No IN THE SUPREME COURT OF THE UNITED STATES BRIAN BOSCO; JASMINE LEE; RONALD PRINCE, PETITIONERS, SECURITIES AND EXCHANGE COMMISSION,

Transcription

1 No IN THE SUPREME COURT OF THE UNITED STATES BRIAN BOSCO; JASMINE LEE; RONALD PRINCE, PETITIONERS, v. SECURITIES AND EXCHANGE COMMISSION, RESPONDENT. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTEENTH CIRCUIT BRIEF FOR THE RESPONDENT Team R11 Counsel of Record for Respondent

2 TABLE OF CONTENTS TABLE OF AUTHORITIES... iii QUESTIONS PRESENTED... vii STATEMENT OF THE CASE... 1 STATEMENT OF FACTS... 2 SUMMARY OF THE ARGUMENT... 4 ARGUMENT... 7 I. RULE 13A-14 OF THE SECURITIES AND EXCHANGE ACT WAS VIOLATED WHEN BOSCO AND LEE SIGNED THE CERTIFICATIONS OF BURLINGHAM S FINANCIAL STATEMENTS A. Rule 13a-14 requires more than a signature for it to be satisfied.. 7 B. Rule 13a-14 does not include a scienter requirement II. SOX 304 ALLOWS DISGORGEMENT OF CEOS AND CFOS EVEN IF THE OFFCERS WERE NOT INVOLVED IN THE MISCONDUCT CAUSING THE VIOLATION AND THE SUBSEQUENT RESTATEMENT A. The plain language of SOX 304 does not require personal misconduct from CEOs and CFOs to allow for disgorgement B. The legislative history of SOX 304 makes it clear that the legislature s intent was not to require personal misconduct on part of the CEO and CFO to allow disgorgement C. Courts have roundly rejected the requirement of personal misconduct in assessing the violation of SOX III. THE SEC S DISGORGEMENT REQUESTS ARE EQUITABLE, NON- PUNITIVE, RELIEF EXCLUDED FROM 28 U.S.C 2462 STATUTE OF LIMITATIONS A. The SEC s disgorgement requests are equitable because disgorgement recovers ill-gotten gains to prevent unjust enrichment B. Disgorgement has been distinguished from forfeiture by a majority of federal courts because of procedural and substantive differences i

3 C. Subjecting disgorgement to Section 2462 s statue of limitations conflicts with Congressional intent to effective security laws violations CONCLUSION ii

4 TABLE OF AUTHORITIES Cases Page(s) Badaracco v. Commissioner., 464 U.S. 386 (1984)... 6, 26 Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216 (4th Cir. 1980) Gabelli v. SEC, 133 S. Ct (2013)...20, 24, 25 GAF Corp v. Milistein, 453 F.2d 709 (2d. Cir. 1971) Holmberg v. Armbrecht, 327 U.S. 392 (1946) Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 (9th Cir. 2000) In the Matter of WSF Corp., 2002 WL (SEC, May 8, 2002) Johnson v. SEC, 87 F.3d 484 (D.C. 1996) Kaley v. US, 134 S. Ct (2014) King v. Burwell, 135 S.Ct. 2480, 2480 (2015) Ponce v. SEC, 345 F.3d 722 (9th Cir. 2003).... 9, 10 Porter v. Warner Holding Co., 328 U.S. 395 (1946) Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010) ,25 SEC v. Ahmed, No. 3:15cv675 (JBA), 2016 WL (D. Conn. Dec. 8, 2016) SEC v. Baker, No. A 12 CA 285 SS, 2012 WL (W.D. Tex. Nov. 13, 2012) , 16 SEC v. Banner Fund Int l, 211 F.3d 602 (D.C. Cir. 2000) SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994) SEC v. Blavin, 760 F.2d 706 (6th Cir.1985) SEC v. Brown, 740 F. Supp. 2d 148 (D.D.C. 2010) iii

5 SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006).... 6,19 SEC. v. Collyard, 154 F.Supp.3d 781 (D. Minn. Dec. 9, 2015) SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014).... 6, 17, 19, 20, 21, 23, 25 SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir.1996) SEC v. Geswein, No. 5:10CV1235, 2011 WL (N.D. Ohio Sept. 29, 2011) SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016) , 25 SEC v. Jenkins, 718 F.Supp.2d 1070 (D. Ariz. 2010) SEC v. Jensen, 835 F.3d 1100 (9th Cir. 2016)... 4, 5, 7, 10, 11, 13, 14, 15 SEC v. Jones, 155 F.Supp.3d 1180 (D. Utah Dec. 18, 2015) SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016) , 19, 20, 21, 23, 24 SEC v. Life Partners Holdings, Inc., 71 F.Supp.3d 615 (W.D. Tex. 2014) SEC v. Lorin, 76 F.3d 458 (2d Cir.1996) SEC v. Maxxon, Inc., 465 F.3d 1174 (10th Cir. 2006).... 6, 18, 20, 21 SEC v. McNulty, 137 F.3d 732 (2d Cir. 1998) SEC v. Merchant Capital, LLC, 486 Fed.Appx. 93 (11th Cir. 2012) SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993)....18, 19, 26 SEC v. Saltsman, No. 07-CV-4370 (NGG), 2016 WL (E.D.N.Y. Aug. 2, 2016) SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978).... 8, 9 SEC v. Stoecklien, Civ. No. 15cv0532 JAH (WVG), 2015 WL (S.D. Ca. Oct. 26, 2015) SEC v. Tambone, 55 F.3d 106 (1st Cir. 2008) iv

