Court Opinion

ID: 2660700
Source: CourtListenerOpinion
Date Created: 2014-04-03 05:05:55.165229+00
Date Added: 2024-06-11T09:17:30.446593
License: Public Domain

UNITED STATES DISTRICT COURT
                      FOR THE DISTRICT OF COLUMBIA

______________________________
SECURITIES AND EXCHANGE        :
COMMISSION,                    :
                               :
          Plaintiff,           :
                               :
     v.                        :       Civil Action No. 09-1423 (GK)
                               :
GARY A. PRINCE,                :
                               :
          Defendant.           :
______________________________:

                            MEMORANDUM OPINION

     Plaintiff United States Securities and Exchange Commission

(“SEC” or “the Commission”) brings this civil action against

Defendant Gary A. Prince (“Prince”) alleging violations of the

Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77a et

seq., the Securities Exchange Act of 1934 (“Exchange Act”), 15

U.S.C. § 78a et seq., and various Rules promulgated under the

Exchange Act. On December 10, 2012 through January 4, 2013, the

Court held a bench trial in which fifteen witnesses testified.

Based   on   the   testimony   presented   by     those    witnesses,   the

voluminous   number    of   exhibits   admitted     into    evidence,   the

parties’ representations of what facts were not in dispute, and

the applicable caselaw, the Court makes the following findings

of fact and conclusions of law.
                            TABLE OF CONTENTS

I.    FINDINGS OF FACT .......................................... 5
 A.       Creation of Integral Systems, Inc. ....................... 5
 B.       Prince’s Duties and Activities Between 1982 and 1998 ..... 5
 C. Prince’s Duties and Activities Between December 1998 and
 August 2006 .................................................. 8
     1.     Prince Becomes a Full-Time Employee at Integral ........ 8
     2.     Mergers and Acquisitions Program ...................... 11
     3.     Prince’s Compensation ................................. 13
     4.     Prince’s Stock Options ................................ 13
     5.     Executive Management Salaries/Bonuses ................. 14
     6.     The “Gang of Six”/”Gang of Seven” ..................... 14
     7.     Advisor to Chamberlain ................................ 15
     8.     Prince’s Responsibility for the Contracts Department .. 17
     9.     Drafting the MD&A Section of Public Filings ........... 19
     10.    Reviewing and Commenting on Drafts of Public Filings .. 20
     11.    Prince’s Role During Brown’s Maternity Leave .......... 21
     12.    Financial Press Releases .............................. 23
     13.    Financial Forecasting ................................. 23
     14.    Financial Presentations ............................... 23
     15.    Attendance at Board of Directors Meetings ............. 24
     16.    Prince’s Involvement with the Accounting Department ... 24
 D. Integral’s Knowledge and Actions from December 1998 to
 August 2006 ................................................. 26
 E.       Role and Involvement of Counsel ......................... 28
     1.     Venable Becomes Corporate Counsel ..................... 28
     2.     The Relationship Between Venable and Integral ......... 29
     3.     Consultation with Venable Regarding Prince’s Hiring ... 30
     4.     Venable’s Knowledge of Prince’s Duties and Activities . 32
     5.   Integral’s Conversations with Venable about Prince’s
     Possible Officer Status .................................... 34
      a.     Fall of 1999 ........................................ 34
      b.     January 2001 ........................................ 37

                                   –2–
      c.    Spring and Summer of 2002 ........................... 38
  6.       Venable’s Termination as Corporate Counsel ............ 39
  7.   Venable’s Rehiring by the Board of Directors Audit
  Committee .................................................. 40
  8.   DLA Piper’s Resignation as Corporate Counsel and
  Venable’s Rehire ........................................... 42
  9.   In December 2005, Venable Again Researched Whether Prince
  Needed to Be Disclosed in Public Filings ................... 42
  10. Integral’s Filing of a Form 8-K Disclosing Wachtel’s
  Allegations ................................................ 44
  11.      NASDAQ and SEC Investigations ......................... 45
  12. In August 2006, Prince Is Named an Executive Officer and
  Disclosed to the SEC ....................................... 51
  13.      Advice from Venable to Integral ....................... 53
 F.    Post-2006 Activities and Procedural History ............. 54
II.    CONCLUSIONS OF LAW ...................................... 56
 A.    Legal Framework ......................................... 56
 B.    Prince’s De Facto Officer Status ........................ 62
  1.   Prince’s Duties, Functions, and Responsibilities Did Not
  Involve Performing Policy Making Functions ................. 66
 C. Count VI: Liability under Section 16(a) and Rule 16a-3 of
 the Exchange Act ............................................ 73
 D. Count II: Liability Under Section 10(b) and Rule 10b-5 of
 the Exchange Act ............................................ 74
  1.   Prince Did Not Act With Scienter When He Did Not File
  Section 16(a) Reports ...................................... 76
      a.   Integral Requested and Received Venable’s Advice After
      Making Complete Disclosure ............................... 77
      b.    Integral Relied on Venable’s Advice in Good Faith ... 81
      c.   In Subsequent Years, Venable Reiterated its Conclusion
      That Prince Could Work at Integral Without Disclosure .... 82
  2.   The SEC Did Not Establish That a “Scheme to Defraud”
  Existed .................................................... 91
 E. Count III: Liability under Section 13(a) and Rules 13a-1
 and 12b-20 of the Exchange Act .............................. 92
  1.       Scienter .............................................. 93

                                  –3–
 F. Count V: Liability Under Section 14(a) and Rule 14a-9 of
 the Exchange Act ............................................ 94
 G.   Count VII: Practicing Accounting Before the Commission .. 95
  1.   Prince Violated the Commission Rule 102(e) Order Barring
  Him from Appearing or Practicing Before the Commission as an
  Accountant ................................................. 95
  2.   Prince Did Not Obtain or Rely on Advice of Counsel
  Regarding Practicing Accounting Before the Commission ..... 109
 H.   Relief ................................................. 112
III. CONCLUSION ............................................. 118

                               –4–
I.   FINDINGS OF FACT

     A.   Creation of Integral Systems, Inc.

1.   Integral   Systems,     Inc.    (“Integral”)     is   incorporated      and

headquartered in Maryland. It makes and sells satellite ground

systems, including satellite communications systems and software

products for satellite command and control.

2.   Integral   was   founded   in     1982.   One    of   the   founders    was

Steven R. Chamberlain, who served as Integral’s Chairman and

Chief Executive Officer (“CEO”) from 1982 until 2006.

3.   Integral   became   a   public    company   in    1988.     At   all   times

relevant to this action, Integral was an issuer of securities

registered pursuant to Section 12 of the Securities Exchange Act

of 1934, 15 U.S.C. § 78l.

     B.   Prince’s Duties and Activities Between 1982 and 1998

4.   In 1982, Prince was retained as a consultant by Integral to

help set up its financial books and record systems. He also

served as a Director on Integral’s Board.

5.   In 1992, Prince became Vice President and Chief Financial

Officer (“CFO”) of Integral during which he had the “final call”

                                      –5–
on    accounting    matters.   He   was    not   a   full-time    employee    and

performed his duties as a part-time consultant.

6.     In June 1993, as a consequence of Prince’s conduct as CFO

of the public company Financial News Network, the SEC filed suit

against Prince for violation of the federal securities laws.

7.     On July 9, 1993, Integral issued a Form 8-K (a filing that

a    company   is   required   to   make    disclosing   any   material   event

important to shareholders or the SEC) disclosing that Prince had

been charged by the SEC.

8.     On August 18, 1994, Judge Charles R. Richey of the U.S.

District Court for the District of Columbia entered an Order of

Final Judgment of Permanent Injunction against Prince. S.E.C. v.

Gary A. Prince, Civ. No. 93-1331 (D.D.C. 1994). That Judgment

prohibited     Prince   from   violating      the    securities   laws   in   the

future, including Section 10(b) and Rule 10b-5 of the Exchange

Act.

9.     On March 31, 1995, Prince resigned as a Director and CFO of

Integral.

                                      –6–
10.   On May 10, 1995, Integral filed a Form 10-Q (a quarterly

financial report filed with the SEC) disclosing that Prince had

resigned   his     Director    and    Officer     positions    at       Integral    and

noting that Integral would continue to use his services as a

consultant.

11.   After Prince’s resignation, Prince continued to act as a

consultant    to    Integral    from      April   1995   until     he    joined     the

company on a full-time basis in December 1998. In this capacity,

Prince   reported     directly       to   Chamberlain.       His    work    included

performing financial analyses, evaluating companies for purposes

of    acquisition      and/or        merger,      drafting     the       “Management

Discussion and Analysis” (“MD&A”) section of the Form S-1 (a

registration       statement    filed      with    the   SEC       to    register     a

company’s securities), making revenue forecasts, drafting press

releases, offering bonus suggestions for members of executive

management, and helping to prepare public filings. Prince ceased

to be responsible for day-to-day accounting decisions and no

longer had the “final call” on accounting matters.

12.   On September 5, 1995, Prince entered a plea of guilty to

two felony counts in the District Court for the Central District

of California charging him with conspiracy under 18 U.S.C. § 371

                                          –7–
and making a false statement to the SEC in violation of 18

U.S.C. § 1001. The charges also arose from Prince’s conduct as

CFO of Financial News Network. He was sentenced in late 1995 to

two   months’    incarceration,     two    months    of     home   detention,   a

$50,000 fine, and three years of probation.

13.   On June 24, 1997, the Commission issued an Order pursuant

to Commission Rule 102(e), 17 C.F.R. § 201.102(e), permanently

prohibiting Prince from exercising “the privilege of appearing

or    practicing     before   the       Commission     as     an   accountant.”

(“Accounting     Bar”).   Pl.’s   Ex.     2.   The   Commission     provided    no

further guidance to Prince on what the Accounting Bar permitted

him to do and not do.

      C.    Prince’s Duties and Activities Between December 1998
            and August 2006

            1.     Prince Becomes a Full-Time Employee at Integral

14.   In December 1998, Prince and Chamberlain began discussing

how to structure a role for Prince as a full-time employee at

Integral.

15.   Chamberlain wanted to create a position for Prince that

would not require Integral to disclose Prince’s legal history in

its public filings. Since Chamberlain knew that officers had to

                                     –8–
be disclosed in a public company’s filings, Prince could not

serve     as    an     officer.      Chamberlain     also    wanted    to   create

procedures ensuring that Prince would not be involved with the

accounting department and the accounting data.

16.   Moreover, Chamberlain was clear that he did not want Prince

to become an officer because the bylaws gave all officers the

ability to sign contracts and bind the company. Chamberlain did

not want Prince to have that sort of unchecked authority because

Chamberlain,         though   very    appreciative    of    Prince's   skills   and

experience, also believed that Prince had an inflated sense of

his own worth and a propensity to meddle in areas beyond his

responsibilities.

17.   A series of “carveouts” were created to “fence in” Prince’s

roles and duties. Prince was not allowed to sign contracts or

checks or bind the company in any way; he was not allowed to

hire or fire staff without permission; and he was not allowed to

hold himself out to be a vice president or officer of Integral.

18.     Prince was not allowed to participate in accounting staff

meetings       and    was     not    allowed    to   work   on   preparation    of

Integral’s financial statements. In general, he was also denied

“write” privileges to the network drives where the accounting
                                          –9–
numbers were stored, and at times he was denied “read” access to

the interim numbers.

19.   Around the time Prince was hired as a full-time employee,

Chamberlain communicated these “carveouts” in person to Elaine

Brown, 1 the company’s Chief Financial Officer, and Thomas Gough,

the company’s President and Chief Operations Officer. Although

these “carveouts” were never put in writing, they were well-

known and understood throughout the company, and were monitored

by Chamberlain.

20.   Prince’s       primary       responsibility      was     development     of   a

mergers and acquisitions program. Prince would also continue the

work he had been doing as a consultant including drafting the

MD&A,      making        revenue   forecasts,       drafting       press   releases,

offering bonus suggestions for members of executive management,

and   helping       to    review   and    prepare    public    filings.     Finally,

Prince would also function as a general advisor and staff member

to Chamberlain, as well as to other members of management.

21.   As    part     of     his    general     advisory      role,    Prince    would

regularly     share       his   opinion   on   a   variety    of   subjects    beyond

1
  Elaine Brown is Elaine Parfitt’s married name. Test. of Elaine
Brown, Trial Tr. Dec. 14, 2012, A.M. Session 68. This opinion
will refer to her as “Brown,” which she used professionally.
                               –10–
those      directly          related         to     his     financial       background          and

experience.           This    activity        was        consistent      with        the     broader

culture established by Chamberlain, who encouraged all employees

to share their opinions on any subject. Prince, a bit of a

gadfly, was particularly likely to share his opinions, except on

technical details to which he admitted total lack of knowledge.

His considerable business acumen and experience and his close

relationship          to     Chamberlain          meant    that    he    had     a    significant

amount     of    influence.           However,       the    other       employees          regularly

disagreed with and disregarded his opinions, if and when they

thought necessary. Moreover, Chamberlain retained control over

all final decisions.

22.   On    December          30,   1998,         Prince    was    hired    as       a     full-time

employee        and        given      the     title        “Director       of        Mergers     and

Acquisitions.”

                2.     Mergers and Acquisitions Program

23.   As    the        Director        of     Mergers       and     Acquisitions,            Prince

investigated           possible        acquisitions          of     other        companies      for

Integral        and    reported        his    findings          directly    to       Chamberlain.

Chamberlain          would     then    negotiate          the    price     and    the       contract

details based on Prince’s information.

                                                  –11–
24.   Once        a      subsidiary     was         acquired,        Prince’s    primary

responsibility           was   to   assess      the       financial    health    of    the

business     and       effectiveness    of     its       existing    management.      After

acquisition or merger, Prince was in charge of overseeing the

operations        of     the   subsidiaries.         After    acquisition,      he    also

supervised the activities of those companies who were acquired

and in some cases later shut down.

25.   Prince served as Board Chairman and/or a Director for the

corporations created to acquire various subsidiaries.

26.   Prince also played a role in assessing officer compensation

for    the        subsidiaries         and      recommended           whether    certain

subsidiaries'            officers     should        be     promoted,      demoted,      or

terminated.        The    ultimate     decision       on     those    issues,   however,

remained with Chamberlain.

27.   As part of his assessment of the financial health of newly-

acquired subsidiaries, Prince interacted with their accounting

staffs.      He       investigated      their        financial       statements,      made

suggestions on how they should record certain transactions, and

consulted         with     Integral’s        accounting        staff     on     how    the

subsidiaries’          financial    statements        would    be    consolidated     with

                                             –12–
Integral’s       statements.     Prince     also       consulted     with     outside

auditors about financial questions related to subsidiaries.

28.   While Prince “wouldn’t hesitate to ask questions and review

[a subsidiary’s] financial results,” the accounting itself was

done by the subsidiary’s accountants, who were supervised by and

reported    to    Brown   as   Integral’s       CFO.   Test.   of    Elaine    Brown,

Trial Tr. Dec. 14, 2012, P.M. Session 24-25.

29.   Prince regularly made presentations to Integral’s Board of

Directors regarding potential acquisitions and issues regarding

subsidiaries.

            3.     Prince’s Compensation

30.   Between      December     1998      and    August     2006,      Prince     was

consistently      one     of   the   five     highest     paid      individuals   at

Integral.

            4.     Prince’s Stock Options

31.   Prince was granted Integral stock options in 2000, 2001,

2002, 2003, and 2004.

32.   Prince did not file a Form 3 (an initial statement to the

SEC regarding beneficial ownership of securities), Form 4 (a

                                       –13–
statement    to   the       SEC    of    changes       in    beneficial       ownership     of

securities),      or    Form      5     (an   annual        statement    to    the   SEC    of

changes in beneficial ownership of securities) between December

1998 and July 2006.

            5.        Executive Management Salaries/Bonuses

33.   At    various      times,         Prince       proposed     what    bonus      amounts

members of executive management should receive. This was done in

collaboration with others. The bonuses recommended by the group

would   then     go    to    Chamberlain         for    final     approval.       After     he

approved, Brown or Gough would present the recommendations to

the independent Directors for approval.

