No IN THE SUPREME COURT OF THE UNITED STATES BRIAN BOSCO; JASMINE LEE; RONALD PRINCE PETITIONER, SEC, RESPONDENT.

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1 No IN THE SUPREME COURT OF THE UNITED STATES TEAM P11 P6 TTEAMTTTTTTTTJT BRIAN BOSCO; JASMINE LEE; RONALD PRINCE PETITIONER, v. SEC, RESPONDENT. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTEENTH CIRCUIT BRIEF FOR PETITIONER TEAM P11 Counsel of Record for Petitioner

2 TABLE OF CONTENTS TABLE OF CONTENTS... i TABLE OF AUTHORITIES...iii QUESTIONS PRESENTED... v STATEMENT OF THE CASE... 1 I. Factual Background... 1 II. Procedural History... 3 SUMMARY OF THE ARGUMENT... 6 STANDARD OF REVIEW... 8 ARGUMENT I. MR. BOSCO AND MS. LEE CANNOT BE HELD LIABLE FOR THE MISCONDUCT OF MR. PRINCE NOR SHOULD THEY HAVE THEIR FUNDS DISGORGED WHEN THERE IS NO PERSONAL LIABILITY.. 10 A. A false certification needs some degree of mental culpability that neither Mr. Bosco nor Ms. Lee had of the misconduct B. Mr. Bosco and Ms. Lee acted in good faith by maintaining the internal controls and having no knowledge of the misconduct II. SOX 304 IS AMBIGUOUS IN ITS MEANING AND SHOULD BE INTERPRETED NARROWLY BECAUSE OF THE RULE OF LENITY AND CONCERNS WITH CONSTITUTIONAL QUESTIONS A. The Rule of Lenity necessitates a narrow reading of SOX 304 that would require personal culpability B. The Due Process Clause would prevent disgorgement in this case because of the lack of a substantial relationship with the misconduct III. SECTION 2462 APPLIES TO DISGORGEMENT ACTIONS BECAUSE DISGORGEMENT ACTIONS ARE EITHER A FORFEITURE OR A PENALTY i

3 A. The five-year statute of limitations in 2462 applies to disgorgement because disgorgement and forfeiture are synonymous i. The ordinary and popular meaning of both forfeiture and disgorgement render the terms synonymous ii. The similar purposes that disgorgement and forfeiture serve subject disgorgement to 2462 s five-year statute of limitations B. Alternatively, disgorgement is a penalty for the purposes of 2462 because Mr. Prince was ordered to disgorge more than what he gained C. Refusing to extend 2462 to cover disgorgement would violate the vital purposes that statutes of limitations serve CONCLUSION APPENDIX: 15 U.S.C.A a APPENDIX: 15 U.S.C.A a APPENDIX: 17 C.F.R a a APPENDIX: 15 U.S.C.A 78 t... 4a APPENDIX: 28 U.S.C.A a ii

4 TABLE OF AUTHORITIES Cases Page(s) Adams v. Woods, 6 U.S. 336 (1805) Addison v. Holly Hill Fruit Products, Inc., 322 U.S. 607 (1944) Gabelli v. SEC, 133 S.Ct (2013)...23,26,27 GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971) Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990) Howard v. Everex Systems, Inc., 228 F.3d 1057 (9th Cir. 2000).. 10,11,12,13,14 Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996) Kaplan v. Rose, 49 F.3d 1363 (9th Cir. 1994) Kasten v. Saint-Gain Performance Corp., 563 U.S. 1 (2011) Leocal v. Ashcroft, 543 U.S. 1 (2004) Morales v. Quintel Entertainment, Inc., 249 F.3d 115 (2d Cir. 2001)... 9 Ponce v. SEC, 345 F.3d 722 (9th Cir. 2003)... 16,17 Railroad Telegraphers v. Railway Express Agency, Inc., 321 U.S. 342 (1994).. 25 Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010) Rotella v. Wood, 528 U.S. 549 (2000) Scales v. U.S., 367 U.S. 203 (2017)...15,17,18 SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) SEC v. Fischbach Corp., 133 F.3d 170 (2d. Cir. 1997) SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016)... 19, 20, 21, 22, 23 SEC v. Koenig, 469 F.2d 198 (2d Cir. 1972) SEC v. Jenkins, 718 F.Supp.2d 1070 (D. Ariz. 2010)...16,17,18 SEC v. Jensen, 835 F.3d 1100 (9th Cir. 2016)...10,11,12 iii

5 SEC v. McNulty, 137 F.3d 732 (2d Cir. 1998) Terwilliger v. Terwilliger, 206 F.3d 240 (2d Cir. 2000)... 9 Trust Co. of New York v. U.S., 304 U.S. 126 (1938) Udall v. Tallman, 380 U.S. 1 (1965) U.S. v. Telluride, 146 F.3d 1241(10th Cir. 1998)... 9, 23, 24 U.S. v. Nat l Broiler Marketing Ass n, 550 F.2d 1380 (5th Cir. 1977)... 20, 22 U.S. v. Ursery, 518 U.S. 267 (1996)... 21, 23 Wood v. Carpenter, 101 U.S. 135 (1897) Statutes 15 U.S.C. 78t U.S.C ,11,18 18 U.S.C. 1963(a)(3) U.S.C. 881(a)(6) U.S.C v, 5, 19, 28 Other Authorities Black s Law Dictionary (10th ed. 2014) Certification of Disclosure in Companies Quarterly and Annual Reports, Exchange Act Release No. 8124, SEC Docket 875 (August 28, 2002) H.R. Rep S. Rep ; Webster s Third New Int l Dictionary (2002) iv

