R7

No. 16-132

IN THE SUPREME COURT OF THE UNITED STATES

BRIAN BOSCO, AND

JASMINE LEE, AND

RONALD PRINCE,

Petitioners,

v.

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

__________________________

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FOURTEENTH CIRCUIT

__________________________

Spring Term 2017

__________________________

BRIEF FOR RESPONDENT

__________________________

TEAM R7

COUNSEL OF RECORD FOR RESPONDENT

R7

i

TABLE OF CONTENTS

TABLE OF AUTHORITIES .............................................................................. iii ISSUES PRESENTED ..................................................................................... vii STATEMENT OF THE CASE ............................................................................ 1 STATEMENT OF FACTS .................................................................................. 3 SUMMARY OF THE ARGUMENT ..................................................................... 5 ARGUMENT .................................................................................................... 8

I. RULE 13a-14 OF THE EXCHANGE ACT CAN BE VIOLATED WITHOUT ACTUAL KNOWLEDGE OF THE MISCONDUCT, AND, IN SUCH CASES, DISGORGEMENT MAY BE WARRANTED UNDER SOX 304. ......................... 8

A. Officers May Be Held Liable Under Rule 13a-14 Despite Lack of Actual Knowledge of the Falsity of the Certification. ............................................. 9

1. The plain language of the Rule indicates an implied truthfulness requirement consistent with other Section 13 rules ............................. 10 2. The SEC concluded that rules under Section 13(a) may be violated absent actual knowledge, and most courts agree ................................. 12 3. Even if scienter is required under Rule 13a-14, that requirement is fulfilled through the officers’ recklessness. ........................................... 14

B. Disgorgement is Still Warranted Even When the Officers Did Not Personally Engage in Misconduct. ........................................................... 16

II. THE STATUTE OF LIMITATIONS IN 28 U.S.C. § 2462 DOES NOT APPLY TO DISGORGEMENT. ..................................................................... 21

A. Disgorgement Is Not Included Under the Plain Language of Section 2462, and Thus Is Not Subject to the Statute of Limitations. .................. 22

B. Disgorgement Is Equitable, and Thus Is Not Subject to the Statute of Limitations in Section 2462 .................................................................... 24

1. Disgorgement is not a forfeiture .................................................... 25

R7

ii

2. Disgorgement is not a penalty. ...................................................... 28

CONCLUSION ............................................................................................... 30 APPENDIX ....................................................................................................... i

R7

iii

TABLE OF AUTHORITIES

CASES

Abramski v. United States, 134 S.Ct. 2259 (2014) .......................................... 27 Alexander & Alexander Servs. v. These Certain Underwriters at Lloyd's,

136 F.3d 82 (2d Cir. 1998)……………………………………………………………… 8 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ....................................... 8 Austin v. United States, 509 U.S. 602 (1993) ................................................. 26 Brennan v. Nassau Cnty., 352 F.3d 60 (2d Cir. 2003) ...................................... 8 City of Roseville Emp. Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404 (D.

Del. 2009) .................................................................................................. 14 Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216 (4th Cir. 1980) .......................... 11 Director, Office of Workers’ Comp. Programs, Dep’t of Labor v. Greenwich

Collieries, 512 U.S. 267 (1994) .............................................................. 26, 27 E.I. du Pont De Nemours & Co. v. Davis, 264 U.S. 456 (1924) ......................... 21 FTC v. Gem Merch. Corp., 87 F.3d 466 (11th Cir. 1996) ................................. 28 Gabelli v. SEC, 133 S.Ct. 1216 (2013) ...................................................... 23, 28 GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971) ........................................ 11 Garfield v. NDC Health Corp., 466 F.3d 1255 (11th Cir. 2006) .................. 14, 15 Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir. 2000) ........................... 10 In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262 (D.N.J. 2007) ........... 14, 15, 16 Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996) ............................................... 29 King v. Burwell, 135 S. Ct. 2480 (2015) ......................................................... 17 Meeker v. Lehigh Valley R.R. Co., 236 U.S. 412 (1915) ............................... 7, 24 Ponce v. SEC, 345 F.3d 722 (9th Cir. 2003) ......................................... 9, 11, 12 Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010) ................................. 22, 23, 25

R7

iv

Rodriguez v. United States, 480 U.S. 522 (1987) ............................................ 13 Sebelius v. Auburn Reg'l Med. Ctr., 133 S.Ct. 817 (2013) ................................21 SEC v. Ahmed, No. 3-15cv675, 2016 WL 7197359 (D. Conn. 2016) ............... 27 SEC v. Baker, 2012 U.S. Dist. LEXIS 161784 (W.D. Tex. Nov. 13, 2012).. passim SEC v. Banner Fund Int’l, 211 F.3d 602 (D.C. Cir. 2000) ................................ 27 SEC v. Blatt, 583 F.2d 1325 (5th Cir. 1978) .............................................. 24, 28 SEC v. Calvo, 378 F.3d 1211 (11th Cir. 2004) ............................................... 23 SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) .............................................. 26 SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) .............................................. 26 SEC v. Das, 723 F.3d 943 (8th Cir. 2013) ...................................................... 13 SEC v. Geswein, No. 5:10CV1235, 2011 WL 4541303 (N.D. Ohio Sept. 29,

2011) ......................................................................................................... 18 SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016) ....................................... 25, 27 SEC v. Jasper, 883 F. Supp. 2d 915 (N.D. Cal. 2010) .................................... 17 SEC v. Jenkins, 718 F. Supp.2d 1070 (D. Ariz. 2010) ......................... 18, 19, 20 SEC v. Jensen, 835 F.3d 1100 (9th Cir. 2016) ........................................ passim SEC v. Koenig, 469 F.2d 198 (2d Cir. 1972) ................................................... 13 SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016) ........................................ 24, 25 SEC v. Life Partners Holdings, Inc., 71 F. Supp. 3d 615 (W.D. Tex. 2014) ....... 20 SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082 (2d Cir. 1972) .......... 26, 29, 30 SEC v. McNulty, 137 F.3d 732 (2d Cir. 1998) ................................................. 13 SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072 (9th Cir. 2010) .............. 29 SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993) ................................................... 23

R7

v

SEC v. Saltsman, 07-CV-4370, 2016 WL 4136829 (E.D.N.Y. 2016) ................ 28 SEC v. Savoy Indus., Inc., 587 F.2d 1149 (D.C. Cir. 1978) ............................. 12 SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008) ......................................... 22, 23 Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390 (1940) ...................... 24 Tull v. United States, 481 U.S. 412 (1987) ..................................................... 22 U.S. v. Telluride Co., 146 F.3d 1241 (10th Cir. 1998) ................................ 23, 28 United States v. Banks, 115 F.3d 916 (11th Cir. 1997) .................................. 22 United States v. Gomez-Gutierrez, 140 F.3d 1287 (9th Cir. 1998) ................... 10 United States v. One 1980 Rolls Royce, 905 F.2d 89 (5th Cir. 1990) ............... 26 Zacharias v. SEC, 569 F.3d 458 (D.C. Cir. 2009) ........................................... 28