6 SEC v. Wang, 944 F.2d 80 (2d Cir. 1991) Torres v. Lynch, 136 S. Ct (2016) United States v. 92 Buena Vista Ave., 507 U.S. 111 (1993) United States v. Bajakajian, 524 U.S. 321 (1998) Zacharias v. S.E.C., 569 F.3d 458 (D.C. 2009)....19, 20, 21 Statutes 15 U.S.C. 78u-2(e) U.S.C. 78u(d)(3) U.S.C. 78u(d)(1) U.S.C. 7241(a)(4) U.S.C , U.S.C Other Authorities Black's Law Dictionary (10th ed. 2014)... 24, 25 Committee on Rules, H. Rep. No at 31, 2002 WL (April 23, 2002)... 14, 15 H.R. Rep. No , at (1990) S. Rep. No at 26, 2002 WL (July 3, 2002).... 5, 14 Webster s New Twentieth Century Dictionary of the English Language, Unabridged (Jean L. McKechnie ed., 2d ed. 1979) Regulations 17 C.F.R a C.F.R a v

7 17 C.F.R d , 9 vi

8 QUESTIONS PRESENTED 1. Whether it is a violation of Rule 13a-14 for a CEO and CFO to certify false statements despite not possessing actual knowledge that the statements were false. 2. Whether SOX 304 allows disgorgement of profits and bonuses from CEOs and CFOs even if the individuals were not involved in the misconduct causing the violation and subsequent restatement. 3. Whether the Securities and Exchange Commission's requests for disgorgement are subject to 28 U.S.C. 2462, which imposes a five-year statute of limitations to claims for "any civil fine, penalty, or forfeiture. vii

9 STATEMENT OF THE CASE On January 1, 2016, the U.S. Securities and Exchange Commission ( SEC or Commission ) filed a civil action against Brian Bosco ( Bosco ), Jasmine Lee ( Lee ), and Ronald Prince ( Prince ) in the District of Fordham. (R. at 6). The complaint alleged Prince engaged in a scheme in 2008, 2009, and 2014 that defrauded Burlingham investors by reporting millions of dollars of unearned revenue; Bosco and Lee certified Burlingham s false and misleading financial statements for the 2014 fiscal year. (R. at 6). In June 2016, the District Court granted the SEC s motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure against defendants. (R. at 6-7). The SEC requested disgorgement of gains. (R. at 7). The District Court ordered: Prince to disgorge $1,770,000 for 2008, 2009, and 2014; Bosco to disgorge $600,000 and Lee to disgorge $475,000 for the 2014 period. (R. at 7). Bosco, Lee, and Prince filed an appeal to the United States Court of Appeals for the Fourteenth Circuit. (R. at 7). Bosco and Lee argued 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 the falsity. (R. at 7). Further, Bosco and Lee asserted they should not be required to disgorge any profits or bonuses. (R. at 7). Prince solely asserted the statute of limitations under 2462 disallows disgorgement of any profits earned from the 2008 and 2009 period. (R. at 8). The Fourteenth Circuit affirmed both of the district court s holdings. (R. at 8). The U.S. Supreme Court granted Bosco, Lee, and Prince s petition for a writ of certiorari on February 1, (R. at 32). 1

10 STATEMENT OF THE FACTS Bosco, Lee, and Prince are executives of Burlingham a microchip manufacturer. (R. at 1-2). Bosco is CEO, Lee is CFO, and Prince is Executive VP and manager of the company s Communications Division. (R. at 1-2). The Communications Division oversees the company s smartphone line (R. at 2). In order to boost his personal income, Prince participated in a kickback scheme in 2008, 2009, and (R. at 5). Prince would clandestinely include unilateral termination rights in exchange for $25,000 in payment per side letters from Burlingham purchasers. (R. at 3). Termination rights only activated if there was a 2.5% decline in UK GDP. (R. at 3). Otherwise, these rights expired two years after the effective side letter date. (R. at 3). Overall, Burlingham received a total forty-one purchase agreements in relation to Prince s kickback scheme. (R. at 7). The only two executive managers in the Communications Division, Henrietta Conrad and Prince, were awarded $250,000 and $495,000 in discretionary bonuses 2008, 2009, and (R. at 7). These bonuses include $45,000 given to each executives at Burlingham in 2009 due to the company securing a major deal. (R. at 2). Throughout 2008, 2009, and 2010 Prince executed thirty side letters. (R. at 3). None were made available to former CEO Ms. Uchekwe, company auditors, or attorneys. (R. at 3). During these years no purchaser exercised their unilateral termination rights. In 2014, after a two year break, Prince again sought to boost his personal income and re-engaged in his fraudulent scheme. (R. at 4). From January 2014 to January 2015 he executed eleven more side letters with a new 2

11 group of Chinese manufacturers, all containing unilateral termination rights. (R. at 4). During the 2014 kickback scheme, Bosco was CEO and Lee was CFO. (R. at 5). Accordingly, in both 2014 and 2015, Bosco and Lee as CEO and CFO, signed certifications of Burlingham s financial statements. (R. at 5). In October 2014, Bosco, Lee, and Prince attended a technology conference. (R. at 5). There, the CEO of a major Japanese smartphone manufacturer, also a Burlingham client, individually approached both Bosco and Lee hoping to amend his company s contract. He hoped to include deal sweeteners like the unilateral termination rights that he had heard about. (R. at 4). Bosco and Lee discussed their encounters and both expressed concern about the request, agreeing that it might be a good idea to look into why the CEO thought Burlingham had offered unilateral termination rights. (R. at 4). Neither took any further action. (R. at 4). In March 2015, after a 2.5% decline in UK GDP, five of the eleven of the purchasers from the 2014 kickback scheme exercised their termination rights. (R. at 5). After the termination attempts, Bosco notified Burlingham s chairman of the side letters. (R. at 5). The chairman immediately called a board meeting and formed a committee of outside directors ( Special Committee ) to investigate. (R. at 5). The Special Committee found Prince s kickback scheme took place in 2008, 2009, and (R. at 5). The scheme had substantially impacted the company s financial statements for fiscal year In light of the Committee s findings the company prepared and filed a restated 10-K for fiscal year 2014 (originally filed January 1, 2015). (R. at 5). 3

