Chief Danielle Lawrence Managing Editor Kostantinos Skordalos Interschool Competitions Editor

2 United States Court of Appeals for the Fourteenth Circuit Argued December 18, 2016 Decided January 12, 2017 No SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee v. BRIAN BOSCO, Defendant-Appellant AND JASMINE LEE, Defendant-Appellant AND RONALD PRINCE, Defendant-Appellant On Appeal from the United States District Court for the District of Fordham Before the Fourteenth Circuit: Opinion for the Court by Circuit Judge RUSSELL Concurrence by Circuit Judge LOVEJOY Dissent by Circuit Judge KHATIBIFAR

3 RUSSELL, Circuit Judge: I. BACKGROUND This case reaches us on appeal from the United States District Court for the District of Fordham. Brian Bosco and Jasmine Lee appeal the District Court s grant of the Securities and Exchange Commission s (the SEC ) motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure ( Rule 56 ). Additionally, Ronald Prince appeals the District Court s award of summary judgment in favor of the SEC. This appeal concerns two distinct issues. First, whether under Rule 13a 14, promulgated under the Sarbanes Oxley Act of 2002 ( Rule 13a 14 ), a cause of action exists against a company s chief executive officer ( CEO ) and chief financial officer ( CFO ) for certifying false financial statements where they did not have actual knowledge of the falsity, and further, whether the disgorgement remedy authorized under Section 304 of the Sarbanes Oxley Act of 2002 ( SOX 304 ) requires personal misconduct of CEOs and CFOs, or whether other issuer misconduct is sufficient. Second, whether a claim for disgorgement is subject to the five-year statute of limitations imposed by 28 U.S.C ( 2462 ). A. SUMMARY OF THE CASE Burlingham Inc., a microchip manufacturer, was founded in 1981 and made its initial common stock offering in The company prospered by perfecting just-in-time shipping of inventory to computer manufacturers in Japan. In 2001, its founder and CEO, Veronica Uchekwe, executed a wide-ranging diversification plan and added smartphone microchips to Burlingham s product lines. By 2005, the smartphone business had attained thirty-three percent market share and earned thirty-six

4 percent of Burlingham s net income. In 2007, market share increased to forty-two percent and net income to fifty-two percent. The smartphone business, overseen by the Communications Division, was the company s greatest generator of revenue and net income. Ronald Prince was named Burlingham s Executive Vice President in 2002 and was given direct managerial responsibility for the Communications Division. He was largely responsible for the success of Burlingham s smartphone business. Prince also led Burlingham s expansion into the large and growing market for the sale of smartphone microchips in China, where manufacturers sold smartphones at an increasing rate to meet demand in the United Kingdom (the UK ). Prince s compensation was not directly tied to the smartphone business success due to the discretionary component of Burlingham s compensation system. Prince expressed his sentiments on compensation to Henrietta Conrad, the Communications Division s only other executive manager, stating, My compensation arrangement is simply inadequate. With the discretionary bonus making up seventy-five percent of my annual income, I don t get paid enough no matter how successful the smartphone microchips are! How am I supposed to establish a reliable financial plan for my family? Conrad acknowledged Prince s concerns and mused that Burlingham s compensation system was atypical for an American enterprise of Burlingham s size and stature. The company s executive compensation was determined at the close of each fiscal year by the board s Compensation Committee. To determine the discretionary bonuses, the Compensation Committee always began its review by analyzing Burlingham s financial and operating results, applying five metrics to Burlingham on a consolidated basis and then to each of Burlingham s divisions individually. These metrics were revenue, profit, market share, retention of employees, and integration of acquired businesses. The 2

5 Compensation Committee used the results of this analysis to determine each individual manager s compensation. In January 2008, Prince began clandestinely negotiating concessions into Burlingham s purchase agreements with select Chinese smartphone manufacturers. All purchase agreements contained termination rights limited to an event of force majeure negatively impacting the UK s smartphone market. However, without informing anyone at Burlingham, Prince offered unilateral termination rights to select purchasers. The termination rights permitted the purchasers to terminate their agreements with Burlingham in the event of a projected decline of over 2% in the UK s GDP. The rights would automatically terminate two years after the effective date of the side letter. Acting on behalf of Burlingham, Prince executed the side letters with the purchasers. Prince was paid $25,000 for each side letter containing the unilateral termination rights. The side letters also called for an additional $50,000 payment to Prince upon unilateral termination. The side letters were not made available to Uchekwe, Burlingham s auditors, or its attorneys. Over the course of nearly three years, Prince executed thirty side letters. He signed his final letter in January None of these purchasers exercised their unilateral termination rights. In February 2010, Prince was financially comfortable and ended his practice of executing side letters. Burlingham entered into a major contract with a leading producer of computer tablets in March At the end of that year, each executive officer at Burlingham, including Prince, was awarded a $45,000 bonus due to the overwhelming success of the deal. Uchekwe retired in 2011, and Burlingham s board of directors named Brian Bosco as her successor. Bosco quickly 3

