Opinion ID: 2511442
Heading Depth: 1
Heading Rank: 6

Heading: SOX Section 304

Text: Before reaching the ultimate issue i.e., whether the Settlement's provisions releasing and indemnifying DHB's former CEO and CFO against liability imposed by § 304 violate that sectionwe must first determine whether § 304 provides a private cause of action. If it does, the SEC would have no claim that the Settlement usurps its sole authority to exempt persons from § 304 liability. See 15 U.S.C. § 7243(b). The Ninth Circuit, the only other Court of Appeals to have directly confronted the issue, has held that no such private right of action exists. See In re Digimarc Corp. Derivative Litig., 549 F.3d 1223, 1233 (9th Cir.2008) ([W]e conclude that section 304 does not create a private right of action.). The Court of Appeals for the District of Columbia addressed this issue in dicta, and came to the same conclusionthat no private cause of action exists. See Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust ex rel. Fed. Nat'l Mortg. Ass'n v. Raines, 534 F.3d 779, 793 (D.C.Cir.2008) (holding that defendant's directors' decision not to bring suit under § 304 for disgorgement by CEO and CFO was within the business judgment rule, as § 304 does not create a private right of action). Since the plain language of the statute does not answer the question of whether a private right of action exists under § 304, we begin our inquiry by analyzing congressional intent. See Bellikoff v. Eaton Vance Corp., 481 F.3d 110, 116 (2d Cir.2007). Congressional intent is the keystone as to whether a federal private right of action exists for a federal statute. Without a showing of congressional intent, a cause of action does not exist.... This Court must begin its search for Congress's intent with the text and structure of the statute, and cannot ordinarily conclude that Congress intended to create a right of action when none was explicitly provided. Id. (citing Alexander v. Sandoval, 532 U.S. 275, 286-88, 121 S.Ct. 1511, 149 L.Ed.2d 517 (2001)) (internal quotation marks and citations omitted). [I]t is settled that there is an implied cause of action only if the underlying statute can be interpreted to disclose the intent to create one. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 164, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008). Section 304 by its terms requires CEOs and CFOs to reimburse their company for any bonus or similar compensation, or any profits realized from the sale of company stock, for the 12-month period following a false financial report, if the company is required to prepare an accounting restatement due to the material noncompliance of the [company], as a result of misconduct. 15 U.S.C. § 7243(a). It also permits the SEC to exempt any person from this mandatory duty, as it deems necessary and appropriate. Id. § 7243(b). The statute makes no explicit provision of a private cause of action for violations of § 304. We therefore presume that Congress did not intend to create one. See Bellikoff, 481 F.3d at 116. Under § 3(b)(1) of SOX, moreover, the SEC has authority to enforce § 304 pursuant to its authority to enforce any provision of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(d)(1). See 15 U.S.C. § 7202(b)(1). A violation by any person of this Act, any rule or regulation of the Commission issued under this Act, or any rule of the Board shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq. ) or the rules and regulations issued thereunder, consistent with the provisions of this Act, and any such person shall be subject to the same penalties, and to the same extent, as for a violation of that Act or such rules or regulations. Id. As in Bellikoff, our presumption that Congress did not intend to create a private cause of action is supported by the text and structure of the statute at issue. See id. It is clear from the text of the statute that § 304 imposes a mandatory duty on those subject to it, see 15 U.S.C. § 7243(a) (CEO and CFO  shall reimburse (emphasis added)), and that it vests the SEC with the authority to exempt any person from the obligation to reimburse the issuer under § 304(a),  as it deems necessary and appropriate.  Id. § 7243(b) (emphasis added). Congress thus provided only the SEC authority to exempt persons from § 304(a), indicating that only the SEC has that authority and that other parties do not. See Sandoval, 532 U.S. at 290, 121 S.Ct. 1511 (The express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others.). Brooks' counsel conceded as much before the district court. See June 25, 2008 Hearing Tr. at 13:8-9 (It's only the SEC that has the power to bring a 304 proceeding.). Other provisions in SOX, moreover, do provide a private cause of action e.g., § 306 expressly creates a private cause of action to recover profits made by officers and directors from insider trading during pension fund blackout periods, 15 U.S.C. § 7244(a)(2). The inclusion of a specific provision to this effect elsewhere in the statute `suggests that omission of any explicit private right to enforce other sections was intentional.'  Bellikoff, 481 F.3d at 116 (quoting Olmsted v. Pruco Life Ins. Co., 283 F.3d 429, 433 (2d Cir.2002)); see also In re BISYS Group Inc. Derivative Action, 396 F.Supp.2d 463, 464 (S.D.N.Y.2005). We therefore join our sister circuits in holding that § 304 does not create a private cause of action.
