United States Securities and Exchange Commission v. Brown ( 2012 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
______________________________
UNITED STATES SECURITIES AND )
EXCHANGE COMMISSION, )
)
Plaintiff, )
)
v. ) Civil Action No. 09-1423 (GK)
)
ELAINE M. BROWN, et al., )
)
Defendants. )
______________________________)
MEMORANDUM OPINION
Plaintiff United States Securities and Exchange Commission
(“SEC”) brings this action against Defendants Elaine M. Brown and
Gary A. Prince1 alleging violations of the Securities Act of 1933
(“Securities Act”), 15 U.S.C. § 77a et seq, the Securities Exchange
Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et seq, and Rules
promulgated under the Exchange Act. This matter is before the Court
on Brown’s Motion for Summary Judgment [Dkt. No. 95] and Prince’s
Motion for Partial Summary Judgement [Dkt. No. 94]. Upon
consideration of the Motions, Oppositions, Replies, and the entire
record herein, and for the reasons stated below, Brown’s Motion for
Summary Judgment is granted in part and denied in part and Prince’s
1
The Complaint was originally brought against a third Defendant,
Steven R. Chamberlain. On February 18, 2010, after receiving notice
of Defendant Chamberlain’s death, the Court granted the Consent
Motion for Order Dismissing Defendant Steven R. Chamberlain as a
Party pursuant to Fed. R. Civ. P. 21. [Dkt. No. 28].
Motion for Partial Summary Judgment is granted in part and denied
in part.
I. Background
A. Factual Background2
Defendants Brown and Prince are former employees of Integral
Systems, Inc. (“Integral”), a publicly traded Maryland corporation.
Integral makes and sells satellite ground systems, including
satellite communications systems and software products for
satellite command and control.
Defendant Brown was the Chief Financial Officer and Principal
Accounting Officer of Integral from 1997 until May of 2007, and the
Vice President of Administration from 2007 until she resigned from
that position in July 2008. During her tenure with Integral, Brown
signed the company’s annual reports. Other members of Integral’s
management and the members of its Board of Directors also signed
Integral’s annual reports.
Defendant Prince was hired in 1982 by Integral to perform
part-time accounting services for the company. In 1993, Prince was
appointed Integral’s Vice President and Chief Financial Officer.
Prince resigned his position as Integral’s CFO in 1995, shortly
before pleading guilty in the Central District of California to a
conspiracy to commit securities fraud and to making false
2
Unless otherwise noted, the facts set forth herein are drawn from
parties' Statements of Material Facts Not in Dispute submitted
pursuant to Local Rule 7(h).
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statements in connection with his conduct as an officer of another
corporation. United States v. Prince, No. 95-cr-00771 (C.D. Cal.
Sept. 5, 1995).
In 1994, the United States District Court for the District of
Columbia enjoined Prince from violating the antifraud and lying-to-
auditors provisions of the Exchange Act based on the conduct
underlying his guilty plea in the Central District of California.
SEC v. Bolen, No. 93-cv-01331 (D.D.C. Aug. 18, 1994). In 1997, the
SEC issued, and Prince agreed to comply with, an Order (“1997
Order”) permanently barring Prince from appearing before the
Commission as an accountant. In re Gary A. Prince, Release No.
38,765, 64 S.E.C. Docket 2074, 1997 WL 343054 (June 24, 1997).
In 1998, Prince was re-hired by Integral. Until his
termination from Integral on March 30, 2007, Prince held various
titles, including Director of Mergers and Acquisitions, Director of
Strategic and Financial Planning, and Managing Director of
Operations. The SEC alleges that Prince had “substantial authority
and responsibilities” during this nine-year period that made him a
de facto officer of Integral in violation of its 1997 Order. It
claims that this “substantial authority and responsibilities”
included Prince’s authority to approve major contracts, attendance
at Integral’s Board of Director meetings, and evaluation of
potential mergers. Prince was a member of a policy-making group of
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senior executive officers and was compensated at levels equal to
Integral’s top-ranking officers.
In the period between 1998 and August 2006, when Integral
named Prince as an officer, Prince’s alleged status as a de facto
officer of the company was never disclosed in periodic filings with
the SEC or in proxy statements. It was not until August 2006, that
Integral filed a Form 8-K stating that Prince had been appointed
Executive Vice President and Managing Director of Operations for
the company and disclosing Prince’s violation of the securities
laws and inability to appear before the Commission as an
accountant. Integral terminated Prince in March 2007, after the
SEC’s Enforcement Division commenced the investigation that led to
this proceeding.
The SEC claims that the failure to disclose was a material
omission in violation of provisions of the Securities Act, the
Exchange Act, and related Rules. Specifically, the SEC alleges that
both Defendants (1) violated § 17(a) of the Securities Act, (2)
violated § 10(b) of the Exchange Act and Rule 10b-5, (3) aided and
abetted Integral’s violations of Exchange Act § 13(a) and Rules
12b-20 and 13a-1, (4) violated Exchange Act Rule 13a-14, and (5)
aided and abetted violations of Exchange Act § 14(a) and Rule 14a-9
by Steven Chamberlain, Integral’s former Chief Executive Officer.
Defendant Prince is also charged with violations of Exchange Act §
16(a), Rule 16a-3, and the 1997 Order.
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B. Procedural Background
On July 30, 2009, the SEC filed this lawsuit against
Defendants Brown and Prince alleging violations of the Securities
Act, the Exchange Act, and related Rules [Dkt. No. 1]. On October
12, 2010, Defendants Brown and Prince filed Answers to the SEC’s
Complaint [Dkt. Nos. 61 and 62].
On September 28, 2009, Defendants Brown and Prince filed
Motions to Dismiss [Dkt. Nos. 13 and 14]. On September 27, 2010,
the Court granted in part and denied in part Brown’s Motion to
Dismiss and denied Prince’s Motion to Dismiss. Order [Dkt. No. 55].
On January 27, 2012, Defendant Prince filed his Motion for
Partial Summary Judgment. [Dkt. No. 94]. On March 2, 2012, the SEC
filed its Opposition to Prince’s Motion for Partial Summary
Judgment. [Dkt. No. 100]. On March 23, 2012, Prince filed his Reply
in Support of his Motion for Partial Summary Judgment. [Dkt. No.
110].
On January 27, 2012, Defendant Brown filed her Motion for
Summary Judgment. [Dkt. No. 95]. On March 5, 2012, the SEC filed
its Corrected Opposition to Brown’s Motion for Summary Judgment.
[Dkt. No. 108]. On March 23, 2012, Brown filed her Reply in Support
of her Motion for Summary Judgment. [Dkt. No. 109]. On April 16,
2012, the SEC filed its Sur-Reply in Opposition to Brown’s Motion
for Summary Judgment. [Dkt. No. 116].
