Team R9

No. 17-1887

IN THE SUPREME COURT OF THE UNITED STATES

________________________________________________

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Respondent

V.

BRIAN BOSCO,

Defendant-Petitioner

AND

JASMINE LEE,

Defendant-Petitioner

AND

RONALD PRINCE,

Defendant-Petitioner

_________________________________________________

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FOURTEENTH CIRCUIT

_________________________________________________

BRIEF FOR THE RESPONDENT

_________________________________________________

Team R9

Counsel of Record for Respondent

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QUESTIONS PRESENTED

1. Whether a cause of action exists under Rule 13a–14 against chief executive officers and chief financial officers who certify false financial statements 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 the five-year statute of limitations authorized by 28 U.S.C. §

2462 applies to disgorgement claims.

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TABLE OF CONTENTS Page

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

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

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

ARGUMENT………………………………………………………………... 6

I. PETITIONERS VIOLATED RULE 13A–14 BY CERTIFYING FALSE FINANCIAL STATEMENTS AND ARE SUBJECT TO DISGORGEMENT UNDER SECTION 304 OF THE SARBANES-OXLEY ACT OF 2002….................................

6

A. CEOs and CFOs violate Rule 13a-14 when they certify false financial statements, even if they did not have actual knowledge of the falsity……………...

9

B. CEOs and CFOs are subject to disgorgement of certain earnings even when they have not personally committed the corporate misconduct that led to an accounting restatement………………..

13

i. The language and context of the statute’s language clearly demonstrate that no personal misconduct is required for a CEO or CFO to be subject to disgorgement……………..................

14

ii. The legislative intent behind passage of the statute further supports the absence of a personal misconduct prerequisite for a CEO or CFO to be disgorged……………………………….

17

II. THE FIVE-YEAR STATUTE OF LIMITATIONS IMPOSED UNDER 28 U.S.C. § 2462 DOES NOT APPLY TO DISGORGEMENT………………………………………………….

21

A. Section 2462 does not apply to disgorgement because disgorgement is not a penalty or forfeiture within the meaning of the statute……………………...

21

Conclusion………………………………………………………………….. 25

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TABLE OF AUTHORITIES

CASES

Abramski v. United States, 134 S.Ct. 2259 (2014)………………………….13 Almendarez-Torres v. United States, 523 U.S. 224 (1998)………………..15

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)…………...………….7 Barnhart v. Sigmon Coal Co., 534 U.S. 438 (2002)……………………..9, 21 Bates v. U.S., 522 U.S. 23 (1997)………………………………………….12, 16 Boyd v. Ill. State Police, 384 F.3d 888 (7th Cir. 2008)……….…………7, 21 Brown v. Gardner, 513 U.S. 115 (1994)………………………………………10

Caminetti v. United States, 242 U.S. 681 (1985)……………………………21 Conn. Nat’l Bank v. Germaine, 503 U.S. 249 (1992)………………………..9 CSX Transp., Inc. v. Alabama Dept. of Revenue, 562 U.S. 277 (2011)…16 E.I. Du Pont De Nemours & Co. v. Davis, 264 U.S. 456 (1924)………….24

E.P.A. v. EME Homer City Generation, L.P., 134 S.Ct. 1584 (2014)……16 FMC Corp. v. Holliday, 498 U.S. 52 (1990)……………………………………11 Gaf Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971)………………………....11 Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280 (2010)…………………………………………………….17 Hibbs v. Winn, 542 U.S. 88 (2004)……………………………………………...22

In re WSF Corp., Exchange Act Release No. 204, 2002 WL 917293 (ALJ May 8, 2002)………………………………………………………………………..12 Jaracki v. G. D. Searle & Co., 367 U.S. 303 (1961)..….....…..…………….14 Johnson v. SEC, 87 F.3d 484, 491 (D.C. Cir. 1996)..............................23

Leocal v. Ashcroft, 543 U.S. 1, 9 (2004)..................................................9

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Los Angeles v. Humphries, 562 U.S. 29 (2010)......................................17 Maracich v. Spears, 133 S.Ct. 2191 (2013)...........................................13 Michigan v. Bay Mills Indian Cmty., 134 S.Ct. 2024 (2014)...................16 Nat’l R.R. Passenger Corp. v. Nat. Ass’n of R.R. Passengers, 414 U.S. 453 (1974)..........................................................................................17 Neuberger v. Commissioner, 311 U.S. 83 (1940)...................................17 Pavelic & LeFlore v. Marvel Entm’t Grp., Div. of Cadence Indus. Corp., 493 U.S. 120 (1989)......................................................16 Ponce v. SEC, 345 F.3d 722 (9th Cir. 2003)..........................................11 Puello v. Bureau of Citizenship & Immigration Servs., 511 F.3d 324 (2nd Cir. 2007)...........................................................................................21 Ratzlaf v. United States, 510 U.S. 135 (1994)........................................10

Reno v. Bossier Parish Sch. Bd., 528 U.S. 320 (2000)...........................10

Rubin v. United States, 449 U.S. 424 (1981).....................................9, 14 SEC v. Blatt, 583 F.2d 1325 (5th Cir. 1978).........................................23 SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016)..................................24

SEC v. Jensen, 835 F.3d 1100 (9th Cir. 2016)......................................10 SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016)....................................23