34.   Prince      also      collaborated             with     members     of      executive

management in recommending salary increases for Chamberlain.

            6.        The “Gang of Six”/”Gang of Seven”

35.   Chamberlain, Gough, Brown, and Prince, as well as two or

three additional executive-level employees, were referred to as

the “Gang of Six” or “Gang of Seven,” or “G6” or “G7” (“G6/G7”).

36.   The group was formed by Chamberlain in order to discuss

companywide policies on a variety of issues, including human

resource     decisions,           benefits,          personnel,     and       mergers      and

                                              –14–
acquisitions. Prince participated in G6/G7 meetings as an equal

member.

37.   Brown, Gough, Peter Gaffney, 2 Prince, and Chamberlain all

testified 3 consistently and credibly that G6/G7      served as an

advisory vehicle to assist Chamberlain in making policy for the

company, and that Prince did not have authority to make policy

as a member of G6/G7.

          7.   Advisor to Chamberlain

38.   In addition to advising Chamberlain in his capacity as a

member of G6/G7, Prince also served as a general advisor to

Chamberlain.   His   office   was   located   immediately   next   to

Chamberlain’s office.

2
  Gaffney held various positions in the company over the years.
When Prince started working at Integral as a full-time employee
in 1998, Gaffney was Vice President of the Commercial Division.
In 2000, he became Vice President of Product Development. In
2004, he became Vice President of the Government Division and
Chief Operating Officer. In the late spring of 2006, he became
Chief Executive Officer of Integral after Chamberlain stepped
down.
3
  Although the Court refers to Chamberlain’s “testimony,” he died
before trial and thus was unavailable to testify in open court.
For ease, the Court refers to the contents of the two
investigative depositions taken by the SEC in 2007 and submitted
in Joint Exhibit 3 as Chamberlain’s “testimony."

                                –15–
39.   Prince could not and did not make policies or rules or

standards    within       the     company.      Until    the    summer    of    2005,   see

infra   ¶¶ 41-49      (describing          Prince’s      authority       over   Contracts

Department), he did not have a Group 4 that reported to him and

therefore    had     no    staff     to    direct,      hire,    or    fire.    Generally,

Prince would advise and make recommendations to Chamberlain, who

would   then   accept        or    reject       them.    Once    Chamberlain       made   a

decision, Prince or the relevant Group head would then implement

it.

40.   Prince’s     influence         with       Chamberlain      was    well-recognized

throughout     the        company.        For    example,       because    of    Prince’s

relationship with Chamberlain, people would often consult him to

get a sense of how Chamberlain might react to a particular idea

or suggestion. However, despite his significant influence, the

Integral employees testified consistently that they felt free to

disagree with Prince and regularly did disagree with him.

4
  The Integral employees referred to the various divisions of the
company as "groups" or "operating groups."
                               –16–
              8.     Prince’s   Responsibility                 for        the    Contracts
                     Department

41.   Prior     to    July     2005,       Brown     was   head      of    the   Contracts

Department at Integral. 5

42.   In the first half of 2005, at least two contracts were

signed     by      Group    heads        containing     significant         errors    which

injured Integral financially. Chamberlain concluded that further

review     of      contracts       was    needed      before     any      contracts     were

finalized.

43.   On   July      6,    2005,    Brown     emailed      the    staff     of   Integral,

telling    them      that    only        officers,    including        Prince,    had   the

authority to sign contracts. She testified that she did not mean

to suggest that Prince was an officer, and that after this email

was sent she spoke to Prince and confirmed he was not in fact an

officer and did not have authority to sign off on contracts. No

formal correction was ever disseminated.

5
    When    Brown   began    at    Integral  in   1983    as   a
receptionist/administrative assistant, she did not have a
college degree. She was promoted quickly within Integral and
worked as a staff accountant while she pursued her college
degree. Eventually, she obtained her degree and then pursued and
obtained a Certified Public Accountant (C.P.A.) license, all
while working full-time as Integral’s CFO.
                               –17–
44.   In    the     same    email,       Brown      stated    that    Prince   had     been

“designated         by     [executive           management]      to      review/approve

contracts and subcontracts” relating to specific business areas,

and that individuals must “obtain and retain proof that [Prince]

ha[d]      reviewed/approved”            a      contract      before     it    could    be

finalized.        Pl.’s    Ex.     95.    The    contracts      that    Prince   had     to

approve were the “high value” or “primary” contracts.

45.   Even after this email was sent, Prince did not execute or

sign any contracts on behalf of Integral.

46.     On August 1, 2005, Chamberlain sent an email to Integral

managers stating that “effective immediately and until further

notice, no contract with our customers, nor any subcontract with

our teammates, is to be executed until approved by either Gary

Prince     or    myself.”    Pl.’s       Ex.    96;   Def.’s    Ex.     109.   Thus,    the

system that emerged was that all major contracts were reviewed

by Prince and required either Prince or Chamberlain’s approval.

47.     Albert     Alderete,       a    contracts     administrator       at   Integral,

Gaffney,        Brown,    Gough,       Chamberlain,     and    Prince    all   testified

consistently that, while Prince reviewed contracts, the final

decisions remained with the heads of the various Groups. Prince

was never given the authority to sign off on contracts. Rather,
                                             –18–
he    performed   a   screening          role   to     ensure    that    contracts      were

properly     drawn      and,        in     particular,          that     all      financial

calculations were correct.

48.    On August 12, 2005, the Contracts Department was notified

that it was to be placed under Prince's direction. Prince began

to    supervise   the   two     employees         in    the     Contracts       Department,

including    exercising        hiring      and       firing     power.    He     also   made

salary decisions and did performance reviews.

49.    In this time period, Prince was named “Managing Director of

Operations.”

            9.    Drafting the MD&A Section of Public Filings

50.    One of Prince’s responsibilities included writing a first

draft of the MD&A section of Integral’s Form 10-Q and 10-K (an

annual financial report filed with the SEC) filings.

51.    The MD&A is a business discussion which attempts to explain

the financial results for a particular period of time. It may

include     comparisons        to    prior       periods        and/or     forecasts      or

projections       for       future         periods.           Before      Prince        took

responsibility        for   the      MD&A,       Chamberlain,           Steve    Carchedi,

                                           –19–
Gaffney, and Gough all contributed to writing it. None of these

individuals was an accountant.

52.   Prince would update the prior filing’s MD&A only after the

accounting department had closed its books “for all intents and

purposes.” Test. of Elaine Brown, Trial Tr. Dec. 14, 2012, P.M.

Session 22-23. His narratives were edited, and ultimately, it

was Chamberlain who approved the final version of the MD&A that

was filed.

            10.    Reviewing       and   Commenting      on   Drafts    of   Public
                   Filings

53.   When a reporting period ended, the accounting department

would   close     its    books,    and   then,   using    the   prior    reporting

period’s    filing      as   a   template,   would    update    the    numbers   and

language.    Brown      would     then   circulate    this     draft   “among    the

management team, among the outside directors, and just solicit

comments and feedback.” Test. of Elaine Brown, Trial Tr. Dec.

14, 2012, P.M. Session 18. Brown served as the “gatekeeper” of

the various comments she received from these individuals, and

would incorporate the comments she believed were appropriate and

ignore the ones she believed were not appropriate. Id. at 18-19.

                                         –20–
54.   Prince    regularly          reviewed    and    commented        on   these    draft

filings. Prince’s comments included asking questions, asking for

backup    related      to    particular       figures,      pointing        out    internal

inconsistencies, suggesting additional language, deletions, or

rephrasings,         adding     information          or    correcting        information

related    to     mergers      and    acquisitions,         and    changing         numbers

related    to     future      forecasts.      In     addition     to     reviewing     and

commenting      on    the    drafts    themselves,         he    occasionally        raised

questions about the accuracy of materials related to the public

filings and made suggestions in email exchanges with Brown and

others while the company was preparing its filing.

55.   Prince’s comments were not always accepted, and even when

his   suggestions           were     good     ones,       they    were       not     always

incorporated verbatim. Brown testified credibly that she did not

feel any particular pressure to accept or reject suggestions

made by Prince.

            11.      Prince’s Role During Brown’s Maternity Leave

56.   Brown was on maternity leave in the fall of 2004 and early

2005 when Integral prepared its Form 10-K for fiscal year 2004

and its Form 10-Q for the first quarter of fiscal year 2005.

                                            –21–
57.     On October 27, 2004, Prince sent an email asking questions

about    the    fourth      quarter    of    fiscal       year    2004    to   Pat    Carey,

Integral’s       Controller,         and     Al    Smith,        Integral’s      Assistant

Controller. 6 Prince copied Brown on this email. The email began,

“Now that I’m running the Accounting Dept., :) . . .” Pl.’s Ex.

79. 7

58.     Brown and Prince both testified that they understood this

phrase to be a joke. As Prince observed, “if I was making a coup

of the accounting department, I probably wouldn’t have copied

Ms. [Brown] on it.” Test. of Gary A. Prince, Trial Tr. Jan. 3,

2013,    P.M.    Session       83.    Brown       and    Prince    concurred,        as   did

Chamberlain,         that     Prince       was     not     running       the   accounting

department       during       this     period.          Brown    testified       that     she

continued       to   be     involved    from      home,     and    delegated      ultimate

responsibility to Carey, her second in command.

59.     While    Prince       was     more       involved        than    usual       in   the

preparation of these filings, he testified, as did Chamberlain,

that his role was, primarily, to coordinate the gathering of all

6
  This term was used in the company’s official documents, not the
more commonly used term “comptroller.”
7
  As can be seen from a large number of exhibits in the record,
Prince not only had a very high opinion of himself, but also
liked to poke his views into everyone else’s work. He also had a
penchant for writing emails he would later come to regret.
                               –22–
the    required      information         from    various     subsidiaries       for

preparation of the Form 10-K and Form 10-Q.

            12.     Financial Press Releases

60.    Another of Prince’s responsibilities was drafting financial

press releases, particularly pre-earnings press releases. A pre-

earnings press release discusses a company’s financials before

the actual numbers are released. Press releases are incorporated

into Form 8-K filings.

61.    Prince wrote the press releases after the numbers had been

finalized by the accounting department. He was not engaged in

the actual calculation of the numbers.

            13.     Financial Forecasting

62.    Prince    regularly     engaged    in    financial   forecasting,    which

were    projections     of    future     earnings.      Although   Prince     would

circulate       internal     emails   which     would   predict    earnings    per

share, the official number released to the street was generated

by the operating Groups and the accounting department.

            14.     Financial Presentations

63.    Prince gave two presentations to the Board of Directors

focusing on financial forecasts. He also gave a presentation to

                                         –23–
the Board of Directors on the “core business” at the request of

an independent Director. Def.’s Ex. 133.

64.   Brown    testified      that   it    was   her   responsibility      to    make

reports to the Board of Directors on overall company financial

performance. She gave numerous such presentations.

65.   Prince also gave financial presentations and tutorials to

fellow staff members.

              15.    Attendance at Board of Directors Meetings

66.   Prince regularly attended Board meetings, even when he was

not   making    a    presentation.    Other      non-Board     members    and    non-

officers    were     periodically     invited     to    and    did    attend    Board

meetings.

              16.    Prince’s   Involvement            with     the      Accounting
                     Department

67.   Prince        occasionally     interacted         with    the      accounting

department in various ways. This included commenting on payroll

analyses, discussing incentives, comparing results to forecasts,

assessing Integral’s core profitability, analyzing general and

administrative       costs,   reviewing      Defense    Contract      Audit    Agency

(“DCAA”) submissions, evaluating legal costs, investigating how

capital losses had been booked, creating a software development
                                          –24–
amortization plan, assessing how the company should adopt new

financial accounting standards, proposing and evaluating segment

reporting      structure,         and     assessing         whether        any   particular

operating      group      was   spending       in    an     unusual     or   inappropriate

fashion.

68.     All   of    these   activities         were       part    of    Prince’s   role    as

Chamberlain’s “watchdog.” Test. of Peter Gaffney, Trial Tr. Dec.

10, 2012, P.M. Session 41-42; Test. of Gary A. Prince, Trial Tr.

Jan. 2, 2013, P.M. Session 13-14. Again, this was part of the

culture established by Chamberlain that encouraged everyone to

participate        and    voice   their       opinions       in    areas     outside   their

assigned duties and responsibilities. Prince, in particular, was

known    for       “not   [being]       shy    about       giving      his   opinions,    or

thoughts, or ideas, or advice.” Test. of Elaine Brown, Trial Tr.

Dec. 14, 2012, A.M. Session 90.

69.   Prince’s       suggestions        were     not      always       followed,   and    the

final call on virtually all decisions was made by Chamberlain.

As    Prince       summarized,      referring          to     Chamberlain’s        ultimate

decisionmaking authority, “Integral was not a democracy; it was

a dictatorship.” Test. of Gary A. Prince, Trial Tr. Jan. 2,

2013, P.M. Session 16-17.

                                              –25–
      D.    Integral’s Knowledge and Actions from December 1998 to
            August 2006

70.   The fact that Prince was convicted of a felony in 1995 was

well-known    among    Integral   staff   members   and   the   Board   of

Directors.

71.   The fact that Prince was barred from practicing accounting

before the Commission was also known by many individuals within

Integral.

72.   The duties and activities discussed above, infra, ¶¶ 23-69,

were also widely known throughout Integral.

73.   There was never any effort to keep Prince’s legal problems

or his actions, duties, or responsibilities from the Board of

Directors, the company’s lawyers, or the SEC.

74.   Gaffney, Gough, Brown, and Prince all testified that Prince

was not named an officer because Chamberlain strongly preferred

not   to    disclose   his   biography    and   past   legal    troubles.

Chamberlain, however, testified that he was not concerned with

disclosure per se, noting that Integral had disclosed Prince’s

conviction in its public filings in 1995. 8 Chamberlain testified

8
   The Form 8-K filing in 1995 predated Prince’s criminal
conviction for securities fraud and Prince’s Accounting Bar.
                            –26–
that    his    primary      concern     regarding     disclosure       was     the

possibility of shareholder lawsuits.

75.    When   Integral    named   its   executive     officers    in   February

2000, Prince was not named an executive officer.

76.    Between December 1998 and August 2006, Integral filed six

Form 10-Ks with the SEC. None of these Form 10-Ks identified

Prince as an officer.

77.    Between December 1998 and August 2006, Integral filed seven

proxy    statements       prior   to    annual      meetings.     These      proxy

statements did not identify Prince as an executive officer.

78.    John   Flaherty,    a   member    of   the    accounting    department,

Gaffney, Brown, Gough, and Prince all testified credibly that

Brown was firmly in control of the accounting department and the

financial statements between December 1998 and August 2006. This

was also acknowledged by outside auditors in 2002.

However, the 1995 filing did note that Prince had been charged
with serious securities fraud violations.
                               –27–
      E.      Role and Involvement of Counsel

              1.      Venable Becomes Corporate Counsel

79.   In the spring of 1998, John Sullivan, a corporate partner

at    the   law     firm       of   Venable       LLP     (“Venable”),        and    Wallace

Christner,     a    senior      associate      at     Venable,       “made    a    pitch”       to

Integral    to     serve      as    corporate       counsel     in   connection          with   a

securities offering. Test. of John Sullivan, Trial Tr. Dec. 17,

2012, A.M. Session 12-13.

80.   After        that       discussion,         Gough     informed         Sullivan       and

Christner      that       Integral     had    a     part-time        consultant,         namely

Prince, with a criminal background.

81.   Chamberlain         decided     to     hire    Venable      and   the       firm    began

working on the Form S-1 filing in early June 1998.

82.   At that point, Sullivan was the senior member of a four-

person team at Venable handling Integral's business, and served

as the relationship partner with Integral. Christner was the

“second-in-command.” Test. of Thomas Gough, Trial Tr. Dec. 20,

2012,   A.M.       Session      81.   The     third       was   an    associate,         Andrea

Kaufman, and the fourth was another associate, James Dvorak. W.