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II. Standard of Review
Under Federal Rule of Civil Procedure 56, summary judgment may
be granted “only if” the pleadings, the discovery and disclosure
materials on file, and any affidavits show that there is no genuine
issue as to any material fact and that the moving party is entitled
to judgment as a matter of law. See Fed. R. Civ. P. 56(c), as
amended Dec. 1, 2007; Arrington v. United States, 473 F.3d 329, 333
(D.C. Cir. 2006). In other words, the moving party must satisfy two
requirements: first, that there is no “genuine” factual dispute
and, second, if there is, that it is “material” to the case. “A
dispute over a material fact is ‘genuine’ if ‘the evidence is such
that a reasonable jury could return a verdict for the non-moving
party.’” Arrington, 473 F.3d at 333 (quoting Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986)). A fact is “material” if it
might affect the outcome of the case under the substantive
governing law. Liberty Lobby, 477 U.S. at 248.
As the Supreme Court stated in Celotex Corp. v. Catrett, “the
plain language of Rule 56(c) mandates the entry of summary
judgment, after adequate time for discovery and upon motion,
against a party who fails to make a showing sufficient to establish
the existence of an element essential to that party's case, and on
which that party will bear the burden of proof at trial.” 477 U.S.
317, 322 (1986). The Supreme Court has further explained,
[a]s we have emphasized, “[w]hen the moving
party has carried its burden under Rule 56(c),
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its opponent must do more than simply show
that there is some metaphysical doubt as to
the material facts. . . . Where the record
taken as a whole could not lead a rational
trier of fact to find for the nonmoving party,
there is no ‘genuine issue for trial.’”
Matsushita Elec. Industrial Co. v. Zenith
Radio Corp., 475 U.S. 574, 586-87, 106 S. Ct.
1348, 89 L.Ed.2d 538 . . . (1986) (footnote
omitted). “‘[T]he mere existence of some
alleged factual dispute between the parties
will not defeat an otherwise properly
supported motion for summary judgment; the
requirement is that there be no genuine issue
of material fact.’”
Scott v. Harris, 550 U.S. 372, 380 (2007) (quoting Liberty Lobby,
477 U.S. at 247-48) (emphasis in original).
However, the Supreme Court has also consistently emphasized
that “at the summary judgment stage, the judge’s function is
not . . . to weigh the evidence and determine the truth of the
matter, but to determine whether there is a genuine issue for
trial.” Liberty Lobby, 477 U.S. at 249. In both Liberty Lobby and
Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150
(2000), the Supreme Court cautioned that “[c]redibility
determinations, the weighing of the evidence, and the drawing of
legitimate inferences from the facts, are jury functions, not those
of a judge” deciding a motion for summary judgment. Liberty Lobby,
477 U.S. at 255.
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III. Analysis
A. Brown’s Motion for Summary Judgment
1. Brown’s Liability for Violations of Section 10(b)
and Rule 10b-5
Section 10(b) “prohibits only the making of a material
misstatement (or omission) or the commission of a manipulative
act.” Central Bank of Denver, N.A. v. First Interstate Bank of
Denver, N.A., 511 U.S. 164, 177 (1994). Primary liability under §
10(b) may be found for any person who:
directly or indirectly, by the use of any
means or instrumentality of interstate
commerce or of the mails, or of any facility
of any national securities exchange ... use[s]
or employ[s], in connection with the purchase
or sale of any security ... any manipulative
or deceptive device or contrivance in
contravention of such rules and regulations as
the Commission may prescribe as necessary or
appropriate in the public interest or for the
protection of investors.
15 U.S.C. § 78j. On the basis of this statute, the SEC promulgated
Rule 10b-5, which makes it unlawful for:
any person, directly or indirectly, . . . (a)
[t]o employ any device, scheme, or artifice to
defraud, (b) [t]o make any untrue statement of
a material fact or to omit to state a material
fact necessary in order to make the statements
made, in the light of the circumstances under
which they were made, not misleading, or (c)
[t]o engage in any act, practice, or course of
business which operates or would operate as a
fraud or deceit upon any person, in connection
with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
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The SEC alleges that Brown committed fraud in her role as
Integral’s principal financial and accounting officer.
Specifically, the SEC contends that Brown made false statements in
violation of Rule 10b-5(b) by signing and certifying as true
Integral’s public filings, when in fact she knew that those filings
were false because they concealed that Prince was functioning as an
executive officer of Integral. Brown argues that the SEC’s claim
fails because, in light of the Supreme Court’s recent decision in
Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct.
2296(2011),3 it cannot establish that she was the “maker” of the
alleged omission.
The SEC further contends that the record establishes that
Brown violated Rule 10b-5(a) and (c) by substantially
participating, with Chamberlain and Prince, in a fraudulent scheme
to conceal Prince’s true status as a de facto officer. Brown argues
that the SEC’s scheme liability claim fails because the SEC has not
alleged that she is liable for anything other than Integral’s
omission of Prince.
a. Genuine Issues of Material Fact Preclude
Summary Judgment on the SEC’s Claim Against
Brown Under Rule 10b-5(b)
Brown argues that Janus requires summary judgment on the SEC’s
claim charging her with primary violations of Rule 10b-5. Brown
3
Janus was issued after this Court decided the Defendants’ Motions
to Dismiss.
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relies on the holding in Janus that one is a “maker” of a false
statement or omission for purposes of Rule 10b-5(b) only if that
person had “ultimate authority” over the statement. Janus, 131 S.
Ct. at 2302 (“[T]he maker of a statement is the person or entity
with ultimate authority over the statement, including its content
and whether and how to communicate it.”). Brown contends that, as
a matter of law, the SEC cannot establish that she was the “maker”
of the alleged omission with “ultimate authority” over its content
and whether and how to communicate it. Brown further argues that
the SEC has already determined that Integral was the “maker” of the
omission, and has already alleged in the Third Claim for Relief
that Brown merely aided and abetted Integral’s omission.
The SEC responds that Brown’s implicit contention that “there
is only one ‘ultimate authority’ over a statement and therefore,
after Janus, there can be only one ‘maker’” is not supported by
Janus or its progeny. SEC’s Opp’n to Brown’s Mot. for Summ. J. at
12. The SEC further argues that the signer of a corporate filing is
always its “maker.”
In Janus, the Supreme Court addressed a situation in which one
legal entity, Janus Capital Management, served as mutual fund
investment adviser for another legal entity, Janus Investment Fund.