12 SUMMARY OF THE ARGUMENT This Court should uphold the circuit 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 personal misconduct of CEOs and CFOS is not required to trigger the disgorgement remedy authorized under Section 304 of the Sarbanes Oxley Act. This Court should also uphold the Commission s disgorgement requests as equitable and not barred by 28 U.S.C Rule 13a-14 was violated when Bosco and Lee certified Burlingham s financial statements that contained material misstatements. Rule 13a-14 requires that each financial statement certified must be correct and accurate with respect to its contents. There are many rules promulgated under Section 13 of the Exchange Act where courts have found an implicit accuracy requirement. For example, Rule 13a-14 just like both 13d-1 and 13a-13, does not contain an explicit accuracy requirement. Yet, the circuits agree that a cause of action still exists for inaccurate statements, as is the situation with the certifications of the documents in the case at hand. The plain language of Rule 13a-14 and its use of certify and not just sign shows that it was meant to include a specific duty on the CEO and CFOs. Indeed, by definition certify requires you to be knowledgeable about the information contained in the reports. SEC v. Jensen, 835 F.3d 1100, 1113 (9th Cir. 2016). 4

13 Rule 13a-14 does not include a scienter requirement and reading one into the Rule would be going against the regulation s plain language meaning. Without any reference to mental culpability it would be drastic to fabricate on and then read one into the regulation. It is more prudent to allow Congress or the SEC to amend the rule if it is their intention to require a scienter requirement. Even if this Court decides there is some requirement of scienter, both Bosco and Lee acted recklessly by not investigating claims by a client that others had unilateral termination rights. SOX 304 is violated even if the officers being disgorged were not involved in the misconduct necessitating the restatement. SOX 304 s language material noncompliance of the issuer, as a result of misconduct implicates that it is not the CEO or CFO s noncompliance that is being referenced, but instead the any misconduct of the issuer that necessitates a restatement. SEC v. Jensen, 835 F.3d 1100, 1114 (9th Cir. 2016). It would go against plain language interpretation to hold that it requires individual misconduct. The legislative history of SOX 304 shows that Congress s intent not to require personal misconduct on behalf of the CEO and CFO for SOX 304 to apply. SOX 304 was adopted in part to address events that raised concerns about management benefitting from inflated financial statements. S. Rep. No at 26, 2002 WL (July 3, 2002). Courts, including the Ninth Circuit in SEC v. Jensen, have resoundingly rejected any personal misconduct being required for a violation of SOX F.3d

14 Disgorgement requests fall outside of Section 2462 s scope because disgorgement is an equitable remedy. Section 2462 applies only to the Commission s punitive actions that constitute a fine, penalty, or forfeiture. This Court established these statutory terms do not extend to equitable relief. See Meeker v. Lehigh Valley R.R. Co., 236 U.S. 412, 423 (1915). Disgorgement is by nature equitable, and not punitive. SEC v. Maxxon, Inc., 465 F.3d 1174, 1179 (10th Cir. 2006). Disgorgement is distinguished from forfeiture because of their procedural and substantive differences. Procedurally, the district court retains discretion to order disgorgement and to limit the total amount. See SEC v. Cavanagh, 445 F.3d 105, 116 (2d Cir. 2006) However, forfeiture is mandatory and a creature of statute. SEC v. Contorinis, 743 F.3d 296, 307 (2d Cir. 2014). Substantively, forfeiture exceeds gains from causally related misconduct, while disgorgement is strictly limited to casually related misconduct. Congress has deliberately omitted a statute of limitations for disgorgement. This Court interprets statute of limitations with strict construction in favor of the Government, and should interpret Section 2462 in favor of the SEC. See Badaracco v. Commissioner., 464 U.S. 386, 398 (1984). 6

15 ARGUMENT I. RULE 13a-14 OF THE SECURITIES AND EXCHANGED ACT WAS VIOLATED WHEN BOSCO AND LEE SIGNED THE CERTIFICATIONS OF BURLINGHAM S FINANCIAL STATEMENTS. The Court of Appeals for the Fourteenth Circuit was correct in stating that 13a-14 was violated by both Bosco and Lee because the rule requires more than just a signature. Rule 13a-14 requires that an issuer s CEO and CFO respectively, certify the accuracy of the issuer s financial statements including all 10-K and 10-Q reports. 17 C.F.R a-14. Stating in relevant part: Each report... filed on 10-Q, Form 10-K... under Section 13(a) of the Act... must include certifications... Each principal executive and principal financial officer of the issuer, or persons performing similar functions at the time of filing of the report must sign a certification. The Petitioners argue that this rule does not provide a cause of action for the certification of false statements contained in the reports that they certified for the year 2014 because they had no knowledge of the misconduct. This interpretation would create little more than an ink on paper requirement, allowing a company s officers to turn a blind eye instead of encouraging investigation. A signature with no meaning about the underlying truthfulness of the information reduces a signature requirement to a trivial mark on the page. A. Rule 13a-14 requires more than a signature for it to be satisfied. Rule 13a-14 requires that each financial statement certified must be correct and accurate with respect to its contents. See SEC v. Jensen, 835 F.3d 7