6 QUESTIONS PRESENTED 1. Whether a cause of action exists under Rule 13a-14 against chief executive officers and chief financial officers who certify incorrect financial statements where they did not have actual knowledge of the falsity, and whether the disgorgement remedy authorized under section 304 of the Sarbanes-Oxley Act of 2002 requires personal misconduct of chief executive officers and chief financial officers. 2. Whether 28 U.S.C s five-year statute of limitations applies to disgorgement claims. v

7 STATEMENT OF THE CASE I. Factual Background Burlingham Inc., a microchip manufacturer, added smartphone microchips to its product lines in (R. at 1). By 2007, the smartphone business had attained forty-two percent market share and earned fifty-two percent of Burlingham s net income. (R. at 2). Ronald Prince ( Mr. Prince ) became Burlingham s Executive Vice President in 2002 and was largely responsible for the success of Burlingham s smartphone business. (R. at 2). Mr. Prince led Burlingham s expansion into China s smartphone business market where manufacturers sold smartphones at an increasing rate to meet demand in the United Kingdom ( UK ). (R. at 2). Mr. Prince s compensation was not connected to the smartphone business success. (R. at 2). Instead, a discretionary bonus made up seventyfive percent of Mr. Prince s compensation. Mr. Prince spoke to Henrietta Conrad, the Communications Division s 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! (R. at 2). In January 2008, Mr. Prince began clandestinely negotiating concessions into Burlingham s purchase agreements with select Chinese smartphone manufacturers. (R. at 3). Ordinarily, all of Burlingham s purchase agreements contained termination rights limited to an event of force majeur negatively 1

8 impacting the UK s smartphone market. (R. at 3). Mr. Prince offered unilateral termination rights to select purchasers without informing anyone at Burlingham. (R. at 3). Mr. Prince executed thirty side letters over the course of three years. Mr. Prince signed his final letter in January (R. at 3). Mr. Prince was paid $25,000 for each side letter. (R. at 3). The side letters required an additional $50,000 to Mr. Prince if a purchaser exercised her unilateral termination rights. (R. at 3). Burlingham entered into a major contract with a producer of computer tablets in March (R. at 3). The success of the deal led to a $45,000 bonus that was unrelated to the smartphone business for each executive officer, including Mr. Prince. (R. at 3). In 2011, Veronica Uchekwe retired from the company as CEO and the board of directors named Brian Bosco ( Mr. Bosco ) the new CEO. (R. at 3). Mr. Bosco brought in young executives including the new CFO Jasmine Lee ( Ms. Lee ). (R. at 4). Mr. Bosco and Ms. Lee then involved themselves in the changing financial structure of the company while maintaining a system above the SOX standards. (R. at 4). In October 2014 both senior officials participated in a technology conference, where they both had a chat with the CEO of a Japanese manufacturer about changing their contract. (R. at 4). The CEO mentioned amending his existing contract to add unilateral terminations rights, which both Mr. Bosco and Ms. Lee brushed off. (R. at 4). After the conference, Mr. Bosco and Ms. Lee realized that the CEO had requested unilateral termination 2

9 rights from both of them individually and became concerned at his request. (R. at 4). From Mr. Prince entered into eleven additional side letters with select Chinese smartphone manufacturers. (R. at 4). In March of 2015, five of the eleven purchasers exercised their termination rights due to a 2.5% decline in UK GDP. (R. at 4-5). When the purchasers attempted to exercise the unilateral termination rights, Mr. Bosco and Ms. Lee immediately attempted to determine the validity of these rights. (R. at 5). Mr. Bosco spoke with the chairman of Burlingham s board and explained the situation. (R. at 5). Consequently, Mr. Bosco placed Mr. Prince on an indefinite leave of absence. (R. at 5). An investigation revealed that Mr. Prince s scheme substantially affected the company s financial statements for fiscal year 2014, and that correction of the statements would mean reclassification of income items related to the Chinese microchip smartphone contracts. (R. at 5). II. Procedural History The Securities and Exchange Commission ( SEC ) filed a civil action against Mr. Bosco, Ms. Lee, and Mr. Prince on January 1, 2016 in the United States District Court for the Southern District of Fordham. (R. at 6). The SEC alleged that Mr. Prince had taken part in a scheme to defraud Burlingham investors by reporting millions of dollars of unearned revenue. (R. at 6). The SEC alleged that Mr. Bosco and Ms. Lee violated Rule 13a-14 by certifying Burlingham s false and misleading financial statements for fiscal year (R. at 6). The SEC additionally alleged that the financial restatements stemming 3