The Court concluded that investment adviser Janus Capital
Management had not “made” any actionable misrepresentations or
omissions, even though plaintiffs alleged that Janus Capital
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Management had been significantly involved in preparing, but not
signing, the prospectus. The Court reasoned that “nothing on the
face of the prospectus indicate[d] that any statements” came from
the investment adviser, and “none of the statements in the
prospectuses were attributed, explicitly or implicitly, to [the
adviser].” Id. at 2305, 2305 n. 11.
The facts in Janus are very different from those in this case.
Janus involved two distinct legal entities, and addressed the issue
of whether statements of one could be attributed to the other to
avoid liability under Rule 10b-5. Brown’s role in the omission
attributed to her in this case is not analogous to Janus Capital
Management’s relationship to the statements issued by Janus
Investment Fund. It is undisputed here that Brown was Integral’s
principal financial and accounting officer and that, as such, she
signed the filings at issue.
As the Southern District of New York recently held, “Janus did
not [] alter the well-established rule that a corporation can act
only through its employees and agents.” In re Pfizer Inc. Sec.
Litig., No. 04 Civ. 9866, 2012 WL 983548, at *4 (S.D.N.Y March 22,
2012) (internal quotations omitted) (citations omitted); see In re
Merck & Co., Sec. Derivative & “ERISA” Litig., MDL No. 1658, 2011
WL 3444199, at *25 (D.N.J. Aug. 8, 2011); Local 703, I.B. of T.
Grocery & Food Emps. Welfare Fund v. Regions Fin. Corp., 2011 U.S.
Dist. LEXIS 93873, at *15 (N.D. Ala. Aug. 23, 2011) (“nothing in
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Janus stands for the proposition that CEOs and CFOs [cannot] be
liable for false and misleading statements in their own company’s
financial statements, for which they signed Sarbanes-Oxley
certifications.”).
Both before and after the decision in Janus, courts have
consistently held that the signer of a corporate filing is its
“maker.” In Pfizer, the court held that because Plaintiffs alleged
that “Defendant McKinnell signed Pfizer’s public filings [] [they]
adequately allege[d] his liability, under Janus, for
misrepresentations in those filings.” 2012 WL 983548, at *4, n. 3
(emphasis added). Similarly, in In re Stillwater Capital Partners
Inc. Litig., the court held that corporate officer Hirst “signed
the documents at issue and thereby ‘made’ the alleged
misstatements.” No. 1:11-2275, 2012 WL 1416837, at *7 (S.D.N.Y.
April 23, 2012); see also Merck, 2011 WL 344199, at *25 (executive
liable for statements in company’s public filings when he signed
those filings).
Whether one is the “maker” of a false statement turns on
factual issues of scienter as well as “ultimate control” over the
statement. Such control may be evidenced by “attribution within a
statement” or “surrounding circumstances,” including the signing of
SEC filings. See Janus, 131 S. Ct. at 2302. Viewing the record in
the light most favorable to the SEC and drawing all inferences in
its favor, the Court concludes that there are adequate “surrounding
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circumstances” for the trier of fact to find that the omission at
issue was “made” by Brown. Therefore, Brown’s Motion for Summary
Judgment on the SEC’s claim against her for violations of Rule 10b-
5(b) is denied.
b. Genuine Issues of Material Fact Preclude
Summary Judgment on the SEC’s Scheme Liability
Claim Against Brown Under Rule 10b-5(a) and
(c)
Brown next argues that the SEC cannot prevail on its Rule 10b-
5(a) and (c) scheme liability claim against her because it has not
alleged that she is liable for anything other than Integral’s
omission of Prince. The SEC responds that even if Brown correctly
states the law, her argument fails because the record shows that
its scheme liability claim is not based only on the omission of
Prince’s involvement.
As the Court noted in its opinion on the Motions to Dismiss,
“to establish primary liability under Rule 10b-5(a) or (c), the
alleged conduct must be more than a reiteration of the
misrepresentations underlying the Rule 10b-5(b) misstatement
claims.” SEC v. Brown, 740 F. Supp. 2d 148, 172 (D.D.C. 2010). The
Court further noted that “[p]rimary liability may arise out of the
same set of facts under all three subsections ‘where the plaintiffs
allege both that the defendants made misrepresentations in
violation of Rule 10b-5(b), as well as that the defendants
undertook a deceptive scheme or course of conduct that went beyond
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the misrepresentations.’” Id. quoting In re Alstom SA, 406 F. Supp.
2d 433, 475 (S.D.N.Y. 2005). There is a difference between a 10b-
5(b) failure to disclose and a 10b-5(a) and (c) scheme to conceal
that failure to disclose.
The SEC points to evidence that, when construed in the light
most favorable to the SEC, could lead the trier of fact to find
that Brown took affirmative steps to conceal Prince’s status that
“went beyond the misrepresentation.” For instance, the SEC claims
that Brown not only omitted Prince’s status as a de facto officer
from public filings with the SEC, but also took steps to ensure
that internal records of the company and email communications were
consistent with Integral’s desire not to disclose Prince. While it
may be true, as Brown contends, that the SEC’s proffered evidence
reflects nothing more than “mundane events” and that her
consultations with Venable are inconsistent with a scheme to
defraud, such a determination, which necessarily requires the
weighing of the evidence, must be left for the trier of fact.
Therefore, Brown’s Motion for Summary Judgment on the SEC’s claim
against her for violations of Rule 10b-5(a) and (c) is denied.
2. Brown’s Liability for Aiding and Abetting
Integral’s Violations of Section 13(a) and Rules
12b-20 and 13a-1
Brown contends that she cannot be both primarily liable for
“making a false statement under Rule 10b-5(b) and secondarily
liable for aiding and abetting Integral’s filing of false
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statements in violation of Section 13(a). Brown argues that she is
“at worst, either secondarily liable for having aided and abetted
Integral’s omission of Mr. Prince [] or primarily liable for
omitting Mr. Prince herself,” but that she “cannot, however, be
both.” Brown’s Mot. for Summ. J. at 14, n. 7. The SEC responds that
there is nothing inconsistent about its pleading or proof.
Section 13(a) and Rule 13a-1 require that every “issuer of a
security registered pursuant to section 12 shall file with the
Commission” certain documents consistent with SEC regulations,
while Rule 12b-20 requires that any such filings not be misleading.
See 15 U.S.C. § 78m(a); 17 C.F.R. §§ 240.13a-1 and 240.12b-20
(emphasis added). Thus, the statutes do not preclude the SEC from
claiming that Brown both “made” a false statement in violation of
Rule 10b-5(b) and aided and abetted Integral, the “issuer” of the
security, with“filing” that false statement in violation of Section
13(a), Rule 12b-20 and Rule 13a-1. See SEC v. Koenig, 2007 WL
1074901, at *6-7 (N.D.Ill. April 5, 2007). Contrary to Brown’s
argument, the SEC is not required to choose between the two and
allege only one or the other violation.