Smith v. United States, 508 U.S. 223 (1993).....................................9, 21 United States v. Bornstein, 423 U.S. 303 (1976)...................................17 United States v. Great N. Ry. Co., 343 U.S. 562 (1952).........................16 United States v. Noland, 517 U.S. 535 (1996).......................................17 United States v. Ron Pair Enters., 489 U.S. 235 (1989).........................21 United States v. U.S. Gypsum Co., 438 U.S. 422 (1978)........................12

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United States v. Williams, 553 U.S. 285 (2008).....................................14 Zacharias v. SEC, 569 F.3d 458, 471 (D.C. Cir. 2009)..........................23

STATUTES AND REGULATIONS 15 U.S.C. § 7241 (2012).....................................................................7, 8 15 U.S.C. § 7243 (2012) .......................................................8, 13, 14, 15

17 C.F.R. 240.13a-14 (2017) ...............................................................10 28 U.S.C. § 2462.......................................................6, 20, 21, 22, 23, 24 Fed. R. Civ. P. 56........................................................7, 8, 13, 20, 21, 24 S. Rep. No. 107-205 (2002) ............................................................18, 19

Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7201 (2012)...........................19

OTHER AUTHORITIES Black’s Law Dictionary (10th ed. 2014).............................................9, 22 David S. Law & David Zaring, Law Versus Ideology: The Supreme Court and the Use of Legislative History, 51 Wm. & Mary L. Rev. 1653 (2010).................................................................................................17 Oxford English Dictionary Online, http://www.oed.com/.................9, 22 Webster’s New Twentieth Century Dictionary of the English Language (Jean L. McKechnie ed., 2d ed. 1979)...................................................9 William H. Donaldson, Testimony Concerning the Implementation of the Sarbanes-Oxley Act of 2002 (Sept. 9, 2003), https://www.sec.gov/news/testimony/090903tswhd.htm...................19

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STATEMENT OF THE CASE

The SEC filed a civil action against Brian Bosco, Jasmine Lee, and

Ronald Prince in the District Court of Fordham, “alleging that Prince had

participated in a scheme to defraud Burlingham investors by reporting millions

of dollars of unearned revenue.” (R. at 6). The complaint further claimed that

“Bosco and Lee violated Rule 13a–14 by certifying Burlingham’s false and

misleading financial statements for fiscal year 2014,” triggering a disgorgement

remedy under Section 304 of the Sarbanes-Oxley Act of 2002. (R. at 6). The

district court denied Bosco and Lee’s motion for summary judgment and

granted the SEC’s cross-motion for summary judgment, finding that “a cause

of action exists under Rule 13a–14 against CEOs and CFOs who certify false

financial statements, even if they did not have knowledge of the falsity.” (R. at

6–7). Further, the court held “SOX 304 requires a CEO and CFO to disgorge

incentive-based and equity-based compensation if their company issues an

accounting restatement, even if the directors were not involved in the

misconduct that caused the restatement,” and ordered Bosco and Lee to

disgorge $600,000 and $475,000 respectively. (R. at 7).

Prince was found liable under Rule 10b–5 for the fraud scheme. (R. at

7). The district court then held that “because disgorgement does not constitute

either ‘penalty’ or ‘forfeiture’ under § 2462, the statute of limitations did not

apply to the SEC’s request for disgorgement for the period of January 2008 to

January 2010,” and ordered Prince to disgorge a total of $1,770,000. (R. at 7).

Bosco and Lee appealed the district court’s decision on the grounds that

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“that the District Court erred in holding that Rule 13a–14 provides a cause of

action against officers who certify false statements, even where the officers

were unaware of the falsity.” (R. at 7). Bosco and Lee also claim that “because

they were not responsible for the misconduct leading to Burlingham’s financial

restatements, they should not be required to disgorge profits or bonuses

stemming from the period of January 2015 through January 2015.” (R. at 7–

8). Prince’s appeal claimed only that the statute of limitations precludes the

SEC’s request for disgorgement. (R. at 8). The United States Court of Appeals

for the Fourteenth Circuit affirmed the decision of the lower court. (R. at 9, 15,

21). Bosco, Lee, and Prince appealed and the Supreme Court granted their

petition for a writ of certiorari to consider the relevant questions.

STATEMENT OF THE FACTS

Birlingham, Inc. is a microchip manufacturer that by 2007 had 42% of

smartphone business market share and earned a 52% of its net income the

smartphone business. (R. at 1–2). Prince, Burlingham’s Executive Vice

President since 2002, was given direct managerial responsibility for the

Communications Division, which oversees the smartphone business. (R. at 2).

Much to Prince’s apparent frustration, the compensation system in place at

Burlingham was such that his compensation was not directly tied to the

success of the business. (R. at 2). Rather, it was instead determined at the

end of each year by a Compensation Committee that made its decisions about

individual managers’ compensation based on consideration of profit, revenue,

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market share, employee retention, and integration of acquired businesses of

Burlingham generally and the divisions individually. (R. at 2–3). Despite what

was in all likelihood a high payment for running Burlingham’s top division,

Prince felt that the executive compensation he received in compliance with

company policy was inadequate. (R. at 2).