Craig   Dubishar,         a   government      contracts         associate     at    Venable,

also worked on Integral issues in 1998.
                                             –28–
83.   Between     December    1998   and        August    2006,     at    least     eight

additional Venable lawyers worked on Integral matters: Treazure

Johnson, a former SEC attorney; Anita Finkelstein, a partner in

the DC office who specialized in SEC matters; David Levenson, a

senior partner in the securities group; Brian Dunn, an associate

in the litigation group; Geoffrey Garinther, a partner; Ron Ben-

Menachem;   Herbert    Smith;      and    Philip        Harvey,    a     litigator    who

specialized in investigations.

84.   When Sullivan left Venable in May 2001, Christner became

the relationship partner and served in that role until at least

October of 2006.

            2.     The Relationship Between Venable and Integral

85.   To reduce legal costs, Chamberlain decided that Brown would

be the conduit between Integral and Venable, and that she would

contact   Dvorak    with     any   questions       or    problems        Integral    had.

Dvorak would then consult the more senior members of the Venable

team if needed.

86.   Venable advised Integral on public filings, securities law

compliance,      financing    matters,      mergers       and     acquisitions,      and

government contracts.

                                         –29–
87.   The     Venable       attorneys         understood         themselves        to     be

Integral’s     general      corporate     counsel,       including        on   disclosure

issues,     and    Integral’s        Board      of     Directors    understood          that

Venable was their general corporate counsel on those issues.

88.   There was no formal or informal protocol in place by which

the Venable lawyers gathered information from Integral about its

activities or problems. There was also no system or protocol

whereby Venable lawyers who represented Integral later in time

became    familiar      with    the     work     that    had     been    performed      for

Integral in the past by other Venable attorneys.

89.   There     was    no   evidence      presented        that    any     employee       at

Integral    ever      failed    to     provide       information        requested    by   a

Venable lawyer.

              3.      Consultation       with        Venable     Regarding      Prince’s
                      Hiring

90.   Chamberlain, who had no legal training, testified that he

spoke to Sullivan at some point before Prince was hired and

discussed      Prince’s        legal     background        and      Accounting          Bar.

Chamberlain        insisted     that     he      had     given     the     SEC's    Order

containing the Accounting Bar to Venable to review in an attempt

                                          –30–
to try to figure out what the meaning of “practicing accounting

before the Commission” was and what activities it covered.

91.    Brown, Gough, and Prince all testified credibly that they

understood that Chamberlain had spoken to Venable about Prince’s

employment,     and   that,   as    a   result    of   that   conversation,       the

“carveouts” and “fencing in” discussed above at ¶¶ 14-19 were

put in place.

92.    Sullivan, however, testified that he never discussed hiring

Prince with Chamberlain, that Chamberlain never told him about

Prince’s     criminal     conviction    or     Accounting     Bar,   and   that   he

never provided advice about how to structure Prince’s role.

93.    The Court finds that the consistent testimony of Brown,

Gough, and Prince was accurate, and that Sullivan, who admitted

to    not   having    a   clear    memory    of   many   of   the    events   which

occurred over fourteen years ago, was not accurate.

94.    Venable never prepared any written document describing what

Prince could or could not do. Any legal advice given by Venable

attorneys     was    generally     transmitted     informally       to   Brown,   who

then transmitted it to other members of management.

                                        –31–
            4.      Venable’s  Knowledge                of     Prince’s      Duties         and
                    Activities

95.   Venable     was    corporate        counsel       for    Integral      for        several

months in 1998 before Prince became a full-time employee. During

that time, Venable lawyers knew that Prince was drafting the

MD&A portion of the fiscal year 1998 Form S-1, participating in

the   preparation       of      the     fiscal        year    1998    Form   10-KSB         (an

abbreviated      version     of     the    annual       financial     10-K     report       for

small businesses), and that Prince was working on mergers and

acquisitions issues.

96.   Between     December        1998    and    August       2006,    Venable       lawyers

regularly worked with Prince on issues related to mergers and

acquisitions.       They     knew     that,      in    that    capacity,       Prince       was

drafting    offer    letters,         reviewing        consulting      agreements         with

employees    of     subsidiaries,          asking       questions      about      financial

issues   pertaining        to     the     subsidiaries,         serving      as     a    Board

Chairman    and/or      Director        for    corporations      created       to       acquire

subsidiaries, drafting press releases, and making presentations

to Integral’s Board of Directors.

97.   Christner      and     Dvorak       knew       that    Prince    interacted          with

outside auditors on behalf of Integral in his role as Director

of Mergers and Acquisitions.

                                              –32–
98.   Christner    knew    that     Prince    worked   on    drafting    the   MD&A

section of public filings.

99.   Sullivan, Christner, and Dvorak knew that Prince drafted

press releases.

100. Christner     and     Dvorak      knew     that    Prince    reviewed       and

commented on drafts of public filings.

101. On April 12, 2000, reports by two financial analysts were

issued which contained lower projections for Integral’s revenues

than previously-issued reports. The price of Integral’s common

stock dropped significantly and Integral issued a press release

in response to the release of those reports. On November 1,

2000, the SEC wrote an inquiry letter to Integral asking for

information    regarding     the     events    that    led   up   to    the    press

release.

102. On December 8, 2000, Venable sent a letter to the SEC on

behalf of Integral in response to its inquiry of November 1,

2000. The letter stated that Prince had interacted with outside

financial analysts on behalf of Integral, generated financial

projections,      and     drafted     the     press    release    in    question.

                                       –33–
Sullivan, the relationship partner at the time, reviewed this

letter before it was sent to the SEC.

103. The   SEC     never    responded     to    Venable’s     December    8,     2000,

letter.    Nor    did    anyone    at    the    SEC    ever   contact    anyone    at

Integral or Venable to inform them that Prince’s activities, as

described in Venable’s letter, required him to be disclosed as

an executive officer or violated his Accounting Bar.

            5.      Integral’s   Conversations   with              Venable       About
                    Prince’s Possible Officer Status

104. Integral and Venable interacted on three separate occasions

between 1999 and 2002 regarding Prince’s desire to become an

Integral officer.

                    a.     Fall of 1999

105. In October of 1999, Flaherty and Brown consulted Dvorak and

Sullivan   about     whether      to    include    Prince’s      compensation     and

biographical      information      in   the     Form   10-KSB    for    fiscal    year

1999. Brown faxed Dvorak various provisions from the Code of

Federal      Regulations          referencing          “significant       employee”

disclosure       requirements     and    excerpts      from     Integral’s     public

filings related to Prince. Dvorak did not recall following up on

this fax with Brown or with Sullivan.

                                         –34–
106. A month later, Flaherty asked Brown “about the verdict from

[her] discussions with Venable regarding Gary Prince and whether

or not he [would] be included” as a highly-paid employee in the

executive compensation table in the Form 10-K for fiscal year

1999. Pl.’s Ex. 11. Brown responded to Flaherty and told him not

to include Prince in the table.

107. The   next      day,    Dvorak       and    Flaherty      spoke    about    “16(A)

disclosure     issues.”      Def.’s       Ex.      46.   Section       16(a)    of   the

Securities Exchange Act, 15 U.S.C. § 78p(a), requires certain

officers and directors to file beneficial ownership reports with

the SEC, including Forms 3, 4, and 5. See supra ¶ 32.

108. A few days later, on December 3, 1999, Brown faxed Dvorak

Prince’s biography and asked him how she could “avoid including”

the biography in the Form 10-KSB for fiscal year 1999, as this

was   Chamberlain’s         preference.          She     referenced      a      previous

discussion     she    had    had    with        Dvorak   where    Dvorak       suggested

removing the word “strategic” from Prince’s title and having

Chamberlain write a memorandum stating that Prince did not play

a key role in the decisionmaking of the company. In addition,

she   stated   in    her    fax    that    she     did   not   “intend     to    include

                                          –35–
[Prince] in the Compensation Table since he is not an executive

officer.” Pl.’s Ex. 13; Def.’s Ex. 23.

109. Dvorak understood Brown’s fax to imply that she saw the

publication      of    Prince’s    biography      and     his   inclusion       in   the

compensation table as separate issues.

110. That same day, Brown sent Dvorak a draft of the Form 10-KSB

for fiscal year 1999, and asked to speak to him about the fax

she had sent him that morning. Again, there was no record of

how, when, and if Dvorak followed up with Brown.

111. When    Chamberlain        discovered      that    Brown   and     Flaherty     had

been consulting Dvorak about disclosing Prince in the public

filings,    he   was    upset     that   legal     costs    had    been    wasted    on

something Chamberlain believed had been addressed the previous

year in his initial consultation with Sullivan. Brown apologized

to   Chamberlain       and   Prince      for    the     additional      legal    costs

incurred, and Prince responded, noting that he “believe[d] that

changing [his] title [would] do absolutely nothing in terms of

protecting    the     Company     in   the     unlikely    event   of     shareholder

litigation.” Pl.’s Ex. 15; Pl.’s Ex. 16.

                                         –36–
112. Sullivan testified that at or around this time, he spoke

with Chamberlain and Gough about Prince’s role in the company

and Prince’s high level of compensation. Sullivan said that they

told him that Prince could not make policy and did not have

staff    reporting     to    him.     On   the    basis    of    this    information,

Venable concluded that Prince did not need to be disclosed as an

executive officer.

                  b.        January 2001

113. In early 2001, Prince raised the issue of becoming a named

executive officer. He set up a meeting with Sullivan and Dvorak,

noting    that   Chamberlain        was    “amenable      to    allow    [sic]   me    to

reclaim my VP title provided I can do so without any adverse

public disclosures in our filings. I plan to present all of this

to Venable to ensure that this would be the case.” Def.’s Ex.

55.

114. On   January      23,    2001,    Chamberlain,       Prince,       Sullivan,     and

Dvorak met to discuss this issue. At that point, Prince was

under the impression that, after five years had passed, he would

no    longer   need    to    disclose      his    legal   background.      Thus,      the

question put to Venable was when the five years would expire.

                                           –37–
115. Sullivan testified that he spoke with Chamberlain about why

the issue was being raised. He advised Chamberlain that giving

Prince the title of Vice President would indicate that he was an

executive officer.

116. Venable   concluded     that    the    five-year   limit     had   not   yet

expired, because the latest triggering event, the issuing of the

Accounting Bar, took place in June of 1997. Prince decided that

he would re-raise the issue when the five years expired in the

summer of 2002.

                  c.     Spring and Summer of 2002

117. In March and April of 2002, Prince again raised the issue

of becoming a named officer.

118. At the end of April, Venable began researching the officer

disclosure question and discussing it with Brown and Prince.

Christner asked Anita Finkelstein, a partner who specialized in

SEC matters, to research the issue.

119. On   April        30,   2002,    Finkelstein       emailed     Christner,

suggesting   that      Prince’s   conviction    might   require     disclosure

beyond the five-year period.

                                     –38–
120. On    May      1,     2002,       Finkelstein    emailed             Christner       again,

concluding        that    Prince’s      conviction        and    Accounting         Bar    would

have to be disclosed if he was named an executive officer. She

stated:    “My     bottom       line    is   that    if    Prince         is   an   executive

officer his history needs to be disclosed and will need to be

disclosed for the foreseeable future. If one wants to be really

compulsive, he or she should also keep in mind that the Rule 405

definition of ‘executive officer’ includes any folks who perform

‘policy making functions’ for the registrant. This means that

Integral     is    open    to    the    complaint     that,          no   matter     what   his

title, Integral should have made disclosure about Prince due to

the nature of his activities at Integral.” Def.’s Ex. 75. No one

at Integral received a copy of this email, nor was the second

sentence of this email ever conveyed to anyone at Integral.

121. On May 10, 2002, Christner emailed Prince informing him

that   his    conviction           would     have    to         be    disclosed       in    the

foreseeable future.

             6.      Venable’s Termination as Corporate Counsel

122. Sometime between June 2003 and mid-2004, Chamberlain became

upset at the fee Venable charged in a particular matter and

                                             –39–
decided    to    fire   the        firm    as    corporate     counsel.        Venable      was

replaced by the law firm DLA Piper.

            7.      Venable’s Rehiring              by   the      Board       of    Directors
                    Audit Committee

123. In    October       of        2005,    Bonnie       Wachtel,        an     independent

Director, raised various corporate governance concerns to the

other members of the Board’s Audit Committee, Doss McComas and

Dominic Laiti. In particular, Wachtel was deeply concerned about

Chamberlain’s failure to disclose to the Board a recent criminal

investigation       into      his     alleged       sexual        misconduct        with    an

underage female.

124. On November 2, 2005, a Subcommittee, consisting of McComas

and Laiti, was created to conduct an internal review of the

allegations       raised      in    Wachtel’s       October       2005      letter.      Laiti

proposed    retaining        Venable       to    conduct     an    investigation           into

Chamberlain’s       actions.         Wachtel       objected       to   hiring       Venable,

alleging that the firm was not independent. Laiti responded by

stating    that    Venable     would       not    risk   its      reputation        by   being

involved in a “cover-up.” Def.’s Ex. 116.

125. The    motion      to    hire    Venable      was    passed       by     the   Board   of

Directors, and Laiti stated that he would coordinate the review

                                            –40–
with Garinther of Venable. The firm was given a $40,000 budget,

but no other restrictions were placed upon it.

126. Venable   lawyers     interviewed     Prince    and       Gough.    While   the

focus of the investigation was on Chamberlain’s activities, the

lawyers   obtained   information       regarding      Prince’s          duties   and

activities. In particular, they discovered and/or confirmed that

Prince was a member of the G6/G7, that he worked on mergers and

acquisitions, and that he reviewed company press releases and

portions of SEC filings. See supra ¶¶ 95-100.

127. On   November   30,    2005,   the    results        of    the     independent

investigation were presented to the Board of Directors. 9 McComas

proposed implementing recommended changes and not pursuing any

further investigation. The Board adopted that proposal.

128. Despite having definitive evidence of the range of Prince's

responsibilities, including his participation in G6/G7, Venable

did not tell Integral at this time that Prince’s duties and

activities required him to be disclosed as an executive officer

or violated his Accounting Bar.

9
   No evidence was         presented     about      the    specifics       of    the
recommendations.
                                    –41–
           8.      DLA Piper’s Resignation as Corporate Counsel and
                   Venable’s Rehire

129. Sometime between November 2, 2005 and December 5, 2005, DLA

Piper resigned as Integral’s corporate counsel, at least in part

because of frustration over not receiving “full communication

about   events    that    may    be   material       to     the   Company   and   that

require disclosure considerations under the federal securities

laws,” presumably in reference to Chamberlain’s silence about

the   criminal    investigation       and       charges      pending   against    him.

Def.’s Ex. 144. Venable was rehired as corporate counsel in late

November   or    December      of   2005,    either        during   the   independent

investigation or shortly after it was completed.

           9.      In   December  2005,  Venable Again   Researched
                   Whether Prince Needed to Be Disclosed in Public
                   Filings

130. On December 5, 2005, Wachtel sent Brown comments on the

draft   Form     10-K    for    fiscal    year       2005,    and   suggested     that

Prince’s biography be included.

131. Executive management decided to confirm with Venable that

Prince’s   biography      did   not   need      to    be    disclosed.    Brown   then

forwarded Wachtel’s email to Dvorak and asked him to “guide us

on how best to respond.” Pl.’s Ex. 112; Def.’s Ex. 136.

                                         –42–
132. On December 7, 2005, Dvorak and Brown had a conversation in

which    Dvorak       asked      Brown       whether     Prince    had   policy       making

authority,         what    his       title    was,   whether      he   could     bind      the

company, and whether his position had evolved or changed. Brown

described Prince as an advisor to Chamberlain.

133. On December 8, 2005, Brown emailed Dvorak “as a follow-up

to our conversation yesterday.” She noted that Prince could not

sign contracts and did not have check signing or wire transfer

authority. She described Prince as “a staff person reporting to

Steve and fill[ing] an advisory role, advising Steve, Tom, Pete

and     me   on     company      policy       and    PMs   and     division      heads     on

contracts.”        Brown    concluded         that     Prince    did   not   need     to    be

disclosed, but asked to speak with Dvorak to “make sure Venable

agrees with our position” before she responded to Wachtel. Pl.’s

Ex. 112; Def.’s Ex. 140.