Brown raises no other grounds for summary judgment on this
claim for relief. Accordingly, Brown’s Motion for Summary Judgment
on the SEC’s claim against her for violations of Section 13(a) and
Rules 12b-20 and 13a-1 is denied.
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3. Brown’s Liability for Violations of Rule 13a-14
Brown next argues that the Janus decision warrants
reconsideration of the Court’s previous decision not to dismiss the
SEC’s claim for relief under Rule 13a-14. Brown contends that Janus
makes clear that courts cannot go beyond the plain language of a
statute to create individual liability where none exists.
More specifically, Brown argues that Rule 13a-14, and Section
13(a) under which it was promulgated, governs only the conduct of
issuers. Brown contends that, “[s]ince the SEC did not allege that
Ms. Brown aided and abetted Integral’s violation of Rule 13a-14 []
summary judgment should be granted on the SEC’s Fourth Claim for
Relief” because “[a]fter Janus, individuals cannot be held
primarily liable for violating that rule since it says nothing
about individual liability.” Id. at 2.
The SEC responds that Janus has no impact on the Court’s prior
ruling. The SEC notes that Janus interpreted the word “make” as
used in Rule 10b-5(b), and that the word “make” does not appear in
Rule 13a-14. The SEC further argues that Janus does not address the
scope of Rule 13a-14 or impact in any way its statutory authority
to claim that an individual is primarily liable for a violation of
the Rule.
Brown relies upon the following language from Janus to support
her contention that reconsideration of the SEC’s claim under Rule
13a-14 is warranted:
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Congress also has established liability in
§ 20(a) for ‘[e]very person who, directly or
indirectly, controls any person liable’ for
violations of the securities laws. First
Derivative’s theory of liability based on a
relationship of influence resembles the
liability imposed by Congress for control. To
adopt First Derivative’s theory would read
into Rule 10b-5 a theory of liability similar
to-but broader in application than-what
Congress has already created expressly
elsewhere.
Janus, 131 S. Ct. at 2304. In this passage, the Supreme Court notes
that Congress enacted Section 20(a) as a means to hold liable
entities that control any person who violates a securities law. The
Supreme Court is cautioning against expanding the narrow private
right of action under Rule 10b-5 to impose liability where Congress
already imposed liability under Section 20.
Brown has put forth no persuasive reason why this passage from
Janus, specifically limiting the scope of private rights of action
under Rule 10b-5, should be read to reach enforcement actions
brought by the SEC pursuant to Rule 13a-14. Brown also fails to
adequately address the Court’s previous conclusion that “Section
21(d)(1) authorizes the Commission to bring an action in a United
States District Court ‘to enjoin’ any ‘acts or practices
constituting a violation of any provision of this title [or] the
rules or regulations thereunder” and that “[i]n light of this
specific statutory authority, [] the SEC’s claim to enforce Rule
13a-14 states a valid cause of action.” Brown, 740 F. Supp. 2d at
165 (quoting 15 U.S.C. § 78u(d)(1)). Accordingly, the Court
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declines to reverse its previous decision, or to depart from the
majority of courts that have addressed the issue.4
Brown raises no other grounds for summary judgment on this
claim for relief. Therefore, Brown’s Motion for Summary Judgment on
the SEC’s claim against her for violations of Rule 13a-14 is
denied.
4. The SEC’s Claim for Equitable Relief Against Brown
The SEC seeks equitable remedies against Brown, including a
permanent injunction against future violations of the securities
laws and a permanent officer and director bar. Brown argues that
the SEC is not entitled to equitable relief because the alleged
violation was not “flagrant” as she repeatedly sought the advice of
outside counsel, the alleged violation involved a single omission
and not a pattern of violations, and the SEC has failed to adduce
4
As the Court previously observed, SEC claims for violations of
the certification requirement of Rule 13a-14 are routinely
permitted. Brown, 740 F. Supp. 2d at 164-165; see, e.g., SEC v.
Geswein, No. 5:10-cv-1235, 2011 WL 4541303 at *3 (N.D. Ohio Sept.
29, 2011) (“[T]he SEC has the authority to bring an enforcement
action [against officers] under Rule 13a-14.”); SEC v. Fuhlendorf,
No. C09-1292, 2011 WL 999221, at *9 (W.D. Wash. Mar. 17, 2011); SEC
v. Das, No. 8:10-cv-102, 2010 WL 4615336, at *10 (D.Neb. Nov. 4,
2010); SEC v. Stanard, No. 06-cv-7736, 2009 WL 196023, at *28
(S.D.N.Y. Jan. 27, 2009); SEC v. Brady, No. 05-cv-1416, 2006 WL
1310320, at *5 (N.D. Tex. May 12, 2006); SEC v. Sandifur, No. 05-
cv-1631C, 2006 WL 538210, at *8 (W.D. Wash. Mar. 2, 2006); but see
SEC v. Retail Pro, Inc., 673 F.Supp.2d 1108, 1143 n.8 (S.D. Cal.
2009) (citing SEC v. Black, No. 04-cv-7377, 2008 WL 4394891 (N.D.
Ill. Sept. 24, 2008) as evidence of a “conflict among courts [as]
to whether a violation of the certification requirement of Rule
13a-14 supports a separate cause of action,” which it declined to
address).
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any evidence showing a reasonable likelihood that she would commit
violations in the future. Brown’s Mot. for Summ. J. at 21-30.
The SEC responds that it is entitled to equitable relief
because “Brown engaged in a course of conduct over a six year
period that constituted substantial participation in a scheme to
defraud, including deceptive acts intended to conceal Prince’s role
at ISI” and because the record “supports a finding of a reasonable
likelihood of future violations.” SEC’s Opp’n to Brown’s Mot. for
Summ. J. at 19-20.
To obtain an injunction against Brown, the SEC must
demonstrate that there is a reasonable likelihood that she will
engage in future violations. SEC v. Savoy Indus., Inc. 587 F.2d
1149, 1168 (D.C. Cir. 1978). Under the Savoy Industries test,
courts should consider “whether a defendant’s violation was
isolated or part of a pattern, whether the violation was flagrant
and deliberate or merely technical in nature, and whether the
defendant’s business will present opportunities to violate the law
in the future.” SEC v. First City Fin., 890 F.2d 1215, 1228 (D.C.
Cir. 1989) (citing Savoy Indus., 587 F.2d at 1168). “No single
factor is determinative; instead, [] district court[s] should
determine the propensity for future violations based on the
totality of the circumstances.” Id. (citations omitted).