In an effort to supplement the on-book compensation he received from

Burlingham for his services, Prince began to negotiating contracts containing

unilateral termination rights with select Chinese smartphone manufacturers.

(R. at 2–3). For each of these special contract provisions, which were highly

favorable to the Chinese companies, Prince earned $25,000. (R. at 3). Prince

stood to pocket an additional $50,000 each time a unilateral termination right

was exercised. (R. at 3). Prince executed 30 such contracts over a near-three

year period for a total of $750,000. (R. at 3). Though none of the purchasers

exercised their unilateral termination rights in the time period, Prince

temporarily ended providing the side letters in 2010. (R. at 3).

In 2011, Burlingham’s founder and CEO retired and was replaced by

Brian Bosco. (R. at 3). Jasmine Lee was made CFO. (R. at 4). The two were

known for being hands on and examining “each division’s cash flow and cost

structure” in addition to maintaining the company’s internal controls. (R. at 4).

However, in 2014 they were notified of “deal sweeteners such as unilateral

termination rights” by a CEO of a Japanese smartphone company but declined

to look into the allegations. (R. at 4).

Around the same time, from the period of January 2014 to January

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2015, Prince, no longer the clear successor to the CEO position as a result of

Bosco’s ties to the board of directors, began to again “enter into side letters

with Chinese smartphone manufacturers.” (R. at 4). This time, however, a

2.5% decline in the United Kingdom’s GDP triggered the contracts’ unilateral

termination rights provisions and five of 11 the smartphone manufactures

opted to exercise that right. (R. at 4–5). It was only upon the companies’

attempts to exercise their termination rights that Bosco and Lee took any

action. (R. at 5). They acted to determine the validity of the rights and to

inform Burlingham’s board of the “material adverse impact on [Burlingham’s]

2015 financial condition, its results of operations, and its first quarter financial

results.” (R. at 5).

The board appointed a special committee comprised of outside directors

to investigate Prince’s agreements. (R. at 5). The committee determined

Prince’s scheme had been operational in 2008, 2009, and 2014, substantially

affecting Burlingham’s 2014 financial statements. (R. at 5). As a result, a

restated 10-K was filed for fiscal year 2014 reclassifying income items related

to the contracts. (R. at 5).

SUMMARY OF THE ARGUMENT

Officers violate Rule 13a-14 when they certify false financial statements,

even if they did not have actual knowledge of the falsity. Certification requires

chief executive officers (CEOs) and chief financial officers (CFOs) to guarantee

the quality of the facts included in the financial statements that they file. If

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certification only required a mere signature, it would be unnecessary to require

the CEO and CFO to personally sign the financial reports. Rather, certification

must require the CEO and CFO to take steps to verify the validity of the

statements contained in the financial reports, leaving them liable for any

misstatements if they fail to do so. This approach has been adopted by other

circuits, which have held that similar rules have an “implicit truthfulness

requirement.” A contrary rule would have absurd consequences. CEOs and

CFOs would be incentivized to be wilfully blind to the content of their financial

statements in order to avoid liability for material misstatements. Such a rule

would leave shareholders unprotected from corporate misconduct and lead to

significant financial oversights.

Per Section 304 of the Sarbanes-Oxley Act of 2002 (SOX 304), CEOs and

CFOs are subject to disgorgement of certain compensation and profits when

the related issuer is required to prepare an accounting restatement because

the issuer’s misconduct resulted in material noncompliance with financial

reporting regulations. The plain language of the statute taken in context is

clear. The statute does not contain any requirement that the CEO or CFO

must be personally responsible for the aforementioned misconduct leading to

noncompliance, and the Court should not read in such a requirement.

Further, Congress’ intent in passing SOX 304 was to create a broad remedy

rather than a punishment. The harm caused by an issuer’s filing a

restatement is created regardless of the CEO or CFO’s personal involvement in

misconduct that led to the material noncompliance with reporting standards.

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It is the job of the CEO and CFO to oversee the company and establish and

monitor internal controls. Thus the remedy should be available regardless of

the CEO or CFO’s personal involvement in the relevant misconduct. Congress’

motivation in passing the Sarbanes-Oxley Act generally also lends additional

support to the proper meaning of the statute. The Act was intended to restore

investor confidence after a series of major accounting scandals.

To decide personal misconduct is a prerequisite for disgorgement would

allow corporate officers to maneuver around responsibility for properly

overseeing their companies by absolving them of any personal liability, flying in

the face of Congress’ intent in passing the Act. Due to the clear and

unambiguous nature of the statute’s wording and Congress’ intent in passing

SOX 304 specifically and Sarbanes-Oxley generally, the Court should not

create a requirement of personal misconduct for CEOs and CFOs in order for

them to qualify for disgorgement.

The five-year statute of limitations implemented under 28 U.S.C. § 2462

does not apply to disgorgement because disgorgement is neither a penalty nor

a forfeiture within the meaning of the statute. Both penalties and forfeitures

are punitive measures by definition. Disgorgement, on the other hand, is an

equitable remedy designed to restore the status quo when an individual

misappropriates a financial gain. Since § 2462 only applies to punitive actions,

it does not impose a five-year statute of limitations on disgorgement actions.