10 from the false certification triggered a disgorgement action pursuant to SOX 304 for the 10-K filing filed on January 1, (R. at 6). The SEC also claimed that Mr. Prince allegedly violated the securities laws under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and Rule 10b-5, 17 C.F.R b-5. (R. at 6). The SEC sought disgorgement of gains during the periods of January 2008 to January 2010 and January 2014 to January (R. at 6). Mr. Bosco and Ms. Lee filed a motion for summary judgment under Rule 56 in June 2016 following limited discovery. (R. at 6). The SEC filed a crossmotion for summary judgment against Mr. Bosco and Ms. Lee and also filed a motion for summary judgment against Mr. Prince. (R. at 6). The district court granted the SEC s cross motion against Mr. Bosco and Ms. Lee. (R. at 6). The district court also granted the SEC s motion for summary judgment. (R. at 7). In granting the SEC s cross-motion against Mr. Bosco and Ms. Lee, the district court ordered Mr. Bosco to disgorge $600,000 and Ms. Lee to disgorge $475,000. (R. at 7). The district court held that because disgorgement does not constitute either penalty or forfeiture under 28 U.S.C ( 2462 ), the statute of limitations did not apply to the SEC s request for disgorgement for the period of January (R. at 7). The district court ordered Mr. Prince to disgorge: (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; 4

11 and (3) $250,000 representing the total amount of bonuses that Henrietta Conrad, the Communications Division s only other executive manager, earned. (R. at 7.) Mr. Bosco, Ms. Lee, and Mr. Prince filed a timely appeal to the United States Court of Appeals for the Fourteenth Circuit. (R. at 7). Mr. Bosco and Ms. Lee argued that the district court erred in holding that Rule 13a-14 provides a cause of action against officers who certify false statements, even where officers were unaware of their falsity. (R. at 7). Mr. Prince argued that the district court erred in granting the SEC s Rule 56 motion because the statute of limitations under 2462 precluded disgorgement of any profits earned from January 2008 through January (R. at 8). The appellate court affirmed the lower court s grant of summary judgment against Mr. Bosco, Ms. Lee, and Mr. Prince. (R. at 21). Mr. Bosco, Ms. Lee, and Mr. Prince filed a writ of certiorari and the United States Supreme Court granted the writ on February 1, (R. at 32). 5

12 SUMMARY OF THE ARGUMENT First, Senior Officials cannot be held liable for a certification of a report if they have no knowledge of or indirect effect on the misconduct. The Sarbanes- Oxley Act, created in response to bad financial practices within various firms, is used to regulate internal behaviors that can lead or potentially lead to misconduct. Section 302 of SOX focuses on senior officials certifying their documents to facilitate more responsibility at multiple levels of the firm. The point of this section was not to create liability for senior officials, but to make senior officials responsible for conduct within their control. Here, both senior officials would avoid joint and several liability regarding Mr. Prince s misconduct because they acted in good faith and with no knowledge of the misconduct. Ms. Lee and Mr. Bosco implemented sufficient internal controls that were well within standards of the SOX guidelines. However, the SEC is still prosecuting Mr. Bosco and Ms. Lee for following the law even without knowledge of the misconduct that brought the parties into court. SOX 304 is ambiguous and a broad interpretation of SOX 304 would lead to a constitutional violation. The phrase as a result of misconduct does not specify who must commit the misconduct and leaves open the question as to whether Congress is speaking about issuer misconduct or CEO and CFO misconduct. While the statute can be read both ways, reading the statute broadly is problematic because it essentially sets up strict liability for senior officials whenever there is misconduct at any level in the firm. However, this gives rise to constitutional issues of Due Process because the senior 6

13 officials are in no way allowed to avoid liability even if they are following all the laws set out by SOX and the SEC. Mr. Bosco and Ms. Lee at no time broke the law and followed the guidelines of the SEC strictly. Therefore, Mr. Bosco and Ms. Lee should not be held liable. Second, the circuit court improperly held that 2462 does not bar the SEC s enforcement action seeking disgorgement s five-year statute of limitations applies to disgorgement because disgorgement and forfeiture are synonymous. Both terms share similar definitions and purposes. In fact, forfeiture casts a wider net than disgorgement. Therefore, disgorgement can also be read as a subset of forfeiture. Alternatively, disgorgement can be a penalty for the purposes of Specifically, the district ordered Mr. Prince to disgorge an amount that goes beyond restoring the status quo. Therefore, because Mr. Prince was ordered to disgorge more than his illegally gained profits, disgorgement was used punitively in this case. As a result, disgorgement is a penalty and 2462 s statute of limitations barred the SEC s action for disgorgement. Refusing to extend 2462 to cover disgorgement would violate the principle that statutes of limitations are in place to promote justice by preventing surprises through the revival of stale claims. While statutes of limitations are usually interpreted narrowly in the government s favor, the SEC is unlike a private citizen. One of the SEC s central missions is to investigate into potential violations of the federal securities laws. The SEC has unlimited resources to carry out its core function 7

14 of rooting out fraud. Therefore, holding in the SEC s favor would leave a defendant at the mercy of the SEC an entity that would have unlimited resources and unlimited time to bring claims against defendants. 8