134. There is no evidence that Venable ever responded to Brown’s

concern.

135. On December 9, 2005, Brown emailed Wachtel, telling her

that Prince “is not a named executive officer and does not meet

the   criteria       to    be    a    named    exec.    officer.”      Def.’s    Ex.     142;

Def.’s       Ex.    144.    Wachtel          responded     on     December      12,    2005,
                                              –43–
reiterating her “preference” that Prince be disclosed. Pl.’s Ex.

104.

136. Executive management forwarded the entire exchange between

Brown    and    Wachtel         to    McComas      and        Laiti,    the    independent

Directors.       McComas        responded,         disagreeing          with      Wachtel’s

preference. He observed, “We have followed legal and accounting

advice on so many issues because of the complexity and need to

be up to date expertise [sic] that only they can provide in the

10K as a whole. The specific issues that Bonnie raises are her

personal      preferences        on     issues     which        have    previously       been

covered with our advisors and the 10K has been approved by them

so I suggest we move forward with its release.” Pl.’s Ex. 104;

Def.’s Ex. 143. Laiti emailed the next day indicating that he

agreed with McComas. Def.’s Ex. 148.

137. Venable        did   not    tell    Integral        at    this    time    that   Prince

should   be    disclosed,        and    Integral     did        not    disclose      Prince’s

employment or background in the Form 10-K for fiscal year 2005.

              10.    Integral’s Filing of                 a     Form     8-K    Disclosing
                     Wachtel’s Allegations

138. Wachtel declined to stand for reelection to the Integral

Board    of    Directors.       A    Form   8-K    was        filed    with    the    SEC   to

                                            –44–
disclose     this    fact.    See    Hewlett-Packard            Co.,   Exchange      Act

Release No. 55,801, 90 S.E.C. Docket 1865 (May 23, 2007) (noting

that Exchange Act requires public companies to file a Form 8-K

when   a   director    resigns      because      of    a     disagreement    with    the

company relating to its “operations, policies, or practices”).

139. Integral filed its Form 8-K on January 9, 2006, but did not

address    Wachtel’s       corporate      governance       concerns.      Instead,    at

Chamberlain’s        request,       the     Form       8-K     attached     Wachtel’s

correspondence and summarily stated that Integral disagreed with

the content of her letters.

            11.     NASDAQ and SEC Investigations

140. Two days later, on January 11, 2006, officials from NASDAQ

contacted Gough seeking a meeting to discuss “issues raised in

the Company’s Form 8K.” Def.’s Ex. 152.

141. At some point in early 2006, the SEC contacted Integral

indicating    that    it    also    was   going       to   investigate     the   events

surrounding the filing of the Form 8-K. Christner asked Treazure

Johnson, a Venable partner who had previously worked at the SEC,

to work on the case.

                                          –45–
142. On February 15, 2006, Prince attended an interview with

NASDAQ, accompanied by Garinther of Venable.

143. NASDAQ requested any emails between Prince and the Audit

Committee. On March 29, 2006, Garinther responded to NASDAQ, on

behalf    of     Integral,      noting      that   Venable     had    “not    seen   any

communications . . . between Mr. Prince and Integral’s outside

auditors.”       Def.’s   Ex.       175.   The   firm   made   this    claim   despite

knowing that such communications existed. See supra ¶¶ 97, 102.

144. On February 3, 2006, Integral staff emailed Venable lawyers

an organizational chart which showed Prince on the same level

with     the     other    executive        managers,    identified      him    as    the

“Managing Director of Operations,” and showed that he supervised

employees in the Contracts Department.

145. On April 7, 2006, Dunn of Venable prepared a memorandum

that     was     circulated     internally         within    the     firm    addressing

whether        Prince    was    a    de    facto    officer     of    Integral.      The

memorandum        concluded     that,       “[g]iven     Prince’s      role    at    the

Company, the SEC could reasonably take the position that he was

a de facto officer and should have been disclosed as such in the

company’s SEC filings.” Def.’s Ex. 183; Def.’s Ex. 184.

                                            –46–
146. Neither this conclusion nor this email was ever conveyed to

anyone at Integral.

147. Later in April, Chamberlain retired as CEO, at least in

part    because    of     the   criminal      charges    pending           against       him.

Gaffney eventually replaced him as CEO.

148. On April 23, 2006, McComas wrote to Christner on behalf of

the independent Directors, asking “some questions regarding the

NASDAQ/SEC discussions” about Prince.

149. Christner drafted, and Garinther and Johnson approved, a

response to the independent Directors noting that “whether or

not he has been acting as an officer seems to be in a gray

area,”    and     informing     them    that     the    best    strategy           was    to

emphasize     Prince’s     “no-officer     attributes”         and    “hope     that       in

light    of     the     company’s      current    status,”           the     SEC     would

“essentially       lose    interest      in    the      matter.”       In      addition,

Christner noted that the firm “ha[d] not seen any evidence so

far that would lead us to believe he has practiced accounting

before SEC.” Def.’s Ex. 189; Def.’s Ex. 204.

150. Integral’s employees were never told directly that whether

Prince was an officer was “in a gray area.”

                                        –47–
151. In June of 2006, Venable began to prepare a letter to the

SEC addressing Prince’s position in the company.

152. Venable directed Prince to put together a memorandum that

described      his   roles    and    functions         in    the   company.       Christner

wanted the memorandum to focus on what Prince was “not doing,

not signing contracts, not VP on bus. cards.” Def.’s Ex. 198

(emphasis in original); Test. of Elaine Brown, Dec. 14, 2012,

A.M. Session 52-55; Test. of Elaine Brown, Dec. 18, 2012, P.M.

Session 52-53.

153. Prince’s         memorandum       to      Venable          indicated         that    he

occasionally         had     individuals       reporting           to    him      directly,

participated in G6/G7, made proposals and suggestions related to

corporate organization and financial spending and controls, led

the Contracts Department, and had been given the added title

Managing Director of Operations.

154. On   June       21,   2006,     Smith,       yet       another     Venable    lawyer,

emailed Johnson a draft of the proposed letter to the SEC. In

his   cover    email,      Smith    made    several         observations.      First,     he

noted   that    he    took    an    approach      in    drafting        the   letter     that

highlighted “what Prince couldn’t/didn’t do at ISI.” Second, he

noted the similarities between Integral’s issues and a legal
                                           –48–
case where a company had been held liable for not disclosing as

a de facto officer a significant management figure. Third, he

raised    the   possibility    that    Prince      might   be    a   “significant

employee” under item 401(c) of Regulation S-K. Def.’s Ex. 211.

155. No one at Venable ever shared any of these observations

with Integral.

156. On June 29, 2006, a special Board of Directors meeting was

held in which Christner participated by teleconference. Gough

suggested naming Prince an executive officer “in light of the

recent changes within the Company.” Def.’s Ex. 219. The Board

took the matter under consideration and decided to put it to

vote at a later date.

157. On July 25, 2006, McComas wrote to Christner on behalf of

the independent Directors, noting that they had sought advice

and   a    written    statement       from    Venable      regarding     possible

liability, if any, as to the naming of new executive officers.

158. That same day, Christner asked Johnson to research whether

Prince’s Accounting Bar prevented him from being an officer.

Johnson responded, observing that she didn’t “see anything to

prevent   Prince     from   serving   as     an   officer,”     noting   that   the

                                      –49–
Accounting Bar was not an officer or director bar. Def.’s Ex.

229. She then noted that the “company will have to [sic] special

care,    however,      to     ensure       that   he     has   nothing       to    do    of   an

accounting nature and particularly that he has no involvement in

the    preparation       of    the    company’s        financial       statements.”           Id.

Johnson then sent another email, this time to both Garinther and

Christner, wherein she reiterated that she had told Christner

“that    the     company      has    to     be    very    careful      that       he    has    no

responsibility at all for any accounting functions at Integral

and nothing to do with the preparation of the financials, other

than provide information when asked.” Def.’s Ex. 226.

159. No    one    at     Venable     ever     sent     either    of    these       emails      or

conveyed the substance of Johnson’s conclusions to Integral.

160. Later that day, Christner emailed McComas, informing him

that Venable “[c]oncluded that while the order does prohibit

Gary    from   practicing       accounting          before     the    SEC,    it       does   not

prohibit him from becoming a director or officer of a registrant

such as Integral System [sic]. If Gary does become an executive

officer, however, Integral should take appropriate actions to

insure    that     his      work     for    the     company     does     not       constitute

practicing accounting before the SEC.” Def.’s Ex. 232.

                                             –50–
161. On July 31, 2006, McComas responded to Christner’s email,

asking him for a definition of “practicing accounting before the

SEC” that the Board could use as guidance to “make sure that the

appropriate action is taken to not allow this to occur.” Def.’s

Ex. 235.

162. The    same    day,   Christner          responded    to   McComas’s     email,

noting that “there is not a clear and useful definition” of

practicing accounting before the Commission. He forwarded his

response to Johnson and asked for “any further insight.” Again,

Johnson    reiterated      that        if    Prince    “stays       away   from   the

financials he should be fine.” Def.’s Ex. 235. There was no

evidence presented that Venable ever passed that information on

to    Integral     management     or    in     any    other   way    provided     more

guidance to the independent Directors after their email request

for   a   clear    and   useful    definition         of   practicing      accounting

before the Commission.

            12.     In August 2006, Prince Is Named                   an   Executive
                    Officer and Disclosed to the SEC

163. On August 2, 2006, the Board of Directors named Prince an

executive officer, after agreeing that his “duties and role in

the Company” did not include practicing accounting before the

                                            –51–
SEC.    Def.’s    Ex.   237.    Venable    began    preparing      a   Form     8-K   to

disclose this fact.

164. On August 4, 2006, Prince filed a Form 3 with the SEC,

reporting his ownership of Integral stock options. On August 16,

2006,    Prince    filed    another    Form    3    with    the    SEC,      reporting

additional Integral stock options.

165. On August 8, 2006, Integral filed a Form 8-K with the SEC

identifying      Prince    as   “Executive    Vice    President        and    Managing

Director of Operations” and disclosing his legal history.

166. On August 14, 2006, Venable sent a letter to the SEC in

response to the SEC's inquiry about the January 9, 2006, Form 8-

K, stating that it “strongly believe[d]” that Prince was not an

executive    officer      between   December       1998    and    March   17,    2006.

Pl.’s Ex. 129; Def.’s Ex. 241.

167. In September of 2006, SEC lawyers called Johnson and said

they had reviewed Venable’s submission and were still of the

opinion that Prince’s employment should have been disclosed. The

SEC    indicated    that    they    were   going     to    recommend      filing      an

enforcement action. They also told Johnson to let them know if

                                       –52–
there were any additional facts they should consider before they

made their recommendation.

168. Johnson spoke with Brown to assess whether there were any

additional relevant facts to disclose to the SEC.

169. On October 2, 2006, Johnson faxed another letter to the

SEC, stating that she had no additional facts to report.

           13.    Advice from Venable to Integral

170. At   no   point   between   December   1998     and    August   2006    did

anyone at Venable ever advise anyone at Integral that Prince

needed to be disclosed to the SEC regardless of his title.

171. At   no   point   between   December   1998     and    August   2006   did

anyone at Venable advise anyone at Integral that any of the

activities     that   Prince   was   engaging   in   were   activities      that

might trigger a disclosure obligation.

172. At   no   point   between   December   1998     and    August   2006   did

anyone at Venable advise anyone at Integral that any of the

activities     that   Prince   was   engaging   in   were   activities      that

might violate his Accounting Bar.

                                     –53–
      F.      Post-2006 Activities and Procedural History

173. On March 28, 2007, Prince filed a Form 4 with the SEC

disclosing      changes    in     his    beneficial       ownership       of   Integral

securities.

174. On March 30, 2007, Integral terminated Prince’s employment.

175. Since his termination, Prince has worked for two private

companies and served as executor of Chamberlain’s estate. He has

also done some consulting work for non-public companies. Brown

and   Gough    testified    credibly      that     they    knew    of     nothing   that

Prince was currently doing or intended to do which would violate

his Accounting Bar now or in the future.

176. On    July   30,     2009,    the   SEC     issued    an     Order    Instituting

Cease-and-Desist        Proceedings,      Making    Findings,       and    Imposing   a

Cease-and-Desist Order in In the Matter of Integral Systems,

Inc., Respondent (Admin. Proceeding File No. 3-13566).

177. On the same day, the SEC filed its Complaint in this Court

against Chamberlain, Brown, and Prince. [Dkt. No. 1]

178. On February 18, 2010, Chamberlain was dismissed as a party

because of his death. [Dkt. No. 28]

                                         –54–
179. On    November        26,   2012,   Final   Judgment    as    to    Brown   was

entered        in   this    case.   Without      admitting    or       denying   any

allegations against her, Brown paid a civil penalty of $25,000

to the SEC pursuant to Section 21(d)(3) of the Exchange Act of

1934,     15    U.S.C.     § 78u(d)(3),     in   resolution       of    the   claims

asserted against her in this civil proceeding. [Dkt. No. 130]

                                         –55–
II.   CONCLUSIONS OF LAW

          A. Legal Framework

      The SEC brought several claims against Prince under the

securities laws, four of which are still pending. All of those

claims are based on the allegation that Prince was a de facto

officer of Integral, and that Integral and Prince violated their

obligations under the securities laws to disclose his officer

status, as well as his troubled legal history.

      The Securities Act of 1933 and Securities Exchange Act of

1934 impose a number of obligations on public companies and the

individuals    who    serve    as    officers   and    directors     of    those

companies. One of those obligations requires companies such as

Integral 10   to   file   annual    reports   with    the   SEC   that    contain

information that would be relevant to the investing public. See

Exchange Act Rule 13(a)(2), 15 U.S.C. § 78m(a)(2). In addition,

such companies must ensure that their proxy statements contain

similar    information.    See     Exchange   Act    Rule   14(a),   15    U.S.C.

§ 78n(a).

      The Regulations establish what must be included in annual

reports and proxy statements to ensure that they are accurate

10
   It is undisputed that Integral issued securities registered
under Section 12 of the Exchange Act, 15 U.S.C. § 78l, and was
thus subject to the Exchange Act’s disclosure obligations. See
Findings of Fact ¶ 3.
                             –56–
and not misleading. 17 C.F.R. § 229.10(a)(2) (setting out the

“requirements         applicable     to   the    content    of    the    non-financial

statement     portions”        of    certain      documents,        including        annual

reports    and    proxy      statements).       Among   other     things,      companies

must     identify      all    “executive        officers”     and     describe        their

business experience. Id. § 229.401(b), (e)(1). They must also

disclose    certain       legal     proceedings     that    are     “material        to   an

evaluation       of    the    ability     or     integrity”      of     any    executive

officer. Id. § 229.401(f).

       The securities laws also require that officers identified

in a company’s filings make disclosures to the SEC. Among other

things, officers are required under Section 16 of the Exchange

Act to periodically report any ownership of or transactions in

the equity securities of their company. 15 U.S.C. § 78p(a)(1),

(3).

       In this case, the SEC’s claims under the securities laws

allege    that    Integral     and    Prince     failed     to   comply       with   their

disclosure obligations. Count VI focuses on Prince’s failure to

file stock ownership disclosure statements and alleges that that

failure violated Section 16(a) and Rule 16a-3. See 15 U.S.C.

§ 78p(a); 17 C.F.R. § 240.16a-3(a) (setting out various forms

for use in fulfilling Section 16(a) reporting requirements).

                                          –57–
     To establish this claim, the SEC need only show that Prince

was a de facto officer, that he owned Integral securities during

the relevant time period, and that he failed to file Section

16(a) disclosure reports. See infra n.14 (noting that the SEC

has consistently held that no scienter need be established to

prove a violation of Section 16(a)).

     Count II builds on that claim by alleging that Prince’s

failure to file Section 16(a) reports with the SEC was part of a

“scheme to defraud” the public in violation of Section 10(b) of

the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R.