ARGUMENT

The standard of review in decisions involving statutory interpretation is

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de novo. See, e.g., Boyd v. Ill. State Police, 384 F.3d 888, 896 (7th Cir. 2008);

Puello v. Bureau of Citizenship & Immigration Servs., 511 F.3d 324, 327 (2nd

Cir. 2007). “The court shall grant summary judgment if the movant shows that

there is no genuine dispute as to any material fact and the movant is entitled

to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Such disputes exist

when, based on evidence, “a reasonable jury could return a verdict for the

nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

The controlling substantive law determines material facts and only those that

“might affect the outcome of the suit” will preclude entry of summary

judgment. Id.

I. PETITIONERS VIOLATED RULE 13a–14 BY CERTIFYING FALSE

FINANCIAL STATEMENTS AND ARE SUBJECT TO DISGORGEMENT

UNDER SECTION 304 OF THE SARBANES-OXLEY ACT OF 2002

The controlling laws as to the first question are Rule 13a–14 and Section

304 of the Sarbanes-Oxley Act of 2002. Rule 13a–14 was enacted under

Section 302 of the Sarbanes-Oxley Act of 2002 (SOX 302). See 15 U.S.C. §

7241 (2012). Under Rule 13a-14, the chief executive officers (CEOs) and chief

financial officers (CFOs) of public companies must certify the accuracy of

certain financial statements. 15 U.S.C. § 7241 (2012). Certification requires,

among other things, CEOs and CFOs to 1) review the report, 2) confirm that

the report does not include any material misstatements, 3) confirm that the

report fairly represents the company’s financial position, and 4) establish

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internal controls for financial accuracy. 15 U.S.C. § 7241(a)(1)-(4) (2012).

Section 304 of the Sarbanes-Oxley Act of 2002 (SOX 304) acts as

enforcement tool for Rule 13a–14. Under SOX 304, when (1) “an issuer is

required to prepare an accounting restatement due to the material

noncompliance” with financial reporting requirements (2) as a result of the

issuer’s misconduct and (3) the chief executive officer (CEO) and/or chief

financial officer (CFO) received incentive-based or equity-based compensation

or profits from sales of securities (4) during a 12-month period following the

“first public issuance of filing” of the document embodying the reporting

requirement, then CEOs and CFOs are subject to disgorgement of that

compensation or profit. 15 U.S.C. § 7243(a) (2012).

Due to the clear and unambiguous text of Rule 13a–14, CEOs and CFOs

violate Rule 13a–14 when they certify false financial statement, even when they

lack knowledge of the falsity. First, the definition of the word “certify” and the

requirement that the officers personally sign the financial statements indicate

that CEOs and CFOs are liable the content of the financial statements,

regardless of their actual knowledge. Second, the clear text of SOX 304 and

the legislative intent demonstrate that CEOs and CFOs may be subject to

disgorgement even if they did not personally engage in the misconduct that led

the issuer to file an accounting restatement. Therefore, the Court should

affirm the holdings of the Fourteenth Circuit and deny the Petitioner’s Rule 56

motion for summary judgment.

A. CEOs and CFOs violate Rule 13a-14 when they certify false

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financial statements, even if they did not have actual knowledge of

the falsity.

Statutory interpretation must always begin with the plain meaning of the

text. Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450 (2002). “When

interpreting a statute, [the court] must give words their ‘ordinary or natural’

meaning.” Leocal v. Ashcroft, 543 U.S. 1, 9 (2004) (quoting Smith v. United

States, 508 U.S. 223, 228 (1993)). If the statutory language is plain and

unambiguous, “this first canon is also the last: ‘judicial inquiry is complete.’”

Conn. Nat’l Bank v. Germain, 503 U.S. 249, 254 (1992) (quoting Rubin v.

United States, 449 U.S. 424, 430 (1981)).

The language of Rule 13a-14 is plain and unambiguous: CEOs and CFOs

are liable for certifying false financial statements. Rule 13a-14 requires CEOs

and CFOs to “certify” that certain financial statements do not contain any false

statements of material fact and fairly represent the company’s financial

position. 15 U.S.C. § § 7421(a)(2)-(3). In both plain language and legal

dictionaries, the word “certify” is defined as “to testify by formal declaration” or

“to guarantee the quality or worth of.” Webster’s New Twentieth Century

Dictionary of the English Language 297 (Jean L. McKechnie ed., 2d ed. 1979);

see also Certify, Oxford English Dictionary Online, http://www.oed.com/view/

Entry/29995?redirectedFrom=certify#eid (last visited Feb. 27, 2017) (defining

“certify” as “to guarantee as certain”); Certify, Black’s Law Dictionary (10th ed.

2014) (defining “certify” as “[t]o attest as being true”). Since statutory language

must be interpreted according to its ordinary meaning, the word “certify” in

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Rule 13a-14 must require CEOs and CFOs to guarantee the quality of the

financial statements that they sign.

The conclusion that certification requires more than a mere signature is

further supported by the fact that CEOs and the CFOS must personally sign

the financial statements. Under 17 C.F.R. 240.13a-14(c), CEOs and CFOs are

prohibited from delegating their signatory authority to another person. 17

C.F.R. 240.13a-14(c) (2017). If only a signature is required for compliance with

Rule 13a-14, it seems unnecessary to require the CEO and CFO to personally

sign the financial reports. Rather, certification must require the CEO and CFO

to take steps to verify the validity of the statements contained in the financial

reports, leaving them liable for any misstatements if they fail to do so.