STATUTES

15 U.S.C. § 7241 ........................................................................................ 8, 9

15 U.S.C. § 7243(a) ................................................................................ 8, 9, 17

15 U.S.C § 78m ............................................................................................ 12

15 U.S.C. § 78j(b) .......................................................................................... 14

15 U.S.C. § 78u(d)(3) ..................................................................................... 22

15 U.S.C. § 78u(d)(5) ................................................................................ 21, 23

28 U.S.C. § 2462 ..................................................................................... 21, 25

REGULATIONS 17 C.F.R. § 240.13a-13 ............................................................................ 11, 12

17 C.F.R. §240.13a-14 .............................................................................. 8, 14

R7

vi

OTHER AUTHORITIES

Alison List, Note, The Lax Enforcement of Section 304 of Sarbanes-Oxley: Why is the SEC Ignoring its Greatest Asset in the Fight Against Corporate Misconduct?, 70 OHIO ST. L. J. 195 (2009) ................................................ 16

BLACK'S LAW DICTIONARY (10th ed. 2014) ......................................................... 27 In the Matter of WSF Corp., 2002 WL 917293 (SEC, May 8, 2002) .................. 12 Marc I. Steinberg & Ralph C. Ferrara, 25 SEC. PRAC. FED. & STATE ENFORCEMENT

§ 4:22 (2014) ............................................................................................. 28 Rachel E. Schwartz, The Clawback Provision of Sarbanes-Oxley: An

Underutilized Incentive To Keep The Corporate House Clean, 64 Bus. L. J. 1 (2008) ................................................................................................... 19, 20

S. Rep. No. 107-205 at 26, 2002 WL 1443523 (July 3, 2002) ........................ 18 Thomas O. Gorman, Heather J. Stewart, Is There A New Sheriff in

Corporateville? The Obligations of Directors, Officers, Accountants, and Lawyers After Sarbanes-Oxley of 2002, 56 ADMIN. L. REV. 135 (2004) .... 13, 14

R7

vii

ISSUES PRESENTED

1. Whether there is a violation of Rule 13a-14 when officers certify false

statements, without possessing actual knowledge that the statements

were false, and furthermore, whether SOX 304 permits the disgorgement

of profits when a CEO and CFO did not personally engage in misconduct.

2. Whether the SEC’s enforcement action for disgorgement is subject to the

five-year statute of limitations in 28 U.S.C. § 2462, which expressly

applies only to claims for “any civil fine, penalty, or forfeiture,” when the

SEC’s action is for equitable relief that seeks to prevent defendants from

unjust enrichment for profiting from ill-gotten gains.

R7

1

STATEMENT OF THE CASE

On January 1, 2016, the U.S. Securities and Exchange Commission

(“SEC”) filed a civil action against Brian Bosco, Jasmine Lee, and Ronald Prince

(“Petitioners”) in the District of Fordham, alleging that Prince had participated

in a scheme to defraud Burlingham, Inc. investors by reporting millions of

dollars of unearned revenue. R. at 6. The SEC asserted that Bosco and Lee

violated Rule 13a-14 for certifying Burlingham’s financial statements for fiscal

year 2014, and as a result Section 304 of the Sarbanes-Oxley Act (“SOX 304”)

triggered disgorgement for the 10-K filing on January 1, 2015. R. at 6. The

SEC also alleged that Prince violated Section 10(b) of the Securities Exchange

Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and requested

disgorgement of gains from January 2008 to January 2010 and January 2014

to January 2015. R. at 6.

Defendants Bosco and Lee filed for summary judgment in June 2016. R.

at 6. The SEC brought cross-motions for summary judgment against Bosco

and Lee, as well as a motion for summary judgment against Prince. R. at 6. The

district court granted the SEC’s motion, finding that a cause of action exists

under Rule 13a-14 against CEOs and CFOs who unknowingly certify false

financial statements. R. at 6-7. The district court also held that SOX 304

requires disgorgement if the company issues an accounting restatement, and

ordered Bosco and Lee to disgorge $600,000 and $475,000, respectively. R. at

7.

R7

2

The district court also granted the SEC’s motion against Prince, finding

Prince liable for a fraudulent scheme under Rule 10b-5. R. at 7. The district

court held that disgorgement is neither a “penalty” nor a “forfeiture” under

Section 2462, and thus the SEC’s request for disgorgement of gains from

January 2008 to January 2010 was not time-barred under the statute of

limitations. R. at 7. The district court ordered Prince to disgorge $1,770,000

consisting of the following amounts: (1) $1,025,000 earned from forty-one side

letters; (2) $495,000 encompassing all bonuses and other discretionary

compensation received from January 2008 to January 2010 and January 2014

to January 2015, including a $45,000 bonus in 2009; and (3) $250,000

representing the total amounts of bonuses that executive manager Conrad

earned during the relevant periods. 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 that the

district court erred in holding that a cause of action exists under Rule 13a-14

against officers who unknowingly certify false statements, and because they

were not responsible for Prince’s misconduct, they should not be held liable for

disgorgement from January 2014 to January 2015. R. at 8. Prince solely

argued that Section 2462 precludes disgorgement of any profits from January

2008 to January 2010. The Fourteenth Circuit affirmed both of the district

court’s holdings. R. at 8. On February 1, 2017, the U.S. Supreme Court

granted Petitioners Bosco, Lee, and Prince’s petition for writ of certiorari.

R7

3

STATEMENT OF FACTS

In 2002, Ronald Prince was named Executive Vice President of

Burlingham, Inc.’s Communications Division. R. at 2. Prince was responsible

for managing Burlingham’s smartphone division and expansion into China,

where manufacturers were trying to break into the UK market. R. at 2. In 2007,

smartphone microchips became the company’s chief revenue generator. R. at 2.

As this market grew, Prince became unsatisfied with Burlingham’s

compensation system. R. at 2. He revealed his frustrations to Henrietta

Conrad, the only other Communications Division executive manager, stating

that the pay was not enough “no matter how successful the smartphone

microchips [were],” because discretionary bonuses made up seventy-five

percent of executives’ annual income. R. at 2. These bonuses were determined

by analyzing Burlingham and its divisions’ revenue, profit, market share,

employee retention, and acquired business integration. R. at 2. This system

inevitably rewarded executives for aggressive business development. R. at 2.

In order to augment his income, Prince began secretly negotiating with

Chinese manufacturers in 2008. R. at 3. Acting for Burlingham, Prince offered

unilateral termination rights to select purchasers, which permitted termination

in the event of a two percent decline in the UK’s GDP. R at 3. The rights would

automatically terminate two years later. R at 3. Prince received $25,000 for

each letter, and $50,000 upon unilateral termination. R. at 3. From January

2008 to 2010, Prince executed thirty side letters for a profit of $750,000, none

of which resulted in unilateral termination. R. at 3. In January 2010, Prince

R7

4

discontinued the side letters, although not permanently. R. at 3. At the end of

2010, each executive, including Prince, was awarded a $45,000 bonus for

Burlingham’s successful negotiation of a computer tablet contract. R. at 3.

In 2011, Brian Bosco was named CEO. R. at 3. Bosco promoted Jasmine

Lee to CFO, and the two became hands-on managers who audited each

division, maintained the company’s internal controls in compliance, and

certified Burlingham’s financial statements at each SEC filing. R. at 4. For

Prince, Bosco’s hiring meant Prince’s income would permanently plateau. R. at

4. Accordingly, Prince issued eleven additional side letters from January 2014

to January 2015 for a profit of $275,000. R. at 4.

At a conference in October 2014, a Japanese CEO approached Bosco and

Lee separately to inquire about the unilateral termination rights that Prince

had previously offered to over thirty Chinese manufacturers. R. at 4.