§ 240.10b-5. The SEC argues that the purpose of the scheme was

to conceal Prince’s role as a de facto executive officer at

Integral,   and   thus   conceal     from   the   public    Prince’s     legal

history.

     Section 10(b) of the Exchange Act forbids anyone to use a

“manipulative     or     deceptive      device     or      contrivance      in

contravention” of the SEC’s rules and regulations. 15 U.S.C.

§ 78j(b). The primary rule that implements Section 10(b) is Rule

10b-5, which makes it unlawful “to employ any device, scheme or

artifice to defraud, . . . or 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.” Exchange Act Rule 10b-5(a), (c); 17 C.F.R.
                                   –58–
§ 240.10b-5(a), (c). Violations of Rule 10b-5(a) and/or (c) are

referred to as “scheme liability.” See Pacific Inv. Mgmt. Co.

LLC v. Mayer Brown LLP, 603 F.3d 144, 158 (2d Cir. 2010).

       In    order       to     establish      Count    II,       the       SEC    must     begin    by

proving what it must prove to establish Count VI: that Prince

was    a    de    facto       executive      officer        of    Integral,         was    therefore

obligated to file Section 16(a) disclosure reports, and failed

to do so.

       To establish scheme liability under Section 10(b), the SEC

must       also    prove       by     a    preponderance          of    the        evidence       that:

1) Prince         did     not       file    Section     16(a)         reports        in    order     to

perpetuate a “scheme to defraud” that had the principal purpose

and effect of not disclosing his history of securities fraud

violations to the public; 2) his legal history was a material

fact; 3) the scheme was made in connection with the purchase or

sale of securities; and 4) Prince had the requisite scienter.

See    S.E.C.       v.    Goble,      682     F.3d    934,       942-43      (11th        Cir.    2012)

(citation         omitted)       (noting      that     in    an       SEC    civil        enforcement

action,      the        SEC   must        establish    that       a    misrepresentation             or

omission          was    material,          made     with        scienter,         and     made     “in

connection with the purchase or sale of securities”) (citation

omitted); S.E.C. v. Brown, 740 F. Supp. 2d 148 (D.D.C. 2010)

(noting       that       an    individual’s          participation            in    a     scheme     to
                                                –59–
defraud may result in primary liability only if the individual

“engaged in conduct that had the principal purpose and effect of

creating    a    false          appearance    of    fact    in     furtherance      of    the

scheme”) (quotation and citation omitted).

      The SEC also brings two claims against Prince for aiding

and     abetting          Integral’s     alleged      failure        to     fulfill       its

disclosure      obligations.           Section      20(e)    of     the     Exchange       Act

creates     aiding-and-abetting              liability      for     “any     person       that

knowingly       or    recklessly        provides      substantial          assistance      to

another    person”         in    violation    of    the    securities      laws     and   the

rules     and    regulations         issued      under      those    laws.     15     U.S.C.

§ 78t(e).

        Count III alleges that Prince aided and abetted Integral’s

failure to file accurate and non-misleading annual reports with

the SEC. The SEC argues that Integral failed to identify Prince

as a de facto officer in its annual reports, making such reports

materially false or misleading in violation of Section 13(a) of

the Exchange Act and Rules 13a-1 and Rule 12b-29. See 15 U.S.C.

§ 78m(a); 17 C.F.R. §§ 240.13a-1 and 240.12b-20. The SEC also

alleges      that         Prince      provided       “knowing        and      substantial

assistance”          to     Integral’s       violation        by     participating         in

Integral’s decision not to disclose him or his violations in

those reports. See Graham v. S.E.C., 222 F.3d 994, 1000 (D.C.
                                             –60–
Cir. 2000) (noting that to establish aiding and abetting claim

under Section 20(e) SEC must show that a principal has committed

a primary violation, the aider and abettor provided substantial

assistance to the primary violator, and the aider and abettor

acted with the requisite scienter).

      Thus,    to    establish           Count     III,      the    SEC     must    show      that:

1) Prince     was        a    de   facto      officer      of      Integral;       2)    Prince’s

officer status made his legal history material information that

Integral     was    required        to     disclose       in    its     annual     reports;        3)

Integral failed to disclose Prince’s history, and thus failed to

submit complete and accurate annual reports; 4) Prince provided

substantial        assistance        to    Integral        in    its     violation;          and   5)

Prince acted with the requisite scienter.

      Similarly, Count V alleges that Prince aided and abetted

Integral’s         distribution            of      false        and       misleading          proxy

statements.        The       SEC   argues       that   Integral         failed     to    identify

Prince as a de facto officer in its proxy solicitations, making

those solicitations false or misleading in violation of Section

14(a)   of    the        Exchange       Act     and    Rule        14a-9.    See    15       U.S.C.

§ 78n(a); 17 C.F.R. § 240.14a-9. It alleges that Prince aided

and abetted that violation by participating in the decision not

to   disclose       his       officer     status       and      legal     history       in    those

solicitations.
                                                –61–
      Therefore, to establish Count V, the SEC must show that:

1) Prince    was      a    de    facto      officer       of   Integral;       2)    Prince’s

officer status made his legal history material information that

Integral was required to disclose in its proxy statements; 3)

Integral     failed        to        disclose       Prince’s        history,        and        thus

distributed      false     and       misleading      proxy     statements;          4)    Prince

provided substantial assistance to Integral in its violation;

and 5) Prince acted with the requisite scienter.

      Because        all   four       of    these    counts     require        the       SEC    to

establish by a preponderance of the evidence that Prince was a

de facto officer of Integral, the Court addresses that issue

first.

      B.     Prince’s De Facto Officer Status

      Counts II and VI allege that Prince was an officer under

Section 16 of the Exchange Act and therefore was required to

file beneficial ownership reports, which he failed to do. Counts

III and V allege that, because Prince was an officer, Integral

was required to disclose him and his legal history in its annual

reports and proxy statements, which it failed to do. Thus, the

SEC   must   establish          by    a    preponderance       of    the     evidence       that

Prince     was   a    de   facto          officer    of   Integral      as     a     necessary

prerequisite to prove any of these claims.

                                              –62–
       Exchange Act Rule 3b-7 defines an “executive officer” to

include a company’s “president, any vice president . . . in

charge of a principal business unit, division or function (such

as    sales,       administration          or    finance),       any    other      officer   who

performs       a    policy        making    function        or    any    other     person    who

performs similar policy making functions for the registrant.” 17

C.F.R. § 240.3b-7.

       Exchange Act Rule 16a-1 defines an “officer” to include a

company’s          “president,       principal          financial       officer,     principal

accounting officer (or, if there is no such accounting officer,

the controller), any vice-president of the issuer in charge of a

principal business unit, division or function (such as sales,

administration or finance), any other officer who performs a

policy-making function, or any other person who performs similar

policy-making         functions          for     the    issuer.”       Id.   § 240.16a-1(f).

Neither    the        Regulations          nor    caselaw        provide     any    additional

description or definition of “policy-making functions.”

       The Second Circuit has interpreted the broad language of

the Regulations to require a court to reject reliance on an

employee’s          title     and     instead          to   perform      a   fact-intensive

analysis       of     the     employee’s          duties       and     responsibilities      to

determine if they are a de facto officer. See Colby v. Klune,

178    F.2d        872,     873    (2d     Cir.        1949)     (addressing       whether   an
                                                 –63–
individual is an officer under Section 16(b) of the Exchange

Act, which prevents officers from using private information for

short-swing profits).

       Versions of this functional approach, mentioned favorably

by the Supreme Court, 11 have been adopted by the Fourth, Sixth,

and Ninth Circuits. See Winston v. Fed. Exp. Corp., 853 F.2d

455, 456-57 (6th Cir. 1988) (evaluating whether individual who

had    been   vice-president      still        had   access    to   confidential

information    after    his     resignation);        Merrill    Lynch,   Pierce,

Fenner & Smith, Inc. v. Livingston, 566 F.2d 1119, 1122 (9th

Cir. 1978) (noting that “court must look behind the title . . .

to ascertain [a] person’s real duties”); Gold v. Sloan, 486 F.2d

340,    351   (4th    Cir.    1973)   (rejecting       “objective    test”   and

evaluating    facts    to    determine    if    particular     officer   actually

received insider information).

       This mode of analysis has also been applied outside of the

Section 16(b) context. See S.E.C. v. Solucorp Industries, Ltd.,

274 F. Supp. 2d 379, 382-87 (S.D.N.Y. 2003) (using functional

approach to determine liability under Section 10(b) and rule

11
   Wolf v. Weinstein, 372 U.S. 633, 652 n.19 (1963) (citing
Colby, 178 F.2d at 875) (observing that in the context of
Section 16(b), “it is clear that a determination of who is a
corporate ‘officer’ within the meaning of the statute requires a
flexible assessment of particular powers and responsibilities
rather than a rigid rule of thumb”).
                               –64–
10b-5); S.E.C. v. Enterprises Solutions, Inc., 142 F. Supp. 2d

561, 574 (S.D.N.Y. 2001) (using functional approach to determine

if individual was an “officer” for Section 16(a) purposes).

       The    rationale    relied    upon    in     these   cases    focuses    on

ensuring that a company not be allowed to “hide a significant

figure in the management of a company” behind a vague title,

such as “consultant.” See Enterprises Solutions, Inc., 142 F.

Supp. 2d at 574; see also US Diagnostic Inc., S.E.C. Release No.

7928, 2000 WL 1920604, at *4 (Dec. 20, 2000) (citing C.R.A.

Realty Corp. v. Crotty, 878 F.2d 562, 563 (2d Cir. 1989)(noting

that     company    “cannot       avoid     liability       by    characterizing

[defendant] as a ‘consultant’ while allowing him to function as

an officer”). 12

       While our Court of Appeals has not addressed this issue,

the functional, fact-intensive analysis of an alleged officer’s

duties    and   responsibilities,         adopted   by   the     Second,   Fourth,

Sixth, and Ninth Circuits, is a fair and reasonable approach

which    is   consistent   with     the    SEC’s    overriding     obligation   to

protect the investing public. See Ernst & Ernst v. Hochfelder,

425 U.S. 185, 194 (1976) (noting that investor protection was a

primary purpose behind passage of the Securities Act of 1933 and

12
   Although no court seems to have definitely addressed this
issue, no court has developed an alternative approach.
                               –65–
Securities Exchange Act of 1934). Therefore, this Court will

apply the functional analysis to evaluate whether Prince was a

de facto officer at Integral.

           1.     Prince’s Activities Did        Not    Include    Performing
                  Policy Making Functions

     As    discussed     above,   the   Regulations      set    out    several

categories of individuals who qualify as “officers,” including

any person who performs “similar policy making functions” to a

“president,” a “vice president . . . in charge of a principal

business unit, division or function,” or “any other officer who

performs   a    policy   making   function.”     17    C.F.R.   §§ 240.3b-7;

240.16a-1(f).

     The few cases that have found an employee to be a de facto

officer because of their ability to make policy involved alleged

“consultants” who were actually in total control of a company.

Solucorp, 274 F. Supp. 2d at 383 (noting testimony that no one

could do anything that alleged “consultant” did not “direct or

approve”);      Enterprises   Solutions,   142    F.    Supp.     2d   at   568

(finding that alleged officer was “running the company,” and

that company had been created as “a corporate shell with no

employees, no facilities and no chief executive”); Weeks, S.E.C.

Release No. 8313, 2004 WL 828 (Oct. 23, 2003) (determining that

named officers “exercised neither authority nor influence in the

                                   –66–
management and operations of DACO” and that Weeks was actually

running    company).       The   SEC   has     never    alleged     that    Prince    was

“running      the   company”     and    thus    none    of    these    cases   involve

factual situations similar to the present one.

       Instead, the SEC argues that, because of his membership in

G6/G7, Prince “proposed and formulated policy” for Integral. See

SEC’s Post-Trial Mem. 5. It is undisputed that G6/G7 was a body

that    met    to    discuss     important        policy      decisions      and     make

recommendations       to    Chamberlain        and     that   Prince       participated

fully as an equal member of that group. See Findings of Fact

¶ 36. Indeed, Gaffney testified that Prince was a particularly

influential member of G6/G7, second only to Chamberlain. Test.

of Peter Gaffney, Trial Tr. Dec. 10, 2012, P.M. Session 52.

       However, as this Court has found in its Findings of Fact,

G6/G7   members     gave    their      opinions      and   advice     to    Chamberlain

because he requested them to and because he fostered an office

culture in which all employees were encouraged to share their

opinions. See ¶¶ 21, 36, 68.

       However, at the end of the day, Chamberlain was the only

person who had authority to make company policy for Integral.

See id. ¶¶ 37, 69; Test. of Elaine Brown, Trial Tr. Dec. 18,

2012, P.M. Session 49 (“ . . . Steve Chamberlain is the one that

set policy in the company.”); Test. of Thomas Gough, Trial Tr.
                                         –67–
Dec. 20, 2012, P.M. Session 93 (“I don’t think any decisions

were made unless Chamberlain was present.”); Test. of Gary A.

Prince, Trial Tr. Jan. 2, 2013, P.M Session 16-17 (“The people

[Chamberlain] chose for membership in G-6 were the people he

thought had the overall interests of the company at heart, and

that’s why he was interested in our recommendations and advice.

But certainly the decisions and policies were set and made by

Mr. Chamberlain.”). Thus, Prince’s participation in G6/G7 does

not, in and of itself, establish that he performed a “policy

making function” at Integral.

       Moreover, the testimony was consistent that Prince did not

and could not make policy for Integral in any capacity. See

Findings    of    Fact     ¶¶ 37,     39.   Each    of    the     former    Integral

employees testified that Prince did not have the authority to

make policy. See Test. of Peter Gaffney, Trial Tr. Dec. 10,

2012,    P.M.    Session   55    (specifying       that   there    was     no   policy

Prince could have instituted on his own without the approval of

G6/G7); Test. of Thomas Gough, Trial Tr. Dec. 20, 2012, A.M.

Session 80 (testifying that Prince “did not have authority to

make    decisions”);     Test.   of    Elaine   Brown,     Trial    Tr.     Dec.   18,

2012, P.M. Session 49 (“ . . . Steve Chamberlain is the one that

set policy in the company.”); Joint Ex. 3, SEC Dep. of Steven R.

                                        –68–
Chamberlain 83, Aug. 8, 2007 (noting that Prince could not make

or implement policy).

     The testimony of Gaffney and Gough that Prince did not have

any authority to make policy is particularly significant. No

evidence was presented that either of them had any continuing

relationship of any kind with Integral or Prince, or had any

particular reason to protect Integral, Chamberlain, or Prince.

There was nothing in their testimony that suggested in word or

tone that they had anything other than professional respect for

Prince. Their testimony, which supports the testimony of Prince,

Brown, and Chamberlain, and which the Court credits, compels the

finding    that   Prince   did    not    and     could    not    make   policy   at

Integral.

     The SEC also argues that various other facts indicate that

Prince had policy-making authority. See SEC’s Post-Trial Mem. 6-

7. The Court finds that none of these facts, independently or

taken together, establish that Prince performed a policy making

function at Integral.

     The    strongest   argument        proffered    by    the    SEC   points   to

Prince’s    influence   over     the    Mergers    and    Acquisitions    program

which he headed at Integral. The SEC established that Prince

supervised    all   day-to-day         details    regarding       the   potential

acquisition of subsidiaries as well as the operations of those
                                       –69–
which    had   been   acquired.    See       Findings    of    Fact     ¶¶ 24,     26-27.

However, as the Court has already found, the ultimate decision

on all significant mergers and acquisitions issues remained with

Chamberlain.      Id.    ¶ 26.    Thus,       while     Prince      had    substantial

influence       and     involvement       with     regard          to     mergers     and

acquisitions      issues,    he   did     not    have        final,     policy     making

authority over that program. 13

      Prince also did not have policy making authority over the

Contracts      Department,   which      he    began     to    supervise      in    August

2005. Id. ¶ 48. At that time, Chamberlain changed the company

protocol to require that all significant contracts be reviewed

and approved by either Prince or Chamberlain before they could

be signed off on by the head of the particular Group involved.

