Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-55221/USCOURTS-ca9-14-55221-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

U.S. SECURITIES &

EXCHANGE COMMISSION,

Plaintiff-Appellant,

v.

PETER L. JENSEN;

THOMAS C. TEKULVE, JR.,

Defendants-Appellees.

No. 14-55221

D.C. No.

2:11-cv-05316-R-AGR

OPINION

Appeal from the United States District Court

for the Central District of California

Manuel L. Real, District Judge, Presiding

Argued and Submitted February 10, 2016

Pasadena, California

Filed August 31, 2016

Before: Jerome Farris, Richard R. Clifton,

and Carlos T. Bea, Circuit Judges.

Opinion by Judge Clifton;

Concurrence by Judge Bea

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2 U.S. SEC V. JENSEN

SUMMARY*

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

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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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 unfairlyprejudicial 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.

COUNSEL

Paul G. Alvarez (argued), Senior Counsel; Benjamin L.

Schiffrin, Senior Litigation Counsel; Jacob H. Stillman,

Solicitor; Michael A. Conley, Deputy General Counsel; U.S.

Securities & Exchange Commission, Washington, D.C.; for

Plaintiff-Appellant.

David C. Scheper (argued), William H. Forman, and Annah

S. Kim, Scheper Kim & Harris, Los Angeles, California, for

Defendant-Appellee Peter L. Jensen.

Seth Aronson (argued), Carolyn Kubota, and Alec Johnson,

O’Melveny & Myers, Los Angeles, California, for

Defendant-Appellee Thomas C. Tekulve, Jr.

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OPINION

CLIFTON, Circuit Judge:

The Securities and Exchange Commission appeals from

a district court judgment in favor of Peter Jensen and Thomas

Tekulve, the former Chief Executive Officer and Chief

Financial Officer of the now-defunct Basin Water, Inc. The

SEC filed suit against Defendants in 2011 alleging that they

had participated in a scheme to defraud Basin investors by

reporting millions of dollars in revenue that were never

realized. The district court granted partial summary judgment

to Defendants on the SEC’s claim under Rule 13a–14 of the

Securities Exchange Act (Exchange Act), which requires that

an issuer’s CEO and CFO certify the accuracy of the issuer’s

financial reports. 17 C.F.R. § 240.13a–14. The court held

that the rule requires CEOs and CFOs to certify certain

financial statements but does not provide a cause of action

against officers who certified false statements. The court

held a bench trial on the SEC’s remaining claims and found

for Defendants on all counts.

On appeal, the SEC challenges the district court’s grant of

partial summary judgment, its grant of Defendants’ motion to

withdraw their demand for a jury trial, its decision to exclude

evidence at trial about a 1995 SEC injunction against Basin’s

Director of Finance, and the substance of several factual

findings and legal conclusions the court reached at trial. 

Among the legal conclusions challenged is the district court’s

interpretation of Section 304 of the Sarbanes-Oxley Act

(SOX 304). See 15 U.S.C. § 7201 et seq. The district court

held that SOX 304 requires CEOs and CFOs to disgorge

incentive- and equity-based compensation if their companies

issue an accounting restatement because of the officers’ own

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U.S. SEC V. JENSEN 5

misconduct, but not if the restatement was caused by issuer

misconduct in which the officers were not directly involved.

We reverse the district court’s rulings interpreting

Exchange Act Rule 13a–14 and SOX 304. 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 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.

We also reverse the district court’s bench trial order,

vacate the judgment, and remand for a jury trial. 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.

Anticipating that the issue may arise again on remand, we

approve the district court’s grant of Defendants’ motion in

limine to exclude evidence about the injunction against

Basin’s Director of Finance.

The judgment of the district court is vacated and the case

is remanded for further proceedings.

I. Background

Peter Jensen founded Basin Water in 1999 to manufacture

water treatment units that would provide municipalities with

clean drinking water. In 2004, Jensen hired Thomas Tekulve

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as CFO. Tekulve created a finance and accounting

department at Basin and put in place accounting procedures

and internal controls intended to position the company to go

public,1 which it did in May 2006.

The SEC alleges that, beginning in Basin’s first quarter as

a public company and ending with the end of the 2007 fiscal

year, Jensen and Tekulve engaged in a scheme to fraudulently

overstate the company’s financial results. The alleged

scheme involved what the SEC viewed as Basin’s failure to

comply with Generally Accepted Accounting Principles

1 Public reporting companies (with the exception of some foreign

issuers) are required to prepare their publicly filed financial statements in

accordance with Generally Accepted Accounting Principles (GAAP)

(though they may also prepare additional reports using non-GAAP

principles). See, e.g., 15 U.S.C. § 78m; 17 C.F.R. § 229.10 (providing

that, if a publicly registered company chooses to present non-GAAP

financial measures, it must include a “presentation, with equal or greater

prominence, . . . of the most directly comparable financial measure or

measures calculated and presented in accordance withGenerallyAccepted

Accounting Principles (GAAP) . . . .”); 17 C.F.R. § 229.601(b)(31)

(requiring CEOs and CFOs to certify, in accordance with Rule 13a–14,

“exactly” as follows: “The registrant’s other certifying officer(s) and I are

responsible for establishing and maintaining disclosure controls and

procedures . . . and internal control over financial reporting . . . and have

. . . [among other things] [d]esigned such internal control over financial

reporting . . . to provide reasonable assurance regarding the reliability of

financial reporting and the preparation of financial statements for external

purposes in accordance with generally accepted accounting principles

. . . .” (emphasis added)). Since 1973, the SEC has entrusted the

maintenance of GAAP to the Financial Accounting Standards Board,

which periodically updates or revises GAAP in light of new accounting

and legal developments. However, “GAAP is not the lucid or

encyclopedic set of pre-existing rules . . . . Far from a single-source

accounting rulebook, GAAP ‘encompasses the conventions, rules, and

procedures that define accepted accounting practice at a particular point

in time.’” Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 101 (1995).

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U.S. SEC V. JENSEN 7

(GAAP) in financial reports to the SEC. The agency pointed

to two general types of transactions that it viewed as violating

GAAP: (1) Basin recognized revenue from sales that were

contingent or had not yet been finalized, and (2) Basin

recognized sales revenue from loans made to Special Purpose

Entities (SPEs), which used that money to purchase water

treatment units from Basin with no reasonable expectation

that the SPEs would ever repay such loans. In its complaint,

the SEC also alleged that Jensen and Tekulve each received

several hundred thousand dollars of incentive-based

compensation, in the form of salary and bonuses, and equitybased compensation, in the form of shares of Basin stock,

during the period in which they were allegedly causing Basin

to inflate its revenues fraudulently. The complaint also

asserted that Jensen had sold his Basin stock based on

material nonpublic information, realizing some $9,000,000 in

profit.

After Jensen and Tekulve left the company in 2008, Basin

restated its financial statements for 2006 and 2007. Basin’s

stock price fell substantially after the company’s

announcement that restatement might be necessary.

Thereafter, the SEC brought this enforcement action

against Jensen and Tekulve. In November 2012, the district

court granted partial summary judgment for Defendants on

the SEC’s claims under Exchange Act Rule 13a–14 and

denied all other motions and cross-motions for summary

judgment. After a bench trial beginning on October 15, 2013,

the district court found in favor of the defendants on all

remaining counts, concluding that “revenue was properly

recognized” on all the transactions at issue, and that they “had

economic substance.” The court also found that the SEC had

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failed to show that Jensen had sold any of his Basin shares in

reliance on insider information. This appeal followed.

II. The SEC’s entitlement to a jury trial

Because it affects the largest number of issues, we start by

taking up the question of whether the SEC was improperly

denied a jury trial. We review entitlement to a jury trial de

novo. Palmer v. Valdez, 560 F.3d 965, 968 (9th Cir. 2009). 

We conclude that the issues should have been tried to a jury,

that the district court erred in proceeding with a bench trial,

and that the results of that bench trial must be vacated.

A. The right to a jury trial

As a preliminary issue, we note that the SEC had a right

to a jury trial on most of its claims against Defendants. 

Parties have a right to a jury trial in lawsuits seeking legal

remedies. Legal remedies are distinct from equitable

remedies in that they are “intended to punish culpable

individuals, as opposed to those intended simply to extract

compensation or restore the status quo.” Tull v. United

States, 481 U.S. 412, 422 (1987).

Although much of the relief sought by the SEC was

equitable, for which there is not a right to a jury, the SEC

requested legal relief in the form of civil penalties for six of

the seven claims asserted in its complaint.2See 15 U.S.C.