Concerned why the CEO would request such an unprecedented clause in

Burlingham’s history, the two resolved to look into it. R. at 4. Despite their

responsibility to accurately report Burlingham’s financial statements to the

SEC, Bosco and Lee chose not to pursue an investigation into the CEO’s

request. R. at 4. Prince’s side letters continued undetected until March 2015,

when five purchasers triggered their unilateral termination rights. R. at 4. A

Special Committee investigated, and determined that Prince’s scheme had been

in place for the years 2008, 2009, and 2014. R. at 5. Because the scheme

substantially affected Burlingham’s financial statements for fiscal year 2014,

the company filed a restated 10-K for that year on January 1, 2015. R. at 5.

R7

5

SUMMARY OF THE ARGUMENT

This Court should affirm the Fourteenth Circuit’s decision and find that

Bosco and Lee violated Rule 13a-14 when they certified false statements,

despite possessing no actual knowledge that the statements were false.

Furthermore, this Court should find that SOX 304 allows the SEC to disgorge

the bonuses and profits of CEOs and CFOs even when the officers did not

personally engage in misconduct. This Court should further affirm the

Fourteenth Circuit and hold that SEC enforcement claims for disgorgement are

not subject to the five-year statute of limitations in 28 U.S.C. § 2462 because

disgorgement is an equitable relief not subject to the statute.

I

The lower court correctly held that Bosco and Lee violated Rule 13a-14,

and therefore disgorgement under SOX 304 is warranted. The Sarbanes-Oxley

Act was enacted in order to prevent corporations from misleading the public.

Rule 13a-14, like other rules promulgated under Section 13 of the Act, includes

an implicit truthfulness requirement. It follows, therefore, that the Rule is

violated when a CEO or CFO certifies a statement that is inaccurate or

misleading. No requirement exists, however, for actual knowledge or scienter.

The statute contains no such language, and most courts have refused to find

an implicit requirement.

CEOs and CFOs need not possess actual knowledge of the inaccuracy of

the statement in order to violate the Rule. Therefore, Bosco and Lee violated

Rule 13a-14 when they certified false financial statements. Alternatively, even if

R7

6

the Court finds that scienter is required, Bosco and Lee still violated the rule

because “red flags” existed to give rise to an inference of scienter.

Additionally, disgorgement under SOX 304 is warranted because Bosco

and Lee filed a restatement due to material noncompliance resulting from

misconduct. While it is uncontested that Bosco and Lee did not take part in

Prince’s misconduct, SOX 304 does not require that the CEO and CFO

personally engage in the misconduct in order for the “clawback” provision to

apply. Such an interpretation requiring personal misconduct would be contrary

to purposes of the Sarbanes-Oxley Act, and public policy as a whole.

Accordingly, this Court should affirm the Fourteenth Circuit’s decision as to

Bosco and Lee.

II

The Fourteenth Circuit properly held that the statute of limitations in 28

U.S.C. § 2462 does not apply to the equitable remedies sought by the SEC.

Section 2462 applies only to claims for a “civil fine, penalty, or forfeiture.”

Because Congress did not provide an explicit limitations period on SEC

enforcement actions, courts have applied the five-year statute of limitations

contained in 28 U.S.C. § 2462.

However, courts uniformly hold that absent congressional intent in

imposing a statute of limitations, such interpretation must “receive a strict

construction in favor of the government.” Section 2462 provides, “[e]xcept as

otherwise provided by Act of Congress, an action . . . for the enforcement of any

civil fine, penalty, or forfeiture” shall be commenced within five years. While

R7

7

Congress did not expressly provide a time limitation on SEC enforcement

actions. Section § 78u(d)(3) of the Exchange Act explicitly authorizes district

courts to grant “any equitable relief that may be appropriate or necessary.”

Thus, congressional intent is clear when analyzing both Section 2462 and the

Exchange Act together—strict time limitations do not apply to SEC enforcement

actions for equitable relief.

Additionally, this Court in Meeker v. Lehigh Valley R.R. Co. established

that Section 2462 applies only to punitive actions, not equitable relief. Thus,

the statute of limitations does not apply to disgorgement, which is an equitable

remedy intended to deprive wrongdoers of their unjust enrichment. The

purpose of disgorgement is to force wrongdoers like Prince to surrender their

ill-gotten gains. Unlike penalties and forfeitures, which serve a punitive

purpose, disgorgement claims merely seek to restore wrongdoers to the status

quo ante.

The Fourteenth Circuit correctly held that disgorgement claims are not

subject to the statute of limitations in Section 2462. This decision upholds the

SEC’s mission to prevent the unjust enrichment of wrongdoers who

fraudulently profit from ill-gotten gains. Accordingly, this Court should affirm

the Fourteenth Circuit’s decision in order to protect the public interest and

investors, and allow the SEC to enforce the federal securities laws to maintain

the integrity of the securities markets.

R7

8

ARGUMENT

This Court reviews an appeal of summary judgment under a de novo

standard of review. See Alexander & Alexander Servs. v. These Certain

Underwriters at Lloyd's, 136 F.3d 82, 84 (2d Cir. 1998). All facts, inferences,

and ambiguities must be construed in the light most favorable to the non-

movant. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). This

Court also reviews the application of a statute of limitations de novo. See

Brennan v. Nassau Cnty., 352 F.3d 60 (2d Cir. 2003).

I. RULE 13a-14 OF THE EXCHANGE ACT CAN BE VIOLATED WITHOUT ACTUAL KNOWLEDGE OF THE MISCONDUCT, AND, IN SUCH CASES, DISGORGEMENT MAY BE WARRANTED UNDER SOX 304. The Fourteenth Circuit correctly held that actual knowledge is not

required in order to hold corporate officers responsible for a company’s

misconduct under Rule 13a-14. The decision is consistent with both the plain

language of Rule 13a-14 and the legislative purpose underlying the Sarbanes-

Oxley Act (“SOX”). See 15 U.S.C. § 7241 (2016); 17 C.F.R. § 240.13a-14.

Moreover, a required restatement resulting from misconduct triggers

disgorgement of profits pursuant to SOX 304, even when the CEO and CFO did

not engage in the misconduct that caused the restatement. See 15 U.S.C. §

7243(a) (2016).

Rule 13a-14 requires that every report filed under Section 13(a) of the

Exchange Act, including Form 10-Q and 10-K financial reports, be

accompanied by a signed certification from the issuer’s principal executive and

principal financial officer that asserts the accuracy of the financial statements

R7

9

within the report. See 17 C.F.R. §240.13a-14. Additionally, an officer is

required to certify that to his or her knowledge, the report does not contain

“any untrue statement of material fact” and “fairly present[s] in all material

respects the financial condition and results of operations of the issuer.” See 15

U.S.C. §§ 7241(a)(1)-(3).

Furthermore, SOX 304 provides, in relevant part, that “[i]f 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.” 15 U.S.C. §

7243(a). This disgorgement statute, colloquially known as the “clawback”

provision, requires that CEOs and CFOs disgorge their bonuses and profits,

even if they did not engage in the misconduct that caused the restatements.

See id. Bosco and Lee violated Rule 13a-14 in the present case, and thus SOX

304 disgorgement is warranted.