6 promoted several young executives to replace retiring senior officers. Jasmine Lee was selected as CFO. Bosco and Lee often worked together on the company s evolving financial architecture, and both were hands-on managers who examined each division s cash flow and cost structure. The two maintained Burlingham s internal controls in compliance with the Sarbanes Oxley Act of 2002 (the Sarbanes Oxley Act ) and signed certifications of Burlingham s financial statements at each filing with the SEC. Bosco, Lee, and Prince attended a technology conference in October 2014, where the CEO of a major Japanese smartphone manufacturer approached Bosco to discuss the option of amending his company s contract with Burlingham. The CEO stated he had heard about deal sweeteners such as unilateral termination rights. Bosco brushed off the request. The CEO separately approached Lee, who reacted similarly to Bosco. At the end of the conference, Bosco and Lee discussed the events of the day and realized that the Japanese CEO had requested unilateral termination rights from each of them individually. Bosco and Lee expressed their concerns about the CEO s request and decided it might be a good idea to look into why the CEO thought that Burlingham offered unilateral termination rights. Ultimately, they did not. For Prince, Bosco s appointment meant that Prince no longer had a clear path to the CEO position at the company, as Bosco s ties to the board of directors secured his tenure as CEO. In early 2014, Prince s elevated lifestyle required him to again enter into side letters with select Chinese smartphone manufacturers. From January 2014 to January 2015, he entered into eleven side letters containing unilateral termination rights with a new group of Chinese smartphone manufacturers. In March 2015, a 2.5% decline in UK GDP triggered the unilateral termination rights. Five of the eleven purchasers 4

7 exercised their termination rights, while the other six purchasers continued their contractual relationships with Burlingham. When the five manufacturers attempted to exercise the termination rights, Bosco and Lee immediately acted to determine the validity of these rights. Bosco called the chairman of Burlingham s board and informed him of the side letters and the probability that they would have a material adverse impact on the company s 2015 financial condition, its results of operations, and its first quarter financial results. Bosco subsequently placed Prince on an indefinite leave of absence. The chairman promptly called a special board meeting for the following week. The board appointed a committee of outside directors (the Special Committee ) to conduct a special investigation into Prince s alleged arrangements with the Chinese smartphone manufacturers. The Special Committee s preliminary findings indicated that Prince s kickback scheme had been in place for the years 2008, 2009, and Upon further investigation, the Special Committee found that the scheme substantially affected the company s financial statements for fiscal year 2014, and correction would require reclassification of income items related to the Chinese microchip smartphone contracts. 1 Accordingly, the company prepared and filed a restated 10-K for fiscal year 2014 (originally filed January 1, 2015). 1 Uchekwe and the SEC entered into a settlement agreement concerning all Burlingham filings certified by Uchekwe from January 2008 to January The parties have stipulated that the only restated filing at issue is Burlingham s 10-K filing for fiscal year

8 B. PROCEDURAL HISTORY On January 1, 2016, the SEC filed a civil action against Brian Bosco, Jasmine Lee, and Ronald Prince (together, the Appellants ) in the District of Fordham, alleging that Prince had participated in a scheme to defraud Burlingham investors by reporting millions of dollars of unearned revenue. The complaint alleged that Bosco and Lee violated Rule 13a 14 by certifying Burlingham s false and misleading financial statements for fiscal year The SEC also asserted that the financial restatements resulting from the false certification triggered a disgorgement remedy pursuant to SOX 304 for the 10-K filing filed on January 1, The SEC s claim against Prince alleged violations of the securities laws under 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 b 5. The SEC requested disgorgement of gains during the periods of January 2008 to January 2010 and January 2014 to January In June 2016, following limited discovery, Bosco and Lee filed a motion for summary judgment under Rule 56. They asserted there was no genuine dispute as to any material fact and they were entitled to judgment as a matter of law. The SEC filed a cross-motion for summary judgment against Bosco and Lee and simultaneously filed a motion for summary judgment against Prince. The District Court denied Bosco and Lee s motion and granted the SEC s cross-motion. In denying Bosco and Lee s Rule 56 motion, the District Court found no genuine dispute as to any material fact, but held that Bosco and Lee were not entitled to judgment as a matter of law. In granting the SEC s cross-motion, the District Court ruled that a cause of action exists under Rule 13a 14 against CEOs and CFOs who certify false financial 6

9 statements, even if they did not have knowledge of the falsity. The District Court further held that SOX 304 requires a CEO and CFO to disgorge incentive-based and equity-based compensation if their company issues an accounting restatement, even if the directors were not involved in the misconduct that caused the restatement. The District Court then ordered Bosco to disgorge $600,000 and Lee to disgorge $475,000, encompassing all bonuses, incentive-based compensation, equity-based compensation, and profits realized from the sale of Burlingham securities during the twelve-month period following January 1, With respect to Prince, the District Court granted the SEC s Rule 56 motion, finding Prince liable for the fraud scheme under Rule 10b 5. The District Court then concluded that because disgorgement does not constitute either penalty or forfeiture under 2462, the statute of limitations did not apply to the SEC s request for disgorgement for the period of January 2008 to January The District Court ordered him to disgorge $1,770,000, consisting of the following amounts: (1) $1,025,000 earned from forty-one side letters; (2) $495,000 encompassing all bonuses and other discretionary compensation received during the periods of January 2008 through January 2010 and January 2014 through January 2015, including the $45,000 bonus in 2009; and (3) $250,000 representing the total amount of bonuses that Conrad earned during the relevant periods. Bosco, Lee, and Prince timely filed this appeal. Bosco and Lee argue before this Court that the District Court erred in holding that Rule 13a 14 provides a cause of action against officers who certify false statements, even where the officers were unaware of the falsity. Further, Bosco and Lee assert that because they were not responsible for the misconduct leading to Burlingham s financial restatements, they should not be required to disgorge profits or bonuses stemming from the period of January