2 The claimed violations arose under the following provisions of the

Securities and Exchange Acts: (1) Section 17(a) of the Securities Act

(fraud); (2) Section 10(b) of the Exchange Act and Exchange Act Rule

10b–5 (fraud); (3) Section 13(a) of the Exchange Act and Exchange Act

Rules 12b–20, 13a–1 and 13a–13 (failure to include material information

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U.S. SEC V. JENSEN 9

§ 77t(d) (granting the SEC the power to seek civil penalties

for violations of the Securities Act); 15 U.S.C. § 78u(d)

(granting the SEC the power to seek civil penalties for

violations of the Exchange Act). For only one claim did the

SEC request exclusively equitable relief. That was for a

claim, identified as Claim Seven, which arose under Section

304 of the Sarbanes-Oxley Act (SOX 304). See SEC v.

Jasper, 678 F.3d 1116, 1130 (9th Cir. 2012) (“Ninth Circuit

law is clear that the reimbursement provision of SOX 304 is

considered an equitable disgorgement remedy and not a legal

penalty.”).

That the SEC, in addition to seeking civil penalties, also

requested equitable relief for Claims One through Six does

not undercut its entitlement to a jury. Where, as here, “a

‘legal claim is joined with an equitable claim, the right to jury

trial on the legal claim, including all issues common to both

claims, remains intact.’” Tull, 481 U.S. at 425.

B. The SEC did not waive its right to a jury trial

The SEC did not request a jury trial in its complaint. 

Rather, the first party to request trial by jury was Tekulve,

whose answer to the SEC’s complaint included a jury demand

“as to all issues which are triable by jury.” Accordingly, the

district court entered an order on December 8, 2011 setting

the case for a jury trial.

on annual and quarterly reports); (4) Section 13(b)(5) ofthe Exchange Act

and Exchange Act Rule 13b2–1 (falsifying books and records);

(5) Exchange Act Rule 13b2–2 (making false statements to accountants);

(6) Exchange Act Rule 13a–14 (false certification), and (7) SarbanesOxley Section 304 (violation of financial reporting requirements).

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Almost a year and a half later, on March 29, 2013, Jensen

and Tekulve filed a notice withdrawing the jury demand and

waiving their right to a jury trial. The SEC responded on the

same day by filing a response stating its lack of consent to the

withdrawal of the jury trial demand, noting that Defendants’

filing did not comply with Rule 38(d) of the Federal Rules of

Civil Procedure (which requires all parties to consent to the

withdrawal of a jury demand), and asking the court to

disregard Defendants’ notice.

Despite the SEC’s objection, the court granted

Defendants’ request and set the case for a bench trial,

reasoning that “only the defendants timely requested a jury

trial.” The court’s order was dated April 1, 2013, but due to

a error by the clerk’s office it was not docketed or served

until June 4, 2013.

The SEC did not state any further objection on the record

until the parties’ jointly proposed Amended Final Pretrial

Conference Order, submitted on September 5, 2013, in which

the SEC again requested that the case be tried by a jury. At

the pretrial conference a few days later, the district court

reiterated its intention to hold a bench trial because the SEC

“didn’t ask for a jury trial in the first place.”

This decision was erroneous. The rules provide that a

jury demand can be withdrawn “only if the parties consent.” 

Fed. R. Civ. P. 38(d). It does not matter whether the party

that filed for waiver was the same party that demanded a jury

in the first place; other parties “are entitled to rely” on the

original jury demand, “and need not file their own demands.” 

Fuller v. City of Oakland, 47 F.3d 1522, 1531 (9th Cir. 1995). 

Moreover, the Federal Rules provide a specific procedure for

withdrawal of a jury demand: As long as there is a federal

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U.S. SEC V. JENSEN 11

right to a jury trial, “trial on all issues so demanded must be

by jury unless . . . the parties or their attorneys file a

stipulation to a nonjury trial or so stipulate on the record.” 

Fed. R. Civ. P. 39(a). It is uncontested that the SEC did not

so stipulate here. To the contrary, the SEC stated its

objection to a bench trial multiple times, beginning on the

very same day that Defendants purported to withdraw the jury

demand.

In its Findings of Fact and Conclusions of Law after trial,

the district court repeated its position that a bench trial was

appropriate, but by that point its reasoning had changed. The

court concluded, and Defendants argue on appeal, that the

SEC waived its right to a jury trial by failing to object to the

district court’s order setting the case for a bench trial between

June 4, 2013, when the agency received notice of the order,

and September 5, 2013, when it filed its Amended Pretrial

Conference Order.

We have recognized a limited exception to the

requirements of Rules 38 and 39 “when the party claiming the

jury trial right is attempting to act strategically—participating

in a bench trial in the hopes of achieving a favorable

outcome, then asserting lack of consent to the bench trial

when the result turns out to be unfavorable for him.” Solis v.

Cty. of Los Angeles, 514 F.3d 946, 955 (9th Cir. 2008). 

However, this exception is narrow. “Because the right to a

jury trial is a fundamental right guaranteed to our citizenry by

the Constitution, . . . courts should indulge every reasonable

presumption against waiver.” Id. at 953 (quoting Pradier v.

Elespuru, 641 F.2d 808, 811 (9th Cir. 1981)). “Reluctant

participation in a bench trial does not waive one’s Seventh

Amendment right to a jury trial.” Id. at 956.

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In White v. McGinnis, 903 F.2d 699 (9th Cir. 1990), we

found waiver where the appellant “sat through the entire

bench trial and never once objected to the absence of a jury

while his counsel vigorously argued his case to the judge.” 

Id. at 700. “Nor did appellant notify the court of its mistake

before it entered judgment against him.” Id. “Nor did he file

a motion for a new trial after judgment.” Id. This case is

nothing like that. Here, the SEC maintained the consistent

position that it did not consent to the withdrawal of the jury

demand, beginning on the day the demand withdrawal was

filed. It then stated its objection to the court’s order setting

the matter for bench trial more than a month before trial. A

few days before trial commenced, the SEC submitted

proposed jury instructions. This is a far cry from the type of

“vigorous participation in a bench trial, without so much as

a mention of a jury” that we have previously held to

constitute waiver. White, 903 F.2d at 703. The SEC’s

repeated objections prior to trial preserved its right to contest

the district court’s erroneous bench trial order.

C. The district court’s error was not harmless

Even though we have concluded that the district court

erred in conducting a bench trial, Defendants argue that

remand for a jury trial is not necessary because the error in

denying the SEC a jury trial was harmless. “The denial will

be harmless only if ‘no reasonable jury could have found for

the losing party, and the trial court could have granted a

directed verdict for the prevailing party.’” Solis, 514 F.3d at

957 (quoting Fuller, 47 F.3d at 1533). “If reasonable minds

could differ as to the import of the evidence, however, a

verdict should not be directed.” Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 250–51 (1986). We conclude that a

directed verdict would not have been appropriate based on the

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U.S. SEC V. JENSEN 13

evidence offered in this case, so the erroneous denial of a jury

trial was not harmless.

The SEC’s claims focused generally on Basin’s

transactions with a group of investors called Opus Trust, a

company called Thermax, and two Special Purpose Entities

(SPEs). With regard to each of the six transactions at issue in

this case, the district court resolved key issues of fact in favor

of Defendants that a jury could have resolved in the SEC’s

favor. This is particularly clear in the context of the district

court’s credibility determinations, which are “the exclusive

function of the jury.” Donoghue v. Orange Cty., 848 F.2d

926, 932 (9th Cir. 1987). The court discounted the testimony

of three of the SEC’s fact witnesses outright,3some of whom

3 The court discounted the testimony ofJames Sabzali, Lloyd Ward, and

Michael Stark. Sabzali’s testimony was discounted on the ground that he

lied about a prior felony conviction and was impeached at trial, as well as

on the basis of his general “demeanor and attitude during his testimony.”

The court gave “little weight” to the testimony of Lloyd Ward (the

attorney who set up the SPE deals) due to Lloyd’s demeanor and attitude,

as well as evidence that Ward had committed numerous recent legal and

ethical violations: His license to practice law had been suspended for

eleven months as of the date of trial; he admitted that he was subject to a

2011 cease and desist order by the Connecticut Banking Commission for

providing illegal debt relief services and had been ordered to pay a

$500,000 fine; and he was subject to a final judgment in Kansas for

providing illegal debt services and had been ordered to pay a $100,000

fine there. Lastly, the district court found “Stark’s credibility to have been

impeached” by evidence that directly contradicted his trial testimony on

material issues. Stark testified that he did not have a close relationship

with Charles Litt, who was involved in setting up the SPE transactions,

and that Stark had never before done a deal with Litt. However, e-mail

correspondence revealed that, at the time he began work at Basin, Stark

had just returned from a three-week vacation in Italy with Litt and his

wife. Moreover, Litt’s wife was Stark’s wife’s cousin, and Stark had

testified in his deposition that he considered Litt a member of the family.