15 STANDARD OF REVIEW A Summary Judgement and cross motion for Summary Judgement must be reviewed de novo on a judgment as a matter of law without any issue of genuine material fact, and must be construed in the light most favorable to the non-moving party in regards to that legal issue. Morales v. Quintel Entertainment, Inc., 249 F.3d 115, 121 (2d Cir. 2001) (citing Terwilliger v. Terwilliger, 206 F.3d 240, 244 (2d Cir. 2000)). Interpretation of a federal statute of limitations is a question of law reviewed de novo. U.S. v. Telluride Co., 146 F.3d 1241, 1244 (10th Cir. 1998) (citing Wolfgang v. Mid-America Motorsports, Inc., 111 F.3d 1515, 1524 (10th. Cir. 1997)). 9

16 ARGUMENT I. MR. BOSCO AND MS. LEE CANNOT BE HELD LIABLE FOR THE MISCONDUCT OF MR. PRINCE NOR SHOULD THEY HAVE THEIR FUNDS DISGORGED WHEN THERE IS NO PERSONAL LIABILITY. The lower court erred by stopping their inquiry of liability with just the issuer, and are required to further investigate whether the senior officials were personally liable under SOX U.S.C. 7241; Ponce v. SEC, 345 F.3d 722, 736 (9th Cir. 2003). Mr. Bosco and Ms. Lee s lack of knowledge regarding Mr. Prince s actions illustrates their separation from the misconduct and makes allegations of extended liability, control, and aiding and abetting baseless. SEC v. Jensen, 835 F.3d 1100, 1118 (9th Cir. 2016). If a senior official is claimed to have certified a false document then they must have some knowledge of this falsity to violate the statute--an element that is absent in this case. Jensen, 835 F.3d at 1118; Howard v. Everex Systems, Inc., 228 F.3d 1057 (9th Cir. 2000). A. A false certification needs some degree of mental culpability that neither Mr. Bosco or Ms. Lee had regarding the misconduct. While there is an implicit truthfulness requirement, questions of falsity and truthfulness require knowledge to determine if a person did in fact falsely certify a document. 15 U.S.C. 7241; Jensen, 835 F.3d at The most recent case on this issue, Jensen, has defined the separation between an inaccurate document and a false document. Id. at There, the court used the implicit truthfulness requirement, but refused to answer the question on mental state in 13a-14 relying instead on the senior official having sufficient 10

17 belief that the document is accurate. 17 CFR a-14; Jensen, 835 F.3d at 1113 (citing Ponce, 345 F.3d at 736). An inaccurate certification of a document, where the official had no knowledge of the misconduct made in the report, is substantially different from a false certification of a document, where the official knew of the misconduct and continued to certify the report. Id. at 1117 (concurring opinion). Other courts have also used section 13 to establish a truthfulness doctrine amongst reports that are being certified by senior officials. GAF Corp. v. Milstein, 453 F.2d 709, 719 (2d Cir. 1971) (rejecting in a 13d-1 that the penal provision on false filings or one of the antifraud provisions ). All of these courts focus on the officer certifying a document when they have a substantial basis to believe that the document is not an accurate report of the company s real financial situation. The court in Howard, separates the liability of both the issuer and the personal liability of the senior officials when attempting to establish liability under SOX 302. Howard, 228 F.3d at There the court decided against a CEO stating that he had scienter and signed the report making him liable for the fraud perpetrated within the firm. Id. The court used circumstantial evidence to determine that he had knowledge of the bad standing of the firm, which was material in establishing his fraud in the case. Here, both Mr. Bosco and Ms. Lee do not have knowledge of the actual misconduct that was taking place at lower levels of the company. SOX 302 states that the review must be based on the officer s knowledge that there is no untrue statement. 15 U.S.C SOX 302 requires that the review of 11

18 the report based on the knowledge of the officer, and it would be improper to assume that the statute requires a state of mind to review and this state of mind would not also extend to the certification of the exact same report.this case is distinguishable from both Jensen and Howard because in both cases the senior officials knew, or were involved in some degree of the misconduct. Jensen, 835 F.3d at 1105 (stating that CEO engaged in overstating the company s financial results); Howard, 228 F.3d at 1064 (stating the CEO s motive and evidentiary finding of material misstatement or omission was found on the annual report). Therefore, any certifications made were false and not just inaccurate. Id. Although the Second Circuit has stated that section 13 rules do not need scienter, these cases can be differentiated for two reasons. SEC v. McNulty, 137 F.3d 732, 741 (2d Cir. 1998); SEC v. Koenig, 469 F.2d 198, 200 (2d Cir. 1972). First, both cases are dealing with senior officials who were found to be a part of the misconduct in some way. McNulty, 137 F.3d at 741 (finding that the CEO included false statements within the report to the SEC); Koenig, 469 F.2d at 200 (finding that the CEO left out material information of the report to the SEC). Second, neither Koenig nor McNulty specifically address 13a-14, which is substantially different than the other parts of the section because it focuses on the specific behaviour of the senior official. Id. These cases focus on believ[ing] that the certification is accurate which is simply impossible when the senior officer has no knowledge of fraud to think the report is anything but true. Id. Here, the record does not show any evidence to that either Mr. Bosco or Ms. 12