A. Officers May Be Held Liable Under Rule 13a-14 Despite Lack of Actual Knowledge of the Falsity of the Certification.

The lower court correctly held that Bosco and Lee violated Rule 13a-14,

despite possessing no actual knowledge of the falsity of the certification. This

holding is consistent with both the plain language of the statute as well as case

precedent requiring implicit truthfulness. See, e.g., Ponce v. SEC, 345 F.3d 722,

734 (9th Cir. 2003). Furthermore, an adverse ruling would run contrary to the

R7

10

purpose of the Sarbanes-Oxley Act and permit officers to turn a blind eye to the

misconduct of their subordinates, to the detriment of the public market.

1. The plain language of the Rule 13a-14 indicates an implied truthfulness requirement consistent with other Section 13 rules.

Though the judiciary has rarely interpreted Rule 13a-14, the Ninth

Circuit’s recent decision correctly parsed out the purpose and effect of the rule.

See SEC v. Jensen, 835 F.3d 1100, 1105-06 (9th Cir. 2016). The court held,

“Rule 13a-14 provides the SEC with a cause of action not only against CEOs

and CFOs who do not file the required certifications, but also against CEOs

and CFOs who certify false or misleading statements.” Id. at 1104. This must

be the result because signers of documents “should be held responsible for the

statements in the document.” See Howard v. Everex Sys., Inc., 228 F.3d 1057,

1061 (9th Cir. 2000). Furthermore, the “affixing of a signature is not a mere

formality, but rather signifies that the signer has read the document and

attests to its accuracy.” Id. (quoting United States v. Gomez-Gutierrez, 140 F.3d

1287, 1289 (9th Cir. 1998)).

The Ninth Circuit appropriately supported its conclusion by confronting

the language of the Rule itself, noting that “certify” is defined as: “to testify by

formal declaration, often in writing; to make known or establish (a fact)”; and

“to guarantee the quality or worth of; vouch for [something].” See Jensen, 835

F.3d at 1112-13 (internal citations omitted). Thus, by definition, one cannot

certify a fact about which one is ignorant or knows is false. Id. at 1113.

R7

11

Furthermore, other rules promulgated under Section 13(a) of the

Exchange Act have been interpreted to include an implicit truthfulness

requirement. See, e.g., Ponce, 345 F.3d at 734. In Ponce, the Ninth Circuit

concluded that Rule 13a-13, which is also promulgated under the authority

of Section 13(a), “requires the filing of quarterly reports that are not

misleading,” even though the rule itself states only that issuers are required to

file such reports without specifying whether they must be truthful. See 17

C.F.R. § 240.13a-13; Ponce, 345 F.3d at 735.

Several other circuit courts have also read rules promulgated under

Section 13 to create liability for false statements, even when the rules did not

explicitly require truthfulness. See GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir.

1971). For example, the Second Circuit found that under Rule 13d-1, which

requires certain stockholders to file a Schedule 13D form with the SEC within a

certain period of time after taking possession of their stock, “the obligation to

file truthful statements is implicit in the obligation to file with the issuer.” Id. at

720. The court held that Rule 13d-1 created a cause of action against a

stockholder who filed a false Schedule 13D, but not against one who failed to

file a Schedule 13D altogether. Id. The court explained that in “some instances,

a false filing may be more detrimental to the informed operation of

the securities markets than no filing at all.” Id.

The Fourth and D.C. Circuits have each followed the Second Circuit’s

decision in GAF Corp. and also found an implicit truthfulness requirement

included in Section 13(d). See Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216,

R7

12

1227 (4th Cir. 1980); see also SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165

(D.C. Cir. 1978) (“Sections 13(d)(1) and 13(d)(3) and the rules promulgated

thereunder undoubtedly create the duty to file truthfully and completely.”).

Similarly, in the present case, the Fourteenth Circuit correctly extended

such reasoning to conclude that Rule 13a-14, like other rules promulgated

under Section 13 of the Exchange Act, includes an implicit truthfulness

requirement. See Jensen, 835 F.3d at 1113. It is not 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. Id.

2. The majority of courts follow the SEC’s interpretation that rules under Section 13(a) may be violated absent actual knowledge.

In order to prove a violation of Rule 13a-14, the SEC need not show

scienter. See Ponce, 345 F.3d at 737 n. 10 (“[I]n at least one proceeding the

SEC has held that a scienter requirement is not necessary since Section 13(a)

violations do not require scienter.”) (citing In the Matter of WSF Corp., 2002 WL

917293, at *6 (SEC, May 8, 2002) (“[v]iolations of Exchange Act Section 13(a)

do not require a finding of scienter.”)). In fact, no language exists in Section

13(a) to suggest a requirement of scienter, unlike other provisions of the

Exchange Act, such as Section 13(b)(5). See 17 C.F.R. § 240.13a-13; 15 U.S.C §

78m (“No person shall knowingly circumvent or knowingly fail to implement a

system of internal accounting controls or knowingly falsify any book, record, or

account . . . .”). This is significant because this Court recognized that “where

R7

13

Congress includes particular language in one section of a statute but omits it

in another section of the same Act, it is generally presumed that Congress acts

intentionally and purposely in the disparate inclusion or exclusion.” See SEC v.

Das, 723 F.3d 943, 956 n. 10 (8th Cir. 2013) (quoting Rodriguez v. United

States, 480 U.S. 522, 525 (1987)). It thus follows that Congress intentionally

excluded scienter language from Section 13(a). See id.

Furthermore, the Second Circuit has consistently held that claims

arising under Section 13(a) do not include an element of scienter. See SEC v.

McNulty, 137 F.3d 732, 740–41 (2d Cir. 1998) (“the court’s ruling that lack of

scienter would not be a defense to the claims under § 13 and the regulations

thereunder was consistent with precedent in this Circuit and with the

Commission's interpretive regulations indicating that scienter is not an element

of civil claims under those provisions”); See SEC v. Koenig, 469 F.2d 198, 200

(2d Cir. 1972) (upholding a finding of § 13(a) liability, without mention of

scienter, of top corporate officer for failure to include required information

in SEC reports).

The policy implications resulting from a Section 13a-14 scienter

requirement could be disastrous and undermine the purpose of the Sarbanes-

Oxley Act. Executives like Bosco and Lee may intentionally turn a blind eye to

misconduct, and remain free from liability. See Thomas O. Gorman, Heather J.

Stewart, Is There A New Sheriff in Corporateville? The Obligations of Directors,

Officers, Accountants, and Lawyers After Sarbanes-Oxley of 2002, 56 ADMIN. L.

REV. 135, 152–53 (2004). Although the Exchange Act provides for civil and

R7

14

criminal liability for false filings, “executives have felt free to disclaim

knowledge about the financial condition of their companies when convenient—

a fact made clear during the hearings into the scandals, which form the

backdrop of the Act.” Id. Rules like 13a-14 “seek an end to the era of ‘I don't

know’ corporate finance and seek to make corporate executives guardians of

the corporate treasure chest, rather than defilers of it.” Id.

In light of these interpretations, and as the Fourteenth Circuit

recognized, Petitioners’ claim that no cause of action exists under Rule 13a-14

without a finding of scienter is a misrepresentation and incorrect interpretation

of the statute. See R. at 14.