The SEC has failed to demonstrate that there is a reasonable
likelihood that Brown will engage in future violations of the
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securities laws. Most significantly, the SEC has neither alleged
nor adduced evidence that Brown is currently seeking employment in
securities-related positions or that she is currently or
prospectively capable of committing any securities violations. It
is undisputed that Brown has not been employed by Integral since
2008, that she does not work for a publicly traded company, and
that she has no legal reporting obligations to the SEC. Moreover,
the SEC never questioned the integrity of Integral’s financials,
Brown’s principal area of responsibility as CFO, nor did it allege
any investor losses or personal gain by Brown. There is also no
allegation that Brown engaged in repeated affirmative misconduct,
self-dealing, insider trading or financial fraud.
These circumstances do not support a finding of a reasonable
likelihood of future violations. Therefore, Brown’s Motion for
Summary Judgment on the injunctive relief and an officer director
bar sought by the SEC is granted.
5. Statute of Limitations
As neither the Exchange Act nor the Securities Act includes a
statute of limitations, Brown argues that the “catch-all” statute
of limitations in 28 U.S.C. § 2462 applies to bar all claims based
on conduct that occurred more than five years before the filing of
the Complaint. Section 2462 states that:
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
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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. Specifically, Brown argues that she is entitled
to a judgment that all conduct before July 30, 2004 is time-barred
because the SEC has adduced no evidence to demonstrate why the
five-year statute of limitations should not apply.
The SEC contends that the record evidence supports a finding
that the five-year statute of limitations is tolled by the
discovery rule, or in the alternative, by the continuing violation
doctrine.
a. The Discovery Rule Does Not Toll the Statute
of Limitations for the SEC’s Civil Penalties
Claims
In its Opposition to Brown’s Motion for Summary Judgment, the
SEC notes that, “[w]hile this Court previously ruled that the
doctrine of fraudulent concealment was not applicable here, the
fraudulent concealment doctrine and the discovery rule are distinct
bases for extending the statute of limitations.” SEC’s Opp’n to
Brown’s Mot. for Summ. J. at 22, n. 12. The SEC then suggests that
the Court “confuse[d] the discovery rule and the doctrine of
fraudulent concealment.” Id.The Court perceives no adequate reason to reverse its previous
decision that “the five-year statute of limitations in § 2462 is
not tolled for the civil penalties claims.” Brown, 740 F. Supp.
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2d at 158. Under the discovery rule, “a cause of action accrues
when the injured party discovers-or in the exercise of due
diligence should have discovered-that it has been injured.” Nat’l
Treasury Emps. Union v. FLRA, 392 F.3d 498, 501 (D.C. Cir. 2004)
(internal quotation omitted) (emphasis added). The SEC contends
that, under the rule, its right of action did not accrue “until
January 9, 2006 when . . . the SEC had or could have had any
inkling about Prince.” SEC’s Opp’n to Brown’s Mot. for Summ. J. at
23.
However, even if the discovery rule applies here-an issue the
Court need not decide-the SEC would not benefit from the rule
because, as the Court previously held, the SEC’s Complaint “fails
to allege any facts that would establish that the SEC used due
diligence in trying to uncover Defendants’ wrongdoing from 1998 to
2005.” Brown, 740 F. Supp. 2d at 158 (emphasis added). The Court
further held that, “[m]ore problematically, the Complaint fails to
allege when the SEC discovered the claims; there are no allegations
that the SEC remained ignorant of Prince’s role at Integral up
until five years or less before filing its complaint.” Id.The SEC did not seek to amend its Complaint, and it cannot
cure pleading defects in an opposition to a motion for summary
judgment. Calvetti v. Antcliff, 346 F. Supp. 2d 92, 107 (D.D.C.
2004); see also Arbitraje Casa de Cambio, S.A. de C.V. v. U.S.
Postal Serv., 297 F. Supp. 2d 165, 170 (D.D.C. 2003) (“It is
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axiomatic that a complaint may not be amended by the briefs in
opposition to a motion to dismiss.”). Accordingly, the Court’s
holding, that the five-year statute of limitations is not tolled by
the discovery rule for the civil penalties claims, still applies.
b. Genuine Issues of Material Fact Preclude a
Final Ruling as to the Applicability of the
Continuing Violation Doctrine
Brown argues that the SEC has neither alleged, adduced nor
proffered any evidence concerning or supporting the applicability
of the continuing violation doctrine. Brown contends that “this
case is about an alleged disclosure violation based on a single
omission, not based on any patterns of continuous and affirmative
conduct” and that, therefore, she is entitled to summary judgment
on the issue. The SEC disputes Brown’s characterization of the
alleged violation, arguing that the violation in this case is a
continuing one whereby, “[t]he scheme to defraud and the deceptive
acts in furtherance occurred from 1999 through 2006.” SEC’s Opp’n
to Brown’s Mot. for Summ. J. at 25.
In ruling on Brown’s Motion to Dismiss, the Court noted that
this Circuit has not considered whether the continuing violation
doctrine applies to claims brought in the securities fraud context.
Brown, 740 F. Supp. 2d at 158. The Court further noted that
district courts in the Second and Third Circuits have indicated
great skepticism that it does. Id.; see In re Comverse Tech., Inc.
Sec. Litig., 543 F.Supp.2d 134, 155 (E.D.N.Y. 2008) (noting that
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“[t]he weight of authority in [the Second Circuit] is skeptical of
the application of the continuing violations doctrine in securities
fraud cases”); In re DVI, Inc. Sec. Litigation, No. 03-cv-5336,
2005 WL 1307959, at *11 (E.D. Pa. May 31, 2005) (declining to
extend continuing violation doctrine to case brought under
securities laws) (unreported opinion); but see SEC v. Kelly, 663
F.Supp.2d 276, 287-88 (S.D.N.Y. 2009) (applying continuing
violation doctrine in case brought by SEC). The Court then deferred
ruling on whether the continuing violation doctrine applied here
pending a more fully developed factual record. Id. at 159.
The Court noted, for example, factual disputes that would bear
on its decision, including when the alleged scheme to conceal
Prince’s officer status began and when Brown’s obligation to
disclose his status arose, if she had such an obligation. Id. These
facts are in dispute. In order to determine whether or not Brown
had an obligation to disclose Prince’s status as an officer, it
will be necessary for the trier of fact to evaluate the Venable
lawyers’ credibility as to their knowledge of Prince’s role at
Integral and the nature and extent of the advice that they gave
Brown. Accordingly, Brown’s Motion for Summary Judgment on the
SEC’s claims for civil penalties based on conduct occurring before
July 30, 2004 is denied.
