Securities Law Alert
In This Edition:• D.C. Circuit: Rejecting a Constitutional Challenge to the SEC’s In-House Courts, the D.C. Circuit
Holds SEC Administrative Law Judges Are Not “Officers of the United States” Subject to the
Appointments Clause• Third Circuit: Speaker’s State of Mind Is Irrelevant for Purposes of the PSLRA’s Safe Harbor Provided the
Forward-Looking Statement Is Accompanied by Meaningful Cautionary Statements• Seventh Circuit: Court Applies the Delaware Chancery Court’s Trulia Decision and Rejects a DisclosureOnly Settlement• Ninth Circuit: (1) Rule 13a-14 Provides the SEC with a Cause of Action Against Executives Who Certify
False or Misleading Statements, and (2) SOX 304’s Disgorgement Provisions Require Only Issuer
Misconduct, Not Personal Misconduct by the CEO or CFO• Tenth Circuit: SEC Claims for Disgorgement and Injunctive Relief Are Not Subject to Section 2462’s
Five-Year Limitations Period
September 2016

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D.C. Circuit: Rejecting aConstitutional Challenge to
the SEC’s In-House Courts,
the D.C. Circuit Holds SEC
Administrative Law Judges
Are Not “Officers of theUnited States” Subject to the
Appointments Clause
On August 9, 2016, in the first circuit court
opinion to consider a constitutional challenge
to the SEC’s in-house administrative
enforcement tribunals, the D.C. Circuit
affirmed the constitutionality of the SEC’s
appointment of administrative law judges(“ALJs”). Raymond J. Lucia Cos. v. SEC,
2016 WL 4191191 (D.C. Cir. 2016) (Rogers,
J.) (Raymond Lucia). The D.C. Circuit
held the SEC’s ALJs are not “Officers of theUnited States” subject to the Appointments
Clause of the United States Constitution

because “no initial decision of [the SEC’s]
ALJs is independently final” under the SEC’s
regulatory framework.

SEC ALJs Are Not “Officers of theUnited States” for Purposes of the
Appointments Clause Because They
Lack the Authority to Issue Final
SEC Decisions
The Appointments Clause states that the
President “shall nominate, and by and with
the Advice and Consent of the Senate, shallappoint . . . Officers of the United States.”
U.S. Const. art. II, § 2, cl. 2.1 The D.C. Circuit
explained that “[o]nly those deemed to be
employees or other ‘lesser functionaries’ neednot be selected in compliance with the strict
requirements of Article II.” Raymond Lucia,
2016 WL 4191191.
1. The Appointments Clause further states that “Congress may by
Law vest the Appointment of such inferior Officers, as they thinkproper, in the President alone, in the Courts of Law, or in the
Heads of Departments.” U.S. Const. art. II, § 2, cl. 2.
1

As a general rule, “an appointee is an Officer,
and not an employee who falls beyond thereach of the [Appointments] Clause, if theappointee exercises ‘significant authority
pursuant to the laws of the United States.’”Id. (quoting Buckley v. Valeo, 424 U.S. 1(1976)). The D.C. Circuit stated that under its
precedent, “the main criteria for drawing theline between inferior Officers and employees
not covered by the [Appointments] Clause are(1) the significance of the matters resolved by
the officials, (2) the discretion they exercise inreaching their decisions, and (3) the finalityof those decisions.” Id. (quoting Tucker v.
Comm’r of Internal Revenue, 676 F.3d 1129
(D.C. Cir. 2012)).

will issue an order stating that it has declined
review and specifying the date that the ALJ’s
sanctions, if any, will take effect. The ALJ’s
initial decision becomes final only upon
issuance of the SEC’s order.
The D.C. Circuit deemed it significant that the
SEC “must affirmatively act—by issuing theorder—in every case.” The court explainedthat the SEC’s “final action is either in theform of a new decision after de novo review
or, by declining to grant or order review, its
embrace of the ALJ’s initial decision as itsown.” The court emphasized that the SEC“retain[s] full decision-making powers” overcases heard by the ALJs. The D.C. Circuit
determined that the SEC’s ALJs “neither
have been delegated sovereign authority to
act independently of the [SEC] nor, by othermeans established by Congress, do they
have the power to bind third parties, or thegovernment itself, for the public benefit.”
Finding the SEC ALJ’s decisions to be “nomore final than the recommended decisions
issued by the FDIC ALJs” in Landry, theD.C. Circuit concluded that SEC ALJs are not“Officers of the United States” subject to the
Appointments Clause.