3. Even if scienter is required under Rule 13a-14, that requirement is fulfilled through the officers’ recklessness.

Assuming arguendo that this Court finds that scienter is required to

violate Rule 13a-14, an inference of scienter can be drawn in the present case,

and therefore the SEC will still prevail. In his dissenting opinion below, Judge

Khatibifar drew several comparisons between Rule 13a-14 and § 10(b) rules to

conclude that scienter must be proven, despite the absence of scienter

language in Rule 13a-14. See R. at 25-26; 15 U.S.C. § 78j(b); 17 C.F.R.

§240.13a-14.

Even applying Judge Khatibifar’s reasoning, however, Bosco and Lee still

violated Rule 13a-14. R. at 4; See Garfield v. NDC Health Corp., 466 F.3d 1255,

1266 (11th Cir. 2006); City of Roseville Emp. Ret. Sys. v. Horizon Lines, Inc.,

686 F. Supp. 2d 404, 420 (D. Del. 2009) (finding executives not liable because

R7

15

the plaintiffs did not plead the scienter element “with sufficient particularity” to

show that the executives were “aware or should have been aware” of the

scheme at the time the certifications were made); In re Intelligroup Sec. Litig.,

527 F. Supp. 2d 262, 355 (D.N.J. 2007).

While there is no bright-line test for what litigants must establish in

order to demonstrate that CEOs and CFOs possessed the requisite state of

mind in Rule 10b-5 violations, court decisions provide some guidance. See

Garfield, 466 F.3d at 1266; In re Intelligroup Sec. Litig., 527 F. Supp. 2d at 355.

The Eleventh Circuit in Garfield held that an inference of scienter is proper

when “the person signing the certification had reason to know, or should have

suspected, due to the presence of glaring accounting irregularities or other ‘red

flags,’ that the financial statements contained material misstatements or

omissions.” Garfield, 466 F.3d at 1266 (emphasis added). Similarly, the District

Court of New Jersey held that erroneous certifications alone do not create a

strong inference of scienter “unless the complaint asserts facts that, at the time

of certification, the defendants knew or consciously avoided any meaningful

exposure to the information that was rendering their SOX certification

erroneous.” In re Intelligroup Sec. Litig., 527 F. Supp. 2d at 355.

While these courts did not find the requisite scienter present in those

cases, such “red flags” and avoidance tactics exist in the present case to find

scienter. See R. at 4. At the technology conference in October 2014, a CEO of a

major Japanese smartphone manufacturer approached both Bosco and Lee. Id.

During both interactions, the CEO mentioned he had heard about “deal

R7

16

sweeteners such as unilateral termination rights.” Later, Bosco and Lee

“expressed their concerns about the CEO’s request and decided it might be a

good idea to look into why the CEO thought that Burlingham offered unilateral

termination rights.” Id. Despite their concerns—and their responsibility to

certify the accuracy of Burlingham’s financial statements—the officers chose

not to investigate. Id.

By ignoring such a clear “red flag,” Bosco and Lee possessed the requisite

scienter consistent with Rule 10b-5 case precedent. See In re Intelligroup Sec.

Litig., 527 F. Supp. 2d at 355. While no scienter is required under Rule 13a-14,

should this court find such a requirement, Bosco and Lee must still be held

liable because they ignored the “red flags” and failed to investigate.

B. Disgorgement Is Still Warranted Even When the Officers Did Not Personally Engage in Misconduct.

The Fourteenth Circuit correctly held that disgorgement was warranted

against Bosco and Lee because under SOX 304, officers can be held

responsible for the misconduct even absent their own misconduct. See Jensen,

835 F.3d at 1104 (“The disgorgement remedy authorized under SOX 304

applies regardless of whether a restatement was caused by the personal

misconduct of an issuer’s CEO and CFO or by other issuer misconduct.”)

(emphasis added).

Until recently, the SEC had been reluctant to utilize SOX 304. See Alison

List, Note, The Lax Enforcement of Section 304 of Sarbanes-Oxley: Why is the

SEC Ignoring its Greatest Asset in the Fight Against Corporate Misconduct?, 70

R7

17

OHIO ST. L. J. 195, 216 (2009). However, as a Texas federal district court aptly

noted, “a sword does not cease to be a sword, even though it may languish in

the scabbard, and likewise, federal agencies have discretion in when and how

to carry out regulatory enforcement actions.” SEC v. Baker, 2012 U.S. Dist.

LEXIS 161784, at *7 (W.D. Tex. Nov. 13, 2012). In recent years, the SEC has

filed a number of actions to compel CEOs and CFOs to reimburse their

employers in the wake of SEC restatements. See, e.g., SEC v. Jasper, 883 F.

Supp. 2d 915 (N.D. Cal. 2010), aff'd, 678 F.3d 1116 (9th Cir. 2012) (order

granting the SEC's “motion to require Defendant to reimburse [the issuer]

$1,869,639 pursuant to Section 304(a) of the Sarbanes-Oxley Act.”).

Furthermore, the SEC’s interpretation of SOX 304 is consistent with the

plain language of the statute, which is “the first thing we look to when

interpreting statutes.” See King v. Burwell, 135 S.Ct. 2480, 2489 (2015). SOX

304 provides that “[i]f 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.” 15 U.S.C. § 7243(a) (emphasis added).

In Jensen, the Ninth Circuit analyzed the sentence structure of the

statute to support the contention that officers need not take part in the

misconduct for disgorgement to apply. See 835 F.3d at 1114. The court noted

that the clause “as a result of misconduct” modifies the phrase “the material

noncompliance of the issuer,” suggesting that it is the issuer's misconduct that

R7

18

matters, and not the personal misconduct of the CEO or CFO.” Id.; see also

SEC v. Geswein, No. 5:10CV1235, 2011 WL 4541303, at *3 (N.D. Ohio Sept.

29, 2011) (“Section 304 requires that, if [the issuer] had to prepare an

accounting restatement because of its material noncompliance with financial

reporting securities laws, and if that noncompliance was caused by [the

issuer’s] misconduct, then the CEO or CFO must provide certain

reimbursements to [the issuer].”).

This interpretation is further bolstered by the legislative history of SOX

304. See S. Rep. No. 107-205 at 26, 2002 WL 1443523, at *26-27 (July 3,

2002). A Senate Committee on Banking, Housing, and Urban Affairs report

from the bill that became SOX 304 indicated that the disgorgement remedy was

“designed to prevent CEOs or CFOs from making large profits by selling

company stock, or receiving company bonuses, while management is

misleading the public and regulators about the poor health of the company.”

Id. at *26 (emphasis added). The report also emphasized that the disgorgement

remedy was intended as a significant expansion of the SEC's enforcement

powers by permitting “courts to impose any equitable relief necessary or

appropriate to protect, and mitigate harm to, investors.” Id. at *27.

While only the Ninth Circuit has addressed this issue directly, the

majority of district courts conclude that SOX 304 does not require CEOs or

CFOs to have personally engaged in misconduct before they are required to

disgorge profits under that statute. See Jensen, 835 F.3d at 1104; see also

Baker, 2012 U.S. Dist. LEXIS 161784 at *12; SEC v. Jenkins, 718 F. Supp.2d

R7

19

1070, 1075 (D. Ariz. 2010). A federal district court in Arizona further

recognized that a CEO “need not be personally aware of financial misconduct to

have received additional compensation during the period of that misconduct,

and to have unfairly benefitted therefrom.” Jenkins, 718 F. Supp.2d at 1075.