Additionally, several courts have found that rules similar to Rule 13a-14

include an “implicit truthfulness requirement.” SEC v. Jensen, 835 F.3d 1100,

1113 (9th Cir. 2016). “A term appearing in several places in a statutory text is

generally read the same way each time it appears.” Ratzlaf v. United States,

510 U.S. 135, 143 (1994). And the presumption that language within a

statutory text has the same or similar meaning has been applied to the

appearance of that language in related statutes. See Brown v. Gardner, 513

U.S. 115, 118 (1994); Reno v. Bossier Parish Sch. Bd., 528 U.S. 320, 329–30

(2000).

The Ninth Circuit has held that Rule 13a-13, which requires public

companies to file quarterly reports, prohibits the filing of misleading reports

even though the rule does not explicitly state that the reports must be truthful.

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Ponce v. SEC, 345 F.3d 722, 735-36 (9th Cir. 2003). Similarly, the Second

Circuit found an implicit truthfulness requirement in Rule 13d-1, which

requires stockholders that acquire over 5% of the equity of a public company to

file a form Schedule 13D with the SEC. Gaf Corp. v. Milstein, 453 F.2d 709,

720 (2d Cir. 1971). The court held that “the obligation to file truthful

statements is implicit in the obligation to file with the issuer.” Gaf Corp. v.

Milstein, 453 F.2d at 720. Rule 13a-14 falls under the same umbrella as Rules

13a-13 and 13d-1. All three of the rules require companies to comply with

certain procedures in filing statements with the SEC, promote corporate

transparency, and prevent misconduct and harm to investors. Therefore, the

Court should apply the same implicit truthfulness requirement present in

Rules 13a-13 and 13d-1 to Rule 13a-14.

Contrary to the Petitioner’s argument, Rule 13a-14 does not have a

scienter requirement. The phrase “based on the officer’s knowledge” in Rule

13a-14(a)(2)-(3) simply emphasizes the fact the CEOs and CFOs must have

knowledge about the content of the financial statements in order to certify their

accuracy. Any other reading would encourage wilful blindness. Requiring

actual knowledge of falsity would incentivize CEOs and CFOs to remain

ignorant about the content of their financial statements in order to avoid

liability. “If Congress had intended such an irrational result, surely it would

have expressed it in straightforward English.” FMC Corp. v. Holliday, 498 U.S.

52, 66 (1990).

Furthermore, when Congress has intended to impose a requirement, it

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has generally done so expressly. “It is generally presumed that Congress acts

intentionally and purposely where it includes particular language in one

section of a statute but omits it in another.” Bates v. United States, 522 U.S.

23, 24 (1997). Though “far more than the simple omission of the appropriate

phrase from the statutory definition is necessary to justify dispensing with an

intent requirement,” United States v. U.S. Gypsum Co., 438 U.S. 422, 438

(1978), in this case there exists an appropriate justification. Reading a scienter

requirement into the statute will not further the intended purpose of the

statute and, in fact, would lead to an absurd outcome.

Requiring the relevant officers to have knowledge of the wrongdoing will

disincentivize officers from thoroughly ascertaining the accuracy of statements

made in corporate filings because they will have no personal liability for false

statements. This will leave investors with a diminished remedy when false

statements are inevitably made due to the lack of necessary oversight. The

lack of scienter requirement in Rule 13a–14 is further supported by the fact

that courts have not required scienter in order to find a violation of Section

13a. See In re WSF Corp., Exchange Act Release No. 204, 2002 WL 917293, at

*3 (ALJ May 8, 2002) (“Violations of Exchange Act Section 13(a) do not require

a finding of scienter.”).

* * *

The definition of certify, signature requirement, and decisions of the

circuits all show that CEOs and CFOs violate Rule 13a-14 when they file false

financial statements, even if they did not have actual knowledge of the falsity.

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In this case, Bosco and Lee each signed a form 10-K which included false

financial information, making them liable for those misstatements. Therefore,

the Petitioners Rule 56 Motion for Summary Judgment should be denied.

B. CEOs and CFOs are subject to disgorgement of certain earnings

even when they have not personally committed the corporate

misconduct that led to an accounting restatement

As previously stated with respect to Rule 13a–14, “[w]hen interpreting a

statute, a court must interpret the relevant words not in a vacuum, but with

reference to the statutory context, ‘structure, history, and purpose.’” Abramski

v. United States, 134 S.Ct. 2259, 2267 (2014) (quoting Maracich v. Spears,

133 S.Ct. 2191, 2209 (2013)). Here, each of the language, statutory context,

history, and purpose in passing SOX 304, 15 U.S.C. § 7243(a), support the

proper interpretation of the Act: that there is no requirement that a CEO or

CFO personally engage in misconduct in order to be subject to disgorgement of

certain profits and bonuses when an issuer is made to release and accounting

restatement. Thus, per SOX 304, Bosco and Lee, should reimburse

Burlingham for failing to prevent Prince’s misconduct under Rule 13a–14.