The D.C. Circuit noted that in Landry v.
FDIC, 204 F.3d 1125 (D.C. Cir. 2000), it heldthat ALJs of the Federal Deposit Insurance
Corporation (“FDIC”) were not Officers
for purposes of the Appointments Clause“because their authority was limited by FDIC
regulations to recommending decisions that
the FDIC Board of Directors might issue.”
Raymond Lucia, 2016 WL 4191191. Applying
Landry, the D.C. Circuit determined the key
question was whether SEC ALJs “issue final
decisions” of the SEC. Id.
The D.C. Circuit found that pursuant to thegoverning statutory scheme, the SEC has adiscretionary right to review the action of any
ALJ as it sees fit, either on its own initiative
or upon a petition for review filed by a party
or aggrieved person. Id. (citing 15 U.S.C.
§ 78d-1(a)-(b)). The SEC has the authority
to “review[ ] an ALJ’s decision de novo” and“may make any findings or conclusions thatin its judgment are proper and on the basis of
the record.” Id. (citing 17 C.F.R. § 201.411(a)).
In the event that “no review of the initialdecision is sought or ordered,” then the SEC

Third Circuit: Speaker’s
State of Mind Is Irrelevant
for Purposes of the PSLRA’s
Safe Harbor Provided the
Forward-Looking Statement Is
Accompanied by Meaningful
Cautionary Statements
On August 22, 2016, the Third Circuit
held that if a forward-looking statement
is accompanied by meaningful cautionary
statements, then “the state of mind of theindividual making the statement is irrelevant”
for purposes of the safe-harbor provisions of
the Private Securities Litigation Reform Act(“PSLRA”). OFI Asset Mgmt. v. Cooper Tire
& Rubber, 2016 WL 4434404 (3d Cir. 2016)(Jordan, J.).
The Third Circuit explained that the
PSLRA’s “safe harbor” provisions establish
a “disjunctive statutory test” for immunizing
certain forward-looking statements from
Section 10(b) liability. Under the first prongof the test, the safe harbor applies if the2

