SEC v. Jensen, No. 14-55221 (9th Cir. 2016)
Annotate this CaseThe SEC filed suit against Peter Jensen and Thomas Tekulve, the former Chief Executive Officer and Chief Financial Officer of the now-defunct Basin Water, Inc., alleging that they had participated in a scheme to defraud Basin investors by reporting millions of dollars in revenue that were never realized. On appeal, the SEC challenged the district court's judgment in favor of defendants. The court reversed the district court’s rulings interpreting Rule 13a–14 of the Securities Exchange Act (Exchange Act), 17 C.F.R. 240.13a-14, and Section 304 of the Sarbanes-Oxley Act (SOX 304),15 U.S.C. 7201 et seq. The court concluded that 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. The court also concluded that 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. The court reversed the district court’s bench trial order, vacated the judgment, and remanded for a jury trial, concluding that the SEC was entitled to a jury trial and did not consent to Jensen and Tekulve’s withdrawal of their jury demand. Nor did the SEC waive its right to a jury trial when it objected consistently and repeatedly before trial to the district court’s decision to hold a bench trial. The court approved the district court’s grant of defendants’ motion in limine to exclude evidence about the injunction against Basin’s Director of Finance. Accordingly, the court vacated and remanded.
Court Description: Securities and Exchange Commission. The panel vacated the district court’s judgment in favor of defendant-corporate officers of the now-defunct Basin Water, Inc., in an enforcement action filed by the Securities and Exchange Commission (“SEC”) alleging that the defendants participated in a scheme to defraud Basin investors by reporting millions of dollars in revenue that were never realized; and remanded for further proceedings. The panel reversed the district court’s rulings interpreting Rule 13a-14 of the Securities Exchange Act and Section 304 of the Sarbanes-Oxley Act. The panel held that Rule 13a-14 provided the SEC with a cause of action not only against Chief Executive Officers and Chief Financial Officers who did not file the required certifications, but also against CEOs and CFOs who certified false or misleading statements. The panel further held that the disgorgement remedy authorized under Section 304 of the Sarbanes-Oxley Act applied regardless of whether a restatement was caused by the personal misconduct of an issuer’s CEO and CFO or by other issuer misconduct. The panel reversed the district court’s bench trial order, vacated the judgment, and remanded for a jury trial. The panel held that the SEC was entitled to a jury trial and did not consent to defendant officers’ withdrawal of their jury demand. The panel also held that the SEC did not waive its U.S. SEC V. JENSEN 3 right to a jury trial when it objected consistently and repeatedly before trial to the district court’s decision to hold a bench trial. The panel approved the district court’s grant of defendants’ motion in limine to exclude evidence about the SEC injunction against Basin’s Director of Finance because the evidence was both unfairly prejudicial and not particularly probative. Judge Bea generally concurred in the panel’s analysis and disposition, but wrote separately to clarify the intended scope of the new legal rules announced in the panel’s opinion.
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