Id. ¶ 46. The testimony of the Integral employees was consistent

that this new level of review was not a substantive one, but

merely an opportunity to screen for major errors, especially

those that might affect Integral's finances. Id. ¶ 47. Moreover,

the     restriction     placed    on    Prince     when       he    was    hired     that

13
   The Court notes that the SEC could have argued that the
“policy making functions” of a “vice president . . . in charge
of a principal business unit, division or function (such as
sales, administration or finance),” 17 C.F.R. §§ 240.3b-7;
240.16a-1(f), encompass the type of influence and authority that
Prince had over the mergers and acquisitions program, even if he
did not have the final say over particular issues. Because the
parties did not raise or address this argument and no court has
addressed this issue, the Court will not consider it.
                               –70–
prevented him from signing off on contracts remained in place,

and   no    evidence          was    presented         that    Prince      ever    signed    any

contract. Id. ¶¶ 17, 43, 45.

      Although          Prince       supervised         a     few   employees,      including

exercising hiring and firing power, see id. ¶ 48, the SEC did

not present any evidence indicating that such supervision of

employees constituted an ability to make policy.

      The    other           arguments       proffered         by    the     SEC    are     also

insufficient to establish that Prince was a de facto officer.

The SEC points to the fact that Prince was one of the most

highly paid employees at Integral, see id. ¶ 30, and that his

office     was    next       to     Chamberlain’s         office,    see    id.    ¶ 38.    Such

facts indicate nothing more than the fact that Prince was a

highly valued employee who worked closely with Chamberlain. See

id. ¶¶ 38, 40.

      The        SEC        also     argues        that       Prince’s      involvement       in

recommending compensation and bonuses for members of executive

management        is        relevant.        See     id.       ¶¶ 33-34.      However,       the

significance           of    that     fact      is     minimized     by     the    consistent

testimony offered by the Integral employees that a number of

people     were    involved          in   the      recommendation        process.     See    id.

¶ 33; Test. of Thomas Gough, Dec. 20, 2012, A.M. Session 74.

Again, this was part of the general office culture established
                                                –71–
by Chamberlain that encouraged everyone to participate and share

their opinions. See Findings of Fact ¶¶ 21, 68. In sum, these

facts, without more, do not support a finding that Prince had

policy-making authority.

       The      record    is     clear         that,     while       Prince   exercised

significant       influence          at   Integral       and   was     very   close    to

Chamberlain, he did not have the authority to make or implement

any policy decisions. Such authority lay with Chamberlain and

the heads of the various Groups. To decide that the Regulations

reach individuals involved in discussing company strategy and

policy, but who do not have the authority to actually implement

such policy, would expand the scope of de facto officer status

far    beyond    what    any    court     has    to     date   recognized     as   policy

making authority.

       Thus, the Court concludes that the SEC did not prove by a

preponderance       of    the    evidence       that     Prince’s     responsibilities

were    such    that     he    was    a   de    facto    officer      under   17   C.F.R.

§ 240.3b-7 or 17 C.F.R. § 240.16a-1(f). The SEC has therefore

failed to establish an essential element of Claims II, III, V,

and VI. The Court will now briefly address the other elements of

the various counts.

                                           –72–
     C.     Count VI: Liability Under Section 16(a) and Rule 16a-3
            of the Exchange Act

     Count VI alleges that Prince is liable under Section 16(a)

of   the    Exchange    Act,    15    U.S.C.    § 78p(a),      and     Rule      16a-3

thereunder,    17   C.F.R.     § 240.16a-3,      for    his   failure      to    file

disclosure    statements       identifying      his    ownership     of    Integral

stock and changes in such ownership during the period from 1998

until 2006. Section 16(a) requires anyone “who is a director or

an officer of the issuer of [any equity] security” to file a

statement     concerning     any     holdings    and    transactions        of     the

issuer's securities. 15 U.S.C. § 78p(a); 17 C.F.R. § 240.16a-

3(a) (establishing various forms for use in fulfilling Section

16(a)   reporting      requirements).    As     discussed     above,      the    Court

finds that Prince was not a director or an officer, and was thus

not required to file Section 16(a) reports. Therefore, Prince is

not liable under Section 16(a) of the Exchange Act and Rule 16a-

3 thereunder. 14

14
   Our Court of Appeals has not addressed the issue of whether
scienter is required to establish a violation of Section 16(a),
but the SEC has consistently held that no scienter is required.
Lexington Resources, Inc., S.E.C. Release No. 379, 2009 WL
1684743, at *18 (June 5, 2009) (citations omitted); Weeks, 2002
WL 169185, at *50; cf. S.E.C. v. Savoy Indus., 587 F.2d 1149,
1167 (D.C. Cir. 1978) (holding that Section 13(d)(1) of the
Exchange Act was a reporting provision as compared to an
antifraud provision, and, therefore, no intentional conduct need
be proven).
                              –73–
       D.      Count II: Liability Under Section 10(b) and Rule 10b-5
               of the Exchange Act

       Count II alleges that Prince violated Section 10(b) of the

Exchange      Act,       15    U.S.C.    § 78j(b),       and     Rule      10b-5,       17    C.F.R.

§ 240.10b-5, by participating in a “scheme to defraud.”

       The    SEC       argues    that    Prince       participated         in     a    scheme    to

defraud, established by Chamberlain, where Prince would function

as an officer for Integral, but his officer status would not be

disclosed          to   the     public    in     order      to      avoid    disclosing          his

negative regulatory and criminal history. SEC’s Post-Trial Mem.

9-10. The SEC asserts that Prince understood his obligation to

file Section 16 ownership reports, but that such filings “would

be tantamount to an admission that he was, in fact, an officer”

and    therefore         that    Prince     chose      not     to    file     them       to    avoid

disclosing his background. Id. at 10-11.

       The    Court       has    already       concluded     that      the    SEC       failed    to

establish that Prince was acting as a de facto officer. Thus,

Prince       was    not       required    to    file     beneficial          stock       ownership

reports      under       Section      16(a).     See    supra       II.B-C.        However,      the

Court finds that, even if Prince was a de facto officer required

to    file    Section         16(a)     reports,      the    SEC     has     not       established

important other elements of its “scheme to defraud” claim.

                                               –74–
     As discussed above, see supra II.A., to establish its claim

under Section 10(b) and Rule 10b-5, the SEC would have to prove

by a preponderance of the evidence that (1) Prince was a de

facto   executive   officer    at   Integral;   (2)   Prince   was      thus

required to file Section 16(a) reports with the SEC; (3) Prince

did not file such reports in order to perpetuate a “scheme to

defraud”   that   had   the   principal   purpose   and   effect   of    not

disclosing his history of securities fraud violations to the

public; (4) Prince's legal history was a material fact; (5) the

scheme was made in connection with the purchase and sale of

securities; and (6) Prince had the requisite scienter. The Court

now addresses the two elements disputed by the parties – whether

or not the SEC has proven by a preponderance of the evidence

scienter and a “scheme to defraud.” 15

15
  This Court has already observed that if Prince was a de facto
officer and had to disclose his past legal troubles, an omission
of those facts might be material because it “could have affected
the total mix of information in Integral’s filings, rendering
them misleading . . . .” Brown, 740 F. Supp. 2d at 160 (citation
omitted); Dolphin & Bradbury, Inc. v. S.E.C., 512 F.3d 634, 638-
39 (D.C. Cir. 2008) (noting that omitted fact is material “if a
reasonable investor would have viewed it as significantly
altering the total mix of information made available”).

     Neither party raised or addressed the issue of materiality
or the issue of whether an alleged “scheme to defraud” involving
Prince’s failure to file Section 16(a) reports would be a fraud
made “in connection with the purchase or sale of securities.”
Goble, 682 F.3d at 943. Thus, the Court assumes without deciding
                              –75–
              1.      Prince Did Not Act With Scienter When He Did Not
                      File Section 16(a) Reports

       The SEC must establish scienter to prove a violation of

Section 10(b) and Rule 10b-5. See Aaron v. S.E.C., 446 U.S. 680,

691 (1980). To act with scienter means to act with “an intent to

deceive, manipulate, or defraud.” Dolphin & Bradbury, 512 F.3d

at     639.     Extreme       recklessness          may   satisfy      this      intent

requirement. Id. (citing S.E.C. v. Steadman, 967 F.2d 636, 641

(D.C. Cir. 1992)). Such recklessness is not merely a heightened

form    of    negligence,         but   is   an    “extreme    departure    from      the

standards of ordinary care.” Id. (citing Steadman, 967 F.2d at

641-42). Moreover, whether a defendant “acted with scienter . .

. is a factual determination.” Id. (citing Steadman, 967 F.2d at

641).

       Prince       argues    that      he   reasonably   relied      on   the   advice

provided by attorneys at Venable, Integral’s corporate counsel,

that    he    was    not     an   officer     at    Integral    who   needed     to    be

disclosed in Integral’s public filings. It is an open question

in this Circuit “whether reliance on the advice of counsel is a

good defense to a securities violation.” Zacharias v S.E.C., 569

F.3d 458, 467 (D.C. Cir. 2009). Generally, in a civil securities

action, reliance on the advice of counsel “does not operate as

that the SEC has met is burden with respect to those elements of
its claim.
                              –76–
an automatic defense, but is only one factor to be considered.”

S.E.C. v. Savoy Industries, 665 F.2d 1310, 1314 n.28 (D.C. Cir.

1981). However, reliance on the advice of counsel “need not be a

formal defense; it is simply evidence of good faith, a relevant

consideration in evaluating a defendant’s scienter.” Howard v.

S.E.C., 376 F.3d 1136, 1147 (D.C. Cir. 2004).

      For the reasons discussed below, the Court finds that the

SEC has not established Prince's scienter by a preponderance of

the evidence. Because proof of such scienter is necessary to

establish a violation under Section 10(b) and Rule 10b-5, the

Court does not need to resolve the open question of whether

advice-of-counsel is an independent defense to such a violation.

                  a.     Integral Requested and Received Venable’s
                         Advice After Making Complete Disclosure

      The   advice-of-counsel         defense       requires   the    defendant   to

establish      four    elements:   he        must    have   “(1)     made   complete

disclosure to counsel; (2) requested counsel’s advice as to the

legality of the contemplated action; (3) received advice that it

was   legal;    and    (4)   relied     in    good    faith    on    that   advice.”

Zacharias, 569 F.3d at 467. While the Court does not need to

address whether Prince established an advice-of-counsel defense

per se, all of its elements are directly relevant to Prince’s

scienter. Thus, the Court addresses each in turn.

                                        –77–
      The first relevant factor as to whether Prince relied on

counsel    is    whether    he     requested    counsel’s    advice    as    to     the

legality of the contemplated action. Id. Chamberlain approached

Venable in 1998        regarding Prince’s possible employment. 16 See

Findings of Fact ¶¶ 90-93. At this point, Venable was Integral’s

general     corporate      counsel       and    advised    Integral     on    public

filings, securities law compliance, financing matters, mergers

and acquisitions, and government contracts. See id. ¶¶ 81, 86-

87.

      Chamberlain spoke with John Sullivan, the senior partner in

charge of Venable’s account, and asked Sullivan how he could

structure       Prince’s   role     so   that   Integral    would     not    have    to

disclose    Prince’s       legal    history     in   its   public   filings.        Id.

¶¶ 15, 74, 90-91; Joint Ex. 3, SEC Dep. of Steven R. Chamberlain

83, July 11, 2007, p. 47. As our Court of Appeals has observed,

it is a “common attorney-client interaction” for a client to

“come[] to his lawyer with a plan and ask[] him to find a way to

implement it in a legal manner.” United States v. DeFries, 129

F.3d 1293, 1309 (D.C. Cir. 1997).

16
  To the extent that the SEC argues that Prince himself did not
request the advice of counsel, that argument has been rejected
by our Court of Appeals. See Howard, 376 F.3d at 1148-49 (noting
that it “would be impractical and highly inefficient” if lower-
level employees were not allowed to rely on the communications
of their superiors with outside counsel).
                               –78–
        Thus,    it     is    clear    that      Chamberlain     “actively     sought”

advice on the very question at issue in this case – whether

Prince    could       legally    perform      certain      functions     at   Integral

without being disclosed to the SEC in Integral’s public filings.

Thus,    this    case    is   not     one   in     which   the   defendant    did   not

actively seek the opinion of counsel or did not present the

entire question to counsel for consideration. See Zacharias, 569

F.3d at 467 (noting that “lawyer must opine on the legality of

the entire issue” in question); S.E.C. v. Scott, 565 F. Supp.

1513, 1535 (S.D.N.Y. 1983) (noting that defendant’s “complacent

attitude” and failure to “actively” seek the advice of counsel

was insufficient to establish the defense). In sum, Prince has

established that Integral “requested counsel’s advice as to the

legality of the contemplated action.” See Zacharias, 569 F.3d at

467.

       The second relevant factor as to whether Prince relied on

counsel is whether, after requesting the advice of counsel as to

the legality of a particular action, he received advice from

counsel that such action was legal. Zacharias, 569 F.3d at 467.

Sullivan and Chamberlain agreed that Prince could be hired as a

full-time employee so long as certain “carveouts” were put in

place to ensure that he would not function as an officer at

Integral.       See     Findings      of    Fact     ¶¶ 90-91,     93.   Chamberlain
                                            –79–
understood that hiring Prince, provided those “carveouts” were

in place, meant that Prince would not have to be disclosed in

Integral’s public filings. Id. ¶¶ 15, 17, 90-91. In other words,

Chamberlain      received      advice      that    Prince         could      be   hired     as    a

full-time employee under certain conditions and that, so long as

those    conditions         were   satisfied,          it    would      be     legal     not     to

disclose       his     employment     to    the    SEC.       Therefore,           Prince      has

established          that     Integral        “received            advice         that        [the

contemplated action] was legal.” See Zacharias, 569 F.3d at 467.

     The third relevant factor as to whether Prince reasonably

relied    on     counsel      is    whether       he    disclosed         to      counsel      all

relevant   information         that    would      bear       on   the     legality       of    the

proposed action. See id. The SEC does not identify any relevant

information that Chamberlain failed to disclose to Sullivan in

their initial meeting. Chamberlain indicated that Prince would

be   working      on     mergers     and    acquisitions           issues         as   well      as

continuing the work he had been doing as a consultant, which

included drafting press releases, making bonus suggestions for

members of executive management, and functioning as a general

advisor to Chamberlain and other members of senior management.

See Findings of Fact ¶ 20.

     Moreover,         Venable     had     served       as    corporate           counsel      for

Integral for several months before this conversation and Venable
                                           –80–
lawyers       knew     that     Prince         had     been      participating         in     the

preparation of financial statements and working on mergers and

acquisitions issues. Id. ¶ 95. Thus, Venable lawyers were aware

of the major responsibilities that Prince would have as a full-

time employee at Integral.

      Because        Chamberlain         and    Integral        disclosed      all    relevant

facts to Venable, they “made complete disclosure to counsel,”

which    is    relevant       to    whether      they       reasonably      relied     on     the

advice of counsel. See Zacharias, 569 F.3d at 467; see also

Dolphin & Bradbury, 512 F.3d at 642 (determining that defendant

cannot      establish       reliance       on    advice         of   counsel     unless       all

relevant facts are disclosed to attorney).

                      b.      Integral Relied on Venable’s Advice in Good
                              Faith

      The     fourth       factor    relevant         to    whether    Prince     reasonably

relied on advice of counsel is whether, after receiving advice

that the proposed action was legal, he relied on that advice in

good faith. See Zacharias, 569 F.3d at 467. There was absolutely

no   evidence        proffered      by    the    SEC       to   suggest   that       Prince    or

anyone at Integral did not believe that Venable’s advice was

accurate or legal. See Steadman, 967 F. 2d at 638 (noting that

evidence      did    not    support       finding      that      anyone   knew       advice    of

counsel was wrong or recklessly relied on it).