“forward-looking statement is identified assuch, and is accompanied by meaningful
cautionary statements identifying importantfactors that could cause actual results todiffer materially from those in the forwardlooking statement.” Id. (quoting 15 U.S.C.
§ 78u-5(c)(1)). Under the second prong of thetest, the PSLRA’s safe harbor applies if “theplaintiff fails to prove the forward-looking
statement was made with actual knowledge
by the speaker that the statement wasfalse or misleading.” Id. (quoting 15 U.S.C.
§ 78u-5(c)(1)). The Third Circuit found the
PSLRA “provides two distinct entrances to thesafe harbor” pursuant to which “any forwardlooking statement is protected if it is either
accompanied by substantive and tailoredcautionary statements or if the plaintiff fails
to show actual knowledge of falsehood.”
In the case before the court, plaintiff
contended that a forward-looking statement
concerning the effect of a strike on aplanned merger was not protected under the
PSLRA’s safe harbor despite the presenceof meaningful cautionary statements.
Plaintiff argued the safe harbor did not apply
because the speakers “could not . . . havebelieved” their stated expectation “that the
strike would not impede the closing of themerger.” The Third Circuit found plaintiff’s
argument rested on a “misread[ing of] thelaw.” The court determined that in light of the“disjunctive” nature of the safe harbor test,
the question of whether the speakers actually
believed the forward-looking statement at thetime it was made was “irrelevant” because“there was sufficient meaningful cautionary
language.” The Third Circuit held that “wherea future-looking statement is accompanied
by sufficient cautions, then . . . the statement
is not actionable regardless of the plaintiff’s
showing of scienter.”Seventh Circuit: Court Applies
the Delaware Chancery Court’s
Trulia Decision and Rejects a
Disclosure-Only Settlement
Earlier this year, the Delaware Chancery
Court indicated that disclosure-only
settlements would likely be met with
continued disfavor “unless the supplemental
disclosures address a plainly material
misrepresentation or omission.” In re Trulia,
Inc. Stockholder Litig., 129 A.3d 884 (Del.
Ch. 2016).2
On August 10, 2016, the Seventh Circuit
explicitly “endorse[d], and appl[ied]” theDelaware Chancery Court’s decision in
Trulia to reverse district court approvalof a disclosure-only settlement where
the supplemental disclosures provided“nonexistent” benefits to the class, in theSeventh Circuit’s view. In re Walgreen Co.
Stockholder Litig., 2016 WL 4207962 (7thCir. 2016) (Posner, J.). The Seventh Circuit
stated that supplemental disclosures must
not only “address the misrepresentation oromissions” but also “must correct them”
for a disclosure-only settlement to merit
court approval.
In the case before the Seventh Circuit,the district court approved a disclosureonly settlement of shareholder litigation
arising out of Walgreen Co.’s agreement toacquire the outstanding stock of Alliance
Boots and create the Walgreens Boots
Alliance. Defendants agreed to six additional
disclosures, amounting to a total of “fewer
than 800 new words,” as well as thepayment of $370,000 in attorneys’ fees to
2. Please click here to read our prior discussion of the Trulia
decision.

3

class counsel. The district court expressed
doubt concerning the added value of these
disclosures, but ultimately concluded that atleast certain of the supplemental disclosures“may have mattered to a reasonable
investor.” Id. (emphasis added by the Seventh
Circuit). A Walgreens shareholder objectedto the settlement and appealed the district
court’s decision.
On appeal, the Seventh Circuit held the
district court had erred in considering
whether the supplemental disclosures “mayhave mattered to a reasonable investor,”finding this standard “not good enough.”
The Seventh Circuit determined the proper
standard is whether the supplemental
disclosures “would be likely to matter to areasonable investor.” The court reasoned that“[d]isclosures are meaningful only if they canbe expected to affect the votes of a nontrivial
fraction of the shareholders.”
The Seventh Circuit emphasized that“[n]o class action settlement that yields zero
benefits for the class should be approved,
and a class action that seeks only worthless
benefits for the class should be dismissed outof hand.” Here, the Seventh Circuit foundthe disclosure-only settlement did not merit
court approval because the supplemental
disclosures “contained no new informationthat a reasonable investor would have foundsignificant.”
In so holding, the Seventh Circuit adopted
the standard for reviewing disclosureonly settlements set forth by the Delaware
Chancery Court in Trulia. The Trulia court
stated that such settlements “are likely
to be met with . . . disfavor . . . unless the
supplemental disclosures address a plainlymaterial misrepresentation or omission.”
Trulia, 129 A.3d 884. The Trulia court
explained that the term “plainly material”
means that “it should not be a close call thatthe supplemental information is material asthat term is defined under Delaware law.” In
endorsing the Trulia decision, the Seventh
Circuit “add[ed] that it’s not enough that thedisclosures address the misrepresentation oromissions: they must [also] correct them.”
Walgreen, 2016 WL 4207962.