19 Lee were involved in Prince s scheme because Prince acted secretly on his own accord when making these illegal arrangements. (R. at 3-4). There is no evidence that makes even a decent allegation, and the closest would be the conversation that Mr. Bosco and Ms. Lee had with the Japanese CEO, but nothing about that conversation was significant enough to launch an investigation. Id. When they both did here about the scandal they investigated appropriately and followed procedure firing Prince. (R. at 5). Without any connection to misconduct the Plaintiffs argument based on these cases falls flat. B. Mr. Bosco and Ms. Lee acted in good faith by maintaining the internal controls and having no knowledge of misconduct. Mr. Bosco and Ms. Liability have an affirmative good faith defense to any claim of liability. In Howard, the court spoke of vicarious liability through 15 U.S.C. 78t creating joint and several liability from the employee to the senior officials. 15 U.S.C. 78t; Howard, 228 F.3d at There, the court found the CEO liable for filing false documents when he had knowledge of the high possibility that the report was false. There the court determined that filing false reports are an intensely factual question looking at day to day affairs of the corporation and the defendant s power to control corporate actions. Kaplan v. Rose, 49 F.3d 1363, 1382 (9th Cir. 1994). The day to day affairs refer to a senior official s involvement in the internal systems that law requires they maintain to prevent misconduct. The court in Howard used circumstantial evidence to determine the liability of the official. Howard, 228 F.3d at

20 Ultimately, the court found the official guilty because the material facts demonstrated that the official should have reasonably known that the report was misstated or contained an omission. Id. As further instruction, SEC Reg also speaks to mental states in a section titled Liability for False Certification through the enforcement sections 10b and 13a of the SEA that support a SOX 302 action. Certification of Disclosure in Companies Quarterly and Annual Reports, Exchange Act Release No. 8124, SEC Docket 875 (August 28, 2002); Udall v. Tallman, 380 U.S. 1, 16 (1965) (stating that courts have a requirement to substantially defer to administrations when interpreting administrative regulation. The regulation only states, aside from antifraud standards, that senior officials that cause or aid or abet securities law can be found liable and do not state anywhere that they are generally liable for misconduct within the firm no matter the manner. Id. Here, Mr. Bosco and Ms. Lee have an affirmative defense against all liability for the Mr. Prince s misconduct because of their exemplary behavior during the period in question. Howard, 228 F.3d at 1065 (citing Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1575 (9th Cir. 1990). This case is distinguishable from Howard because neither senior official knew about the misconduct in question. While an argument could be made that the individual conversations with the Japanese CEO regarding unilateral termination rights were unusual, that fact is not enough to support knowledge of misconduct. (R. at 4). The record is silent as to how specific the conversation was and whether the unilateral 14

21 terminations rights were spoken about at length. (R. at 4). The exchange is not sufficient to raise suspicion on the part of either official to believe this had to do with their own company, and not simply shop talk about the procedural aspects of their trade. II. SOX IS AMBIGOUS IN ITS MEANING AND SHOULD BE INTERPRETED NARROWLY BECAUSE OF THE RULE OF LENITY AND CONCERNS WITH CONSTITUIONAL QUESTIONS. SOX 304 s ambiguity stems from the phrase as a result of misconduct, which places liability on senior officials even if the officials follow the law. 15 U.S.C The lower court should have interpreted 7243 narrowly because reading 7243 broadly leads to assigning blame on parties that are not attached to the misconduct. Therefore, a broad interpretation of 7243 essentially creates strict liability. Reading 7243 broadly ignores the Rule of Lenity that would have required the court to focus the misconduct on personal liability. Further, the senior official s rights under the Due Process Clause of the Fifth Amendment are also being infringed upon when they have no connection to the misconduct. Kasten v. Saint-Gain Performance Corp., 563 U.S. 1, 16 (2011); Scales v. U.S., 367 U.S. 203, 225 (2017). A. The Rule of Lenity necessitates a narrow reading of SOX 304 that would require culpability. When a phrase in a statute is materially ambiguous, the Rule of Lenity applies. Kasten, 563 U.S. at 16. The Rule of Lenity protects defendants against a unclear reading of a statute that would lead to an unfair effect on the defendant. Id. at 16. The Rule of Lenity can be applied in a noncriminal case 15

22 when the statute in question has criminal sanctions. Id. at 16 (citing Leocal v. Ashcroft, 543 U.S. 1, 18 (2004)). If a court looks at the plain meaning of a statute in conjunction with the legislative history of the statute and still finds ambiguity in the statute, the Rule of Lenity requires that the court construe the statute in favor of the party asked to pay the sanctions in question. Id. Although the court in Jenkins favored a broad interpretation of when reading ambiguous statutes, statutory construction requires that ambiguous statutes receive a narrow interpretation when considering the defendant s position. SEC v. Jenkins, 718 F.Supp.2d 1070, 1076 (D. Ariz. 2010). In Jenkins, Jenkins was unaware his fellow senior official s fraudulent actions, but that court did reverse the lower court s decision granting the motion to dismiss. Id. That court specifically went out of its way to stop short of answering the issue of mental state because this issue was being decided around a motion to dismiss. Id. They stated that a motion to dismiss standards to not rise to what is need to decide a constitutional issue thus avoiding the question. Id. Here, the phrase as a result of misconduct does not indicate whose misconduct is violates the statute. Because neither the plain meaning nor the legislative history conclusively addresses Congress intent as to whose misconduct violates the statute, the statute should be interpreted narrowly in Mr. Bosco and Ms. Lee s favor. On its face, the statute is unclear as to whether it covers all misconduct within the company, or whether it covers more specific types of misconduct. Any misconduct in the firm could violate the statute, or misconduct can refer to personalized misconduct on the part of the senior 16