10 through January On appeal, Prince contests neither liability under Rule 10b 5 nor disgorgement for the period of January 2014 through January He asserts solely that the statute of limitations under 2462 precludes disgorgement of any profits earned from January 2008 through January C. STATEMENT OF JURISDICTION The District Court established jurisdiction over the SEC s claims against the Appellants pursuant to 15 U.S.C. 78aa and 28 U.S.C This Court has jurisdiction pursuant to 28 U.S.C D. STANDARD OF REVIEW We review de novo the District Court s grant of a motion for summary judgment under Rule 56 and view the facts in the light most favorable to the appellant. See In re Aria Sec. Litig., 610 F.3d 2504, 2507 (14th Cir. 2014). Summary judgment is appropriate where the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The construction and applicability of a federal statute of limitations is a question of law we review de novo. See Secrets v. Bernardin, Inc., 77 F.3d 1704, 1708 (14th Cir. 2012). II. RULE 13A 14 AND SOX 304 The first issue before this Court is two-part. First, we must determine whether Rule 13a 14 is violated when officers certify false statements, despite possessing no actual knowledge that the statements were false. Second, we must determine whether SOX 304 allows the SEC to force a CEO or CFO to disgorge profits where they did not personally engage in misconduct. For the 8

11 reasons stated below, we answer both questions in the affirmative and uphold the decision of the District Court. A. APPLICABLE LAW As directed by Section 302 of the Sarbanes Oxley Act ( SOX 302 ), the SEC enacted Rule 13a 14 in 2002, which applies to companies filing periodic reports under 13(a) of the Exchange Act. See 15 U.S.C (2016). Rule 13a 14 requires the principal executive officer(s) and the principal financial officer(s) of a public company to sign certifications as to the accuracy of the listed financial statements that become part of the company s quarterly or annual reports. See 17 C.F.R a 14 (2016). An officer is required to certify that she has reviewed the report, and, based on her knowledge, the report does not contain any untrue statement of a material fact and fairly present[s] in all material respects the financial condition and results of operations of the issuer. 15 U.S.C. 7241(a)(1) (3). SOX 304 states: If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for-- (1) any bonus or other incentive-based or equitybased compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and 9

12 (2) any profits realized from the sale of securities of the issuer during that 12-month period. 15 U.S.C. 7243(a) (2016). Additionally, the SEC has the authority to exempt any persons from reimbursement. 15 U.S.C. 7243(b). B. ANALYSIS We first discuss Rule 13a 14. Bosco and Lee argue that although Rule 13a 14 is violated when CEOs and CFOs do not sign or file certifications, there is no violation when the officers file false certifications. We disagree. The language of Rule 13a 14 implies that a mere signature is not sufficient for compliance. The rule states that officers who are required to provide certifications may not have the certification signed on his or her behalf pursuant to a power of attorney or other form of confirming authority. 17 C.F.R a 14(c). Further, certify has been defined as to testify by formal declaration, often in writing; to make known or establish (a fact) and to guarantee the quality or worth of; vouch for [something]. SEC v. Jensen, 835 F.3d 1100, 1113 (9th Cir. 2016) (quoting Webster s New Twentieth Century Dictionary of the English Language, Unabridged 297 (Jean L. McKechnie ed., 2d ed. 1979)). Additionally, [w]hen a corporate officer signs a document on behalf of the corporation, that signature will be rendered meaningless unless the officer believes that the statements in the document are true. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 (9th Cir. 2000). Accordingly, if an individual certifies a false document, that individual is liable for any false statements therein. 10

13 The Ninth Circuit has read an implicit truthfulness requirement into other rules promulgated under 13(a) of the Exchange Act. Jensen, 835 F.3d at Addressing Rule 13a 13, the Ninth Circuit held that quarterly report filings must not be misleading, even though the text of Rule 13a 13 merely states that reports must be filed without reference to the truthfulness of the content. See Ponce v. SEC, 345 F.3d 722, (9th Cir. 2003). Similarly, other rules promulgated under 13 create liability for false statements, even if such rules do not expressly require truthfulness. Rule 13d 1, which requires certain stockholders to file a form Schedule 13D, does not expressly require the Schedule 13D to be accurate. See 17 C.F.R d 1 (2016). Still, the Second Circuit held that the obligation to file truthful statements is implicit in the obligation to file with the issuer. GAF Corp. v. Milstein, 453 F.2d 709, 720 (2d Cir. 1971). Accordingly, the Second Circuit held that Rule 13d 1 creates a cause of action against stockholders who file false Schedule 13D s and those who fail to file entirely. See id. We extend such reasoning to our holding today and find that a cause of action exists against CEOs and CFOs for certifying false statements under Rule 13a 14. Further, although the dissent would read a scienter element into Rule 13a 14, none are applicable. In Re WSF Corp., Exchange Act Release No. 204, 2002 WL , at *3 (ALJ May 8, 2002) ( Violations of Exchange Act Section 13(a) do not require a finding of scienter. ). So long as a CEO and a CFO certify a financial statement that contains false representations, the SEC will have a cause of action against the CEO and CFO under Rule 13a 14. Here, where Bosco and Lee both certified a false statement, they are liable under Rule 13a