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B. Prince’s Motion for Partial Summary Judgment
1. Prince’s Liability for Violations of Section 10(b)
and Rule 10b-5
The SEC’s Complaint alleges that Prince drafted and prepared
the Management Discussion and Analysis section of the periodic
reports Integral was required to file with the SEC, which addressed
the company’s financial results for that period. Compl. ¶ 39.
Prince is also alleged to have created and prepared internal
quarterly financial results and forecasts which were incorporated
into the periodic reports to the SEC. Id. The SEC further alleges
that Prince reviewed, commented on, and approved Integral’s draft
annual reports and proxy statements. Id. ¶ 35. Prince argues that
these allegations fail to state a claim under Rule 10b-5(b)
because, in light of the Supreme Court’s decision in Janus, the SEC
cannot establish that he “made” any material misstatement or
omission or that he had a duty to disclose or clarify any material
omission by Integral.
In addition to its Rule 10b-5(b) claim, the SEC contends that
Prince is liable under Rule 10b-5(a) and (c) for, respectively,
employing a “device, scheme or artifice to defraud,” and engaging
in an “act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person.” 17 C.F.R. §
240.10b-5. Prince argues that the SEC’s claim for scheme liability
fails because there is no evidence in the record that Prince
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engaged in any deceptive acts in connection with an alleged scheme
to defraud.
a. The SEC Concedes its Claim Against Prince
Under Rule 10b-5(b)
Prince contends that under Janus, the SEC cannot establish
that he “made” any of the alleged material misstatements or
omissions at issue. Nor, according to Prince, can the SEC establish
that he had a duty to clarify any alleged material omissions by
Integral. The SEC responds by “conced[ing] that as a result of the
Supreme Court’s decision in [Janus], the Second Claim for Relief
against Prince can no longer rest on violations of subsection Rule
10b-5(b).” SEC’s Opp’n to Prince’s Mot. for Partial Summ. J. at 2,
n. 2.
Accordingly, Prince’s Motion for Summary Judgment on the SEC’s
claim against him for violations of Rule 10b-5(b) is granted.
b. Genuine Issues of Material Fact Preclude
Summary Judgment on the SEC’s Scheme Liability
Claim Against Prince Under Rule 10b-5(a) and
(c)
Prince argues that the SEC cannot sustain its scheme liability
claim against him under Rule 10b-5(a) and (c) “by pointing to an
independent claim [i.e. a violation of Section 16(a) of the
Exchange Act] that assumes, as its premise, the disputed issue
which is at the heart of this proceeding.” Prince’s Mot. for
Partial Summ. J. at 18. Prince further contends that “the
undisputed documentary record demonstrates that Mr. Prince’s
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conduct at Integral was not concealed in any way, and was widely
known both within the company and to Integral’s outside disclosure
counsel at the Venable law firm.” Id. 16.
The SEC responds by arguing that knowledge known within
Integral is irrelevant to the issue of whether Prince purposefully
concealed from the public his status as a de facto officer of the
Company. The SEC further contends that Prince’s alleged reliance on
advice from Venable is to no avail because there are genuine issues
of material fact regarding what Venable lawyers knew and when they
knew it.
In ruling on the Defendants’ Motions to Dismiss, the Court
held that the SEC’s allegations state a claim under Rule 10b-5(a)
and (c) for scheme liability because, if the SEC was able to
establish that “Prince did act as an officer of Integral Systems
with scienter, a reasonable fact finder could conclude that his
failure to file the reports required under § 16(a) was done with
the purpose and effect of concealing his officer status from the
public.” SEC v. Brown, 740 F. Supp. 2d at 172; see In re Alsom SA,
406 F. Supp. 2d 433, 474 (S.D.N.Y. 2005) (“[S]ubsections (a) and
(c) of Rule 10b-5 encompass a wide range of activities and are not
limited to the prohibition of market manipulation.”). Therefore, as
previously held, and contrary to Prince’s argument in this Motion,
a scheme liability claim under Rule 10b-5(a) and (c) may rest upon
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a violation of § 16(a).5 The question is whether there is a genuine
issue of material fact for trial on the SEC’s scheme liability
claim.
The SEC is correct that the “gist of [Prince’s] argument is
factual” as it largely depends upon what the Venable lawyers knew,
and what advice Prince received, about his conduct at Integral.
SEC’s Opp’n to Prince’s Mot. for Partial Summ. J. at 16. These
facts relate directly to Prince’s scienter, an element of the SEC’s
scheme liability claim that cannot be resolved at this stage
because the record is replete with genuine issues of material fact.
For example, the parties disagree about what information was
disclosed to Venable, when that information was disclosed to
Venable, the extent and nature of the advice given by Venable, and
whether Prince relied on that advice in good faith.
As Prince concedes, resolution of these facts turn on
credibility determinations. Prince states that, in determining
“whether Prince was a de facto officer of ISI . . . and whether
ISI’s non-disclosure thereof was appropriate . . . it will be
necessary for this Court to evaluate [the Venable] lawyers’
credibility at trial vis-a-vis the clear, contemporaneous
evidentiary record that exists as to their knowledge of and advice
5
Section 16(a) requires anyone “who is a director or an officer of
the issuer of [any equity] security” to file a statement concerning
any holdings and transactions of the issuer’s securities. 15 U.S.C.
§ 78p(a).
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to their client, ISI.” Prince’s Mot. for Partial Summ. J. at 5, n.
2.
Drawing all reasonable inferences in favor of the SEC, and
avoiding credibility determinations and the weighing of evidence,
the Court concludes that, should the trier of fact find that Prince
was a de facto officer of Integral, there is a genuine dispute of
material fact over whether Prince knowingly concealed that status
from the public. Therefore Prince’s Motion for Summary Judgment on
the SEC’s claim against him for violations of Rule 10b-5(a) and (c)
is denied.
2. Prince’s Liability for Violations of the SEC’s 1997
Rule 102(e) Bar Order
The 1997 Administrative Order against Prince was issued by the
SEC pursuant to Sections 102(e) and (f) of the Commission’s Rules
of Practice. See 17 C.F.R. §§ 201.102(e), (f). The Rule 102(e) bar
order entered against Prince by the SEC on June 24, 1997 provides
that: “Prince is permanently denied the privilege of appearing or
practicing before the Commission as an accountant.” In re Gary A.
Prince, Release No. 38,765, 64 S.E.C. Docket 2074, 1997 WL 343054(June 24, 1997). The SEC contends that Mr. Prince violated the bar
order during the period from December 30, 1998 until August 2,
2006. As a result, the SEC is asking the Court to issue a permanent
injunction commanding Prince to comply with the Commission’s 1997
Rule 102(e) bar order.