23 officials who will be disgorged. The court in Jenkins stated that the plain meaning allows for any entity within the firm to commit the misconduct, but this is based on an assumption because Congress did not specifically state whom the misconduct needed to come from then it must include everyone in the issuer s misconduct. Jenkins, 718 F.Supp.2d at But this argument is faulty because the same could be said for making it clearly broad by including words like any within the statute. There is no reason the broader or narrow decision should have more weight than the other. The legislative history also does not help much with saying conclusively whether this should be interpreted narrowly or broadly because the House Report asked the commission to look into adding a mental culpability element to the statute, but the Senate Bill that was ultimately put into law did not focus on any element of mental culpability and left it unclear. S. Rep ; H.R. Rep This lack of clarity means that the proper action for this Court to take would be to construe the statute in favor of the narrow interpretation that would require mental culpability by the senior officials. Katson, 563 U.S. at Mr. Bosco and Ms. Lee again have no knowledge of any of the conduct or any connection to Prince s misconduct meaning that they lack any mental state, reckless or scienter, required to find that they both violated the statute. (R.3-4). B. The Due Process Clause would prevent disgorgement in this case because of the lack of a substantial relationship with the misconduct. 17

24 Placing liability on either senior official creates a Due Process issue because there is no substantial relationship between Mr. Prince s misconduct with the unilateral contracts and Mr. Bosco s and Ms. Lee s day to day activities. Scales, 367 U.S. at 203. There, the Supreme Court stated that guilt is personal, and guilt is only extended when another party acts with misconduct if there is a substantial relationship. Again, the court in Jenkins could have been instructive on the issue of constitutionality, but did not discuss it because that case was being decided around a motion to dismiss. Jenkins, 718 F.Supp.2d at Looking again to the legislative history the court in Jenkins states that the legislature could have added personal misconduct elements but did not. Id. at But the same argument again can be said for making sure that liability is more general. Maintaining proper internal controls within the firm provides evidence of the accuracy of an annual report. Jensen, 835 F.3d at Here, Mr. Bosco and Ms. Lee do not have any personal guilt because they had no knowledge of the misconduct. Further Mr. Bosco and Ms. Lee lacked any substantial connection to the misconduct by Mr. Prince because in no way affected or produced the misconduct that Mr. Prince created to serve his own needs. (R. at 3-4). Due Process Clause is used to prevent finding fault in parties that have shown no signs of wrongdoing. Scales, 367 U.S. at 225. Under the lower court s theory, Mr. Bosco and Ms. Lee have in someway violated the statute without actually doing anything to break the law while still complying with the guidelines of the SEC on internal controls. 15 U.S.C. 7241; (R. at 4). 18

25 Mr. Bosco and Ms. Lee should not ordered to disgorge funds when there is no evidence that they did not influence or participate in the misconduct. III APPLIES TO DISGORGEMENT ACTIONS BECAUSE DISGORGEMENT ACTIONS ARE EITHER A FORFEITURE OR PENALTY. This Court should reverse the Fourteenth Circuit s holding that the fiveyear statute of limitations in 2462 does not apply to SEC enforcement actions seeking disgorgement. Because forfeiture and disgorgement are synonymous and serve the same purposes, 2462 captures disgorgement and subjects it to a five-year statute of limitations. Alternatively, disgorgement is a punitive forfeiture that falls within 2462 s ambit. Reviewing the issue de novo as is required in statutory interpretation it is clear that allowing the SEC to bring enforcement actions seeking disgorgement after the prescribed five-year statute of limitations would contravene the vital purposes that statutes of limitations serve. A. The five-year statute of limitations in 2462 applies to disgorgement because disgorgement and forfeiture are synonymous. At issue in this appeal is the interpretation of 2462, which states in relevant part as follows: Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim is first accrued

26 28 U.S.C (2017) does not include a definitions section or clear modifying language. Therefore, a failure to read disgorgement into forfeiture would violate the long settled-principle that words in statutes should be given their ordinary, popular meaning unless Congress clearly meant the words in some more technical sense. SEC v. Graham, 823 F.3d 1357, 1364 (11th Cir. 2016) (quoting U.S. v. Nat l Broiler Marketing Ass n, 550 F.2d 1380, 1386 (5th Cir. 1977)). i. The ordinary and popular meaning of both forfeiture and disgorgement render the terms synonymous does not define the term forfeiture; therefore, the term s ordinary and popular meaning governs. See Addison v. Holly Hill Fruit Products, Inc., 322 U.S. 607, 618 (1944) ( [L]egislation when not expressed in technical terms is addressed to the common run of men and is therefore to be understood according to the sense of the thing.... ). Webster s Dictionary defines forfeiture as the divesting of the ownership of particular property of a person on account of the breach of a legal duty and without compensation to him. See Graham, 823 F.3d at 1363; Forfeiture, Webster s Third New Int Dictionary (2002). Black s Law Dictionary defines forfeiture as [t]he divestiture of property without compensation and as [t]he loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty. Forfeiture, Black s Law Dictionary (10th ed. 2014). These definitions illustrate that forfeiture occurs when a person is forced to turn over 20