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presented testimony that materially contradicted other

witnesses favorable to Defendants.4“A directed verdict is

improper when there is conflicting testimony raising a

question of witness credibility.” Id.

The district court also credited statements made by other

witnesses despite evidence in the record that a reasonable jury

could conclude contradicted their testimony. For instance,

the district court’s determination that Basin properly

Stark was also confronted on cross-examination with a May 12, 2007 email to a business colleague in which Stark identified Litt as his “financial

guy who does all [his] deals.”

 

4 The court also discounted the testimony of the SEC’s expert because

she “did not sufficiently take into consideration the role of professional

judgment in accounting for transactions and relied excessively on

hindsight in evaluating the accounting issues in this case, rather than

viewing the facts as they existed at the time.” This determination

doubtless affected the verdict, as the key issue in many of the SEC’s

claims was whether revenue had been properly recognized under GAAP,

a subject on which the district court accepted Defendants’ expert’s

testimony in full.

Defendants argue on appeal that, were this case tried before a jury, the

district court would have been obligated to bar the jury from hearing the

SEC’s expert witness altogether because the court found her methodology

“unreliable.” It is true that “the Federal Rules of Evidence impose a

‘gatekeeping’ duty on the district court, requiring the court to ‘screen[ ]’

the proffered evidence to ‘ensure that any and all scientific testimony or

evidence admitted is not only relevant, but reliable.’” United States v.

Alatorre, 222 F.3d 1098, 1100–01 (9th Cir. 2000) (quoting Daubert v.

Merrell DowPharmaceuticals, Inc., 509 U.S. 579, 597 (1993)). However,

under this standard, the district court’s critiques of the SEC’s expert’s

methodology in its Findings of Fact and Conclusions of Law, by

themselves, would not have given it proper grounds to bar the expert from

testifying before a jury. We do not need to resolve this issue, because

there are enough other conflicts to foreclose a directed verdict.

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recognized revenue from the Opus Trust transaction was

dictated by its assessment of Tekulve’s credibility as a

witness. In the initial letter agreement between Opus and

Basin, dated December 2005, Opus agreed to purchase a five

percent stake in a Basin subsidiary and two 1,000 gpm

(gallons per minute) ion exchange units for a total price of

$1.5 million. Basin’s auditors advised the company that the

revenue from that deal could not be recorded based on the

letter agreement because the agreement did not specify the

items sold. At trial, Tekulve testified that Basin identified the

specific units sold to Opus in March 2006, at which point

Basin’s auditors gave their approval for the revenue to be

recorded.

The district court credited Tekulve’s testimony and found

that the revenue from the Opus sale had been properly

recorded as of March 2006. But other evidence in the record

suggests that the identity of the units sold to Opus may not

have been finalized until late June 2006. An e-mail sent by

Tekulve on June 16, 2006 stated that Opus would have to

identify for Basin’s auditors that “the units [Opus] owns are

the Salinas Well 06 and 20 units,” which had a respective

gpm of 500 and 600, but the formal purchase agreement,

signed later that month, identified the units sold to Opus as

Salinas Units Nos. 15 and 108, which had a gpm of 700 and

1,100. While Defendants argue that the June 16 e-mail “only

notes that the [final agreement] should reflect the identity of

the units sold”—essentially, that the units named were

meaningless placeholders—it would not be unreasonable for

a jury to read the e-mail to show that the units sold were not

agreed upon until June 2006, and thus to conclude that the

sale price should not have been recognized as revenue in the

first quarter of 2006.

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Similarly, the district court’s decision to credit Jensen’s

testimony over potentially contradictory evidence affected its

verdict on the SEC’s claim that Basin prematurelyrecognized

revenue in the Thermax transaction. In September 2006,

Thermax representative James Sabzali e-mailed Jensen

stating his intent to purchase two controlled softening

modules from Basin. The e-mail attached a letter that

included several terms and conditions (T&Cs), including an

escape clause providing that Thermax’s purchase order was

contingent on Thermax receiving an order for controlled

softening modules from PDVSA, a state-owned petroleum

company in Venezuela, by November 30, 2006. Sabzali

asked Jensen to confirm agreement with the T&C by reply email. At trial, Sabzali testified that Jensen provided him with

oral consent to Thermax’s T&Cs in a later phone

conversation. Jensen, in contrast, testified that he called

Sabzali and told him that he would reject the offer unless

Thermax sent him a non-contingent purchase order.

On September 28, 2006, Thermax’s Finance Unit sent

Jensen a purchase order for two controlled softening modules

at a total cost of $860,320. The purchase order did not

contain the T&Cs or the escape clause that had been included

in Sabzali’s prior e-mail, but stated only “TBA[:] Agreed that

the T&C to Basin will reflect the T&C’s on PDVSA’s to

Thermax Inc.” Jensen testified that he understood this

purchase order to be non-contingent. Based on this

understanding, Basin began construction on the modules and,

over the next four quarters, recorded revenues from the

transaction totaling $642,000. Having discredited Sabzali’s

testimony to the contrary, the district court found that Jensen

had properly rejected Thermax’s T&Cs and that Basin

recognized revenue in accordance with GAAP based on the

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U.S. SEC V. JENSEN 17

purchase order from Thermax’s Finance Unit.5 But had a jury

credited Sabzali’s testimony instead of Jensen’s, it could have

concluded that collectibility was not reasonably assured on

the Thermax transaction, and that as a result Basin’s

accounting had not complied with GAAP.

The other transactions at issue in this case involved the

two SPEs, VL Capital, LLC (VLC) and Water Services

Solutions (WSS), which the SEC alleged had been

established at Basin’s direction. According to the SEC, the

transactions Basin entered into with the SPEs were without

“economic substance,” because “Basin essentially paid [the

SPEs] to purchase the system[s]” and then reported those

purchases as revenue without reasonably expecting to receive

repayment of the purchase price. At trial, Defendants

countered that the decision to recognize revenue from these

transactions complied in full with GAAP because at the time

it recognized revenue, Basin thought the SPEs could secure

financing.

One of the requirements under GAAP is that collectibility

of reported revenue is reasonably assured. At trial,

5 Whether Basin’s recognition of revenue comported with SEC Release

(Staff Accounting Bulletin) No. 104 (“SAB 104”) was a significant point

of contention at trial. A Staff Accounting Bulletin is a periodic

publication from the SEC that offers “interpretive guidance” regarding

how the SEC thinks GAAP’s broad principles (as well as applicable SEC

rules and regulations) should be applied with respect to a particular

accounting issue or in a particular situation. SAB 104, 81 SEC Docket

2848, 2003 WL 22971049, at *1 (Dec. 17, 2003). SAB 104 provides that

the SEC “believes that revenue generally is realized or realizable and

earned when all of the following criteria are met: [1] Persuasive evidence

of an arrangement exists, [2] Delivery has occurred or services have been

rendered, [3] The seller’s price to the buyer is fixed or determinable, and

[4] Collectibility is reasonably assured.” Id. at *4.

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Defendants’ expert testified that preliminary financing

arrangements between VLC and CCH, a Danish bank, and

between WSS and National City Energy Capital, an

American bank, provided evidence of collectibilityin the SPE

transactions. The district court’s conclusion that collectibility

for the SPE transactions was reasonablyassured relied at least

in part on this testimony. But the early arrangements with

CCH and National City were never finalized, and both banks

dropped out of the transactions before formal contracts

between Basin and the SPEs were signed. The district court

did not acknowledge this, and Defendants’ expert testified

that it was an “important” part of the collectibility analysis

that the preliminaryfinancing arrangement with National City

allowed the bank “to not fulfill [the loan] at their own

discretion.” Because a reasonable jury could have viewed the

lack of outside financing as having undermined collectibility,

a directed verdict would not have been appropriate regarding

the SPE transactions.

The examples above are not intended to provide a

comprehensive list of the potential issues on which a jury

could reach a different result than the judge did. Rather, they

point to evidence as to all transactions at issue that “presents

a sufficient disagreement to require submission to a jury.” 