14 Regarding the SEC s SOX 304 claim, we also uphold the District Court s decision ordering disgorgement of Bosco s and Lee s bonuses and profits. Burlingham was required to prepare an accounting restatement due to the misleading 10-K certified by Bosco and Lee for fiscal year The District Court found that the SEC properly alleged the elements of a SOX 304 claim: (1) Burlingham was required to prepare an accounting restatement due to material noncompliance with financial reporting requirements; (2) the noncompliance was caused by misconduct within Burlingham, notably, Prince s fraud scheme; and (3) Bosco and Lee received bonuses, incentive-based or equity-based compensation, or profits from sales of Burlingham s securities during the twelve-month period after the first improper public issuance of filing. Bosco and Lee contest the District Court s finding that SOX 304 requires CEOs and CFOs to disgorge their bonuses and profits even if the individuals were not involved in the misconduct that caused the restatements. They argue that this conclusion is erroneous because SOX 304 is concerned not with the CEO s or CFO s misconduct, but rather with the issuer s misconduct. We disagree with Bosco and Lee and instead follow all other courts that have addressed this issue. We first look to the language of the statute. SOX 304 requires CEO and CFO disgorgement as a result of misconduct. 15 U.S.C. 7243(a). This phrase modifies the earlier clause of SOX 304, which references the misconduct of the issuer: [i]f an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer.... Id.; see also SEC v. Jenkins, 718 F. Supp. 2d 1070, (D. Ariz. 2010) (holding that issuer misconduct triggers the reimbursement obligation of the CEO and CFO). As such, there is no mention of personal misconduct of either the CEO or CFO, just that of the issuer, which 12

15 occurred here. We decline to read such a requirement into the statute and instead hold that any misconduct of an issuer triggers disgorgement. Legislative history provides further guidance. Congress intended on crafting a broad remedy that focused on disgorging unearned profits rather than punishing individual wrongdoing. See Jensen, 835 F.3d at 1115 (citing S. Rep. No at 26, 2002 WL (July 3, 2002)). Moreover, the title of the statute is indicative of Congress intent in enacting SOX 304 to include compensation that flows to a CEO as a result of misconduct. While statutory titles are not part of legislation, they can be instructive in putting statutes into context. See Almendarez-Torres v. United States, 523 U.S. 224, 234 (1998). Here, the title of the statute, Additional Compensation Prior to Noncompliance with Commission Financial Reporting Requirements, signals that the statute is aimed at encompassing additional compensation, such as that received by a CEO. For example, a CEO can receive additional compensation during a period of financial misconduct, even if he is not aware of the occurrence. See Jenkins, 718 F. Supp. 2d at Similarly, a CEO who sells stock or receives a bonus during the occurrence may be unjustly benefitting from any misrepresentation of the issuer s financial position caused by the occurrence. See id. Because the title suggests that it was Congress intent to capture any additional compensation paid to a CEO for any period in which an issuer was not in compliance with financial reporting requirements, Congress could rightfully require this compensation to be reimbursed. Additionally, the statutory scheme of SOX 304 contemplates that CEOs and CFOs are responsible for establishing internal controls for financial reporting, which would bring to their attention any misconduct that results in a restatement. See SEC v. Life Partners Holdings, Inc., 71 F. Supp. 3d 615, 625 (W.D. Tex. 13

16 2014). Therefore, SOX 304 operates as an enforcement tool for Rule 13a 14, and CEOs and CFOs should reimburse their companies under SOX 304 for failing to prevent misconduct arising out of Rule 13a 14. This does not mean, as the dissent suggests, that SOX 304 imposes strict liability against CEOs and CFOs, as the reimbursement requirement is not meant to hold CEOs and CFOs liable for the misconduct that led to the restatement. Instead, the reimbursement holds CEOs and CFOs accountable for their own failures to prevent or put a stop to misconduct a responsibility with which they are already charged under Rule 13a 14. Finally, while the dissent argues that our holding will leave those CEOs and CFOs that lack mental culpability at risk, this argument ignores the context in which the Sarbanes Oxley Act was enacted. Congress enacted the Sarbanes Oxley Act [a]fter a series of celebrated accounting debacles. Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 484 (2010). These events illustrate the role that SOX 304 plays in assuring the integrity of the financial markets. See S. Rep. No at 23 (2002), 2002 WL (July 3, 2002). Further, CEOs and CFOs are in the best position to ensure that internal controls are in place, and incentivizing them to oversee their companies by requiring disgorgement under SOX 304 is appropriate. For these reasons, we affirm the District Court s decision to grant the SEC s motion for summary judgment. III. STATUTE OF LIMITATIONS FOR DISGORGEMENT CLAIMS UNDER 28 U.S.C The second issue before this Court is whether the five-year statute of limitations in 28 U.S.C (2016) applies to SEC disgorgement claims. For the reasons stated below, we answer the 14