27 money or property because of crime or wrongdoing. Graham, 823 F.3d at Similarly, Black s Law Dictionary defines disgorgement as [t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion. Disgorgement, Black s Law Dictionary (10th ed. 2014). Both definitions demonstrate that the ordinary and popular meaning of disgorgement and forfeiture occurs when a person is forced to turn over money or property because of a crime or wrongdoing. Arguing that disgorgement and forfeiture diverge significantly in meaning is arguing for a difference without distinction. There is no meaningful difference found in the definitions of the terms. Indeed, the Supreme Court and certain circuits have used disgorgement and forfeiture interchangeably. See U.S. 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. ). Additionally, some federal forfeiture statutes have recently been broadened to encompass disgorgement-like remedies. See 18 U.S.C. 1963(a)(3) (permitting forfeiture of proceeds from racketeering); 21 U.S.C. 881(a)(6) (authorizing forfeiture of proceeds from illegal drug activity). The similar ordinary and popular meaning of the terms coupled with Congress recent 21

28 practice of expanding forfeiture in certain statutes to include disgorgement-like remedies supports the conclusion that the five-year statute of limitations in 2462 should be applied to disgorgement actions. Further, it can be argued that disgorgement includes [only] direct proceeds from wrongdoing[,] while forfeiture can include both ill-gotten gains and any additional profit earned on those ill-gotten gains. Graham, 823 F.3d at However, a line should not be drawn between the terms merely because forfeiture casts a wider net than disgorgement. In fact, drawing a line between forfeiture and disgorgement would contravene the principle that terms in statutes are given their ordinary and popular meaning unless it is apparent that Congress intended for the terms to have a more specialized meaning. See Nat l Broiler Marketing Ass n, 550 F.2d at At a minimum, disgorgement is a subset of forfeiture. See Graham, 823 F.3d at At best, disgorgement and forfeiture are synonymous. Therefore, 2462 applies and this Court should reverse the circuit court s holding. ii. The similar purposes that disgorgement and forfeiture serve subject disgorgement to 2462 s five-year statute of limitation. A primary purpose of disgorgement is to deter violations of the securities laws by depriving violators of their ill-gotten gains. SEC v. Fischbach Corp., 133 F.3d 170, 175 (2nd. Cir. 1997). In Fischbach, the Second Circuit was reviewing the district court s decision to order payment of disgorged funds to the Treasury as opposed to the direct victim of the fraud. Id. at 171. The Second Circuit made clear that compensating securities fraud victims for their 22

29 losses is a secondary goal of disgorgement. Id. at 175. First and foremost, deterrence is the goal. See id. Otherwise, SEC enforcement actions would be undermined if violators were not required to disgorge illegally obtained profits. See id. Therefore, because the definition of forfeiture includes both illegally obtained profits and any additional profits gained from illegal activity, forfeiture and disgorgement both serve as deterrence mechanisms. Additionally, the Supreme Court has stated that [f]orfeitures 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. Ursery, 518 U.S. at 284 (emphasis added). There, the Court recognized that civil forfeitures, unlike civil penalties, do more than merely compensate the Government. Id. When the Supreme Court uses forfeiture and disgorgement interchangeably in describing their purpose, it is clear that the terms serve similar purposes. Therefore, this Court should reverse the Fourteenth Circuit s hold and rule that disgorgement is subject to 2462 s five-year statute of limitations. B. Alternatively, disgorgement is a penalty for the purposes of 2462 because Mr. Prince was ordered to disgorge more than what he gained. Disgorgement seeks to force a defendant to give up what he has illegally obtained. See id. at 284; See Graham, 823 F.3d at The punitive aspect of disgorgement becomes clear when a defendant is ordered to disgorge more than his illegally gained profits. See also Gabelli v. SEC, 133 S.Ct. 1216, 1223 (2013) ( Penalties [sic] which go beyond compensation, are intended to punish, and 23

30 label defendants as wrongdoers. ). At this point disgorgement is no longer about making the wronged party whole, but instead is about fill[ing] the Federal Government s coffers. Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010). Thus, a disgorgement action can be a punitive measure for the purposes of See U.S. v. Telluride, 146 F.3d 1241, 1244 (10th Cir. 1998) s phrase pecuniary or otherwise modifies both penalty and forfeiture. See Telluride, 146 F.3d at In Telluride, the court recognized that actions or equitable relief generally do not include actions for penalties or fines. See id. Further, where the effect of the SEC s action is to restore the status quo ante, such as through a proceeding for restitution or disgorgement of ill-gotten gains, 2462 will not apply. Johnson v. SEC, 87 F.3d 484, 491 (D.C. Cir. 1996). Therefore, the D.C. Circuit recognizes that an SEC action for disgorgement cannot go beyond restoring the status quo. It follows that a disgorgement action that goes beyond restoring the status quo is punitive and falls within 2462 s ambit. Here, the district court s disgorgement order was punitive because it asked that Mr. Prince disgorge more than his illegally gained profits. Specifically, Mr. Prince was ordered to disgorge: (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 2009l and (3) $250,000 representing the total amount of bonuses that Conrad earned during the relevant periods. (R. at 7). 24