We now turn to whether the Settlement's provisions releasing and indemnifying DHB's former CEO and CFO against liability under § 304 violate that statute. Cohen argues that the indemnification and release provisions of the Settlement violate SOX and public policy [b]ecause Congress vested authority to `exempt' CEOs and CFOs from application of § 304(a) solely in the SEC, and did not grant such discretion to the public companies themselves, Appellant's Br. 25, and because the indemnification and release provisions would nullify the right and remedy that Congress expressly provided in the statute, id. 27. The United States, as amicus, similarly asserts that the Settlement's release and indemnification provisions are illegal and effectively [n]ullif[y] the SEC's authority to pursue the § 304 remedy or to grant exemptions from the statute. United States Br. 18. We agree. The district court erred when it approved the Settlement's provisions requiring DHB to release and indemnify Brooks and Schlegel against any liability imposed under § 304. As noted, only the SEC has authority to enforce § 304, see 15 U.S.C. §§ 78u(d)(1), 7202(b)(1), and to exempt CEOs and CFOs from liability under § 304, see id. § 7243(b). The Settlement's release and indemnification provisions attempt an end-run around § 304 that vitiates the SEC's role and is inconsistent with the law. If allowed to stand, it would effectively bar the relief the SEC is authorized to seek. It is true the SEC could order disgorgement. The terms of the indemnification agreement, however, would allow Brooks and Schlegel to pass that claim on to DHB so that they, individually, would suffer no penalty at all. The Supreme Court has held that agreements of private parties cannot frustrate the power of a federal agency to pursue the public's interests in litigation. See EEOC v. Waffle House, Inc., 534 U.S. 279, 296, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002) (holding that an individual's agreement with his employer to arbitrate claims is not binding on the EEOC in its own Title VII action); see id. ([W]henever the EEOC chooses from among the many charges filed each year to bring an enforcement action in a particular case, the agency may be seeking to vindicate a public interest, not simply provide make-whole relief for the employee, even when it pursues entirely victim-specific relief.). Here, the Settlement's release and indemnification provisions would accomplish exactly that, flying in the face of Congress's efforts to make high ranking corporate officers of public companies directly responsible for their actions that have caused material noncompliance with financial reporting requirements. The SEC's decision to pursue § 304 relief is not solely intended to reimburse a company; it also furthers important public purposes. The § 304 remedy is an enforcement mechanism that ensures the integrity of the financial markets. As the Supreme Court recently observed, Congress enacted SOX in the wake of a series of celebrated accounting debacles. Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., ___ U.S. ___, 130 S.Ct. 3138, 3147, 177 L.Ed.2d 706 (2010); see also Carnero v. Boston Scientific Corp., 433 F.3d 1, 9 (1st Cir.2006) (The Sarbanes-Oxley Act ... is a major piece of legislation bundling together a large number of diverse and independent statutes, all designed to improve the quality of and transparency in financial reporting and auditing of public companies.); S.Rep. No. 107-205 at 23 (2002), 2002 WL 1443523 ([SOX] requires CEOs and CFOs to certify their companies' financial reports, outlaws fraud and deception by managers in the auditing process, prevents CEOs and CFOs from benefitting from profits they receive as a result of misstatements of their company's financials, and facilitates the imposition of judicial bars against officers and directors who have violated the securities laws. (emphasis added)). In sum, companies themselves do not have the authority effectively to exempt persons from § 304 liability. Our holding is further supported by our jurisprudence addressing similar situations under comparable statutes. While no court has previously addressed whether a company may indemnify an officer subject to a § 304 remedy, courts have addressed indemnification against liability under other provisions of federal securities law and have concluded that indemnification cannot be permitted where it would effectively nullify a statute. For example, § 29(a) of the Exchange Act, 15 U.S.C. § 78cc(a), which provides that any condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of an exchange required thereby shall be void, is instructive. This Court, citing § 29(a), has refused to give effect to contractual language... purporting to be a general waiver or release of Rule 10b-5 liability altogether. Vacold LLC v. Cerami, 545 F.3d 114, 122 (2d Cir.2008); see also Globus v. Law Research Serv., Inc., 418 F.2d 1276, 1288 (2d Cir.1969) (holding an indemnification agreement unenforceable when an underwriter was liable under § 11 of the Securities Act of 1933) ([W]e concur in [the district court's] ruling that to tolerate indemnity under these circumstances would encourage flouting the policy of the common law and the Securities Act. It is well established that one cannot insure himself against his own reckless, wilful or criminal misconduct.).