                                               –81–
      The      evidence      demonstrates      that     Chamberlain       relied     on

Venable’s advice when he hired Prince and structured his role at

Integral to reflect the “carveouts” discussed with Sullivan. See

Findings of Fact ¶¶ 17, 91; Joint Ex. 3, SEC Dep. of Steven R.

Chamberlain 83, July 11, 2007, p. 47. These “carveouts” were

communicated          to    Integral’s      senior      management,        and     were

recognized      and    complied     with    throughout    Prince’s       tenure.    See

Findings of Fact ¶¶ 17, 19, 91. Not only were these “carveouts”

communicated      internally,       the     evidence    showed    that     there    was

never    any    effort       to   keep    Prince’s     regulatory    and    criminal

history or his actions, duties or responsibilities from anyone,

inside or outside of Integral. 17 See id. ¶¶ 70-73. Thus, Prince

has     successfully        established      that      Integral     requested       and

received     advice        from   Venable    after     disclosing    all    relevant

information and then relied on that advice in good faith when

concluding that there was no need to file various reports with

the SEC, including Section 16(a) reports.

                      c.     In Subsequent Years, Venable Reiterated its
                             Conclusion   That   Prince  Could  Work  at
                             Integral Without Disclosure

      Integral and Venable had a number of discussions regarding

Prince’s officer status in subsequent years, and at no point did

17
     The Court notes that Integral issued a Form 8K in 1993
disclosing the charges of securities fraud filed by the SEC
against Prince. See id. ¶ 7.
                             –82–
anyone at Venable ever advise anyone at Integral that Prince’s

employment needed to be disclosed to the SEC in public filings.

See Findings of Fact ¶¶ 170-71.

       In 1999, Integral employees asked Venable lawyers whether

Prince’s compensation required that he be disclosed in the Form

10-KSB for fiscal year 1999. Id. ¶¶ 105-10. Sullivan spoke with

Chamberlain and Gough about Prince’s roles in the company and

level of compensation, and concluded that, because Prince did

not make policy and did not have staff reporting to him, he did

not   have     to   be   disclosed.   Id.   ¶ 112.    Based   on    that    advice,

Integral did not disclose Prince as a highly-paid employee in

the executive compensation table in its Form 10-KSB for fiscal

year 1999. Id.

       In 2001, Prince set up a meeting with Venable attorneys,

including      Sullivan    and    Dvorak,   to    discuss   whether    or   not    he

could become a named executive officer without being disclosed

in    Integral’s     public      filings.   Id.    ¶ 113.   The    attorneys      and

Prince were under the (mistaken) impression that, after five

years    had    passed,    Prince’s    earlier      legal   troubles    would     no

longer need to be disclosed. Id. ¶¶ 114, 116. Venable attorneys

informed Prince that the five-year limit would not expire until

the summer of 2002 and they decided to revisit the issue at that

time. Id. ¶ 116.
                                       –83–
       In the spring of 2002, Prince again raised the question of

his    officer    status    and    the    firm    researched        the   issue.     Id.

¶¶ 117-118. It concluded that, if Prince was named an executive

officer, his legal history would have to be disclosed for the

foreseeable future. Id. ¶ 121. Venable partner Anita Finkelstein

explicitly noted in an email to Wallace Christner, who was the

relationship partner at that time, that, “Integral is open to

the complaint that, no matter what his title, Integral should

have   made    disclosure    about       Prince   due   to    the    nature     of   his

activities      at    Integral.”   Def.’s     Ex.   75.      No   one     at   Integral

received a copy of this email, nor was this information ever

conveyed to anyone at Integral. See Findings of Fact ¶¶ 120-21. 18

       Finally, in December 2005, Bonnie Wachtel, a member of the

Integral      Board   of   Directors,      suggested    that      Integral      include

Prince’s biography and legal history in its Form 10-K for fiscal

year 2005, regardless of his title. Id. ¶¶ 130, 135. Integral

18
    The SEC argues that Integral’s investigation into whether
Prince would have to be disclosed if he was named an executive
officer was irrelevant because that is a distinct question from
the   question  at  issue   here,   which is   whether  Prince’s
compensation and roles required his disclosure regardless of his
title. SEC’s Post-Trial Mem. 17-18. The SEC fails to realize
that the latter question is a logical antecedent of the first
question. The question of whether providing Prince with an
additional title would require disclosure is based on an
assumption that Prince’s current job functions did not require
disclosure. Finkelstein’s memorandum underscores that Venable
lawyers understood the relationship between these two inquiries.
See Def.’s Ex. 75.
                               –84–
employees       consulted       with    Venable       lawyers       and    decided       not    to

disclose Prince in that filing. Id. ¶¶ 131-34, 137.

       Over     the    years,     Venable      lawyers        worked       intimately         with

Prince on a number of issues. They worked with Prince on mergers

and    acquisitions        issues,       and    were        well    aware       that    he     was

drafting       offer    letters,       Def.’s      Ex.      40,    reviewing       consulting

agreements       with     employees       of     subsidiaries,            Def.’s       Ex.     46,

drafting       press    releases,       Def.’s       Exs.    82,    85,    serving       on    the

Board     of     Directors        for     corporations             created       to     acquire

subsidiaries,          Def.’s    Exs.    64,     69,        87,    and    interacting         with

outside    auditors       in    his    capacity        as    Director      of    Mergers       and

Acquisitions, Def.’s Exs. 80, 82. See Findings of Fact ¶¶ 96-97.

They    also     knew     that     Prince        was        interacting         with    outside

financial analysts, drafting press releases, and participating

in the preparation of Integral’s public filings. See id. ¶¶ 98-

100, 102. The evidence shows that Venable understood the breadth

of     Prince’s        duties,     activities,              and     responsibilities            at

Integral.

       Thus,     with     full     awareness          of      Prince’s      activities         at

Integral,       Integral       employees       and     Venable      attorneys          discussed

Prince’s officer status five times between December 1998, when

Prince became a full-time employee at Integral, and August 2006,

when Prince was named an executive officer. At no point in this
                                            –85–
period did anyone at Venable ever advise anyone at Integral that

Prince needed to be disclosed to the SEC. Id. ¶¶ 170-71.

      The SEC argues that during this time, Prince “affirmatively

misrepresented his role as a member” of G6/G7 to Venable. SEC’s

Post-Trial     Mem.    17-18,       22.    However,    there     was    no   evidence

produced at trial indicating that Prince or anyone at Integral

actively hid Prince’s membership on that committee from Venable.

      The SEC then argues that Prince's and Integral's failure to

disclose Prince’s “involvement and influence” on G6/G7 was an

omission of a material fact that would have affected the advice

Venable provided. SEC’s Post-Trial Mem. 17, 22. While there was

no evidence that Venable lawyers knew about G6/G7 or Prince’s

participation     in   the    group       until   2005,    see   Findings     of    Fact

¶ 126, the fact is, as discussed supra, Prince did not have

policy-making authority at Integral, even though he was a member

of G6/G7. See supra II.B.1. Moreover, Venable lawyers were fully

apprised of the scope of Prince’s duties and responsibilities.

And   even   after     Venable      lawyers       definitely     knew   of   Prince's

participation in G6/G7, they continued to advise Integral that

Prince   was   not     an    executive      officer.      See    Findings     of    Fact

¶¶ 137, 149.

      Moreover,      there    was    no    evidence       that   at    any   time   any

employee of Integral failed to provide information requested by
                                          –86–
a    Venable    lawyer.     See    id.     ¶ 89.    Our    Court     of    Appeals    has

cautioned against finding that a defendant, particularly a non-

lawyer defendant, did not rely on counsel because they did not

disclose all possibly relevant facts. In DeFries, the Court of

Appeals observed:

       No client ever tells his or her lawyer every single
       fact that a good lawyer probes before giving advice.
       Indeed, clients do not typically even know which facts
       a lawyer might think relevant. (That is, in part, why
       they consult lawyers.) So long as the primary facts
       which a lawyer would think pertinent are disclosed, or
       the client knows the lawyer is aware of them, the
       predicate for an advice-of-counsel defense is laid.

129 F.3d at 1308-09. The record shows that Integral’s employees

asked    for    Venable's     advice,      believed       they   had      disclosed   the

relevant facts to Venable, and that the Venable lawyers were

aware of those facts.

        The    Court   also    notes     that    the     firm    put   no    formal    or

informal protocol in place by which its many lawyers (at least

twelve    different     ones      worked    on     the    Integral     account)   could

gather and compile information from Integral, nor did it have

any system by which it could track earlier work that had been

done by Venable lawyers on Integral issues. 19 See Findings of

19
   At least one Court of Appeals has observed that “part and
parcel of effectively protecting a client, and thus discharging
the attorney’s duty of care, is to protect the client from the
liability which may flow from promulgating a false or misleading
offering to investors.” F.D.I.C. v. O’Melveny & Myers, 969 F.2d
                              –87–
Fact ¶ 88. This systemic failure had consequences. For example,

a   Venable      lawyer    wrote       to    NASDAQ    officials       asserting     that

Venable knew of no communications between Prince and outside

auditors despite the fact that Venable lawyers had been copied

on such communications and represented to the SEC in 2000 that

Prince    had    had     such    communications.        Id.     ¶ 143.    Although       the

issue    of     Prince’s    disclosure         was    raised     multiple     times      by

Venable over the years, Venable attorneys never prepared any

written document setting out what Prince could or could not do.

Id. ¶ 94.

     This is particularly troubling in light of several exhibits

which    show     that     Venable      lawyers       repeatedly    raised        concerns

amongst       themselves     regarding        the     inherent    risk     involved      in

Integral’s      choice     to    not    disclose      Prince.    See     Def.’s    Ex.   75

(internal email noting that “Integral is open to the complaint

that,    no     matter    what    his       title,    Integral     should    have     made

disclosure about Prince due to the nature of his activities at

Integral”); Def.’s Exs. 183-84 (memorandum prepared by Venable

744, 749 (9th Cir. 1992), rev’d on other grounds O’Melveny &
Myers v. F.D.I.C., 512 U.S. 79 (1994). The Ninth Circuit
concluded that “attorneys, in rendering opinions relating to the
securities laws, are not justified in assuming facts as
represented to them by the client and in basing their opinion on
the assumption that such facts are correct. Rather . . . the
attorney must make a reasonable effort to independently verify
the facts on which the opinion is based.” Id. (quotation
omitted).
                              –88–
attorney Brian Dunn concluding that, “[g]iven Prince’s role at

the Company, the SEC could reasonably take the position that he

was a de facto officer and should have been disclosed as such in

the    company’s      SEC    filings”);        Def.’s    Ex.    211   (internal       email

noting troubling similarities between Integral’s issues and a

legal    case    where      a     company      had    been     held   liable    for    not

disclosing      as    a     de    facto     officer     a    significant       management

figure). Venable lawyers never shared these documents or the

concerns they raised with anyone at Integral. See Findings of

Fact ¶¶ 121, 146, 155.

       The   record       shows    that   the      Integral     employees      repeatedly

sought Venable’s advice and did everything they were asked to do

to assist their attorneys in formulating such advice. See, e.g.,

Def.’s Ex. 21 (fax from Brown to Dvorak with portions of the

Code    of   Federal       Register     asking       questions    about     “significant

employee” disclosure requirements); Def.’s Ex. 24 (email from

Brown to Dvorak asking him to follow-up regarding her earlier

fax);   Test.    of       James    Dvorak,     Trial    Tr.    Dec.   21,    2012,    P.M.

Session 15-17 (testimony of Dvorak that he does not remember

ever following up as requested).

       Based on these facts, the Court concludes that Integral’s

employees, including Prince, acted in an entirely reasonable and

transparent     fashion          when   they    repeatedly       sought     advice    from
                                            –89–
their attorneys about Prince’s officer status and relied on that

advice accordingly. Moreover, this factual scenario demonstrates

the good faith of Integral employees in attempting to get legal

advice from their lawyers to avoid problems with the SEC.

       The    record      shows      that       Integral    requested     and    received

nothing but “green flags” from Venable regarding its choice to

hire Prince as a full-time employee and structure his position

in a way that was supposed to avoid disclosure of his legal

history. See Howard, 376 F.3d at 1147 (noting that court found

no    scienter      existed    when     Howard      relied    on     counsel    and    only

encountered        “green    flags”     not      “red   flags”).     As   our    Court   of

Appeals has observed, such approval of its actions by counsel

“constitutes powerful evidence that [the] actions did not amount

to an extreme departure from the standards of ordinary care so

obvious that the actor must have been aware of it.” Id. at 1148

(internal quotation marks omitted) (citation omitted).

       Thus, the Court concludes that, even if Prince had been a

de facto officer required to file Section 16(a) reports, he did

not    fail    to    file     such    reports       with    the     requisite    scienter

because,      in    reasonable       and    good    faith    reliance     on    Venable’s

advice, he believed he was not required to file them. Because

such   scienter      is     required       to    establish    the    SEC’s     claim   that

Prince participated in a scheme to defraud that violated Section
                                            –90–
10(b) and Rule 10b-5 of the Exchange Act, the SEC has failed to

establish an essential element of that claim.

             2.     The SEC Did Not              Establish    That   a   “Scheme    to
                    Defraud” Existed

       Even if Prince had acted with scienter in failing to file

Section 16(a) reports, the SEC failed to show that he did so as

part of a “scheme to defraud.” The SEC argued that Chamberlain

“was the chief architect of the scheme to defraud and Prince was

a willing and active participant.” SEC’s Post-Trial Mem. 9.

       However, the evidence shows that Chamberlain intended to

and believed he could legally employ Prince without disclosing

him    to   the    SEC.    See    supra    II.D.1.        Prince   understood   that

Chamberlain had received legal approval for this action, and

reasonably relied on that advice. Id. Prince did not believe he

was obligated to file Section 16(a) reports, and there was no

indication that he, Chamberlain, Brown, or anyone else decided

he should not file such reports in order to defraud the public

or    the   SEC.   Thus,   even    if     Prince    was    extremely     reckless   in

relying on counsel’s advice that he did not need to file Section

16(a) reports, the Court finds there was no “scheme to defraud”

at Integral.

       The SEC has failed to establish by a preponderance of the

evidence several elements of its claim that Prince participated

                                          –91–
in a “scheme to defraud” that violated Section 10(b) and Rule

10b-5 of the Exchange Act and, thus, has failed to establish

liability under Claim II of the Complaint.

     E.     Count III: Liability Under Section            13(a)   and   Rules
            13a-1 and 12b-20 of the Exchange Act

     Count III alleges that Integral violated Section 13(a) and

Rules 13a-1 and 12b-20 of the Exchange Act when it failed to

identify Prince as an executive officer in its annual reports,

making    such   reports   materially     false   or   misleading.   See   15

U.S.C. § 78m(a); 17 C.F.R. §§ 240.13a-1, 240.12b-20; see also

SEC’s Proposed Findings of Fact & Conclusions of Law 27 [Dkt.

No. 138-9]. The SEC also argues that Prince aided and abetted

that violation by “engaging in conduct the purpose and effect of

which was to conceal his status as an officer from investors,”

which     constituted   “knowing   and     substantial     assistance”     to

Integral’s violations. Id.

     Because the Court has concluded that Prince was not a de

facto executive officer who Integral was required to disclose in

its annual reports, there was no primary violation for Prince to

aid and abet. However, even if Prince was a de facto officer,

the SEC has failed to prove by a preponderance of the evidence

                                   –92–
that Prince had the requisite scienter to establish its aiding

and abetting claim under Section 20(e) of the Exchange Act. 20

             1.      Scienter

      Section 20(e) was amended recently to specifically cover

anyone who “knowingly or recklessly” (emphasis added) provides

substantial        assistance       to   a   securities      fraud     violator.       See

S.E.C. v. Apuzzo, 689 F.3d 204, 211 n.6 (noting that Dodd-Frank

Act   of    2010    amended    Section       20(e)    to   include     recklessness).