16 1100, 1113 (9th Cir. 2016). A certification without any weight behind it would be senseless. It is well accepted that a signature, as required by Rule 13a-14, requires more than just ink on the page, when a corporate officer signs a document on behalf of the corporation, that signature will be rendered meaningless unless the officer believes the statements in the document are true. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 (9th Cir. 2000). It follows that those who certify the document are also responsible for its contents. Throughout rules promulgated under the authority of the Exchange Act courts have found that there is an implicit accuracy requirement in filing requirements. See SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978) ( The reporting provisions of the Exchange act... are satisfied only by the filing of complete, accurate, and timely reports. ) Section 13 of the Exchange Act, which is what Rule 13a-14 is promulgated under, contains many examples where courts have read in an implicit accuracy requirement. The language in 13d-1, also promulgated under Section 13, does not explicitly require that the Schedule 13D filing be accurate, Any person who... shall, within 10 days... file with the Commission a statement containing the information required by Schedule 13D. 17 C.F.R d-1. Notwithstanding, the Second Circuit in GAF Corp v. Milistein found that 13d-1 created a cause of action not just for failing to file a 13D, but also created a cause of action for inaccuracies in schedule 13D filings. 453 F.2d 709, 720 (2d. Cir. 1971). Correspondingly, the D.C. Circuit held in SEC v. Savoy Inds., Inc. 8

17 that Sections 13(d)(1) and 13(d)(3) and the rules promulgated thereunder undoubtedly create the duty to file truthfully and completely. 587 F.2d 1149, 1165 (D.C. Cir. 1978); see also Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216, 1227 (4th Cir. 1980) (Finding a cause of action for the failure to file a complete and accurate Schedule 13D. ) Additionally, in Ponce v. SEC, the Ninth Circuit concluded that Rule 13a-13, requires the filing of quarterly reports that are not misleading. 345 F.3d 722, 735 (9th Cir. 2003). These decisions read an accuracy and truthfulness requirement into required Section 13 financial disclosures. Furthermore, these decisions are analogous to the issue at hand. Rule 13a-14 just like both 13d-1 and 13a-13, does not contain an explicit accuracy requirement. Yet, the circuits agree that a cause of action still exists for inaccurate statements, as is the case with the certifications of the documents in the case at hand. See 17 C.F.R d-1, 17 C.F.R a-1. The plain language of Rule 13a-14 supports this same conclusion, that a signature alone is insufficient to comply with the rule s requirements. It is clear that the regulation seeks not just a signature, but instead a certification by the CEO and CFO. The rule even explicitly bans substitutes, they 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. It would be dubious to adopt the Petitioners assertion that as long as it is signed no other questions need to be asked. The Ninth Circuit held in Jensen that by definition one cannot certify a fact to which one is ignorant or which one 9

18 knows is false. SEC v. Jensen, 835 F.3d 1100, 1113 (9th Cir. 2016). The Jensen court supported its conclusion by examining the rule s plain language, citing the dictionary definition of certify, 1. to testify by formal declaration, often in writing, to make known or establish (a fact) or 3. to guarantee the quality or worth of; vouch for [something]. Id. (quoting Webster s New Twentieth Century Dictionary of the English Language, Unabridged 297 (Jean L. McKechnie ed., 2d ed. 1979)). To hold otherwise would make it enough for CEOs and CFOs to sign their names to a document certifying that SEC filings include no material misstatements or omissions without a sufficient basis to believe that the certification is accurate. Jensen, 835 F.3d at A holding of this sort eliminates any meaningful purpose of Rule 13a-14 existing. B. Rule 13a-14 does not include a scienter requirement. It is Petitioners position that there must be an implicit element of scienter for there to be a violation of Rule 13a-14. This is incorrect. Reading a scienter or mental culpability requirement into Rule 13a-14 would be going against the regulation s plain language meaning. The Ninth Circuit noted that in at least one administrative opinion the SEC held that scienter was not required for there to be a 13a violation. Ponce v. SEC, 345 F.3d 722, 737 n.10 (9th Cir. 2003) (citing In the Matter of WSF Corp., 2002 WL , at *3 (SEC, May 8, 2002)). Surely had the Commission, as well as Congress, envisioned the rule to have an intent or mental element for its violation, they would have included it. Imposition of a scienter requirement would be a broad stroke against the language of the 10

19 regulation, at least one other circuit has concluded that rules promulgated under Section 13- including rules that apply to persons and not to issuers themselves do not incorporate a scienter requirement. SEC v. Jensen, 835 F.3d 1100, 1113 n.6 (9th Cir. 2016) (citing SEC v. McNulty, 137 F.3d 732, 740 (2d Cir. 1998)). It seems more prudent for this Court to allow either Congress or the Commission to decide whether to add an entire new element rather than reading one into the regulation. The Petitioners argue that Rule 13a-14 does not provide a cause of action for the certification of false statements contained in the reports that they certified for the year 2014 because they lacked the subsequent scienter to be in violation. However, certification, as the definition and the Ninth Circuit suggest, means much more than a name on a page. Rule 13a-14 was adopted by the SEC as directed by Congress in Section 302 of the Sarbanes-Oxley Act (SOX 302). SOX 302 states that the signing officers are responsible for establishing and maintaining their internal controls, and ensuring that material information relating to the issuer is made known to such officers. 15 U.S.C. 7241(a)(4). The language shows that Congress s motivation, at least in part, was to place a duty on the issuer s CEOs and CFOs to gather information and certify the accuracy of a company s financial statements. It would make little sense to then find that all that is required is a signature on the page. If a statement contains falsities it means they failed at Congress s task. Congress s use of the word certify, and not sign, shows that they intended officers to vouch for the information in the report. Should lack of knowledge be 11