Additionally, finding the SEC’s interpretation of SOX 304 correct, a federal

district court in Texas recognized that the “text of the statute plainly contains

no such additional [misconduct] requirement, and absent any ambiguity, the

words of the statute itself are dispositive.” See Baker, 2012 U.S. Dist. LEXIS

161784, at *12 (“Jenkins persuasively rejected similar attempts by the officer

defendant to read into the statute a requirement of misconduct by the officer.”).

While it may be rare to apply SOX 304 in such circumstances as the

present case, where the certifying officers did not engage in the misconduct,

the statute is no less applicable. As the district court in Jenkins rightly

explained, “[w]hen a CEO either sells stock or receives a bonus in the period of

financial noncompliance, the CEO may unfairly benefit from a misperception of

the financial position . . . even if the CEO was unaware of the misconduct

leading to misstated financials.” See Jenkins, 718 F. Supp.2d at 1075. Thus,

this Court should follow the Ninth Circuit’s broad application of SOX 304. See

Jensen, 835 F.3d at 1114; see also Rachel E. Schwartz, The Clawback

Provision of Sarbanes-Oxley: An Underutilized Incentive To Keep The Corporate

House Clean, 64 Bus. L. J. 1, 35 (2008) (arguing that the statute should be

interpreted broadly to apply to any management executives engaged

in misconduct).

R7

20

The Sarbanes-Oxley Act imposes a number of important disclosure and

control-related duties on corporate officers and their companies, including Rule

13a-14, to serve as a tool to rein in corporate fraud. See SEC v. Life Partners

Holdings, Inc., 71 F. Supp. 3d 615, 625 (W.D. Tex. 2014). For SOX 304 to fulfill

this purpose, the Court must give effect to the statute as written and require

“reimbursement . . . without any showing of wrongdoing by the CEO or CFO.”

See, e.g., Jensen, 835 F.3d at 1114; see also Jenkins, 718 F. Supp.2d at 1075.

This broad interpretation of SOX 304 creates an incentive for executives

to be diligent in carrying out their duties, which include making sure that they

know and inquire about serious misconduct in their companies. Schwartz,

supra. This is an explanation that for the majority of the American

shareholding public “is only common sense and basic fairness.” Id. The

absence of any personal misconduct requirement ensures that corporate

officers “cannot simply keep their own hands clean, but must instead be

vigilant in ensuring there are adequate controls to prevent misdeeds by

underlings.” See Baker, 2012 U.S. Dist. LEXIS 161784, at *17.

It is uncontested that neither Bosco nor Lee took part in Prince’s scheme to

issue unilateral termination rights. R. at 4. However, this is not a defense to

disgorgement under SOX 304. See Jensen, 835 F.3d at 1114. Accordingly, this

Court should affirm the Fourteenth Circuit and hold that disgorgement is a

proper remedy for the violation of Rule 13a-14.

R7

21

II. THE STATUTE OF LIMITATIONS IN 28 U.S.C. § 2462 DOES NOT APPLY TO DISGORGEMENT.

Congress did not provide an explicit limitations period on SEC

enforcement actions. Instead, courts have turned to the five-year “catch-all”

statute of limitations contained in 28 U.S.C. § 2462.1 In interpreting Section

2462, this Court has recognized that unless there is a “congressional

enactment clearly imposing [a statute of limitation], actions brought on behalf

of the United States in its governmental capacity are “subject to no time

limitation.” E.I. du Pont De Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924).

Nonetheless, “[s]tatutes of limitation . . . must receive a strict construction in

favor of the government.” Id.

Section 2462 states, “[e]xcept 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 . . . .” 28 U.S.C. §

2462. Thus, the plain language of the statute does not place a time limit on the

SEC to bring claims for equitable remedies; instead, Congress expressly

provided wide discretion for courts to order “equitable relief that may be

appropriate or necessary.” 15 U.S.C. § 78u(d)(5).

1This Court need not decide whether Section 2462's statute of limitations is jurisdictional, as this Court held in order “to ward off profligate use of the term ‘jurisdiction,’ ” courts “inquire whether Congress has clearly stated that the rule is jurisdictional; absent such a clear statement . . . courts should treat the restriction as non-jurisdictional in character.” Sebelius v. Auburn Reg'l Med. Ctr., 133 S. Ct. 817, 824 (2013).

R7

22

The Fourteenth Circuit correctly held that disgorgement falls outside the

purview of Section 2462 because it is an equitable remedy distinguishable from

the punitive damages explicitly covered under Section 2462. See 28 U.S.C. §

2462. Thus, the SEC is not time-barred from seeking disgorgement against

Prince.

A. Disgorgement Is Not Included Under the Plain Language of Section 2462, and Thus Is Not Subject to the Statute of Limitations.

Section 2462 provides, “an action, suit or proceeding for the enforcement

of any civil fine, penalty, or forfeiture,” is subject to a five-year statute of

limitations. 28 U.S.C. § 2462. Accordingly, the “plain language of section 2462”

does not include or apply to disgorgements. See United States v. Banks, 115

F.3d 916, 919 (11th Cir. 1997). Section 2462 only applies to “penalties sought

by the SEC,” and does not apply to its “request[s] for . . . the disgorgement of

ill-gotten gains.” SEC v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008), reh’g en

banc granted, withdrawn, 573 F.3d 54 (1st Cir. 2009), reinstated in relevant

part, 597 F.3d 436 (1st Cir. 2010); see also Riordan v. SEC, 627 F.3d 1230,

1234-35 (D.C. Cir. 2010).

Instead, equitable relief such as disgorgement is under a separate

provision of the “monetary penalties in civil penalties” provision. 15 U.S.C. §

78u(d)(3). This Court has consistently recognized that remedies “separably

authorized” in different statutory subsections are distinct and independent.

Tull v. United States, 481 U.S. 412, 425 (1987). Furthermore, had Congress

intended Section 2462 to extend beyond claims for a “civil fine, penalty, or

R7

23

forfeiture” to include disgorgement, it would have included that term under

Section 2462’s exhaustive list.

In Gabelli v. SEC, this Court held that Section 2462 applied to a request

for civil penalties, but expressly declined to address the SEC’s request for

disgorgement. 133 S.Ct. 1216, 1220 n.1 (2013). Nevertheless, there is “no

indication that Congress intended for a statute of limitations” to apply to an

enforcement action where “the relief sought is disgorgement.” SEC v. Calvo, 378

F.3d 1211, 1214, 1218 (11th Cir. 2004). In line with the Court’s limited holding

in Gabelli, the majority of circuits have declined to apply Section 2462 to

disgorgement claims. See Riordan, 627 F.3d at 1234 (finding that disgorgement

is not a “penalty” under Section 2462, and thus is not subject to the five-year

statute of limitations); see also Tambone, 550 F.3d at 148 (Section 2462 does

not apply to “disgorgement of ill-gotten gains”); SEC v. Rind, 991 F.2d 1486,

1492 (9th Cir. 1993) (noting that SEC enforcement actions should not be

subject to any strict time limit, lest frustrating the national policy to “protect[]

investors and safeguard[] the integrity of the markets”).

Congressional intent in excluding equitable relief from Section 2462

aligns with the purpose of disgorgement—to force defendants like Prince to

surrender their ill-gotten gains. See U.S. v. Telluride Co., 146 F.3d 1241, 1247-

48 (10th Cir. 1998). Thus, the Fourteenth Circuit correctly found that Section

2462 does not apply to disgorgement.