Anderson, 477 U.S. at 251–52. Because the court could not

have granted Defendants a directed verdict, the court’s error

in concluding that the SEC waived its right to a jury trial was

not harmless. We reverse the bench trial order and remand

for a jury trial. See Solis, 514 F.3d at 957.

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D. Remand moots the SEC’s challenges to the findings of

fact

For the most part, our decision that the order setting the

case for a bench trial was erroneous moots the SEC’s

remaining challenges to the district court’s findings of fact

and conclusions of law on appeal. As noted above, the right

to a jury trial exists only for legal and not equitable claims,

but the jury serves as the finder of fact for “issues common to

both claims.” Tull, 481 U.S. at 425. Therefore, the SEC’s

Claims One through Six must be tried to a jury. This

conclusion vacates the district court’s findings of fact as to

those claims and, on remand, the district court may consider

equitable relief for Claims One through Six only “after the

jury renders its verdict.” See Beacon Theatres, Inc. v.

Westover, 359 U.S. 500, 508 (1959) (holding that in cases for

both legal and equitable relief, the legal claims must be tried

to a jury before the court can grant equitable relief). To the

extent that the SEC’s challenges to the district court’s legal

conclusions depended on the court’s application of the law to

the facts, those challenges are moot as well.

SEC’s Claim Seven for relief under SOX 304 presents a

more challenging question. As noted above, this claim

requests only equitable relief, so it does not trigger the right

to a jury trial. However, it involves the same set of facts that

the jury will be required to find in order to resolve Claims

One through Six. The key issue in determining Jensen and

Tekulve’s liability under Claim Seven, which we discuss in

greater detail below, is whether Basin’s restatements resulted

from misconduct. Claims One through Six all involve

allegations of misconduct, including fraud, falsifying books

and records, and false certification. As a result, a finding that

Jensen and Tekulve committed a violation of securities laws

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under any of Claims One through Six would necessarily

require the jury to consider the same issues that the court is

called upon to determine in Claim Seven.

In cases that involve both legal and equitable claims, the

Supreme Court has cautioned against “trying part to a judge

and part to a jury.” Id. at 508. When a plaintiff brings legal

and equitable claims “based on the same facts, the Seventh

Amendment requires the trial judge to follow the jury’s

implicit or explicit factual determinations in deciding the

legal claim.” Miller v. Fairchild Industries, Inc., 885 F.2d

498, 507 (9th Cir. 1989). Therefore, even though it is

uncontested that Claim Seven is purely equitable, it is

necessary to vacate the district court’s judgment as to that

claim. In ruling on Claim Seven on remand, the district court

“will be bound by all factual determinations made by the

jury” in the process of deciding Claims One through Six. Id.

III. Rule 13a–14

Prior to trial, the district court granted summary judgment

to Defendants on the claim that their certification of false

financial statements violated Rule 13a–14 of the Exchange

Act. The SEC challenges that decision. We review a district

court’s grant of summary judgment de novo. Oswalt v.

Resolute Indus., Inc., 642 F.3d 856, 859 (9th Cir. 2011).

Rule 13a–14 requires that for every report filed under

Section 13(a) of the Exchange Act, including Form 10–Q and

10–K financial reports, each principal executive and principal

financial officer of the issuer must sign a certification as to

the accuracy of the financial statements within the report. 

17 C.F.R. §240.13a–14. The rule was adopted in 2002, as

directed by Section 302 of the Sarbanes-Oxley Act (SOX

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302). 15 U.S.C. § 7241. The rule in relevant part reads as

follows:

Each report, including transition reports, filed

on Form 10–Q, Form 10–K, Form 20–F or

Form 40–F . . . under Section 13(a) of the Act

. . . 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.

17 C.F.R. § 240.13a–14(a). In accordance with SOX 302, the

certification must provide, among other things, that “the

signing officers . . . are responsible for establishing and

maintaining internal controls,” and that those controls “ensure

that material information relating to the issuer . . . is made

known to such officers.” 15 U.S.C. § 7241(a)(4). The

signing officers are also required to certify that, “based on the

officer’s knowledge, the report does 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 of

the circumstances under which such statements were made,

not misleading.” Id. § 7241(a)(2).

Defendants argue that this rule creates a cause of action

against CEOs and CFOs who do not sign or file certifications

but does not create a cause of action based on false

certifications independent of the existing provisions in the

Exchange Act that prohibit fraudulent statements. The

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district court agreed with Defendants and dismissed the

SEC’s Rule 13a–14 claim.

We disagree. “[S]igners of documents should be held

responsible for the statements in the document.” Howard v.

Everex Sys., Inc., 228 F.3d 1057, 1061 (9th Cir. 2000). 

“[T]he 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. GomezGutierrez, 140 F.3d 1287, 1289 (9th Cir. 1998)).

The wording of Rule 13a–14 supports the conclusion that

a mere signature is not enough for compliance. The

dictionary definition of “certify” is “1. to testify by formal

declaration, often in writing; to make known or establish (a

fact)”; or “3. to guarantee the quality or worth of; vouch for

[something].” Webster’s New Twentieth Century Dictionary

of the English Language, Unabridged, 297 (Jean L.

McKechnie ed., 2d ed. 1979). Thus, by definition, one cannot

certify a fact about which one is ignorant or which one knows

is false.

While we have not previously had the opportunity to

define the scope of Rule 13a–14, we have in the past

concluded that other, similar rules include an implicit

truthfulness requirement. Rule 13a–14 is promulgated under

the authority of Exchange Act Section 13(a), which requires

companies to file with the SEC annual and quarterly reports

as well as such “information and documents . . . as the

Commission shall require to keep reasonably current the

information and documents required to be included in or filed

with an application or registration statement.” United States

v. Berger, 473 F.3d 1080, 1097 (9th Cir. 2007) (quoting

15 U.S.C. § 78m(a)). In Ponce v. SEC, 345 F.3d 722 (9th Cir.

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U.S. SEC V. JENSEN 23

2003), we 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,” id. at

735, 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. We also

upheld the SEC’s determination that the defendant had

violated Rule 13a–1, which requires issuers to file annual

reports, by filing reports that contained misleading

information. Ponce, 345 F.3d at 735–36 (quoting 17 C.F.R.

§ 240.13a–1).

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. For

example, Rule 13d–1, promulgated under Exchange Act

Section 13(d), requires certain stockholders to file a form

called a Schedule 13D with the SEC within a certain period

of time after taking possession of their stock. 17 C.F.R.

§ 240.13d–1. The rule does not explicitly require that the

Schedule 13D be accurate. Nonetheless, in GAF Corp. v.

Milstein, 453 F.2d 709 (2d Cir. 1971), the Second Circuit

concluded that “the obligation to file truthful statements is

implicit in the obligation to file with the issuer.” Id. at 720. 

It held that Rule 13d–1 created a cause of action against a

stockholder who filed a false Schedule 13D and not merely

against one who failed to file a Schedule 13D altogether. In

so holding, the court explicitly rejected the argument that

false filings violated only “the penal provision on false filings

. . . or one of the antifraud provisions” within the Exchange

Act. Id; see also Dan River, Inc. v. Unitex Ltd., 624 F.2d

1216, 1227 (4th Cir. 1980); SEC v. Savoy Indus., Inc.,

587 F.2d 1149, 1165 (D.C. Cir. 1978) (“Sections 13(d)(1) and

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24 U.S. SEC V. JENSEN

13(d)(3) and the rules promulgated thereunder undoubtedly

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

We agree and conclude that Rule 13a–14, like other rules

promulgated under Section 13 of the Exchange Act, includes

an implicit truthfulness requirement. 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. We reverse the district court’s

decision to the contrary and remand the SEC’s Rule 13a–14

claim.6

6 We decline to reach the question of the mental state required for a

violation of Rule 13a–14. The parties have not presented arguments on

that issue, which confirms that a rule on mental state is not needed to

resolve the case before us. Moreover, as the concurrence notes, our only

precedent on this issue expressly declines to reach the question of the

mental state required for a violation of a rule promulgated under Section

13. Ponce, 345 F.3d at 741 (noting that “in at least one proceeding the

SEC has held that a scienter requirement is not necessary [for a violation

of Rules 13a–1 and 13a–13] since Section 13(a) violations do not require

scienter”). In addition, at least one other circuit has concluded that rules

promulgated under Section 13—including rules that apply to persons and

not to the issuers themselves—do not incorporate a scienter requirement. 