20 accepted as a complete bar on violations of Rule 13a-14, one could see a chilling effect on the motivation to discover whether what they are certifying is in fact all materially true. Assuming, arguendo, that as the Petitioners suggest, there is some mental culpability or knowledge required for a violation of the Rule 13a-14 both Bosco and Lee would still be liable for their violation. They both recklessly ignored the Japanese smartphone manufacturer s CEO when he approached and told Petitioners that others had received unilateral termination rights in their dealings with Burlingham. (R. at 4). Both Bosco and Lee were approached separately and told the same information, and later discussed the occurrence. (R. at 4). Both subsequently agreed that it would be a good idea to look into why the Japanese CEO thought others had unilateral terminations rights. (R. at 4). Despite coming to the conclusion that investigation would be wise, no further action was taken. (R. at 4). Even if this Court should find that a mental state is necessary for violation of Rule 13a-14, by certifying the financial statements in light of what both Bosco and Lee considered a concerning revelation, they acted recklessly. II. SOX 304 ALLOWS DISGORGEMENT OF CEOS AND CFOS EVEN IF THE OFFICERS WERE NOT INVOVLED IN THE MISCONDUCT CAUSING THE VIOLATION AND SUBSEQUENT RESTATEMENT. Section 304 of Sarbanes-Oxley act (SOX 304) states in pertinent part that 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 12

21 financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for bonuses, and any profits realized from the sale of securities of the issuer during the 12-month period following the first filing of the financial document that requires restatement. 15 U.S.C (emphasis added). A. The plain language of SOX 304 does not require personal misconduct from CEOs and CFOs to allow for disgorgement. Petitioners argue that SOX 304 does not apply because the misstatement that necessitated the restatement was not caused by any misconduct on the part of Bosco or Lee. SOX 304 is not concerned with individual misconduct on the part of the CEO or CFO, but rather with the noncompliance of the issuer. Id. To find otherwise would go against the plain language of the statute. When interpreting statutes, the first thing courts look at is the plain language of the statute. See King v. Burwell, 135 S.Ct. 2480, 2480 (2015). The language material noncompliance of the issuer, as a result of misconduct implicates that it is not the CEO or CFO s noncompliance that is being referenced, but instead any misconduct of the issuer that necessitates a restatement. SEC v. Jensen, 835 F.3d 1100, 1114 (9th Cir. 2016). B. The legislative history of SOX 304 makes it clear that the legislatures intent was not to require personal misconduct on the part of the CEO and CFO to allow disgorgement. The history of the statute reinforces the same interpretation of SOX 304 that the plain language compels. The Senate Committee on Banking, Housing and Urban Affairs report regarding the bill that would eventually become SOX 304, reveals that the disgorgement remedy the bill contained was developed to 13

22 address recent events that have raised concerns about management benefitting from unsound financial statements. S. Rep. No at 26, 2002 WL (July 3, 2002). It seems also partly based on then President Bush s recommendation that, CEOs or other officers should not be allowed to profit from erroneous financial statements CEOs bonuses or other incentive based forms of compensation should be disgorged in cases of accounting restatement Id. The Senate report contains countless examples that make it clear that no intent that personal misconduct is required, The bill prevents CEOs and CFOs from benefitting from profits they receive as a result of misstatements of their company s financials... Id.; See SEC v. Jensen, 835 F.3d 1100, 1114 (9th Cir. 2016) (citing these reports extensively in reaching their conclusion that personal misconduct on the part of the CEO or CFO is not necessary for disgorgement under SOX 304.) Clearly, Congress intended SOX 304 to ensure that CEOs and CFOs are not allowed to keep bonuses and other incentive based pay granted on the basis of inflated financial statements, whether they know of the false statements is not at issue. Comparing the legislative history of the Senate Bill, S. 2673, with that of the House Bill, H.R further indicates Congress s deliberate choice to draft a bill that would not demand individual misconduct by the CEO or CFO for the SEC to seek disgorgement. One version of H.R provided for disgorgement of all compensation or earnings obtained by a CEO or CFO if such officer or director engaged in misconduct resulting in, or made or caused to be made in, the filing of a financial statement. Committee on Rules, H. Rep. No at 14

23 31, 2002 WL (April 23, 2002) (emphasis added). Contrast this with final language of the statute, material noncompliance of the issuer, as a result of misconduct. 15 U.S.C Consequently, the choice not to adopt language about director misconduct denotes a conscious rejection by Congress of the requirement of personal misconduct. C. Courts have roundly rejected the requirement of personal misconduct in assessing the violation of SOX 304. Courts have roundly rejected the Petitioners requirement of personal misconduct. The Ninth Circuit in Jensen, cited extensively above, noted that most district courts to have examined [this issue] have concluded that SOX 304 does not require CEOs or CFOs to have personally engaged in misconduct. SEC v. Jensen, 835 F.3d 1100, 1114 (9th Cir. 2016). Jensen quotes a 2010 District of Arizona decision, [a] CEO need not be personally aware of financial misconduct to have to have received additional compensation during that period of misconduct, and to have unfairly benefited from therefrom. Id. (quoting SEC v. Jenkins, 718 F.Supp.2d 1070, 1075 (D. Ariz. 2010); see also, SEC v. Geswein, No. 5:10CV1235, 2011 WL , at *3 (N.D. Ohio Sept. 29, 2011), SEC v. Life Partners Holdings, Inc., 71 F.Supp.3d 615, 625 (W.D. Tex. 2014). Correspondingly, courts have held that requiring personal misconduct would impede the furtherance of Congress s intent. SEC v. Baker, No. A 12 CA 285 SS, 2012 WL , at *4 (W.D. Tex. Nov. 13, 2012) (Adopting Jenkins rejection of reading a requirement of misconduct by the defendant officer into SOX 304). By not requiring personal misconduct, it 15

24 ensures corporate officers cannot simply keep their own hands clean, but instead must be vigilant in ensuring there are adequate controls to prevent misdeeds by underlings. Id. Plain language, legislative intent detailed in legislative history and prior interpretation by courts all demand that the Court hold that misconduct is not required for both Bosco and Lee to be disgorged of the profits they received during the period where the financial statements inaccuracies required a restatement. III. THE SEC S DISGORGEMENT REQUESTS ARE EQUITABLE, NON- PUNITIVE, RELIEF EXCLUDED FROM 28 U.S.C STATUTE OF LIMITATIONS. This Court should affirm the Fourteenth Circuit s ruling that the SEC s disgorgement requests are equitable, non-punitive, relief excluded from 28 U.S.C statute of limitations. Both Congress and a majority of federal courts including this Court establish that disgorgement requests are outside the scope of Section 2462 and the five-year statute of limitations. Under Section 2462, only claims for a civil fine, penalty, or forfeiture are subject to a five-year statute of limitations: 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 first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon. These three actions are punitive, not equitable. Equitable remedies are excluded from Section This Court stated that statutes of limitations are 16