R7

24

B. Disgorgement Is Equitable, and Thus Is Not Subject to the Statute of Limitations in Section 2462.

This Court in Meeker v. Lehigh Valley R.R. Co. established that the words

“penalty or forfeiture” in Section 2462 “refer to something imposed in a

punitive way for an infraction of a public law.” 236 U.S. 412, 423 (1915).

Unlike penalties and forfeitures, disgorgement is an equitable remedy that

ensures that individuals like Prince—who willfully violate the securities laws at

the expense of the public—do not profit from ill-gotten gains. To further this

goal, the Exchange Act expressly authorizes federal courts to grant “any

equitable relief that may be appropriate or necessary.” 15 U.S.C. § 78u(d)(5).

For example, in SEC v. Kokesh, the Tenth Circuit upheld the district

court’s final judgment against an individual who misappropriated funds from

SEC-registered companies that included a disgorgement of $34.9 million. 834

F.3d 1158, 1161 (10th Cir. 2016). The court held that disgorgement is an

equitable remedy because it “just leaves the wrongdoer in the position he would

have occupied had there been no misconduct.” Id. at 1164. Further, the court

found that disgorgement is solely an equitable remedy as it simply requires “a

wrongdoer to pay for all the funds he caused to be improperly diverted to

others as well as himself.” Id.; see also SEC v. Blatt, 583 F.2d 1325, 1335 (5th

Cir. 1978) (disgorgement in the amount by which the defendant “profited from

his wrongdoing” is “remedial”). Such equitable remedies do not “inflict

punishment,” and thus fall outside the scope of Section 2462. See Sheldon v.

Metro-Goldwyn Pictures Corp., 309 U.S. 390, 399 (1940).

R7

25

In this case, Prince “participated in a scheme to defraud Burlingham

investors by reporting millions of dollars of unearned revenue” and in return

received $1,770,000 in ill-gotten gains. See R. at 6-7. The Fourteenth Circuit

correctly relied on Kokesh in holding that disgorgement is an equitable remedy

that is “not subject to the statute of limitations.” Kokesh, 834 F.3d at 1162.

Instead, Prince shall disgorge his wrongfully obtained profits, and merely be

returned to his pre-illegal activity financial position. See id. at 1161. Because

the SEC’s disgorgement order of $1,770,000 is an equitable remedy that

returns Prince to the status quo ante, it is not a “fine, penalty, or forfeiture,”

and thus is not barred by the statute of limitations. Id.

1. Disgorgement is not a forfeiture.

The equitable nature of disgorgement claims clearly distinguishes them

from a “civil fine, penalty, or forfeiture,” which serve a punitive purpose. See 28

U.S.C. § 2462. While courts agree that disgorgement is not a “civil fine,” courts

disagree on whether disgorgement qualifies as a “penalty” or “forfeiture.” See

Riordan, 627 F.3d at 1234-35 (holding that disgorgement is “purely remedial

and preventative” and “not a penalty”); but see SEC v. Graham, 823 F.3d 1357,

1363 (11th Cir. 2016) (disgorgement and forfeiture are “effectively synonyms”

for purposes of Section 2462). Disgorgement does not serve a punitive purpose,

but rather is remedial in nature, because it only recovers the “ill-gotten gains”

earned by wrongdoers. Thus, the Fourteenth Circuit correctly held that Section

2462 does not apply to disgorgement claims.

Disgorgement derives from the equitable remedies of “accounting,

R7

26

constructive trust, and restitution,” which require “wrongdoers to disgorge” ill-

gotten gains. SEC v. Cavanagh, 445 F.3d 105, 120 (2d Cir. 2006). Unlike the

equitable nature of disgorgement claims, forfeiture claims “impose

punishment.” See Austin v. United States, 509 U.S. 602, 615 (1993).

Furthermore, forfeiture lacks the inherent discretion and flexibility found in

equitable remedies like disgorgement; courts may grant “any equitable relief”

that is “appropriate or necessary.” 15 U.S.C. § 78u(d)(5). In contrast to

equitable remedies, forfeiture claims are “mandatory,” and “a creature of

statute.” SEC v. Contorinis, 743 F.3d 296, 307 (2d Cir. 2014).

Moreover, forfeitures go beyond the direct proceeds of the defendant’s

misconduct and include “any profits, appreciation, or income” from any

illegally obtained profits. United States v. One 1980 Rolls Royce, 905 F.2d 89,

91 (5th Cir. 1990). By contrast, disgorgement must be proportional to the

defendant’s unjust enrichment from fraud. See SEC v. Manor Nursing Ctrs.,

Inc., 458 F.2d 1082, 1104-05 (2d Cir. 1972).

When Congress uses a legal term of art like “forfeiture,” the term should

be interpreted “in light of [its] history, and presume Congress intended the

phrase to have the meaning generally accepted in the legal community at the

time of enactment.” Director, Office of Workers’ Comp. Programs, Dep’t of Labor

v. Greenwich Collieries, 512 U.S. 267, 275 (1994). Historically, this Court’s

application of disgorgement and forfeiture has served two distinct purposes.

Forfeiture claims have been used to recover property and any loss resulting

from the criminally acquired property, see Austin, 509 U.S. at 621, while

R7

27

disgorgement is “an equitable obligation to return a sum equal to the amount

wrongfully obtained,” rather than “a requirement to replevy a specific asset.”

SEC v. Banner Fund Int’l, 211 F.3d 602, 617 (D.C. Cir. 2000).

In SEC v. Graham, the Eleventh Circuit incorrectly held that the SEC was

time-barred from proceeding with its claim for disgorgement under Section

2462. 823 F.3d at 1363–64. The court mistakenly equated “disgorgement” with

“forfeiture,” two exclusive remedies, and improperly held that “[b]ecause

forfeiture includes disgorgement, § 2462 applies to disgorgement.” Id. In

reaching this conclusion, the court entirely failed to consider the “varied

historical meaning of the two terms, the continued differences between the two

remedies, and the statutory context of Section 2462.” SEC v. Ahmed, No. 3-

15cv675, 2016 WL 7197359, at *7 (D. Conn. 2016).

While Graham and the case at bar are factually similar, the Eleventh

Circuit in Graham failed to consider Section 2462 with “reference to the

statutory context, structure, history, and purpose.” Id. (citing Abramski v.

United States, 134 S.Ct. 2259, 2267 (2014)) (internal quotations and citation

omitted); see also Greenwich Collieries, 512 U.S. at 275. Instead, Graham

wholly relied on the modern definitions of the two terms to find no distinction

between them. Graham, 823 F.3d at 1363-64.

However, the court defined disgorgement as “[t]he act of giving up

something on demand or by legal compulsion” and forfeiture as “[t]he loss of a

right, privilege, or property because of a crime, breach of obligation, or neglect

of duty.” Id. at 1363 (citing BLACK'S LAW DICTIONARY (10th ed. 2014)). There is a

R7

28

clear distinction between these definitions; forfeiture indicates a loss as a

consequence for that individual's actions, while disgorgement merely requires

an individual to give up something, without necessarily losing any rights. Thus,

these terms are not interchangeable, and further support the contention that

Congress made a “conscious choice to include one and not the other.” See SEC

v. Saltsman, 07-CV-4370, 2016 WL 4136829, at *28 (E.D.N.Y. 2016). Therefore,

the SEC’s disgorgement claims against Prince do not constitute forfeiture

under Section 2462.