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i. The language and context of the statute’s language

clearly demonstrate that no personal misconduct is required

for a CEO or CFO to be subject to disgorgement

Statutory interpretation begins with the assumption that Congress

accurately expressed its purpose in the ordinary meaning of the language it

used and, as previously stated, when the words of a statute are unambiguous,

“judicial inquiry is complete.” Rubin v. United States, 449 U.S. at 430. Here,

the statute’s text is clear on the question of when a CEO and/or CFO properly

qualifies for disgorgement.

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.

15 U.S.C. § 7243(a).

Thus, per the clear language of the statute, CEOs and CFOs qualify for

disgorgement of certain bonuses and profits when an issuer must prepare an

accounting restatement. Nothing in the statute says or even indicates that

personal misconduct is a prerequisite for disgorgement. The absence of such a

requirement becomes increasingly clear when context and legislative intent are

considered.

The context of the words in a statute also gives guidance as to their

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intended meaning. “In context . . . meanings are narrowed by the

commonsense canon of noscitur a sociis—which counsels that a word is given

more precise content by the neighboring words with which it is associated.”

United States v. Williams, 553 U.S. 285, 294 (2008); Jaracki v. G. D. Searle &

Co., 367 U.S. 303, 307 (1961) (“The maxim noscitur a sociis, that a word is

known by the company it keeps, while not an inescapable rule, is often wisely

applied where a word is capable of many meanings in order to avoid the giving

of unintended breadth to the Acts of Congress.”).

SOX 304, requires CEOs and CFOs to disgorge earnings “if an issuer is

required to prepare an accounting restatement due to the material

noncompliance of the issuer, as a result of misconduct.” 15 U.S.C. § 7243(a).

The phrase “as a result of misconduct,” taken in context, clearly refers to the

issuer’s conduct, not that of the CEO or CFO specifically, as it addresses the

“material noncompliance of the issuer” immediately before. Therefore, the CEO

and CFO may be required to disgorge earnings based on the issuer’s

misconduct, even if they are not personally responsible for that misconduct.

Reading the language of the statute in the context of it’s title further supports

this proposition. The title of the statute also supports this meaning, and the

Court has held that statutory titles can be instructive in adding context. See

Almendarez-Torres v. United States, 523 U.S. 224, 234 (1998). The statute is

titled “Additional Compensation Prior to Noncompliance with Commission

Financial Reporting Requirements,” indicating the statute is targeting

additional compensation, such as that of the CEO or CFO, either of whom may

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be receiving additional compensation as a result of misconduct they might not

even have been aware of. 15 U.S.C. § 7243(a).

Just as the Court must consider the actual language of a statute and

context in which that language is found, the Court may not amend the

language used by Congress. “[The Supreme] Court does not revise legislation,”

Michigan v. Bay Mills Indian Cmty., 134 S.Ct. 2024, 2033 (2014), and the

Court has said “‘Congress wrote the statute it wrote’—meaning, a statute going

so far and no further.” Id. at 2033–34 (citing CSX Transp., Inc. v. Alabama

Dept. of Revenue, 562 U.S. 277, 296 (2011)); United States v. Great N. Ry. Co.,

343 U.S. 562, 575 (1952) (“It is the judicial function of the United States

Supreme Court to apply statutes on the basis of what Congress has written,

rather than on the basis of what Congress might have written.”). The Court is

not authorized “to disregard clear language” on the assumption that Congress

intended the statute to mean something broader than is written. Id. at 2034.

The Courts are also prohibited from adding language not written by

Congress into a statute. “[A] reviewing court's ‘task is to apply the text [of the

statute], not to improve upon it.” E.P.A. v. EME Homer City Generation, L.P.,

134 S.Ct. 1584, 1600–01 (2014) (quoting Pavelic & LeFlore v. Marvel Entm’t

Grp., Div. of Cadence Indus. Corp., 493 U.S. 120, 126 (1989)). As such, “[the]

Court ordinarily resists reading words into a statute that do not appear on its

face.” Bates v. United States, 522 U.S. 23, 24 (1997).

The statute’s text says simply that “if an issuer is required to prepare an

accounting restatement . . . the chief executive office and chief financial officer

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of the issuer shall reimburse the issuer” for specified bonuses and profits. SOX

304. The statute contains no requirement that the CEO or CFO must

personally engage in misconduct to be subject to disgorgement. Since SOX

304 does not explicitly require personal misconduct on behalf of the CEO and

CFO in order for them to be subject to disgorgement, the court should not read

such a requirement into the statute.

ii. The legislative intent behind passage of of the statute

further supports the absence of a personal misconduct

prerequisite for for a CEO or CFO to be disgorged

The Court has frequently turned to the legislative history to glean a

better understanding of Congress’ intent in passing a statute. See, e.g., Los

Angeles v. Humphries, 562 U.S. 29, 35–37 (2010); United States v. Noland, 517

U.S. 535, 535 (1996) (“The language of [the statute], principles of statutory

construction, and legislative history clearly indicate Congress's intent . . . .”).

See also David S. Law & David Zaring, Law Versus Ideology: The Supreme

Court and the Use of Legislative History, 51 Wm. & Mary L. Rev. 1653 (2010).