17 question in the negative and uphold the decision of the District Court. On appeal, Prince asserts that the District Court erred when it ordered disgorgement because the SEC s requested form of relief for the period of January 2008 through January 2010 was barred by Our discussion is limited to that single issue. We decline to decide today whether 2462 is applicable to all equitable remedies, and whether the statute of limitations in 2462 is jurisdictional in nature or only provides an affirmative defense. A. APPLICABLE LAW Neither the Securities Act of 1933 nor the Exchange Act contain a statute of limitations period applicable to SEC enforcement actions. Instead, the five-year statute of limitations under 28 U.S.C applies. See Gabelli v. SEC, 133 S. Ct. 1216, (2013). An action seeking to enforce any civil fine, penalty, or forfeiture, pecuniary or otherwise, must be brought within five years from the date when the claim first accrued. 28 U.S.C As such, 2462 applies to disgorgement only if disgorgement is a fine, penalty, or forfeiture. Legal analysis as to whether disgorgement falls within 2462 has revolved primarily around whether disgorgement constitutes either penalty or forfeiture under The Tenth Circuit has held that disgorgements are not penalties because they are remedial and preventative. See SEC v. Kokesh, 834 F.3d 1158, 1164 (10th Cir. 2016). Rather than inflicting punishment on the wrongdoer, disgorgement eliminate[s] profit from wrongdoing while avoiding, so far as possible, the imposition of a penalty. Id. (citing Restatement (Third) of Restitution and Unjust Enrichment 51(4) (Am. Law Inst. 2010)). The District of Columbia Circuit has similarly held 15

18 that disgorgement does not constitute a civil penalty under 2462, so long as the disgorged amount is causally related to the wrongdoing. Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010). As to whether disgorgement constitutes forfeiture, the Tenth and Eleventh Circuits are in conflict. The Tenth Circuit has held that disgorgement does not constitute forfeiture under See Kokesh, 834 F.3d at In Kokesh, the court analyzed the historical meaning of the word forfeiture, reasoning that when 2462 was enacted, forfeitures were linked to undoubtedly punitive actions for a civil fine or penalty. Id. Conversely, the Eleventh Circuit has held that disgorgement claims are subject to 2462 s five-year statute of limitations. See SEC v. Graham, 823 F.3d 1357, 1363 (11th Cir. 2016). In doing so, the Eleventh Circuit analyzed the ordinary meaning of the word disgorgement, finding that it is effectively a synonym of the word forfeiture under See id. B. ANALYSIS The SEC initiated its action against Prince on January 1, 2016, more than five years after Prince s initial fraud scheme during the period of January 2008 through January The question is whether, as Prince asserts, the District Court s order requiring Prince to disgorge the sum of $1,770,000 imposes a civil penalty or forfeiture. We hold that disgorgement falls outside of 2462 s ambit, and the SEC is not prohibited from seeking disgorgement more than five years after alleged wrongful conduct occurs. We begin interpretation of the statute by looking at its language. Penalty and forfeiture are not defined in Therefore, we are guided by the Supreme Court s common sense rule that [c]ourts properly assume, absent sufficient indication to 16

19 the contrary, that Congress intends the words in its enactments to carry their ordinary, contemporary, common meaning. Pioneer Inv. Servs. Co. v. Brunswick Assoc. Ltd. P ship, 507 U.S. 380, 388 (1993) (quoting Perrin v. United States, 444 U.S. 37, 42 (1979)). Prince first argues that disgorgement constitutes a penalty within We hold that it does not. While the Supreme Court has not addressed whether disgorgement falls within 2462 s five-year statute of limitations, the Court has stated that civil penalties go beyond compensation, are intended to punish, and label defendants wrongdoers. Gabelli, 133 S. Ct. at 1223 (citing Meeker v. Lehigh Valley R.R. Co., 236 U.S. 412, 423 (1915)). Further, time limits are significant for penalty actions, as it would be utterly repugnant to the genius of our laws if actions for penalties could be brought at any distance of time. Gabelli, 133 S. Ct. at 1223 (quoting Adams v. Woods, 6 U.S. 336, 342 (1805)). On the other hand, the primary purpose of disgorgement is not to inflict punishment on a wrongdoer, but to divest him of his ill-gotten gain. Zacharias v. SEC, 569 F.3d 458, (D.C. Cir. 2009); see also Tull v. United States, 481 U.S. 412, 422 (1987) (finding that penalties are intended to punish culpable individuals, not to extract compensation or restore the status quo ). Because disgorgements are remedial and penalties are not, disgorgements are not penalties. The dissent argues that disgorgement in this case is punitive because Prince was also ordered to disgorge the $250,000 in profits that Conrad earned. However, it is not punitive to require a wrongdoer to disgorge all the monies that improperly trickled down to others as a result of his own actions. See SEC 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 17