See SEC v. McNulty, 137 F.3d 732, 740–41 (2d Cir. 1998) (holding that

there is “no scienter requirement inserted in SEC Rule 13b2–1 . . . because

§ 13(b) of the 1934 Act ‘contains no words indicating that Congress

intended to impose a ‘scienter’requirement.’”) (internal citations omitted). 

To be sure, we do not express an opinion on whether or not the standard

suggested by the concurrence is correct. Rather, we recognize that this

issue is not properly before us and observe the “cardinal principle of

judicial restraint—if it is not necessary to decide more, it is necessary not

to decide more.” Ventress v. Japan Airlines, 747 F.3d 716, 724 (9th Cir.

2014) (Bea, J., concurring in part) (quoting PDK Labs. Inc. v. DEA,

362 F.3d 786, 799 (D.C. Cir. 2004) (Roberts, J., concurring in part and

concurring in the judgment)).

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IV. Sarbanes-Oxley Section 304

The SEC also raises a substantive challenge to the district

court’s legal analysis of Section 304 of the Sarbanes-Oxley

Act, commonly referred to as SOX 304. We review de novo

the district court’s conclusions of law following a bench trial. 

Lentini v. California Ctr. for the Arts, Escondido, 370 F.3d

837, 843 (9th Cir. 2004).

SOX 304 provides, in relevant part:

If an issuer is required to prepare an

accounting restatement due to the material

noncompliance of the issuer, as a result of

misconduct, with any financial reporting

requirement under the securities laws, the

chief executive officer and chief financial

officer of the issuer shall reimburse the issuer

for—

(1) any bonus or other incentive-based or

equity-based compensation received by that

person from the issuer during the 12-month

period following the first public issuance or

filing with the Commission (whichever first

occurs) of the financial document embodying

such financial reporting requirement; and

(2) any profits realized from the sale of

securities of the issuer during that 12-month

period.

15 U.S.C. § 7243(a). The district court held that Jensen and

Tekulve did not violate SOX 304 because “Basin’s

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misstatement was not issued due to any misconduct on the

part of Defendants.” SEC argues that this conclusion was

legally erroneous because SOX 304 is concerned not with

individual misconduct on the part of the CEO and the CFO,

but rather with the misconduct of the issuer. Because this is

a purely legal issue that may arise again on remand, we

address it here.

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 for

reimbursement to issuers 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.” 15 U.S.C. § 7243(a)

(emphasis added). 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

matters, and not the personal misconduct of the CEO or CFO.

This conclusion is bolstered by the history of the statute. 

The report from the Senate Committee on Banking, Housing,

and Urban Affairs on the bill that became the law indicated

that the disgorgement remedy was developed with the broad

goal of addressing concerns “about management benefitting

from unsound financial statements.” S. Rep. No. 107–205 at

26, 2002 WL 1443523 (July 3, 2002). That report echoed

then-President George W. Bush’s recommendations that

“‘CEOs or other officers should not be allowed to profit from

erroneous financial statements,’ and that ‘CEO bonuses and

other incentive-based forms of compensation [sh]ould be

disgorged in cases of accounting restatement and

misconduct.” Id. It also emphasized that the disgorgement

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U.S. SEC V. JENSEN 27

remedy was intended as a significant expansion of the SEC’s

enforcement powers:

For a securities law violation, currently an

individual may be ordered to disgorge funds

that he or she received “as a result of the

violation.” Rather than limiting disgorgement

to these gains, the bill will permit courts to

impose any equitable relief necessary or

appropriate to protect, and mitigate harm to,

investors.

Id. at 27.

Congress’s intent to craft a broad remedy that focused on

disgorging unearned profits rather than punishing individual

wrongdoing is particularly apparent when comparing the

legislative history of the Senate bill, S. 2673, with the

legislative history of its House of Representatives

counterpart, H.R. 3763. One proposed version of H.R. 3763

would have provided for disgorgement of all salary,

commissions, and other earnings obtained by an officer or

director “if such officer or director engaged in misconduct

resulting in, or made or caused to be made in, the filing of a

financial statement.” Committee on Rules, H. Rep. No.

107–418 at 31, 2002 WL 704333 (April 23, 2002). The

contrast between that language and the “as a result of

misconduct” language in the final statute suggests that

Congress knew how to draft a statute that would limit the

disgorgement remedy to cases of officer or director

misconduct, and chose not to do so.

While we are aware of no circuit court that has addressed

this issue, most district courts to have examined it have

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concluded 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. As a court in

the District of Arizona has observed, “[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.” SEC v. Jenkins,

718 F.Supp.2d 1070, 1075 (D. Ariz. 2010); see also SEC v.

Baker, No. A-12-CA-285-SS, 2012 WL 5499497, at *4

(W.D. Tex. Nov. 13, 2012) (“Jenkins persuasively rejected

similar attempts by the officer defendant to read into the

statute a requirement of misconduct by the officer.”); SEC v.

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

Ohio Sept. 29, 2011) (“[I]f [the issuer] had to prepare an

accounting restatement because ofits 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].”); SEC v. Life Partners Holdings, Inc., 71 F. Supp. 3d

615, 625 (W.D. Tex. 2014) (holding that, in order to secure

relief under SOX 304, the SEC was required to demonstrate

that 1) the issuer was required to issue a restatement because

of non-compliance with reporting requirements, 2) “the noncompliance was caused by misconduct within [the issuer],”

and 3) the CEO received incentive pay within the relevant

time period).

In accordance with its text and legislative history, we hold

that 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 of those officers. This is

consistent with our conclusion elsewhere that the

reimbursement provision is an equitable and not a legal

remedy. See Jasper, 678 F.3d at 1130. “[A]mple authority

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U.S. SEC V. JENSEN 29

supports the proposition that the broad equitable powers of

the federal courts can be employed to recover ill gotten gains

for the benefit of the victims of wrongdoing, whether held by

the original wrongdoer or by one who has received the

proceeds after the wrong.” SEC v. Colello, 139 F.3d 674, 676

(9th Cir. 1998). Here, disgorgement is merited to prevent

corporate officers from profiting from the proceeds of

misconduct, whether it is their own misconduct or the

misconduct of the companies they are paid to run.7

V. Exclusion of evidence

The final issue we address, as it is likely to appear again

on remand, is whether the district court properly excluded

evidence about an SEC injunction against Doug Hansen,

whom Tekulve hired as Basin’s Director of Finance in the

period before the company went public. Evidentiary rulings

are reviewed for abuse of discretion, and reversed only if the

decision below was both erroneous and prejudicial. Orr v.

Bank of Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 2002).

In 1994 Hansen was the target of an SEC action alleging

violation of Section 10(b) and Rules 10b–5 and 13b2–1 of the

Exchange Act. “[W]ithout admitting or denying the

allegations” against him, Hansen entered into a consent

decree in which he agreed to a permanent injunction

prohibiting him from committing securities fraud, an

administrative order prohibiting him from practicing in front

of the SEC, and other relief. The SEC argues that the district

7 We decline to reach the issue of the meaning of “misconduct” under

SOX 304. Once again, this issue was not presented or argued before us

on appeal, and it goes significantly beyond what is needed to resolve the

dispute before us.

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court erred in excluding evidence of the injunction at trial

because the evidence was relevant and not unduly prejudicial.

We affirm the district court’s decision to exclude that

evidence. Under Rule 403 of the Federal Rules of Evidence,

a court may exclude evidence “if its probative value is

substantially outweighed by a danger of . . . unfair prejudice,

confusing the issues, [or] misleading the jury.” Fed. R. Evid.

403. Here, there is a clear risk of unfair prejudice. The

consent decree was not evidence of culpability, but admitting

the settlement into evidence would run the risk of

“permitt[ing] the jurors to succumb to the simplistic

reasoning that if the defendant was accused of the conduct, it

probably or actually occurred.” United States v. Bailey,

696 F.3d 794, 801 (9th Cir. 2012).

Moreover, evidence of the two-decades-old injunction

would be minimally probative at best. While there is no clear

time bar on evidence of civil settlements, the Federal Rules

of Evidence and the SEC’s own internal policies both suggest

that the probative value of prior bad acts is diminished after

ten years. Under the Federal Rules, evidence that a witness

in a civil or criminal trial has been convicted of a felony must

be admitted within ten years of the conviction; after ten years,

the conviction is admissible only if its probative value,

“supported by specific facts and circumstances, substantially

outweighs its prejudicial effect.” Fed. R. Evid. 609(b)(1). 

Similarly, the SEC’s own regulations on reporting for public

companies require that directors and officers disclose legal

proceedings “material to an evaluation of . . . ability and

integrity” only from the last ten years. 17 C.F.R. 229.401(f). 