And in seeking to find the proper interpretation of a statute, courts must take

legislative intent into consideration. Nat’l R.R. Passenger Corp. v. Nat. Ass’n of

R.R. Passengers, 414 U.S. 453, 458 (1974) (citing Neuberger v. Commissioner,

311 U.S. 83, 88 (1940)) (“But even the most basic general principles of

statutory construction must yield to clear contrary evidence of legislative

intent.”). Further, “the absence of specific legislative history in no way modifies

the conventional judicial duty to give faithful meaning to the language

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Congress adopted in the light of the evident legislative purpose in enacting the

law in question.” Graham County Soil & Water Conservation Dist. v. United

States ex rel. Wilson, 559 U.S. 280 (2010) (quoting United States v. Bornstein,

423 U.S. 303, 310 (1976)).

The proper interpretation of the statute, namely the lack of personal

misconduct requirement as a precursor to disgorgement of CEOs and CFOs, is

further supported by both the history behind the statute and Congress’ clear

intent in passing the statute. Congress intended to craft a broad remedy,

rather than a punishment. See S. Rep. No. 107-205, at 26 (2002) (declining to

limit disgorgement to gains received by an individual “as a result of the

[securities law] violation,” instead permitting “courts to impose any equitable

relief necessary or appropriate to protect, and mitigate harm to, investors”). No

personal misconduct on behalf of the CEO or CFO is required in order for the

statute to serve its purpose as a remedy. An issuer’s need to file a restatement

creates harm regardless of the CEO or CFO’s personal involvement in

misconduct that led to the material noncompliance with reporting standards,

thus the remedy should be available regardless of the CEO or CFO’s personal

involvement in the relevant misconduct. As such, the CEO and CFO need not

have personally engaged in misconduct in order for disgorgement to serve

Congress’ purpose.

This congressional intent is further supported when viewed in light of

Congress’ motivations for passing Sarbanes-Oxley generally. Sarbanes-Oxley

was passed in the wake of a series of high profile corporate and accounting

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scandals, most notably the scandal that resulted in the collapse of energy

conglomerate Enron and its Big Five accounting firm, Arthur Andersen. See

generally Scott Green, A Look at the Causes, Impact and Future of the

Sarbanes-Oxley Act, 3 J. Int'l Bus. & L. 33 (2004). The fall of Enron along with

a series of other scandals resulted in billions of dollars of losses and

significantly damaged investors’ trust. S. Rep. No. 107-205, at 26 (2002)

(“Recent events have raised concern about management benefitting from

unsound financial statements, many of which ultimately result in corporate

restatements.”).

Congress, in passing the sweeping Act, aimed “[t]o protect investors by

improving the accuracy and reliability of corporate disclosures made pursuant

to the securities laws, and for other purposes." Sarbanes-Oxley Act of 2002, 15

U.S.C. § 7201 (2012). See also William H. Donaldson, Testimony Concerning

the Implementation of the Sarbanes-Oxley Act of 2002 (Sept. 9, 2003),

https://www.sec.gov/news/testimony/090903tswhd.htm (“The Act [a]ffects

dramatic change across the corporate landscape to re-establish investor

confidence in the integrity of corporate disclosures and financial reporting.”).

One measure for ensuring trust and minimizing harm to investors is the

establishment of internal controls. CEOs and CFOs have a responsibility to

establish internal controls and to ensure that such misconduct does not occur,

even if they are not the ones doing it. To decide otherwise would allow

corporate officers to maneuver around responsibility for properly overseeing

their companies by absolving them of any personal liability, flying in the face of

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Congress’ intent in passing the Act.

* * *

Due to the clear, unambiguous language of SOX 304, which does not

give any indication of imposing a personal misconduct requirement for

disgorgement, paired with the context of and congressional intent behind the

legislation, the Court must find that there is no requirement of personal

misconduct by a CEO or CFO in order for them to qualify for disgorgement.

Thus, because each of the requirements for disgorgement were met in this case

— (1) Burlingham, an issuer, was required to prepare an accounting

restatement due to material noncompliance with financial reporting

requirements (2) that resulted from Burlingham’s misconduct, namely Prince’s

fraud scheme, and (3) the Bosco, the CEO, and Lee, the CFO, received

incentive-based or equity-based compensation or profits from sales of

securities (4) during the 12-month period following the public filing of the

document embodying the reporting requirement — the Court must find Bosco

and Lee are subject to disgorgement and deny their Rule 56 Motion for

Summary Judgment.

II. THE FIVE-YEAR STATUTE OF LIMITATIONS IMPOSED UNDER 28

U.S.C. § 2462 DOES NOT APPLY TO DISGORGEMENT

Section 2462 of Title 28 of the United States Code imposes a five-year

statute of limitations on certain SEC enforcement actions. (2012). The statute

states:

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[A]n 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.

28 U.S.C. § 2462. Whether § 2462 applies to disgorgement under SOX 304 is a

matter of statutory interpretation reviewed de novo. See, e.g., Boyd v. Ill. State

Police, 384 F.3d 888, 896 (7th Cir. 2008); Puello v. Bureau of Citizenship &

Immigration Servs., 511 F.3d 324, 327 (2nd Cir. 2007).

In light of the unambiguous text, the five-year statute of limitations

imposed in § 2462 does not apply to disgorgement because disgorgement is a

remedial, not punitive measure. Therefore, the decision of the Fourteenth

Circuit should be affirmed and the Petitioner’s Rule 56 motion should be

denied.

A. Section 2462 does not apply to disgorgement because

disgorgement is not a penalty or forfeiture within the meaning of

the statute.