25 not controlling measures of equitable relief. Holmberg v. Armbrecht, 327 U.S. 392, 396 (1946). Before the Fourteenth Circuit s holding, the Tenth Circuit was the most recent court of appeals to analyze whether disgorgement is subject to Section The Tenth Circuit unanimously affirmed the district court that disgorgement is an equitable remedy not subject to Section 2462 s statute of limitations. See SEC v. Kokesh, 834 F.3d 1158, 1164 (10th Cir. 2016). In Kokesh, the court concluded the Commission s disgorgement requests only recover money acquired through wrongdoing. Id. The sum recovered is equitable as it is limited only to the illicit gains casually connected to the violations. Id. ( [Disgorgement] eliminate[s] profit from wrongdoing while avoiding, so far as possible, the imposition of a penalty. ). This sum includes requiring a wrongdoer to pay for all the funds he caused to be improperly diverted to others as well as to himself. Id. at The Fourteenth Circuit s holding should be affirmed that disgorgement is excluded from the statute of limitations in 28 U.S.C First, Disgorgement is equitable because it is remedial and preventative, rather than punitive. The Commission was limited to recovering Prince s and his affiliates ill-gotten gains. Second, disgorgement is distinguished from forfeiture by a majority of federal courts due to procedural and substantive differences. Procedurally, disgorgement is flexible with discretion given to the district court on the total amount, forfeiture is a mandatory, and a creature of statute. SEC. v. 17

26 Contorinis, 743 F.3d 296, 306 (2d Cir. 2014). Substantively, disgorgement prevents unjust enrichment, and criminal forfeiture [is] a statutory legal penalty imposed as punishment. Id. Lastly, Congress purposely excluded disgorgement from a statute of limitations to allow the Commission effectively administer security law policies. This is supported by the Commission s authority to request relief for disgorgement and penalties appearing in separate sections of the Exchange Act. Disgorgement appears under Exchange Act Section 21(d)(5) s authorization that district courts may grant any equitable relief that may be appropriate for the benefit of investors. 15 U.S.C. 78u(d)(1), (5). Penalties appear in a separate subsection under Exchange Act. Section 21(d)(3), 15 U.S.C. 78u(d)(3). A. The SEC s disgorgement requests are equitable because disgorgement recovers ill-gotten gains to prevent unjust enrichment. Disgorgement has been used by the Commission to prevent defendants and their affiliates unjust enrichment. Disgorgement is a necessary measure as it prevents any future harm by disallowing a wrongdoer to continue to profit off of misconduct. See SEC v. Rind, 991 F.2d 1486, 1490 (9th Cir. 1993). Furthermore, disgorgement merely returns the wrongdoer to the status quo before any wrongdoing had occurred. SEC v. Lorin, 76 F.3d 458, 461 (2d Cir.1996). Disgorgement is naturally an equitable remedy since it is employed against wrongdoers who profit by abusing positions of trust. SEC v. Maxxon, 18

27 Inc., 465 F.3d 1174, 1179 (10th Cir. 2006) ( Disgorgement is by nature an equitable remedy. ). Disgorgement intends to deprive defendants of unjust enrichment, rather than punish. The Tenth Circuit in Kokesh explained disgorgement remedy does not inflict punishment, but leaves the wrongdoer in the position he would have occupied had there been no misconduct. Equitable remedy requests have no time limitation and are for the public s benefit. See Rind, 991 F.2d at 1490 ( Civil enforcement actions promote economic and social policies independent of the claims of individual investors. ). The public benefit for disgorgement is bolstered by courts granting the Commission's request for disgorgement even if no injured investors can be identified. See SEC v. Blavin, 760 F.2d 706, 713 (6th Cir.1985). District courts are authorized to distribute disgorged funds to victims. Id. at ; See also SEC v. Wang, 944 F.2d 80 (2d Cir. 1991). Another option is disgorgement funds are distributed to the United States Treasury, but this does not change disgorgement s equitable nature. See Contorinis, 743 F.3d at 307. Disgorgement is also equitable as it is necessary to prevent any future harm by disallowing the wrongdoer to continue to profit off of fraud. SEC v. Brown, 740 F. Supp. 2d 148, 157 (D.D.C. 2010). Disgorgement is not a penalty under Section 2462 as disgorgement is remedial [rather] than punitive. SEC v. Cavanagh, 445 F.3d 105, 116 (2d Cir. 2006). The D.C. Circuit stated, Our disgorgement cases uniformly hold that an order to disgorge is not a punitive measure; it is intended primarily to prevent 19