Because evidence of the injunction against Hansen was both

unfairly prejudicial and not particularly probative, the district

court’s decision to exclude it was not error.

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U.S. SEC V. JENSEN 31

VI. Conclusion

We reverse the district court’s decision to hold a bench

trial in spite of the SEC’s repeated objections in the months

before trial that it had not consented to the withdrawal of the

jury demand. As a result, we vacate the district court’s bench

trial judgment and remand for proceedings consistent with

this opinion.

We also reverse the court’s interpretations of Exchange

Act Rule 13a–14 and SOX 304. Rule 13a–14 provides a

cause of action against CEOs and CFOs who file false

certifications as well as those who do not file certifications at

all. SOX 304 allows the SEC to pursue a disgorgement

remedy against CEOs and CFOs of issuers required to

prepare an accounting restatement as a result of misconduct,

even if the officers did not engage in the relevant misconduct

themselves.

We agree with the district court’s exclusion of evidence

regarding Hansen’s consent decree and injunction.

We decline the request by the SEC that we order that the

case be reassigned on remand to a different district judge.

All parties shall bear their own costs.

VACATED and REMANDED.

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BEA, Circuit Judge, concurring:

I generally concur in the panel’s analysis and disposition. 

I write separately only to clarify the intended scope of the

new legal rules we announce today.

A. Rule 13a–14

I turn first to our holding that Rule 13a–14, a regulation

promulgated pursuant to the Exchange Act of 1934

(“Exchange Act”), permits a cause of action against a Chief

Executive Officer (“CEO”) or Chief Financial Officer

(“CFO”) for “false” certification of a financial report.1

 Maj.

Op. at 5, 21–24. I agree that the district court erred to the

extent it recognized a cause of action under Rule 13a–14 only

for the failure to file any certification at all, and granted

summary judgment to Defendants Peter Jensen (“Jensen”)

and Thomas Tekulve (“Tekulve”) (collectively,

“Defendants”) on that basis. I therefore concur in the panel’s

reversal of the district court’s grant of summary judgment to

Defendants on this claim. Maj. Op. at 24.

Nevertheless, Iwould emphasize that not everyinaccurate

certification is “false” within the meaning of the rule we

announce. Maj. Op. at 5, 21–24. Rather, the concept of

falsity embodies a mental element. Merriam-Webster defines

“false,” as “intentionally untrue” (e.g., “false testimony”),

1 Rule 13a–14 provides: “Each report, . . . filed on Form 10–Q, Form

10–K [etc.] . . . under Section 13(a) of the Act . . . must include

certifications . . . 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.” 

17 C.F.R. § 240.13a–14.

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and as “intended or tending to mislead” (e.g., “a false

promise”). False, Merriam-Webster (last visited Aug. 9,

2016). Thus, to prevail on a cause of action for false

certification in violation of Rule 13a–14, the SEC must show

that the CEO or CFO who certified as true a financial

statement which contained materially false or misleading

information acted with some mental culpability.

Specifically, I would hold that liability for false

certification under Rule 13a–14 may lie only where a CEO or

CFO acts with knowledge or at least recklessness as to the

falsity of a certification. I find support for this rule in the

plain meaning of the word “false.” But should some

imaginative person claim “false” is somehow an ambiguous

term, I also find support in the SEC’s official release in

connection with the final version of Rule 13a–14. See

Certification of Disclosure in Companies’ Quarterly and

Annual Reports, Release No. 8124, 78 S.E.C. Docket 875,

2002 WL 31720215, at *9 (Aug. 28, 2002) [“Release No.

8124”].

2 As an agency’s interpretation of its own regulation,

Release No. 8124 is entitled to “substantial deference.” 

Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994);

see also Chase Bank USA, N.A. v. McCoy, 562 U.S. 195,

208–09 (2011) (With the exception of “post hoc

rationalization[s]” taken by an agency “as a litigation

position,” or interpretations that are “plainly erroneous or

inconsistent with the regulation,” courts generally “defer to

an agency’s interpretation of its own regulation.”).

2 That release commences with the following preamble: “As directed by

Section 302(a) of the Sarbanes-Oxley Act of 2002, we are adopting rules

to require an issuer’s principal executive and financial officers each to

certify the financial and other information contained in the issuer’s

quarterly and annual reports.” Id. at *1.

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SEC Release No. 8124 envisions that liability for a

“false” certification will require at least recklessness on the

part of the certifying officer. Under a section entitled

“Liability for False Certification,” Release No. 8124

provides:

An issuer’s principal executive and financial

officers already are responsible as signatories

for the issuer’s disclosures under the

Exchange Act liability provisions [citing

Sections 13(a) and 18 of the Exchange Act]

and can be liable for material misstatements

or omissions under general antifraud

standards [i.e. under Exchange Act Section

10(b) and Rule 10(b)-5] and under our

authority to seek redress against those who

cause or aid or abet securities law violations

[citing various sections of the Exchange Act

which impose reporting requirements on the

issuer]. An officer providing a false

certification potentially could be subject to

Commission action for violating Section 13(a)

or 15(d) of the Exchange Act and to both

Commission and private actions for violating

Section 10(b) of the Exchange Act and

Exchange Act Rule 10b-5.

Release No. 8124, at *9. I address each of the provisions

listed in Release No. 8124 as a basis for liability for false

certification in turn.

Section 13(a) of the Exchange Act, codified at 15 U.S.C.

§ 78m, requires “‘every issuer having securities registered’

with the SEC to file annual [and quarterly] reports including

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certain financial information.” Ponce v. S.E.C., 345 F.3d

722, 734 (9th Cir. 2003). Because the text of Section 13(a)

focuses on the issuer’s conduct, an aiding and abetting theory

is necessary to hold the CEO or CFO liable for a Section

13(a) violation. In the securities context, aiding and abetting

liability requires the SEC to establish “(1) the existence of an

independent primary wrong [by the issuer], (2) actual

knowledge or reckless disregard by the alleged aider and

abettor of the wrong and of his or her role in furthering it, and

(3) substantial assistance in the wrong.” Levine v.

Diamanthuset, Inc., 950 F.2d 1478, 1483 (9th Cir. 1991)

(emphasis added) (setting forth the elements of a prima facie

cause of action for aiding and abetting securities fraud); see

also Ponce, 345 F.3d at 734 (SEC must prove the same

elements in order to prevail on a claim that the defendant

aided and abetted an issuer’s violation of Section 13(a) by

causing the issuer to file false annual and quarterly reports). 

In sum, at least recklessness as to the falsity of a certification

is required to hold an officer liable for aiding and abetting an

issuer’s issuance of a false or misleading financial statement

in violation of Section 13(a) by falsely certifying the

statement as true.3

 

3

 My colleagues incorrectly suggest that our precedent leaves open the

possibility that Section 13 may permit the imposition of liability on an

individual defendant without a showing of mental culpability. See Maj.

Op. at 24 n.6. This misconception appears to stem from a misreading of

a footnote in Ponce. The binding holding of Ponce in fact forecloses any

argument that an individual could be held liable for a Section 13(a)

without a showing that he acted with at least recklessness. In Ponce, we

specifically held that a finding that an issuer had violated Section 13(a)

“does not end our inquiry with respect to [an individual’s] liability,”

because Section 13(a) applies only to issuers of securities. Ponce,

345 F.3d at 737. Ponce was a certified public accountant who had

prepared and certified the issuer’s financial statements. Id. at 725–26. To

hold Ponce liable, the SEC was required to establish the additional

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Section 15(d) of the Exchange Act imposes an analogous

elements necessary for “aider and abettor liability.” Id. Accordingly, we

instructed that “it must be found that . . . (2) Ponce had knowledge of the

[issuer’s] primary violation and of his or her own role in furthering it; and

(3) [that] Ponce provided substantial assistance in the primary violation.” 

Id. (emphasis added). Then, in a footnote, we queried whether knowledge

was a necessary element of the “third prong” (i.e., the substantial

assistance prong) of aider and abettor liability, noting that the SEC had

assumed that it was. We cited “one [administrative] proceeding” in which

the SEC had held that scienter was not a necessary requirement to

establish a Section 13(a) violation. Id. at 737 n.10 (citing In the Matter of

WSF Corp., 2002 WL 917293, at *3 (SEC, May 8, 2002)).