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a. The 1997 Order Is Valid
Prince argues, as a threshold matter, that there is virtually
“no guidance from the SEC or precedent” that articulates a clear
standard as to when a Rule 102(e) proceeding is triggered and that,
therefore, “it is not surprising that academic commentators have
observed that Rules 102(e) and (f) ‘suffer[] from a fatal lack of
clarity.’”6 Prince’s Mot. for Partial Summ. J. at 20. The SEC
disputes this contention, arguing that any deficiency with the Rule
102(e) standard “was resolved long ago.” SEC’s Opp’n to Prince’s
Mot. for Partial Summ. J. at 19.
Prince’s assertion that Rule 102(e) is deficient runs contrary
to this Circuit’s position that the Rule “clearly sets out the
standard for when an accountant is deemed to have engaged in
‘improper professional conduct.’” Marrie v. S.E.C., 374 F.3d 1196,
1203 (D.C. Cir. 2004) (providing an extensive background on the
dialogue between the D.C. Circuit and the SEC that led to the 1998
amendment of Rule 102(e)).7 Therefore, the question is not whether
6
Rule 102(e) provides the SEC may “deny, temporarily or
permanently, the privilege of appearing or practicing before [the
Commission] in any way to any person who is found by the Commission
... to have engaged in unethical or improper professional conduct.”
17 C.F.R. § 201.102(e). Rule 102(f) provides that “practicing
before the Commission includes but shall not be limited to . . .
[t]he preparation of any statement, opinion, or other paper by any
attorney, accountant, engineer, or other professional or expert”
that is filed with the Commission with the consent of the person
who prepared it. 17 C.F.R. § 201.102(f).
7
Tellingly, Prince relies exclusively on law review articles,
(continued...)
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the 1997 Order pursuant to Rule 102(e) is valid, but rather,
whether Prince violated that Order by practicing before the
Commission as an accountant at Integral.
b. The SEC’s Interpretation of Its 1997 Order
Pursuant to Rules 102(e) and (f) Is Entitled
to Deference
The parties dispute the meaning of “practicing before the
Commission as an accountant” used in the 1997 Order pursuant to
Rules 102(e) and (f). Prince argues that, even if the 1997 Order is
deemed valid, an “analysis of the limited guidance on the issue -
including the very same authority relied upon by the SEC and its
expert - makes plain that the functions performed by Mr. Prince at
ISI did not constitute practicing before the Commission as an
accountant within the meaning of Rules 102(e) and (f).” Prince’s
Mot. for Partial Summ. J. at 20-21. Prince contends that the
decision principally relied upon by the SEC and its experts to
conclude that Prince violated the 1997 Order, namely In re Robert
W. Armstrong III, Release No. 34-51920, 85 S.E.C. Docket 2321, 2005
WL 1498425 (June 24, 2005), rests on facts that are distinguishable
from this case and ultimately support a finding that he did not
practice before the Commission.
More specifically, Prince contends that, unlike here,
Armstrong involves an individual who “computed the figures and
7
(...continued)
published between 1984 and 1999, to support his argument.
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provided the data” for public filings containing false, inaccurate,
or misleading statements or financial information. Id. at 21-22.
Prince argues, based on disputed facts, that the instant case is
distinguishable because he did not compute figures or provide data
for public filings while at Integral, and because the SEC has not
alleged that any of Integral’s public filings contained any false,
inaccurate or misleading information. Prince asserts that, “[w]hile
it is true that [he] reviewed ISI’s public filings and sometimes
provided comments on the filings, Commission precedent (and common
sense) require that individuals play a much more direct and
expansive role in preparing public filings in order to find that
such involvement constitutes practicing before the Commission.” Id.
at 23.
In response, the SEC argues that it is clear that Prince
violated the 1997 Order because “Rule 102(f) encompasses all those
who ‘participate in the preparation of’ a document filed with the
Commission, even if the individual did not sign the document, is
not identified in the document, and did not have final
responsibility for the document.” SEC’s Opp’n to Prince’s Mot. for
Partial Summ. J. at 20. The SEC relies on Armstrong to support its
position that individuals are “practicing before the commission” if
they create, compile, or edit information or data included in
filings with the Commission; and that Rule 102(e) is not limited to
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instances where conduct is fraudulent or unlawful. Id. at 20-22,
24-25.
In Armstrong, the SEC reversed an Administrative Law Judge’s
decision which held that Robert Armstrong8 engaged in securities
fraud, but that he was not subject to discipline under Rule 102(e)
because he was not ‘practicing before the Commission’ within the
meaning of Rule 102(f). The Commission ruled that Armstrong had in
fact practiced accounting before the Commission.
In analyzing Rule 102(f), the Commission in Armstrong stated
that “[t]he text of the Rule does not specify that a person must
sign a document filed with the Commission. Moreover, the term
‘preparation’ of a document is, we believe, sufficiently broad to
encompass the preparation of data to be included in a document
filed with the Commission, at least where, as here, the data was
prepared for the express purpose of being included in such a
document.” Armstrong, 2005 WL 1498425 at *11. Relying on this broad
reading of Rule 102(f), the Commission reasoned that:
The law judge's holding would allow
accountants to escape discipline under Rule
102(e) simply by instructing someone else to
draft, sign, and file fraudulent documents.
The Rule, however, recognizes that financial
statements often incorporate information
created, compiled, or edited by accountants
who are not responsible for signing or filing
the financial statements. Thus, practicing
8
Armstrong was the vice president and controller of a subsidiary
of a public company whose financial results were reported with
those of its parent company. Armstrong, 2005 WL 1498425 at *2-3.
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before the Commission includes computing the
figures and supplying the data incorporated
into Commission filings and consenting to
their incorporation.
Armstrong, 2005 WL 1498425 at *11 (emphasis added). The Commission
concluded that “[t]he reliability of the disclosure process” would
be impaired if incompetent or unethical accountants were permitted
“to participate in the preparation of financial statements
certified and filed with the Commission.” Id.Thus, while Prince is correct that the Commission found that
Armstrong practiced before it because he “computed the figures and
provided the data,” and consented to their inclusion in filings
with the Commission, the SEC is also correct that Armstrong clearly
established that an individual may also be found to have
“practic[ed] before the Commission” if he or she “participate[d] in
the preparation of” financial statements filed with the Commission
by, for example, “creat[ing],” “compil[ing]” or “edit[ing]”
information or data incorporated into those documents and
consenting to their incorporation. See Id.Prince’s argument that the 1997 Order prohibits only
fraudulent or inaccurate accounting finds no support in the
language of the 1997 Order, the underlying Rule, or in Armstrong.