28 unjust enrichment. Zacharias v. S.E.C., 569 F.3d 458, 471 (D.C. 2009). In Zacharias, the court concluded disgorgement is non-punitive and does not fall within penalty under Section 2462 to impose a statute of limitations on the action. Id. Furthermore, courts hold that disgorgement need only be a reasonable approximation of the profits causally connected to the violation. Id; see also Porter v. Warner Holding Co., 328 U.S. 395, 402 (1946) ( Disgorge profits differs greatly from penalties. ). A penalty under Section 2462 is a sanction intended to punish, and the monetary amount exceeds the amount causally connected to the violation. Maxxon, Inc., 465 F.3d at This Court in Gabelli v. SEC declined to impose a statute of limitations on disgorgement. Instead, this Court stated, penalties are intended to punish culpable individuals, not to extract compensation or restore the status quo. Gabelli v. SEC, 133 S. Ct. 1216, 1223 (2013). Moreover, when the SEC s action is to restore the status quo ante... through disgorgement of ill-gotten profits, 2462 will not apply. Johnson v. SEC, 87 F.3d 484, 491 (D.C. 1996); see also SEC v. Tambone, 55 F.3d 106, 148 (1st Cir. 2008) ( [F]ive-year statute of limitations period [defendant] invokes applies only to penalties sought by the SEC, not its request for injunctive relief or the disgorgement of ill-gotten gains. ). Petitioner Prince s disgorged gains are equitable relief to recover illicit gains, not a penalty under Section Just like the defendants in Kokesh and Contorinis, the Commission only recovered gains from Prince s misconduct and gains that were allocated to third parties. In Contorinis, the court held that 20

29 the district court may order disgorge not only the unlawful gains that accrue to the wrongdoer directly, but also the benefit that accrues to third parties whose gains can be attributed to the wrongdoer's conduct. Contorinis, 743 F.3d at 306. The court reasoned limiting the defendant s disgorgement amount would run contrary to the equitable principle. Likewise, the defendant in Kokesh also failed in arguing that the order was punitive since he disgorge[d] more than he actually gained himself (some of the misappropriated money went others). Kokesh, 834 F.3d at Conrad, Prince s affiliate, disgorged $250,0000 in bonuses does not render the order punitive since Conrad benefitted from Prince s misconduct. Conrad was the only other executive manager in the Communications Division, and therefore directly benefitted from Prince s kickback scheme. (R. at 2). The Communications Division received forty-one side letters from Prince s kickback scheme, this generated more profits and bonuses for Conrad. (R. at 2-3). Next, Prince contends the $45,000 bonus Prince and Conrad had received individually 2009 is excessive. This bonus was a result from a deal that Burlingham structured in a tablet, but the was a result of a computer tablet deal Burlingham structured, however, Prince abused his position of trust that enabled him to receive this bonus. Maxxon, Inc., 465 F.3d at Furthermore, bonuses were properly included in the total amount because disgorgement need only be a reasonable approximation of the profits causally connected to the violation. Zacharias v. S.E.C., 569 F.3d at 471. In rendering a disgorgement order, the district court has broad discretion not only in determining whether or not to order 21

30 disgorgement but also in calculating the amount to be disgorged. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, (2d Cir.1996). Imposing a five-year statute of limitations on disgorgement would allow Prince to be unjustly enriched approximately million dollars. Holding in favor of the Commission s disgorgement order will restore the status quo. After disgorgement, the public will be protected from Prince and other similar defendants that profit off of deceptive misconduct. B. Disgorgement has been distinguished from forfeiture by a majority of federal courts because of procedural and substantive differences. Disgorgement has been distinguished from forfeiture by nearly every court including this Court. Disgorgement and forfeiture have substantive and procedural differences. In Kaley v. US, this Court differentiated forfeiture. Forfeiture only applies to specific assets that likely have already been spent by the defendant. See Kaley v. US, 134 S. Ct. 1090, 1102 (2014). Government must then resort to equitable remedies and force a [defendant] to disgorge an equivalent amount. Id. This Court has also said that forfeiture has historically been used to refer to an in rem procedure to take tangible property used in criminal activity, without regard to the culpability of the property s owner. United States v. 92 Buena Vista Ave., 507 U.S. 111, 118 (1993). The D.C. Circuit similarly distinguished disgorgement is not a forfeiture covered by Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010). Procedurally, disgorgement is in equity as it is accounting and an order 22

31 compelling the defendant to pay for ill-gotten profits with the district court still retaining discretion in determining the amount. However, forfeiture has no flexibility as it is mandatory, and a creature of statute. SEC v. Contorinis, 743 F.3d 296, 307 (2d Cir. 2014). Statutorily, forfeiture in 2462, must be read in the context of government causes of action an action, suit or proceeding, 28 U.S.C See Kokesh, 834 F.3d at 1165 (quoting 28 U.S.C. 2462). There is no statutory text for disgorgement in Section 2462 that enables district court s retaining discretion in disgorgement orders, contrasted with statutory mandated forfeiture actions. This Court must refrain from equating deterrence with punishment. On the substantive differences, this Court has stated forfeiture serves no remedial purpose, it is designed to punish the offender, and cannot be imposed upon innocent owners. United States v. Bajakajian, 524 U.S. 321, 332 (1998). Circuit courts have bolstered this understanding by holding disgorgement s deterrent purpose does not constitute punishment. SEC v. Bilzerian, 29 F.3d 689, 696 (D.C. Cir. 1994). The D.C. Circuit has reasoned that disgorgement is a deterrence, not a punishment for security law violations. See SEC v. Banner Fund Int l, 211 F.3d 602, 619 (D.C. Cir. 2000). The D.C. Circuit distinguished forfeiture and disgorgement on a substantive basis because it held disgorgement is an equitable obligation to return a sum equal to the amount wrongfully obtained, rather than a requirement to replevy a specific asset. Contrastingly, forfeiture goes beyond the causally related proceeds of the misconduct, while disgorgement cannot be anything in excess of the 23