20 the funds he or she retained. ). Further, disgorgement plays a significant role in preventing unjust enrichment. See Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 399 (1940). Conrad was unjustly enriched due to Prince s wrongdoing, and requiring Prince to disgorge Conrad s gains is not sufficient to render the disgorgement punitive. Disgorgement has historically been viewed as an equitable remedy employed against wrongdoers who profit by abusing positions of trust. See SEC v. Maxxon, Inc., 465 F.3d 1174, 1179 (10th Cir. 2006) ( Disgorgement is by nature an equitable remedy as to which a trial court is vested with broad discretionary powers. ); see also SEC v. Commonwealth Chem. Sec., 574 F.2d 90, 95 (2d Cir. 1978) ( A historic equitable remedy was the grant of restitution by which [a] defendant [was] made to disgorge illgotten gains. (quoting Porter v. Warner Holding Co., 328 U.S. 395, (1946)). Equitable remedies are to be contrasted from punitive damages that are covered under See, e.g., Curtis v. Loether, 415 U.S. 189, 197 (1974) (holding that punitive damages awarded during proceedings are not the equivalent of equitable relief administered at common law); see also United States v. Telluride Co., 146 F.3d 1241, 1247 (10th Cir. 1998) ( [E]quitable remedies, such as disgorgement, which sanction past conduct, are remedial. ). Because disgorgement is an equitable remedy, and equitable remedies are not punitive, we hold that disgorgement does not fall within the reach of Prince also asserts that disgorgement constitutes forfeiture under We disagree. First, we interpret 2462 in light of the meanings of forfeiture and disgorgement at the time of the statute s enactment. See Office of Workers Comp. Programs v. Greenwich Collieries, 512 U.S. 267, 275 (1994). Section 2462 was codified in 1948, but earlier versions of the statute date back to the 1790s. See 3M Co. (Minnesota Mining & Mfg.) v. Browner, 17 F.3d 1453, 18

21 1457 & n.7 (D.C. Cir. 1994). Consequently, we look to the definitions of forfeiture and disgorgement during that time. Forfeiture had two meanings in the 1790s. A forfeiture proceeding was a statutory civil remedy to recover property used in violation of customs and revenue laws. See Austin v. United States, 509 U.S. 602, (1993). Alternatively, forfeiture was used as a synonym for fine. See id. at 614 n.7. In contrast, the ancient remedies of accounting, constructive trust, and restitution have compelled wrongdoers to disgorge i.e., account for and surrender their ill-gotten gains for centuries. See SEC v. Cavanagh, 445 F.3d 105, 119 (2d Cir. 2006). As the Tenth Circuit aptly highlighted, the word forfeiture in 2462 must be read in the context of an action, suit, or proceeding. See Kokesh, 834 F.3d at 1165 (quoting 28 U.S.C. 2462). Government forfeiture was an in rem procedure to take tangible property used in criminal activity. United States v. 92 Buena Vista Ave., 507 U.S. 111, 118 (1993). Similarly, Black s Law Dictionary defines civil forfeiture as [a]n in rem proceeding brought by the government against property that either facilitated a crime or was acquired as a result of criminal activity. Civil Forfeiture, Black s Law Dictionary (10th ed. 2014). Therefore, disgorgement and forfeiture have distinct legal meanings and are independent remedies with important differences. The dissent cites the Eleventh Circuit s holding in Graham to support the claim that there is no meaningful difference between the dictionary definitions of disgorgement and forfeiture merely because both acts require turning over profits or property due to wrongdoing. See Graham, 823 F.3d at We find this unpersuasive as it ignores the distinct meanings of forfeiture and disgorgement at the time Congress enacted the statute. 19

22 Further, unlike forfeiture, disgorgement is not punitive. Section 2462 has been interpreted as applying only to punishments. See Meeker, 236 U.S. at 423 (construing 2462 s predecessor, which imposed a five-year statute of limitations period for a suit or prosecution for any penalty or forfeiture[,] as refer[ring] to something imposed in a punitive way ). Additionally, reading forfeiture together with fine and penalty demonstrates that Congress intended actions brought under 2462 be punitive in nature. Finally, because the statute of limitations in 2462 is being used to bar the rights of the SEC, we must construe the statute in the SEC s favor. 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 a strict construction in favor of the government. ). Prince argues that because securities violations are generally victimless, this is not the sort of case that merits strict construction in favor of the government. We disagree. The central mission of the SEC Enforcement Division is to protect investors and the markets by investigating potential violations of the federal securities laws and litigating the SEC s enforcement actions. SEC, Enforcement Manual 1 (2016). In light of the important public function served by the SEC s enforcement activity, we conclude that the statute of limitations in this case should be interpreted narrowly in the SEC s favor. Finally, we acknowledge that in the absence of holding that disgorgement falls within 2462 s reach, there is no statute of limitations imposed on disgorgement claims. Our holding today does not imply an infinite look-back period for legal claims. The underlying Rule 10b 5 claim was brought within the reasonable time of repose. There is no fundamental problem with an indefinite action for disgorgement, and the action against Prince does not represent one that was brought unreasonably late. 20

23 IV. CONCLUSION For the foregoing reasons, we affirm the District Court s holding that a cause of action exists under Rule 13a 14 against CEOs and CFOs for certifying false certifications, even where they do not possess actual knowledge of the falsity, and that personal misconduct of CEOs and CFOs is not required to trigger the disgorgement remedy authorized under Section 304 of the Sarbanes Oxley Act. We also affirm the District Court s holding that the Securities and Exchange Commission s enforcement actions seeking disgorgement are not barred by 28 U.S.C