The Order issued against Prince unambiguously “denied [him] the
privilege of appearing or practicing before the Commission as an
accountant.” Nothing in the Order or the Rule suggests that he
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could continue to practice before the SEC so long as he did not
engage in fraud.
The Commission’s interpretation in Armstrong of “practicing
before the Commission” is consistent with the language of Rule
102(f). Prince points to no past practices or pronouncements that
are inconsistent with this interpretation. Consequently, it is
reasonable, especially in view of the purpose of Rule 102(e),9 to
accord deference to the Commission’s interpretation of it.10 See
Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945)
(holding that an agency’s interpretation of one of its own
regulations “becomes of controlling weight unless it is plainly
erroneous or inconsistent with the regulation.”); see also Drake v.
FAA, 291 F.3d 59, 67 (D.C. Cir. 2002) (“Recent decisions of this
court make it clear that we owe deference to an agency’s
interpretation advanced during litigation regarding the meaning of
an ambiguous regulation, if the position is not inconsistent with
9
Rule 102(e) “is directed at protecting the integrity of the
Commission’s own processes, as well as the confidence of the
investing public in the integrity of the financial reporting
process.” Marrie v. S.E.C., 374 F.3d 1196, 1200 (D.C. Cir. 2004).
10
The SEC also argues that “practicing before the Commission” as
an accountant encompasses those who merely “review” a financial
statement or related disclosure filed with the SEC. SEC’s Opp’n to
Prince’s Mot. for Partial Summ. J. at 23. The Court need not
address the merits of this position because as discussed, infra,
the record is replete with genuine issues of material fact under
Armstrong as to whether Prince practiced before the Commission as
an accountant.
-35-
the agency’s prior statements and actions regarding the disputed
regulation.”).
c. There Are Genuine Disputes of Material Fact as
to Whether Prince Practiced Accounting Before
the Commission.
Prince admits that he reviewed and “sometimes provided
comments” on Intergral’s financial filings, but denies that his
comments were anything more than “limited, prose-style drafting.”
Prince’s Mot. for Partial Summ. J. at 22-23. Prince states that he
“never provided any of the numbers or financial figures for
inclusion in the filings; never made any substantive accounting
judgments in connection with preparation of the filings; and never
played any role in determining the appropriateness or accuracy of
ISI’s financial records set forth in the filings.” Id. at 23.
Relying on the expert testimony submitted by Professor Jonathan
Macey, Prince further contends that, to the extent that he dealt
with Integral’s financial statements and related disclosures, he
did so as a corporate manager, not as an accountant.11
11
Prince also argues that there is no evidentiary basis to support
the SEC’s charge that Prince knowingly failed to comply with the
1997 Order because “at every turn Mr. Prince, Mr. Chamberlain and
the ISI Board of Directors consulted with Venable and took steps to
ensure that Mr. Prince’s job function complied with both the letter
and the spirit of the 1997 Rule 102(e) bar order.” Id. at 27.
However, as discussed supra at Part III.B.1.b, there are genuine
issues of material fact regarding, for example, what information
was disclosed to Venable, when that information was disclosed to
Venable, the extent and nature of the advice given by Venable, and
whether Prince relied on that advice in good faith.
-36-
The SEC responds that “Prince was undoubtedly the dominant
figure at ISI with respect to the company’s financial statements
and disclosures” and that he “generat[ed] figures and data that
became part of ISI’s financial filings and also [made] accounting
judgments that affected the accuracy and completeness of those
filings.” SEC’s Opp’n to Prince’s Mot. for Partial Summ. J. at 28-
29. The SEC then points to evidence that it contends establishes
that Prince participated directly and substantively in the
preparation of Integrated’s filings, including numerous 10Q’s and
10-K’s. Id. at 29-33.
With respect to Prince’s contention that he acted as a
corporate manager and not as an accountant, the SEC relies on the
conclusions of its own expert, Mr. Lynn Turner, who submitted a
detailed report rebutting Professor Macey’s testimony. Id. at 25-
28.
Thus, it is clear that the SEC has raised genuine issues of
material fact as to whether Prince’s participation in the
preparation of SEC filings while at Integral constitutes
“practicing before the Commission” as defined in Armstrong. The
SEC, for example, points to evidence suggesting that Prince
calculated figures incorporated into the 10-K for FY 2001, made
numerous edits and recommendations to the 10-K for FY 2002, and
took the lead in preparing the 10-K for FY 2004 and the 10-Q for
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the quarter ending December 31, 2004. See SEC’s Opp’n to Prince’s
Mot. for Partial Summ. J. at 5-13, 28-33.
While it may be true, as Prince contends and purports to
establish through the testimony of his fact witnesses and experts,
that the SEC is mischaracterizing and taking out of context
evidence in the record, such a weighing of the evidence is not
appropriate at this stage and must be left for the trier of fact.
Whether Prince’s role at Integral was more akin to a corporate
manager than an accountant requires a fact-specific inquiry and
expert credibility determinations that are inappropriate for
summary judgment. Therefore, Prince’s Motion for Summary Judgment
on the SEC’s claim against him for violations of the 1997 Rule
102(e) bar order is denied.
3. The SEC’s Claim for Injunctive Relief Against
Prince
Prince contends that there is no evidence to support the
notion that there is a reasonable likelihood that he will violate
the 1997 Order in the future, and that therefore, the permanent
injunction the SEC seeks must be rejected. However, that assessment
necessarily requires an evaluation of material factual issues that
are in dispute. For example, the SEC points to evidence suggesting
that Prince is currently “solicit[ing] business by claiming to have
been involved in the preparation of financial statements for more
than 100 companies,” and claims that it will present evidence
showing that Prince is a recidivist who has engaged in several
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securities violations throughout his career. See SEC’s Opp’n to
Prince’s Mot. for Partial Summ. J. at 35-36. Prince disputes the
sufficiency of the SEC’s proffered evidence, arguing that
injunctive relief is “simply not justified as a matter of law.”
Prince’s Mot. for Partial Summ. J. at 38.
Whether or not the SEC’s evidence is sufficient to meet its
burden requires the Court to hear and weigh the evidence, which is
properly done at trial. Therefore, Prince’s Motion for Summary
Judgment on the injunctive relief sought by the SEC is denied.
IV. CONCLUSION
For the reasons set forth above, Brown’s Motion for Summary
Judgment is granted in part and denied in part and Defendant
Prince’s Motion for Partial Summary Judgment is granted in part and
denied in part. An Order will accompany this Memorandum Opinion.
/s/
July 19, 2012 Gladys Kessler
United States District Judge
Copies to: attorneys on record via ECF
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