31 Here, the district court ordered Mr. Prince to disgorge an amount significantly larger than the profits he made from the forty-one side letters. The district court nudged disgorgement over the remedial line and into the realm of a penalty when they ordered him to disgorge the $45,000 bonus from 2009, the $495,000 in bonuses and discretionary compensation, and the $250,000 that Conrad earned as bonuses. When the circuit affirmed the district court s holding, the circuit court in effect created a loophole for the SEC to seek penalties disguised as disgorgement actions and bring the disgorgement action at any time. Because affirming the circuit court s hold would contravene Congress clearly articulated intention that actions for penalties must be brought within five-years, this court should reverse the circuit court s decision. C. Refusing to extend 2462 to cover disgorgement would violate the vital purposes that statutes of limitations serve. Carving out a specific time limitation for Government enforcement efforts to end promotes the basic policies of all limitations provisions: repose, elimination of stale claims, and certainty about a plaintiff s opportunity for recovery and a defendant s potential liabilities. Rotella v. Wood, 528 U.S. 549, 555 (2000). One purpose of statutes of limitations is to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. Railroad Telegraphers v. Railway Express Agency, Inc., 321 U.S. 342, 348 (1994). Further, the Supreme Court has deemed statutes of limitations as vital to the welfare of society. Wood v. Carpenter, 101 U.S. 135, 139 (1897). In the context of forfeitures, this Court has stated, [i]n a country 25

32 where not even treason can be prosecuted after a lapse of three years, it could scarcely be supposed that an individual would remain forever liable to a pecuniary forfeiture. See Adams v. Woods, 6 U.S. 336, 342 (1805). This Court has a long standing presumption against perpetual penalties. See id. While [s]tatues of limitations are interpreted narrowly in the government s favor, we must bear in mind that the SEC is different from a regular plaintiff. See Trust Co. of New York v. U.S., 304 U.S. 126, 132 (1938). Unlike a private party, a key function of the SEC is to investigat[e] potential violations of the federal securities laws. Gabelli, 133 S.Ct. at 1221 (2013) (quoting SEC enforcement Manual 1 (2012)). The SEC has a plethora of tools and resources at its disposal to root out fraud. See id. Specifically, the SEC can require brokers and dealers to submit detailed trading information. See id. The SEC can order investment advisers to hand in their comprehensive books and records at the SEC s discretion. See id. Further, the SEC may subpoena documents and witnesses it deems relevant or material to an investigation, without having filed a suit. See id. The Supreme Court in Gabelli addressed only SEC enforcement actions for civil penalties in holding that civil penalty claims accrue, and the five-year countdown begins, when the fraud occurs as opposed to when the fraud is discovered. Id. However, because disgorgement can be both a forfeiture or a penalty, the holding in Gabelli should be applied to disgorgement actions as well. 26

33 The SEC s resources are the same when seeking to enforce a disgorgement order as when seeking civil penalties. For the SEC, rooting out fraud remains the goal when seeking an action for disgorgement. Therefore, it would be inconsistent for this Court to hold that the five-year statute of limitations that 2462 prescribes applies to civil penalties but not to disgorgement--especially when, as here, the disgorgement action is a civil penalty in disguise. Further, allowing the SEC to bring disgorgement claims at any time would contravene this Court s reasoning in Gabelli. The SEC, with its panoply of resources, should be required to bring its enforcement actions within the five-year statute of limitations that 2462 prescribes. 27

34 CONCLUSION For the foregoing reasons, the petitioners respectfully request that this Court reverse the United States Court of Appeals for the Fourteenth Circuit s finding 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. The petitioners respectfully request that this Court also reverse the United States Court of Appeals for the Fourteenth Circuit s finding that the SEC s enforcement actions seeking disgorgement are not barred by 28 U.S.C Respectfully submitted /s/ Team P.11 Counsel of Record for Respondents 28

35 29 TEAM P11

36 APPENDIX A

37 1a 15 U.S.C.A Corporate responsibility for financial reports (a) Regulations required The Commission shall, by rule, require, for each company filing periodic reports under section 78m(a) or 78o(d) of this title, that the principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, 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; (4) the signing officers (A) are responsible for establishing and maintaining internal controls; B

38 (B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared; (C) have evaluated the effectiveness of the issuer's internal controls as of a date within 90 days prior to the report; and (D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date; (5) the signing officers have disclosed to the issuer's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function)-- (A) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize, and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and C

39 (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and (6) the signing officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. (b) Foreign reincorporation have no effect Nothing in this section shall be interpreted or applied in any way to allow any issuer to lessen the legal force of the statement required under this section, by an issuer having reincorporated or having engaged in any other transaction that resulted in the transfer of the corporate domicile or offices of the issuer from inside the United States to outside of the United States. (c) Deadline The rules required by subsection (a) of this section shall be effective not later than 30 days after July 30, D

40 2a 15 U.S.C.A (a) Additional compensation prior to noncompliance with Commission financial reporting requirements 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 equity-based 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 (2) any profits realized from the sale of securities of the issuer during that 12-month period. (b) Commission exemption authority The Commission may exempt any person from the application of subsection (a) of this section, as it deems necessary and appropriate. E