24 LOVEJOY, Circuit Judge, concurring: I concur with Parts I and II of Judge Russell s opinion. I also agree with the result in Part III, but I write separately to clarify that disgorgement does not constitute a fine. A fine is a payment to a sovereign as punishment for some offense. Browning-Ferris Indus. of Vermont, Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 265 (1989). On the other hand, disgorgement is not a payment, but instead acts as a means of returning proceeds that a wrongdoer unlawfully gained. See Kokesh, 834 F.3d at 1164 ( Disgorgement just leaves the wrongdoer in the position he would have occupied had there been no misconduct. (quoting Restatement (Third) of Restitution and Unjust Enrichment 51 cmt. k (Am. Law Inst. 2010)). Further, Prince s disgorgement requires him to surrender profits to the SEC, rather than being returned to Burlingham. Black s Law Dictionary defines a fine as [a] pecuniary criminal punishment or civil penalty payable to the public treasury. Fine, Black s Law Dictionary (10th ed. 2014). This is not to say, however, that there is a distinction between cases in which the government recovers proceeds of disgorgement and those in which they are returned to a victim. Rather, disgorgement is categorically an equitable remedy designed to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws. SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989) (collecting cases). Regardless as to who receives the disgorged monies, the purpose of unjust enrichment is served by disgorging the ill-gotten gains by a wrongdoer. As a result, the receiver of disgorgement does not transform disgorgement into a fine. As the majority notes, disgorgement does not share the punitive nature that is inherent in penalty and forfeiture. In fact, reading fine, along with penalty and forfeiture demonstrates 22

25 that Congress intended that actions brought under 2462 be punitive in nature. Since disgorgement is not punitive, it does not constitute a fine, penalty, or forfeiture and does not fall under

26 KHATIBIFAR, Circuit Judge, dissenting: I respectfully dissent from the majority s ruling on both claims. I would reverse the District Court s decision to grant the SEC s motion for summary judgment and the decision holding that disgorgement falls outside the reach of I. RULE 13A 14 & SOX 304 Today, the majority interprets Rule 13a 14 and SOX 304 as strict liability statutes. Regarding Rule 13a 14, I would hold that Rule 13a 14 contains a scienter element. Section 7241, under which Rule 13a 14 is promulgated, requires an officer to certify items based on the officer s knowledge. 15 U.S.C This expressly states a requirement of knowledge. The majority cites Howard v. Everex Systems, Inc. to support the proposition that signatories of documents should be held responsible for statements in the document because signatures indicate that the signatory has read the document and attests to its accuracy. Nevertheless, Howard is distinguishable from the case at hand. The defendant in Howard knew that the statement he filed contained a misrepresentation. See 228 F.3d at Here, Bosco and Lee were not involved in Prince s fraudulent scheme, and more importantly, neither of them knew that the statements they certified were false. Further, Howard concerned liability for a misstatement under Rule 10b 5. See generally Howard, 228 F.3d Rule 10b 5 requires scienter, a mental state embracing intent to deceive, manipulate, or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Rule 13a 14, however, includes a qualification for knowledge but does not delineate what level. The majority today does not answer this question and instead ignores 24

27 the knowledge requirement based on the act of penning a signature. Under the majority s holding, an inaccurate certification is improperly classified as false, even where there was no mental culpability on the part of the signatory. Falsity includes a mental element. See Jensen, 835 F.3d at 1117 (citing Merriam Webster s definitions for false testimony and false promise as intentionally untrue and intended or tending to mislead[,] respectively). Thus, the SEC should be required to show that any CEO or CFO who certifies a false financial statement under Rule 13a 14 acted with either actual knowledge or recklessness as to the falsity of the certification. Here, under either an actual knowledge or a recklessness standard, there is no question that Bosco and Lee did not have actual knowledge with respect to Prince s scheme, and further, neither were reckless. Moreover, the SEC s official release in connection with the final version of Rule 13a 14 supports a finding that liability for false certification requires, at a minimum, recklessness from the certifying officer. See Certification of Disclosure in Companies Quarterly and Annual Reports, Exchange Act Release No. 8124, 78 SEC Docket 875, 2002 WL , at *9 (Aug. 28, 2002) [ Release No ]. Release No is entitled to substantial deference, because courts show great deference to interpretations given to statutes by officers and agencies charged with their administration and even greater deference when the interpretation concerns an administrative regulation. See Udall v. Tallman, 380 U.S. 1, 16 (1965). Specifically, SEC Release No lists sections 10(b) and 13(a) of the Exchange Act under a section titled Liability for False Certification. Release No. 8124, 2002 WL , at *9. Sections 10(b) and 13(a) are enforcement mechanisms that have since been held by courts to require executives to act with either knowledge or recklessness before being held liable for a false 25