As previously mentioned, statutory interpretation must begin with the

plain meaning of the text. Barnhart, 534 U.S. at 450. Words in the statute

should be given their “ordinary or natural” meaning. Smith v. United States,

508 U.S. at 228. When “the statute’s language is plain, ‘the sole function of

the courts is to enforce it according to its terms.’” United States v. Ron Pair

Enters., 489 U.S. 235, 241 (1989) (quoting Caminetti v. United States, 242 U.S.

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681, 685 (1985)).

The statute of limitations laid out in § 2462 does not apply in this case

because disgorgement is neither a forfeiture nor a penalty within the meaning

of the statute. Under § 2462, a five-year statute of limitations is imposed when

an action aims to enforce “any civil fine, penalty, or forfeiture, pecuniary or

otherwise.” 28 U.S.C. § 2462 (emphasis added). The word “penalty” is

ordinarily defined as a “punishment.” Penalty, Oxford English Dictionary

Online, http://www.oed.com/view/Entry/139990?redirected

From=penalty#eid (last visited Feb. 28, 2017); see also Penalty, Black’s Law

Dictionary (10th ed. 2014) (defining “penalty” as a “[p]unishment imposed on a

wrongdoer”). By definition, therefore, a penalty is a punitive measure.

Similarly, “forfeiture” is defined as “losing . . . [property] in consequence

of a crime, offence, or breach of engagement.” Forfeiture, Oxford English

Dictionary Online, http://www.oed.com/view/Entry/73286?redirected

From=forfeiture& (emphasis added); see also Forfeiture, Black’s Law Dictionary

(10th ed. 2014) (defining “forfeiture” as the “loss of a right, privilege, or

property because of a crime, breach of obligation, or neglect of duty”). This

definition indicates that a forfeiture is also a punitive measure. While a

penalty encompasses all punishments, a forfeiture is a specific type of

punishment designed to take away property as a consequence for wrongdoing.

The conclusion that forfeiture is a punitive measure is further supported

by the surrounding context. “[S]tatutory language must be read in context

[since] a phrase gathers meaning from the words around it.” Hibbs v. Winn,

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542 U.S. 88, 101 (2004). The word “forfeiture” in § 2462 does not stand in

isolation; it is immediately preceded by the words “fine” and “penalty.” This

close proximity implies that all three of the words have a similar meaning and

should be construed together. Since both fines and penalties are punitive

measures, Congress must have intended forfeitures to be punitive as well.

Unlike a penalty or a forfeiture, disgorgement is remedial, not punitive,

in nature. The primary purpose of disgorgement is to “deprive the wrongdoer of

his ill-gotten gain.” SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978). By

divesting profits received as a result of wrongdoing, disgorgement simply

restores the status quo and eliminates the financial incentive for individuals to

falsify financial statements. “[W]here the effect of the SEC’s action is to restore

the status quo ante, such as through a proceeding for . . . disgorgement . . . §

2462 will not apply.” Johnson v. SEC, 87 F.3d 484, 491 (D.C. Cir. 1996).

Disgorgement does not become punitive just because the wrongdoer is

required to disgorge money than he earned from his illicit conduct. “[R]emedial

sanctions [do not have to] restore violators to the exact financial situation they

were in before their wrongful acts.” Zacharias v. SEC, 569 F.3d 458, 471 (D.C.

Cir. 2009). Suffering a loss alone is not enough to render a remedial sanction

punitive. Id.; Johnson, 87 F.3d at 488.

After considering this issue in depth, Both the Tenth and D.C. Circuits

have also concluded that § 2462 does not apply to disgorgement. Looking into

the historical definition of “forfeiture,” the Tenth Circuit reasoned that

forfeitures were “undoubtedly punitive actions” when § 2462 was enacted. SEC

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v. Kokesh, 834 F.3d 1158, 1166 (10th Cir. 2016). Since disgorgement is an

equitable remedy, forfeiture cannot be stretched to encompass disgorgement

under the statute. Id. Similarly, the D.C. Circuit found that § 2462 only

applies to punitive actions and disgorgement is not a punitive action.

Zacharias, 569 F.3d at 471. Although the Eleventh circuit has come to the

opposite conclusion, its decision overlooked the clear differences between a

forfeiture and disgorgement. See SEC v. Graham, 823 F.3d 1357, 1363 (11th

Cir. 2016) (holding that there is “no meaningful difference” between a forfeiture

and a disgorgement simply because both measures involve a confiscation of

property).

Additionally, § 2462 must be construed in favor of the SEC because it

may bar the SEC’s right to pursue disgorgement against the Petitioners. See

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

limitation sought to be applied to bar rights of the government[] must receive a

strict construction in favor of the government.”). Since § 2462 can be

interpreted to exclude disgorgement, that interpretation should prevail. Any

other holding would prevent the SEC from pursuing an equitable remedy

necessary to compensate the corporation and its shareholders

* * *

Since disgorgement is neither a penalty nor a forfeiture, it is not covered

under the five-year statute of limitations imposed by § 2462. Therefore, the

Petitioner’s Rule 56 Motion for Summary Judgment should be denied.

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CONCLUSION

For the foregoing reasons, the decision of the Fourteenth Circuit should

be affirmed.