Ninth Circuit: (1) Rule 13a14 Provides the SEC witha Cause of Action Against
Executives Who Certify False
or Misleading Statements, and(2) SOX 304’s Disgorgement
Provisions Require Only
Issuer Misconduct, Not
Personal Misconduct by the
CEO or CFO
Pursuant to Rule 13a-14 of the Securities
Exchange Act,3 an issuer’s CEO and CFO mustcertify the accuracy of the issuer’s financial
reports filed with the SEC. On August 31,
2016, the Ninth Circuit 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.” SEC v. Jensen, 2016
WL 4537377 (9th Cir. 2016) (Clifton, J.).
The Ninth Circuit also considered the reachof Section 304 of the Sarbanes-Oxley Act(“SOX 304”),4 which permits the SEC toseek disgorgement of certain CEO and CFO
compensation and stock sale profits when theissuer is required to prepare an accounting
restatement “as a result of misconduct.” The
Ninth Circuit held SOX 304’s disgorgement
remedy “applies regardless of whether arestatement was caused by the personal
misconduct of an issuer’s CEO and CFO or
by other issuer misconduct.” Jensen, 2016
WL 4537377.

3. 17 C.F.R. § 240.13a-14. Under Rule 13a-14 and related
provisions, an issuer’s CEO and CFO must certify that they
have established and maintained internal controls pursuant towhich they are made aware of material information concerning
the company. The executives must also certify that based on
their knowledge, the company’s SEC filings do “not contain any
untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made, in light ofthe circumstances under which such statements were made, notmisleading.” Jensen, 2016 WL 4537377 (quoting Section 302 of
the Sarbanes-Oxley Act).
4. 15 U.S.C. § 7243. SOX 304 provides in relevant part that “[i]f an
issuer is required to prepare an accounting restatement due to thematerial noncompliance of the issuer, as a result of misconduct,with any financial reporting requirement under the securities
laws,” the CEO and CFO “shall reimburse the issuer” for certain
compensation and profits from the sale of issuer stock during thepreceding twelve month period.
4

Rule 13a-14 Includes an Implicit
Truthfulness Requirement for CEO
and CFO Certifications of Issuer
Financial Statements
The Ninth Circuit held that “Rule 13a-14,
like other rules promulgated under Section
13 of the Exchange Act, includes an implicit
truthfulness requirement.” Relying on the
dictionary definition of the word “certify,”
the court determined “one cannot certify afact about which one is ignorant or which
one knows is false.” The court also reasoned
that “[s]igners of documents should beheld responsible for the statements in the
document.”
The Ninth Circuit found “a mere signature is
not enough for compliance” with Rule 13a-14.
The court stated that CEOs and CFOs cannot
simply “sign their names to a document
certifying that SEC filings include no material
misstatements or omissions without asufficient basis to believe that the certificationis accurate.”
The Ninth Circuit concluded Rule 13a14 creates a cause of action against CEOs
and CFOs who certify false or misleadingstatements, as well as a claim against CEOs
and CFOs who do not sign or file the required
certifications.

SOX 304’s Disgorgement Remedy
Applies Whenever the Issuer’s
Misconduct Triggers a Restatement
The Ninth Circuit then considered the reachof SOX 304, which permits the SEC to seek
disgorgement of certain CEO and CFO
compensation and profits from the sale ofissuer stock if a restatement is required “asa result of misconduct, with any financial
reporting requirement under the securities
laws.” The court held “SOX 304 allows the
SEC to seek disgorgement from CEOs and
CFOs even if the triggering restatement did
not result from misconduct on the part ofthose officers.”
The Ninth Circuit determined that “theplain language of the statute” supported its
interpretation. The court explained that “[t]heclause ‘as a result of misconduct’ modifies
the phrase ‘the material noncompliance of
the issuer,’ suggesting that it is the issuer’s
misconduct that matters, and not the personal
misconduct of the CEO or CFO.”

The Ninth Circuit found its interpretation“bolstered by the history of the statute,” which
was designed “to craft a broad remedy that
focused on disgorging unearned profits rather
than punishing individual wrongdoing.”
Finally, the Ninth Circuit observed that most
district courts to consider the issue have
similarly concluded that SOX 304 “does not
require CEOs or CFOs to have personallyengaged in misconduct before they are
required to disgorge profits.”