28 certification. See Hochfelder, 425 U.S. at 193 n.12 (holding that Rule 10b 5, which prohibits fraud in the purchase or sale of securities, requires a showing of scienter); see also Ponce, 345 F.3d at 737 (holding that at least recklessness as to the falsity of a certification is required to hold an officer liable for aiding and abetting a public company s issuance of a false or misleading financial statement in violation of 13(a)). Section 18 of the Exchange Act, which is also listed under the relevant section in SEC Release No. 8124, imposes direct liability on [a]ny person who... make[s] or cause[s] to be made any statement in any application, report, or document... which... at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact. Jensen, 835 F.3d at 1121 (Bea, J., concurring) (quoting 15 U.S.C. 78r(a)). Although there is no knowledge requirement expressly stated in 18, it contains a good faith defense, and a person can escape liability for making a false or misleading statement if he proves that he had no knowledge of the falsity. See id. For the reasons stated above, I would hold that in order to impose liability for false certification, the SEC must demonstrate that CEOs and CFOs who certify false financial statements acted with the requisite intent of either actual knowledge or recklessness. Accordingly, I would reverse the District Court s holding as to Rule 13a 14. Regarding SOX 304, the majority today holds that CEOs and CFOs must constantly patrol their subordinates actions, in fear that the officers will be liable for all misconduct. Here, there is no question that Prince s conduct not Bosco s or Lee s led Burlingham to issue an accounting restatement. Despite the majority s discussion regarding the language of SOX 304, the statute does not plainly express whose misconduct must cause an accounting restatement in order to trigger the 26

29 reimbursement requirement. Had Congress modified the statute to merely add the word issuer before the word misconduct, SOX 304 would have clearly conveyed that no culpability on the part of the CEO or CFO is required. However, because it is not clear, I would instead read SOX 304 as containing a requirement of personal misconduct of CEOs and CFOs because the statute unambiguously requires CEOs and CFOs to reimburse the issuer for all qualifying compensation. See 15 U.S.C. 7243(a). Interpreting SOX 304 in favor of the SEC creates a problematic result. It makes 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. This interpretation is absurd and begs the question as to whether SOX 304 is constitutional. When there are multiple interpretations of a statute, the canon of constitutional avoidance requires courts to choose the interpretation that does not raise questions about the statute s constitutionality. See Clark v. Martinez, 543 U.S. 371, 381 (2005) (explaining the canon of constitutional avoidance as a tool for choosing between competing plausible interpretations of a statutory text, resting on the reasonable presumption that Congress did not intend the alternative which raises serious constitutional doubts ). I would avoid this constitutional question by choosing an interpretation of SOX 304 that requires the element of personal CEO and CFO misconduct, in favor of Bosco and Lee. If the intent of SOX 304 is punitive, it is irrational to apply it to officers who have not engaged in any misconduct. I cannot agree with the majority utilizing one person s misconduct to punish another. 27

30 II. STATUTE OF LIMITATIONS FOR DISGORGEMENT CLAIMS UNDER 28 U.S.C I would hold that disgorgement of ill-gotten gains realized from alleged violations of securities laws constitutes punitive forfeiture under 2462 and bars the SEC from recovering gains beyond the five-year statute of limitations. The majority s interpretation of 2462 allows the SEC to label its requested relief as something other than a penalty or forfeiture, regardless of its punitive effect. I would hold that 2462 restricts the SEC s jurisdiction to seek disgorgement or any other remedy that operates in effect, regardless of formal title or label, as a civil fine, penalty, or forfeiture, pecuniary or otherwise. 28 U.S.C We should look not at the label of relief, but rather [at] its character and purpose. Gompers v. Buck s Stove & Range Co., 221 U.S. 418, 441 (1911) (discussing the difference of effect and nature between criminal and civil proceedings). The majority illogically equates disgorgement with equitable remedies and makes a blanket statement that because disgorgement is often considered an equitable remedy, and equitable remedies are often not under the purview of 2462, disgorgement cannot fall under I would apply 2462 to SEC actions for either equitable or remedial relief where such relief seeks to punish the defendant rather than remedy a past wrong. See Johnson v. SEC, 87 F.3d 484, 491 n.11 (D.C. Cir. 1996) ( It is clearly possible for a sanction to be remedial in the sense that its purpose is to protect the public, yet not be remedial because it imposes a punishment going beyond the harm inflicted by the defendant. ). Here, the District Court ordered disgorgement of a $45,000 bonus that was awarded to all executive officers at Burlingham and a sum of $250,000 gained by someone other than Prince. This does more than bring Prince back to the status quo 28

31 ante. Rather than acting as equitable relief, the disgorgement ordered by the majority is punitive. Similarly, the majority claims that 2462 does not apply to disgorgement claims because they are often described as nonpunitive and remedial. This is unpersuasive. Disgorgement claims are no more remedial and non-punitive than civil forfeitures, which are expressly governed by Additionally, the primary purpose of both disgorgement and civil forfeiture is deterrence. See SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972) ( The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profit. ). By handpicking canons of construction to support its decision, the majority examined the historical meanings of disgorgement and forfeiture. In doing so, the majority failed to consider the contemporary role of disgorgement in enforcement actions. Courts use the terms disgorgement and forfeiture interchangeably when referring to a confiscation of property as a result of wrongdoing. See, e.g., United States v. Ursery, 518 U.S. 267, 284 (1996) ( 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. ); see also SEC v. Contorinis, 743 F.3d 296, 310 (2d Cir. 2014) ( Both forfeiture and disgorgement seek to force a defendant to give up that is, to forfeit or to disgorge what he has wrongfully gained. ). I am further persuaded by the Eleventh Circuit s holding in Graham that for the purposes of 2462[,] forfeiture and disgorgement are effectively synonyms and there is no meaningful difference between the two words. 823 F.3d at The ordinary meaning of forfeiture demonstrates that forfeiture occurs when a person is forced to turn over money or property because of a crime or wrongdoing. Id. (citing Forfeiture, 29