32 amount of [the] illicit gains. Bilzerian, 29 F.3d at 696. Prince s argument fails that forfeiture is synonymous with disgorgement under Section This argument is based on SEC v. Graham. Graham and the court s reasoning has been rejected by subsequent federal courts for holding forfeiture synonymous with disgorgement. In SEC v. Graham, the court held that disgorgement is synonymous with forfeiture. See SEC v. Graham, 823 F.3d 1357, 1363 (11th Cir. 2016). This decision is an outlier, 1 and every subsequent federal court analyzing Section 2462 in relation to disgorgement has rejected following the Graham court s decision. Every court to consider the underlying. ruling on disgorgement has rejected it. SEC v. Ahmed, No. 3:15cv675 (JBA), 2016 WL , at *7 (D. Conn. Dec. 8, 2016) (quoting Saltsman, 2016 WL , at *27-28). These courts found Graham s reasoning unpersuasive because the Eleventh Circuit relied heavily on Black s Law Dictionary when analyzing disgorgement within Section See SEC v. Stoecklien, No. 15 CV 0532 (JAH) (WVG), 2015 WL , at *3 (S.D. Cal. Oct. 26, 2015). But even Black's Law Dictionary states that a forfeiture is a penalty, fine, proceeding brought by the government against property, and a punishment. Black's Law Dictionary 1 See SEC v. Saltsman, No. 07-CV-4370 (NGG), 2016 WL , at *28 29 (E.D.N.Y. Aug. 2, 2016) ( [T]he court agrees with the courts that have viewed Graham as an outlier ) (citing SEC v. Jones, 155 F.Supp.3d 1180, (D. Utah Dec. 18, 2015) ( The court finds Graham unpersuasive and inapplicable. ); SEC v. Collyard, 154 F.Supp.3d 781, 792 (D. Minn. Dec. 9, 2015) ( [T]hat decision [Graham] is something of an outlier ); SEC. v. Stoecklien, No. 15 CV 0532 (JAH) (WVG), 2015 WL , at *3 (S.D. Cal. Oct. 26, 2015) ( This Court does not find Graham persuasive in light of the many cases finding section 2462 inapplicable to cases seeking disgorgement, the Supreme Court's limitation on its holding in Gabelli and the Ninth Circuit's indication disgorgement is equitable in nature. )); see also Kokesh, 834 F.3d at (Following those courts that have rejected Graham, [r]espectfully, we also see things a bit differently. ). 24

33 (10th ed. 2014). Contrastingly, disgorgement consists of accounting for profits that defines it as equitable relief. Black's Law Dictionary (10th ed. 2014). The courts that rejected Graham, explained that the Eleventh Circuit s disgorgement interpretation is contrary to previous courts of appeals analyzing disgorgement is a kind of forfeiture covered by Riordan, 627 F.3d at 1234 (Second Circuit concluding that disgorgement is not within Section 2462). The Second Circuit also held arguments that analogize criminal forfeiture penalty and disgorgement remedy fail because of their incompatible natures. Contorinis, 743 F.3d at 307. Graham based its reasoning on Gabelli, even though this Court declined to analyze whether disgorgement is within Section See Gabelli, 133 S. Ct. at 1223 ( Those issues are not before us. ). In equating forfeiture and disgorgement, the Graham court chose selective dictionary definitions rather than follow established principles. Graham s approach is incompatible with this Court s note that courts must interpret the relevant words not in a vacuum, but with reference to the statutory context and look consider wellestablished background principle[s]. Torres v. Lynch, 136 S. Ct. 1619, (2016). The Fourteenth Circuit correctly rejected Graham by distinguishing disgorgement as an equitable remedy and not punitive forfeiture subject to fiveyear limitations period in Section

34 C. Subjecting disgorgement to Section 2462 s statute of limitations conflicts with Congressional intent to effectively prevent security laws violations. The SEC is authorized by Congress to order disgorgement as a civil remedy. [T]he Commission or the appropriate regulatory agency may enter an order requiring accounting and disgorgement, including reasonable interest. 15 U.S.C. 78u-2(e). If disgorgement is subject to a five-year statute of limitations, the Commission would be hindered by obtaining full disgorgement remedies in the enforcement of securities laws. The Commission seeks disgorgement in its majority of enforcement actions to prevent unjust enrichment from securities law violations by wrongdoers. Rind, 991 F.2d at 1491 ( Disgorgement plays a central role in the enforcement of the securities laws. ). Understanding the importance of disgorgement, Congress deliberately omitted a statute of limitations for disgorgement because of the complexity of certain security fraud schemes. See id. at 1492 ( The fact that [Congress] did not enact an express statute of limitations for lawsuits instituted by the [SEC], therefore, must be interpreted as deliberate. ). Securities fraud involves multiple parties and transactions. Imposing a time-limit would interfere with the enforcement of these complex fraud schemes. See id. Disgorgement need to be free of any strict time limits for the Commission to effectively act. Congress deliberate omission is also seen by adding civil fine in 1990 and not disgorgement to Section Congress added civil penalties [to the securities laws] in 1990 because disgorgement did not result in any actual 26

35 economic penalty or financial disincentive to engage in securities fraud. SEC v. Merchant Capital, LLC, 486 Fed.Appx. 93, 96 (11th Cir. 2012); H.R. Rep. No , at (1990). Courts are unauthorized to rewrite a statute that Congress has passed just because it might be improved. See Badaracco v. Commissioner, 464 U.S. 386, 398 (1984) ( Courts are not authorized to rewrite a statute because they might deem its effects susceptible of improvement. ). This Court has held that courts must interpret statute of limitations, such as Section 2462, with strict construction in favor of the Government. Id. The plain language of Section 2462 does not apply to equitable remedies, nor does it not list disgorgement. See United States v. Banks, 115 F.3d 916, 919 (11th Cir. 1997). An overbroad reading to include disgorgement will be contrary to Congressional intent and judicial precedent. 27

36 CONCLUSION For the reasons stated herein, Respondent requests this Court to uphold the Fourteenth Circuit s ruling 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 personal misconduct of CEOs and CFOS is not required to trigger the disgorgement remedy authorized under Section 304 of the Sarbanes Oxley Act. Additionally, Respondent requests this Court uphold the Fourteenth Circuit s ruling that the Commission s disgorgement requests as equitable and not barred by 28 U.S.C Respectfully submitted, /s/ Team R11 Counsel of Record for Respondent 28