Tenth Circuit: SEC Claims for
Disgorgement and Injunctive
Relief Are Not Subject toSection 2462’s Five-Year
Limitations Period
Pursuant to 28 U.S.C. § 2462, the SEC andother federal government entities may notbring any “action, suit, or proceeding forthe enforcement of any civil fine, penalty, or
forfeiture” more than five years after the claim
first accrued.
On August 23, 2016, the Tenth Circuit held
Section 2462’s limitations period does not
apply to SEC claims for disgorgement or
injunctive relief. SEC v. Kokesh, 2016 WL
4437585 (10th Cir. 2016) (Hartz, J.). The
Tenth Circuit’s decision deepened a circuit
split on the question of whether disgorgement
is a type of “forfeiture” within the meaning ofSection 2462.

Tenth Circuit Holds Disgorgement
Is Not a “Forfeiture” for Section
2462 Purposes
The Tenth Circuit stated that “[d]isgorgement
consists of factfinding by a district court todetermine the amount of money acquired
through wrongdoing . . . and an ordercompelling the wrongdoer to pay that amountplus interest to the court.” Kokesh, 2016
WL 4437585. The Tenth Circuit noted thatit has previously held that “disgorgement
is not a penalty under § 2462 because it isremedial” in nature. The court observed thatwhen “[p]roperly applied, the disgorgement
remedy does not inflict punishment” butinstead “leaves the wrongdoer in the position
he would have occupied had there beenno misconduct.”5

The Tenth Circuit determined thatdisgorgement is also not a “forfeiture” within
the meaning of Section 2462. The court
acknowledged that “in common English thewords forfeit and disgorge . . . capture similar
concepts.” However, the Tenth Circuit found“[t]he word forfeiture in § 2462 must beread in the context of government causes ofaction.” The court explained that historically,“[f]orfeiture was an in rem procedure to taketangible property used in criminal activity.”
The Tenth Circuit found that “[w]hen theterm forfeiture is linked in § 2462 to theundoubtedly punitive actions for a civil fine or
penalty, it seems apparent that Congress wascontemplating the meaning of forfeiture inthis historical sense.” The court reasoned that“[t]he nonpunitive remedy of disgorgement
does not fit in that company.”
The Tenth Circuit “recognize[d] that in recent
years some federal forfeiture statutes havebeen expanded to include disgorgementtype remedies.” However, the court foundthat “this expansion should not expand themeaning of the word forfeiture in § 2462
to encompass traditional disgorgement
remedies outside those forfeiture statutes.”
The Tenth Circuit explained that words instatutes must “be interpreted as taking theirordinary, contemporary, common meaningat the time Congress enacted the statute.”
Moreover, the court emphasized that statutesof limitation must be “interpreted narrowly in

the government’s favor.” The court reasoned
that it “should not strain to expand themeaning of [§ 2462’s] language to restrict the
government” from bringing suit.
Notably, the Tenth Circuit expressly disagreed
with the Eleventh Circuit’s decision in SEC
v. Graham, 823 F.3d 1357 (11th Cir. 2016).5
The Graham court found “no meaningful
difference in the definitions of disgorgement
and forfeiture,” and concluded thatdisgorgement is a type of “forfeiture” subject
to Section 2462’s limitations period.

Tenth Circuit Finds Injunctive
Relief Is Not a “Penalty” Subject toSection 2462’s Limitations Period
The Tenth Circuit further held that an SEC
order permanently enjoining a defendantfrom violating certain provisions of the
securities laws is not a “penalty” for purposesof Section 2462’s limitations period. The
court reasoned that “an order to obey the law”
is not designed to “penalize [a d]efendant”
but rather, “to protect the public by giving[the d]efendant an added incentive to conduct
himself in accordance with the securities
laws.” The Tenth Circuit stated that courts
have long recognized that an order to obey thelaw “is purely remedial and preventative” andnot punitive in nature.
5. Please click here to read our prior discussion of the Eleventh
Circuit’s decision in Graham.

The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

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