2. Disgorgement is not a penalty.

This Court has distinguished “penalty” from equitable relief precisely

because penalties are intended to punish wrongdoers. Gabelli, 133 S.Ct. at

1223. Accordingly, circuit courts have consistently distinguished equitable

relief—including disgorgement— from penalties. See Zacharias v. SEC, 569

F.3d 458, 471-72 (D.C. Cir. 2009) (disgorgement is not a “penalty” under

Section 2462 because it is “not a punitive measure; it is intended primarily to

prevent unjust enrichment”); see also Blatt, 583 F.2d at 1335 (disgorgement is

“not punitive”); FTC v. Gem Merch. Corp., 87 F.3d 466, 468-69 (11th Cir. 1996)

(“disgorgement is an equitable remedy”).

In U.S. v. Telluride Co., the Tenth Circuit held that the sole purpose of a

disgorgement action is to restore the “ill-gotten gains” earned by the defendant

“while in violation of securities laws.” 146 F.3d at 1247-48. The disgorged

amount causally relates to the “actual harm caused by the defendant’s prior

actions,” and thus is remedial. Id. As a result, disgorgement is “remedial,

R7

29

rather than punitive,” when it does not “exceed[] the defendant’s ill-gotten

gains.” Marc I. Steinberg & Ralph C. Ferrara, 25 SEC. PRAC. FED. & STATE

ENFORCEMENT § 4:22 (2014).

Here, the SEC merely seeks to disgorge Prince of the ill-gotten gains he

profited from his fraudulent deals. The SEC seeks a disgorgement of

$1,770,000, which is based on:

(1) $1,025,000 earned from forty-one side letters; (2) $495,000 encompassing all bonuses and other discretionary compensation received during the periods of January 2008 through January 2010 and January 2014 through January 2015, including the $45,000 bonus in 2009; and (3) $250,000 representing the total amount of bonuses that Conrad earned during the relevant periods.

R. at 16. While Judge Khatibifar noted below in his dissenting opinion that the

disgorgement of $250,000 in profits that Conrad earned is punitive, the

purpose of disgorgement actions is to prevent unjust enrichment. See Manor

Nursing Ctrs., Inc., 458 F.2d at 1104-05. Thus, it is not punitive to require a

wrongdoer to disgorge all the monies that improperly trickled down to others as

a result of his own actions. See SEC v. Platforms Wireless Int’l Corp., 617 F.3d

1072, 1098 (9th Cir. 2010). Because Conrad profited from the ill-gotten gains

due to Prince’s misconduct, the SEC is fully within its discretion to disgorge

Prince of Conrad’s ill-gotten gains. R. at 7; see Platforms Wireless Int’l Corp.,

617 F.3d at 1098. The entirety of the requested amount causally relates to

illegally obtained profits and does not exceed them; thus, the SEC’s actions

would not constitute a “penalty” because it restores Prince to the status quo

ante. Johnson v. SEC, 87 F.3d 484, 491 (D.C. Cir. 1996).

Disgorgement orders uphold the SEC’s central mission to “protect

R7

30

investors and the markets by investigating potential violations of the federal

securities laws . . . .” R. at 20. In order to maintain the “effective enforcement

of the federal securities laws,” the SEC must “be able to make violations

unprofitable.” Manor Nursing Ctrs., Inc., 458 F.2d at 1104. The equitable nature

of disgorgement claims, which prevent unjust enrichment of individuals like

Prince, do not fall under the purview of Section 2462. Accordingly, this Court

should affirm the decision of the Fourteenth Circuit.

CONCLUSION

For these reasons, Respondent respectfully requests that this Court

affirm the United States Court of Appeals for the Fourteenth Circuit and hold

that Bosco and Lee violated Rule 13a-14 when they certified false statements,

despite possessing no actual knowledge that the statements were false, and

furthermore, that SOX 304 allows the SEC to seek disgorgement of the profits

and bonuses from Bosco and Lee even when they did not personally engage in

misconduct. Additionally, this Court should affirm the Fourteenth Circuit’s

decision that the SEC’s enforcement claims for disgorgement are not subject to

the five-year statute of limitations in 28 U.S.C. § 2462 because disgorgement is

equitable relief not subject to the statute.

Respectfully submitted, ___________________/s/

Team R7 Counsel of Record for Respondents

R7

i

APPENDIX

R7

ii

1a

17 C.F.R § 240.13a-14

Certification of disclosure in annual and quarterly reports.

(a) Each report, including transition reports, filed on Form 10-Q, Form

10-K, Form 20-F or Form 40-F ( § 249.308a, § 249.310, § 249.220f or §

249.240f of this chapter) under Section 13(a) of the Act ( 15 U.S.C. 78m(a)),

other than a report filed by an Asset-Backed Issuer (as defined in §

229.1101 of this chapter) or a report on Form 20-F filed under § 240.13a-19,

must include certifications in the form specified in the applicable exhibit filing

requirements of such report and such certifications must be filed as an exhibit

to such report. 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 principal executive and principal financial

officers of an issuer may omit the portion of the introductory language in

paragraph 4 as well as language in paragraph 4(b) of the certification that

refers to the certifying officers' responsibility for designing, establishing and

maintaining internal control over financial reporting for the issuer until

the issuer becomes subject to the internal control over financial

reporting requirements in § 240.13a-15 or § 240.15d-15.

(b) Each periodic report containing financial statements filed by

an issuer pursuant to section 13(a) of the Act ( 15 U.S.C. 78m(a)) must be

accompanied by the certifications required by Section 1350 of Chapter 63 of

Title 18 of the United States Code (18 U.S.C. 1350) and such certifications

R7

iii

must be furnished as an exhibit to such report as specified in the applicable

exhibit requirements for such report. Each principal executive and principal

financial officer of the issuer (or equivalent thereof) must sign a certification.

This requirement may be satisfied by a single certification signed by an issuer's

principal executive and principal financial officers.

(c) A person required to provide a certification specified in paragraph (a),

(b) or (d) of this section may not have the certification signed on his or her

behalf pursuant to a power of attorney or other form of confirming authority.

R7

iv

2a

15 U.S.C. § 7243

Forfeiture of certain bonuses and profits.

(a) Additional compensation prior to noncompliance with Commission financial

reporting requirements

If an issuer is required to prepare an accounting restatement due to the

material noncompliance of the issuer, as a result of misconduct, with any

financial reporting requirement under the securities laws, the chief executive

officer and chief financial officer of the issuer shall reimburse the issuer for—

(1) any bonus or other incentive-based or equity-based compensation

received by that person from the issuer during the 12-month period

following the first public issuance or filing with the Commission

(whichever first occurs) of the financial document embodying such

financial reporting requirement; and

(2) any profits realized from the sale of securities of the issuer during

that 12-month period.

(b) Commission exemption authority

The Commission may exempt any person from the application of

subsection (a), as it deems necessary and appropriate.

R7

v

3a

28 U.S.C. § 2462

Time for commencing proceedings.

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.

R7

vi

4a

15 U.S.C. § 78u

Investigations and actions.

(d) Injunction proceedings; authority of court to prohibit persons from serving

as officers and directors; money penalties in civil actions

(5) Equitable Relief.

In any action or proceeding brought or instituted by the

Commission under any provision of the securities laws, the Commission

may seek, and any Federal court may grant, any equitable relief that may

be appropriate or necessary for the benefit of investors.