But the case we cited, In the Matter of WSF Corp., was about issuer

liability—not aider and abettor liability. 2002 WL 917293, at *2, 6

(holding that an issuer, WSF Corporation, had violated Section 13(a) by

virtue of its failure to file various mandatory annual and quarterly reports;

holding that no showing of scienter on the part of WSF Corporation was

required). Thus, the administrative proceeding we cited was, in fact,

irrelevant to the question in Ponce—whether aider and abettor liability

requires a showing of recklessness or knowledge. And even conceding

that our dicta in Ponce created some ambiguity as to whether the “third

prong” of aider and abettor liability incorporates a scienter requirement,

Ponce unambiguously held that the second prong of a Section 13(a) aider

and abettor theory requires the SEC to establish both “knowledge” of both

“the primary violation” and the aider and abettor’s “own role in

furthering” that violation. In short, the only way to hold a CEO or CFO

liable for a Section 13(a) violation is through aider and abettor liability,

which requires knowledge of the falsity of the statement certified.

Thus, our precedent leaves no room for doubt that a CEO or CFO

cannot be held liable for an issuer’s violation of Section 13(a) without a

showing that he acted with knowledge of such falsity. But cf. Levine, 950

F.2d at 1483 (suggesting that recklessness is sufficient). Accordingly, I

would make clear that the SEC may not attempt to circumvent our

precedent, or to take a position in this litigation contrary to its prior,

official position with respect to officer liability for false certifications,

simply because we today adopt a more expansive view of Rule 13a–14 as

permitting yet another cause of action against CEOs and CFOs who

falsely certify financial reports.

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reporting requirement on the issuer. See 15 U.S.C. § 78o(d)

(“Each issuer [of registered securities] . . . shall file with the

Commission, in accordance with such rules and regulations

as the Commission may prescribe . . . such supplementary

and periodic information, documents, and reports as may be

required pursuant to section 78m of this title [i.e., Section

13(a)] in respect of a security registered [with the SEC].”). 

In S.E.C. v. Fehn, 97 F.3d 1276 (9th Cir. 1996), this Circuit

recognized that a cause of action may lie against an executive

for an issuer’s violation of Section 15(d)—again under an

aiding and abetting theory. Id. at 1288. We concluded that

the elements were similar to those required for aiding and

abetting under Section 10(b) (securities fraud): “(1) the

existence of an independent primary violation; (2) actual

knowledge by the alleged aider and abettor of the primary

violation and of his or her own role in furthering it; and

(3) ‘substantial assistance’ in the commission of the primary

violation.” Id. Thus, under our precedent, the SEC must

establish knowledge to hold a CEO or CFO liable under

Section 15(d) for falsely certifying a financial report as true.

A CEO or CFO could also be held liable, either directly

or through an aiding and abetting theory, under the Exchange

Act’s anti-fraud provisions. Liability for securities fraud

under Exchange Act Section 10(b) and its implementing

regulation, Rule 10b-5 (which collectively prohibit fraud in

the purchase or sale of securities),4

requires a showing of

4

“Section 10(b), the central antifraud provision of the Securities

Exchange Act, 15 U.S.C. § 78j(b), makes it unlawful ‘for any person,

directly or indirectly’:

To use or employ, in connection with the purchase or

sale of any security registered on a national securities

exchange or any security not so registered, any

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“scienter.” Id. at 1289 (“To prove a primary violation of

Section 10(b) of the Securities Exchange Act, the SEC was

required to ‘show that there has been a misstatement or

omission of material fact, made with scienter.’” (citation

omitted)). We have held that “[k]nowledge or recklessness

[as to whether statements made in connection with the sale of

securities are false or misleading] is required for a finding of

scienter under § 10(b).” Howard v. Everex Sys., Inc.,

228 F.3d 1057, 1063 (9th Cir. 2000). Sitting en banc, we

have previously defined “recklessness” for purposes of

Section 10(b) violations as “a highly unreasonable omission,

involving not merely simple, or even inexcusable negligence,

but an extreme departure from the standards of ordinary care,

and which presents a danger of misleading buyers or sellers

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.

Rule 10b–5 further defines the conduct prohibited under Section 10(b),

making it unlawful:

(a) [t]o employ any device, scheme, or artifice to

defraud,

(b) to 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) to 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.

S.E.C. v. Fehn, 97 F.3d 1276, 1289 (9th Cir. 1996) (quoting 15 U.S.C.

§ 78j(b); 17 C.F.R. § 240.10b–5).

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that is either known to the defendant or is so obvious that the

actor must have been aware of it.” Id. (quoting Hollinger v.

Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990) (en

banc)). In other words, direct liability under Section 10(b)

and Rule 10b-5 would also require the SEC to establish that

the CEO or CFO acted either knowingly or with “inexcusable

negligence” in certifying a financial report as true when the

report in fact contained false or misleading statements. 

Alternatively, aiding and abetting liability for the issuer’s

commission of securities fraud would require a showing that

the CEO or CFO knowingly or recklessly aided the issuer’s

commission of securities fraud by falsely certifying as true a

financial report that in fact contained false or misleading

statements. See Levine, 950 F.2d at 1483.

Finally, SEC Release No. 8124 cites Section 18 of the

Exchange Act as a basis for imposing liability on a CEO or

CFO who falsely certifies a financial statement as true. 

Section 18 imposes direct liability on “[a]ny person who . . .

make[s] or cause[s] to be made any statement in any

application, report, or document . . . which . . . at the time and

in the light of the circumstances under which it was made

false or misleading with respect to any material fact.” 

15 U.S.C. § 78r(a). Plainly, a false certification is a

“statement” which is “false or misleading with respect to any

material fact”—namely, that the certified financial statement

is accurate. Though mental culpability is not an element of

a prima facie Section 18 violation, that section contains a

“defense of good faith”: A person who makes a false or

misleading statement is not liable under Section 18 if that

person can “prove that he acted in good faith and had no

knowledge that such statement was false or misleading.” Id.

(emphasis added). Though the burden rests on the defendant

under Section 18 rather than on the SEC as it does under

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40 U.S. SEC V. JENSEN

related securities laws, Section 18—like the other provisions

discussed above—ultimately requires the fact-finder to

conclude that the CEO or CFO had knowledge of the falsity

of a certification in order for the SEC to prevail on a claim for

false certification.

From consideration of the sources cited, I conclude

that—simultaneously with its issuance of Rule 13a–14—the

SEC explicitly considered and listed various mechanisms

through which an officer may be held liable for a false

certification. Each of the enforcement mechanisms listed

requires the executive to have acted with knowledge or

recklessness as to the falsity of a certification in order to be

held liable for it. We may therefore reasonably infer that the

SEC, in promulgating Rule 13a–14, intended any cause of

action brought thereunder to require a showing of

recklessness or knowledge. The SEC’s official position on

this issue is entitled to deference, Thomas Jefferson Univ.,

512 U.S. at 512, particularly given that it is consistent with

the plain meaning of the word, “false,” as explained above.

B. SOX 304

I also concur in today’s holding that Section 304 of the

Sarbanes-Oxley Act (“SOX 304”) permits the SEC to seek

disgorgement of executive compensation whenever an issuer

is required to restate a financial report because of the issuer’s

misconduct—personal misconduct on the part of the CEO or

CFO is not required. Maj. Op. at 27.5I therefore concur in

 

5

 SOX 304 provides:

“If an issuer is required to prepare an accounting

restatement due to the material noncompliance of the

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the panel’s reversal of the district court’s interpretation of

SOX 304 as requiring the SEC to establish personal

“misconduct” on the part of the CEO and CFO. Maj. Op. at

31. However, the panel’s rule fails to provide sufficient

instruction to the district court judge on remand, who will be

required to determine whether the jury’s findings with respect

to the SEC’s Claims One through Six, coupled with other

relevant record evidence, establish that Basin Water, Inc.

committed “misconduct.”6 Neither we, nor the SEC, have

previously explained what qualifies as “misconduct” as

necessary to trigger disgorgement under SOX 304, and thus

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 . . . 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 . . . any profits realized from

the sale of securities of the issuer during that 12-month

period.”

15 U.S.C. § 7243(a) (emphasis added).

6 As explained fully in the panel’s opinion, Claims One through Six

sought both legal and equitable relief, and the SEC was therefore entitled

to a jury trial on those claims. See Maj. Op. at 8 & n.2 (summarizing the

seven causes of action brought by the SEC); Tull v. United States,

481 U.S. 412, 422 (1987). We have previously held, however, that a

claim for disgorgement under SOX 304 is purely equitable, and therefore

the SEC has no right to demand a jury trial for its claims seeking

disgorgement pursuant to SOX 304. S.E.C. v. Jasper, 678 F.3d 1116,

1130 (9th Cir. 2012).

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further clarification regarding the meaning of “misconduct”

is warranted here.

Iwould adopt a plain language understanding of the word,

which Merriam Webster defines as “1. mismanagement” or

“2. intentional wrongdoing; specifically: deliberate violation

of a law or standard . . . .” Misconduct, Merriam-Webster

(last visited Aug. 10, 2016). In my view, “misconduct”

requires an intentional violation of a law or standard (such as

GAAP) on the part of the issuer, which can be shown by

evidence that any employee of the issuer (not only the CEO

or CFO), acting within the course and scope of that

employee’s agency, intentionally violated a law or corporate

standard.

Such an understanding is consistent with the statutory

scheme of which SOX 304 is a part, as well as the case law to

date. SOX 302, entitled “Corporate responsibility for

financial reports,” requires CEOs and CFOs to “certify in

each annual or quarterly report” that the officers have

reviewed the report and, based on their knowledge, the report

does not contain any false or misleading statements or

omissions of material fact. 15 U.S.C. § 7241(a). More

importantly, the signing officers must certify that they have

“designed . . . internal controls to ensure that material

information relating to the issuer . . . is made known to such

officers by others within [the issuer], particularly during the

period in which the periodic reports are being prepared,” and

the officers “have evaluated the effectiveness of the issuer’s

internal controls as of a date within 90 days prior to the

report.” Id. (emphasis added).

In short, SOX 302 (in conjunction with other securities

rules and regulations) imposes a management obligation on

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CEOs and CFOs to maintain internal controls that will be

effective in ensuring that other agents of the issuer are—for

purposes of the present case—recording income in a manner

that produces accurate and complete financial statements in

accord with GAAP. See id.; see also 17 C.F.R.

§ 229.601(b)(31) (requiring CEOs and CFOs to certify, in

accordance with Rule 13a–14, “exactly” as follows: “The

registrant’s other certifying officer(s) and I are responsible

for establishing and maintaining disclosure controls and

procedures . . . and internal control over financial reporting

. . . and have . . . [among other things] [d]esigned such

internal control over financial reporting . . . to provide

reasonable assurance regarding the reliability of financial

reporting and the preparation of financial statements for

external purposes in accordance with generally accepted

accounting principles . . . .” (emphasis added)); Maj. Op. at

6 n.1.

In turn, SOX 304 encourages vigorous compliance with

SOX 302 by making CEOs and CFOs subject to

disgorgement if their internal controls fail to prevent (or to

detect prior to the publication of a false or misleading

financial report) intentional wrongdoing by any authorized

agent of the issuer. When the internal controls fail to

detect such wrongful behavior, a CEO or CFO (and thus,

by extension, the issuer itself) has committed

“mismanagement”—i.e., the first definition of “misconduct.”

7

 

7

 The definition I propose would also be consistent with the handful of

lower court decisions which have considered the circumstances under

which CEOs may be subject to disgorgement under SOX 304. Compare,

e.g., SEC v. Jenkins, 718 F. Supp. 2d 1070, 1072, 1077 (D. Ariz. 2010)

(holding that the SEC’s allegations that a CFO, Chief Operating Officer,

and other employees intentionally attempted to conceal losses from write

offs of uncollected receivables would, if proven, establish “misconduct”

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In sum, the district court should consider on remand

whether the evidence establishes that Basin was required to

restate its financial reports as a result of an intentional

violation of any law or standard by any Basin employee

acting within the course and scope of that employee’s agency.

* * *

Our holdings today with respect to both Rule 13a–14 and

SOX 304 resolve difficult and complex issues of first

impression. My colleagues would prefer to announce broad,

but unclear rules and to leave for another day important

questions—questions which will likely be determinative on

remand of this case—about the precise scope of the rules we

announce. While I am generally in accord with the notion

that we should decide only that which is strictly necessary to

decide, I disagree with my colleagues’ suggested course in

this particular case.8 What is culpably “false” and what

for purposes of SOX 304), with e.g., SEC v. Life Partners Holdings, Inc.,

71 F. Supp. 3d 615, 618, 625 (W.D. Tex. 2014) (finding no “misconduct”

within the meaning of SOX 304—notwithstanding a jury finding that the

issuer had filed numerous false or misleading financial statements in

violation of Exchange Act Rule 13(a) and related regulations—because

those who prepared the inaccurate financial statements had reasonably

relied on the issuer’s outside auditor, Ernst & Young, in good faith, and

the mistakes which ultimately required restatement and upon which the

securities violations were predicated were discovered only after-the-fact

and corrected).

8 Even Chief Justice Roberts, a great proponent of judicial restraint, has

acknowledged: “[W]hile it is true that ‘[i]f it is not necessary to decide

more, it is necessary not to decide more,’ . . . , sometimes it is necessary

to decide more. There is a difference between judicial restraint and

judicial abdication.” Citizens United v. Fed. Election Comm’n, 558 U.S.

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constitutes “misconduct” are central to the disposition of this

case. We have discretion to decide those issues to guide this

case on remand. We ought to do so. Cf. Singleton v. Wulff,

428 U.S. 106, 121 (1976) (“The matter of what questions may

be taken up and resolved for the first time on appeal is one

left primarily to the discretion of the courts of appeals, to be

exercised on the facts of individual cases.”).

It is well-established that where we “undertake[]to decide

[a] claim” that “is properly before th[is] court, [we] [are] not

limited to the particular legal theories advanced by the

parties, but rather retain[] the independent power to identify

and apply the proper construction of governing law.” Kamen

v. Kemper Fin. Servs., Inc., 500 U.S. 90, 99 (1991); cf.

Engquist v. Oregon Dep’t of Agric., 478 F.3d 985, 996 n.5

(9th Cir. 2007) (“[W]here an issue is purely legal, and the . . .

part[ies] would not be prejudiced, we can consider an issue

not raised below.”), aff’d sub nom. Engquist v. Oregon Dep’t

of Agr., 553 U.S. 591 (2008).

Having properly undertaken to answer the broader

question whether Rule 13a–14 requires CEOs and CFOs only

to certify financial reports, or whether it requires them to do

so truthfully, we act well within our discretion when we

clarify precisely what we mean when say that Rule 13a–14

permits a cause of action against CEOs and CFOs who

“falsely” certify a financial statement (regardless of the

parties’ failure specifically to brief that nuance). Whether a

cause of action includes a mental element is a purely legal

question that, for reasons of judicial economy, we are far

better situated than the district court to resolve: Our mandate

310, 375 (2010) (Roberts, C.J., concurring) (second alteration in original)

(citation omitted).

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specifically directs the district court to apply our newly

minted rule on remand, no prior precedent has addressed what

it means for a certification to be “false” (reasonably so, as we

have not previously recognized this cause of action), and this

issue is likely to be determinative to the SEC’s claim.9

The same analysis applies with respect to our new

interpretation of SOX 304. We announce today that CEOs

and CFOs may be subject to disgorgement not onlywhen they

commit “misconduct,” but also when any agent of the issuer

(acting within the course and scope of his agency) commits

“misconduct” on behalf of the issuer. Given the lack of any

definition of “misconduct” in the securities laws and

regulations, or in our own precedent, the district court will be

hard-pressed on remand to determine whether, for example,

evidence of an accounting error qualifies as “misconduct”

within the meaning of the rule we announce, absent some

clarification regarding what “misconduct” for purposes of

SOX 304 actually means. The clarification provided herein

answers purely legal questions and in no way opines on the

factual issues the district court must resolve in the first

instance on remand (e.g., whether the SEC has adduced

evidence sufficient to establish that Defendants committed

misconduct on the record before the court).

Lastly, I suggest the panel bear in mind that, due to the

district court’s improvident decision to proceed with a bench

9 Because Basin did, in fact, restate information in some financial reports

certified by Defendants, there will be little dispute on remand that the

certifications were in some sense “incorrect.” Thus, the critical question

will likely be what more the SEC must show to establish that the

certifications were also “false”—i.e., what mental state is required to make

an incorrect certification a “false” one?

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trial in the initial proceedings, our holding today vacates a

host of factual and legal conclusions that were, unfortunately,

the product of significant resource investment by all parties

involved. To remand this case for application of new legal

rules that are so woefully vague as to virtually guarantee

another appeal to this Court and remand—after yet another

significant resource investment—would be the paradigm of

judicial inefficiency.

Subject to these additional clarifications, I concur in the

panel’s opinion.

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