Thus, the level of scienter that the SEC must prove for its

aiding and abetting claims is the same as for its claims under

Section     10(b)    and     Rule    10b-5    of     the   Exchange    Act.      For   the

reasons     discussed        above,      Prince      and    Integral’s      reasonable

reliance on counsel compels this Court to conclude that Prince

did   not    act    with   “extreme        recklessness”     in     participating       in

Integral’s        decision    to     not     disclose      Prince     in   its    public

filings. See supra II.D.1.

      Therefore, the SEC has failed to prove by a preponderance

of the evidence that, even if Integral violated Section 13(a) or

Rules 13a-1 or 12b-20 by not disclosing Prince in its annual

reports as an officer, Prince aided and abetted that violation

20
   The Court notes that the SEC failed to address this claim in
its Post-Trial Brief. Because the only issue raised by Prince in
his Post-Trial Brief as to this claim specifically was the issue
of scienter, that is the only element of this claim the Court
will address.
                              –93–
with    the     requisite       scienter.     See    Howard,     376    F.3d   at    1143

(quoting Graham, 222 F.3d at 1004) (finding that Howard was not

extremely        reckless       in    aiding       and   abetting       violation     of

securities       laws    when    he   did    not     encounter    “‘red     flags’    or

‘suspicious events creating reason for doubt’ that should have

alerted him to the improper conduct of the primary violator”).

Thus, the SEC has failed to establish an essential element of

this claim.

        F.     Count V: Liability Under Section 14(a) and Rule 14a-9
               of the Exchange Act

        Count V alleges that Integral violated Section 14(a) and

Rule 14a-9 of the Exchange Act when it failed to identify Prince

as an executive officer in its proxy statements, making such

statements       false     or   misleading.        See   15   U.S.C.     § 79n(a);     17

C.F.R. § 240.14a-9; see also SEC’s Proposed Findings of Fact &

Conclusions of Law 28. The SEC also argues that Prince aided and

abetted that violation by concealing his status as an officer,

which        constituted    “knowing        and     substantial        assistance”    to

Integral’s violations. Id.

        Because the Court has concluded that Prince was not a de

facto executive officer who Integral was required to disclose in

its proxy statements, there was no primary violation for Prince

to aid and abet. However, even if Prince was a de facto officer,

                                            –94–
the SEC has failed to prove by a preponderance of the evidence

that    Prince       aided    and    abetted    any   violation     by   Integral    of

Section 14(a) or Rule 14a-9 with the requisite scienter. For the

same reasons discussed above, see supra II.D.1, II.E.1, the SEC

has thus failed to prove an essential element of this claim. 21

        G.     Count VII: Practicing Accounting Before the Commission

               1.     Prince Violated the Commission Rule 102(e) Order
                      Barring Him from Appearing or Practicing Before
                      the Commission as an Accountant

       SEC Rule 102(e) allows the Commission to “deny, temporarily

or permanently, the privilege of appearing or practicing before

[the Commission] in any way to any person who is found by the

Commission       .    .   .   to    have    engaged   in   unethical     or   improper

professional         conduct.”      17     C.F.R.   § 201.102(e).    This     rule   is

“directed at protecting the integrity of the Commission's own

processes, as well as the confidence of the investing public in

the integrity of the financial reporting process.” Marrie v.

S.E.C., 374 F.3d 1196, 1200 (D.C. Cir. 2004).

       The Commission issued a Rule 102(e) Order against Prince in

1997.    See     Findings      of    Fact    ¶ 13;    Pl.’s   Ex.   2.   This    Order

permanently prohibits Prince from exercising “the privilege of

21
  The SEC failed to address this claim in its Post-Trial Brief.
Again, because the only issue raised by Prince in his Post-Trial
Brief as to this count was the issue of scienter, that is the
only element of the claim the Court addresses.
                               –95–
appearing or practicing before the Commission as an accountant.”

See id. For purposes of analysis, violation of this prohibition

requires two elements. First, an individual must “appear[] or

practice[] . . . as an accountant.” Second, such action must

have occurred “before the Commission.”

      The    Court    addresses      the      second      prong   regarding      actions

taken      “before    the    Commission”          first.     Rule      102(f)    defines

“practicing before the Commission” to include “[t]he preparation

of   any    statement,      opinion,      or      other    paper”    filed      with   the

Commission.     17    C.F.R.   § 201.102(f).            As   discussed     above,      the

securities     laws     require      a    public        company     to   file    various

documents with the SEC. See supra II.A. Primarily, companies are

obligated to file annual and quarterly reports. See 15 U.S.C.

§ 78m(a)     (requiring     every    issuer        of     registered     securities     to

file annual and quarterly reports with the SEC). These are filed

on   Form    10-Ks    and   10-Qs.       17   C.F.R.      §§ 240.13a-1,      240.13a-13

(requiring that annual and quarterly reports be filed on Form

10-Ks and Form 10-Qs, respectively).

      In addition, when a public company acquires a significant

subsidiary, the financial statements of that subsidiary must be

filed with the SEC. See 17 C.F.R. § 210.3-05; Test. of Lynn

Turner, Trial Tr. Dec. 12, 2012, A.M. Session 48. Thereafter,

the company has to file financial statements that consolidate
                                           –96–
their balance sheets and statements of income and cash flow with

those of the subsidiary. See 17 C.F.R. §§ 210.3-01; 210.3-02;

see   also    17     C.F.R.   § 210.3A-02         (discussing         how    to    present

consolidated        financial     statements       of     a     registrant        and   its

subsidiaries).

      The    evidence      was    undisputed       that       Prince     reviewed       and

commented on drafts of Integral’s public filings, including Form

10-Ks and Form 10-Qs. See Findings of Fact ¶ 54. Prince also

wrote the first draft of the MD&A section included in those

filings.     See     id.   ¶¶ 50-52.      In     addition,          Prince    engaged    in

discussions with members of the Integral accounting staff and

the   accounting      staff      at    Integral    subsidiaries          regarding      the

financial     statements.        See     id.   ¶¶ 27,         67.    These     activities

clearly meet the second prong, in that they involve work done on

various     types     of   statements      and     documents         “filed    with     the

Commission.” 17 C.F.R. § 201.102(f)(2). 22 Thus, the question is

whether      these    activities        constitute      “practicing          accounting”

before the Commission.

22
   Several of the SEC’s allegations do not constitute filings
with the Commission. The fact that Prince occasionally attended
meetings of the Board of Directors and gave presentations and
tutorials on financial issues to Directors and members of the
Integral staff has no relationship to public filings. See
Findings of Fact ¶¶ 63, 65-66. In addition, neither the
financial forecasts that Prince prepared for internal analysis
nor Defense Contract Auditing Agency submissions were filed with
the Commission. See id. ¶¶ 62, 67.
                               –97–
       Rule 102(f) defines “practicing before the Commission” to

include “[t]he preparation of any statement, opinion, or other

paper by any . . . accountant” if that document is filed with

the    Commission.        17   C.F.R.     § 201.102(f)         (emphasis      added).     The

crux    of    this    dispute        turns     on    what     the   word    “preparation”

encompasses.

       In the leading decision addressing this issue, Robert W.

Armstrong     III,        S.E.C.     Release     No.       34-51920,   2005   WL    1498425

(June 24, 2005), Armstrong, a vice president and controller of a

subsidiary     of     a     public     company,       prepared      financial     data    and

submitted it to the parent company, which included that data in

its    filings       with      the    SEC.     Id.     at    *2,    *4,    *11.    The    SEC

administrative law judge found that Armstrong did not “appear or

practice” before the Commission because he did not prepare the

actual reports filed by the public company with the SEC. Id. at

*11.

       The Commission disagreed, stating that “[t]he text of the

Rule does not specify that a person must sign a document filed

with    the   Commission.            Moreover,       the    term    ‘preparation’        of   a

document is, we believe, sufficiently broad to encompass the

preparation of data to be included in a document filed with the

Commission, at least where, as here, the data was prepared for

the express purpose of being included in such a document.” Id.
                                             –98–
Thus, participation in the preparation of data for inclusion in

a financial statement filed with the Commission is sufficient.

       This Court has already observed that Armstrong “established

that an individual may . . . be found to have practiced before

the Commission if he or she participated in the preparation of

financial statements filed with the Commission by, for example,

creating, compiling or editing information or data incorporated

into    [filings    with    the    Commission]      and     consenting     to   their

incorporation.”      S.E.C.       v.   Brown,    878   F.    Supp.   2d    109,   125

(D.D.C.     2012)    (emphasis         added)     (internal       quotation     marks

omitted) (citing Armstrong, 2005 WL 1498425 at *11). 23

       The language in Armstrong rejects the theory put forth by

Prince’s expert witness, Jonathan Macey, that only accounting

department personnel and the executives who have final authority

for    financial    disclosures        are    “practicing     accounting.”      Macey

originally    defined      “practicing        accounting”    as   “calculating     or

computing    specific      numbers      for    inclusion     in   public   filings;

making substantive accounting determinations in connection with

23
   The Court also noted that Armstrong’s interpretation of
“practicing before the Commission” was consistent with the
language of Rule 102(f) and noted that Prince could identify no
past practices or rulings that were inconsistent with its
interpretation. See Brown, 878 F. Supp. 2d at 125. Thus, the
Commission’s interpretation of Rule 102(f) in Armstrong was
reasonable and entitled to deference. Id. (citing Bowles v.
Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945) and Drake v.
F.A.A., 291 F.3d 59, 67 (D.C. Cir. 2002)).
                               –99–
the   preparation       of    public    filings;    or   making      determinations

regarding the accuracy or appropriateness of public filings.”

Def. Gary A. Prince’s Post-Trial Br. 43; see also Dkt. No. 110-

1, Reply Aff. of Professor Jonathan R. Macey in Further Support

of Def. Gary A. Prince’s Mot. for Partial Summ. J. 3; Test. of

Jonathan Macey, Trial Tr. Dec. 18, 2012, A.M. Session 48-49.

      However, Macey’s testimony at trial made clear that his

definition      was     far    more      limited.    After        extensive    cross-

examination, it became clear that Macey’s definition was really

limited    to     two   groups;        low-level    accounting       personnel     and

individuals who have final authority over exactly what numbers

are included in a public filing. See Test. of Jonathan Macey,

Trial Tr. Dec. 18, 2012, A.M. Session 43, 46-47, 51, 58-59;

Test. of Jonathan Macey, Trial Tr. Dec. 17, 2012, P.M. Session

15, 39-40, 51.

      Macey’s     definition         would     exclude   from      legal   liability

people who review and decide on accounting treatments, even if

those actions affect the data included in a financial statement,

unless    those    people     have     final    authority    to    implement     their

suggestions. Test. of Jonathan Macey, Trial Tr. Dec. 18, 2012,

A.M. Session 52, 58-59, Test. of Jonathan Macey, Trial Tr. Dec.

17, 2012, P.M. Session 46, 51-52.

                                         –100–
      This cramped definition ignores the language and spirit of

Armstrong, which rejected the premise that only those who were

“responsible    for       signing    or    filing    the    financial      statements”

were practicing accounting. Armstrong, 2005 WL 1498425 at *11.

Armstrong himself did not make the ultimate determination as to

whether the information that he contributed would be included in

the filings. Id. at *4. In fact, he “voiced concerns” regarding

the   substance      of    the    subsidiary’s      statements,      but     they   were

submitted despite his disagreement. Id. at *5. Thus, the fact

that Prince did not have final authority over what information

was included in Integral’s filings with the SEC, see Findings of

Fact ¶ 53, is not dispositive.

      Macey’s definition ignores the fact that accounting is not

a mechanistic, quantitative endeavor, but instead requires many

non-quantitative          decisions       on   which     people      can    reasonably

disagree. See Test. of Lynn Turner, Trial Tr. Dec. 12, 2012,

A.M. Session 37, 70 (discussing how preparation of financial

disclosures involves quantitative decisions, but also involves

numerous non-quantitative decisions about how various accounting

principles     and    treatments          should    be     applied    to    underlying

data). 24   Because       these   non-quantitative         decisions       may   greatly

24
  Lynn Turner, the SEC’s expert witness, was extremely qualified
to opine on what constitutes accounting. He is a certified
                             –101–
affect   what    final    numbers    are    included   in   the     financial

statements, those who participate in making those decisions are

“creating”     and   “compiling”    the   relevant   information,    even   if

they do not have final authority over the exact numbers that are

included. 25

public accountant who practiced at one of the country’s largest
accounting firms for twenty years, served as chief financial
officer of a major technology company, served as Chief
Accountant of the Commission from July 1998 to August 2001, and
served on the Board of Directors of several major companies.
Pl.’s Ex. 132, Ex. 8. Macey, on the other hand, is not now nor
ever has been an accountant, C.P.A., or corporate officer. Test.
of Jonathan Macey, Trial Tr. Dec. 18, 2012, A.M. Session 32.
Moreover, Macey has never been involved in a Rule 102(e)
proceeding nor has he ever written about Rule 102 as an
academic. See Def.’s Ex. 266, ex. 1 (Macey’s resume).
25
   The SEC argues that the definition of “practicing accounting”
goes beyond when someone is “creating, compiling, or editing”
data or information that is incorporated into financial
statements, and includes any editorial review of the statements.
For example, it argues that Prince was practicing as an
accountant when he suggested using rounded numbers, Pl’s Ex. 36
p. 15; Pl.’s Ex. 37 p. 16; Pl.’s Ex. 55 p. 8, noted that a
particular sentence was illogical, Pl.’s Ex. 37 p. 43, and
suggested consolidating two sentences into one, Pl.’s Ex. 53 p.
9. It also alleges that the various times that Prince pointed
out   inconsistencies   within   or   among  financial   filings
constituted practicing accounting. Pl.’s Ex. 29, pp. 2, 12;
Pl.’s Ex. 30, p. 7; Pl.’s Ex. 37, p. 24; Pl.’s Ex. 53, p. 12;
Test. of Gary A. Prince, Trial Tr. Jan. 2, P.M. Session, 56-57,
59-60, 62-63, 69, 71.

     The SEC’s position is vulnerable to the criticism that it
is far too broad because it could arguably encompass anyone,
including non-accountant executive officers and directors, who
identified typographical errors or engaged in editorial review
of public filings. However, the Court need not delve into this
challenging question on which the Circuit has not ruled, because
                              –102–
       The record contains evidence showing that Prince engaged in

such decisionmaking. For example, Prince sent an email to Brown

and Pat Carey, Integral’s controller, regarding the accrual of

bonuses       given    to     employees          at     SAT,     one     of   Integral’s

subsidiaries. Pl.'s Ex. 134. He wrote, “I have instructed Paul

[SAT’s controller] to accrue the bonuses in FY00 and to reverse

the    FY01   entries.      Please    make       sure    the     consolidated    numbers

reflect this change also.” Id.; Test. of Gary A. Prince, Trial

Tr. Jan. 3, 2013, A.M. Session 53-54. Clearly, Prince was making

an    accounting      determination        for    SAT,     and    then   directing     the

Integral      accounting     staff    to    make      sure     that    this   number   was

reflected      in     the    consolidated         financial        statements.       Those

financial statements were then filed with the SEC. See 17 C.F.R.

§ 210.3A-02        (discussing    how     to     present       consolidated    financial

statements of a registrant and its subsidiaries).

       Prince's actions are similar to the work the SEC deemed

“practicing         accounting”      in     Armstrong.           Armstrong,     2005    WL

1498425,      at    *11     (determining         that    Armstrong       “appeared     and

practiced before the Commission” when he computed the income

that needed to be held in reserve, directed that determination

be included in the subsidiary’s reports, and then reviewed and

there  is   substantial   evidence   in  the record  of  Prince
“practicing accounting” under the narrower “creating, compiling
or editing” standard set forth in Armstrong.
                               –103–
approved    its   inclusion     in    the    parent   company’s        financial

filings).

     Similarly,    Prince     wrote     to   the   controller     of     another

Integral subsidiary, RT Logic, and opined on how the subsidiary

should book certain journal entries in its closing financial

statements. Pl.’s Ex. 54. He made specific recommendations as to

how certain items should be recorded. For example, he stated

that a particular credit should be booked to additional paid-in

capital rather than retained earnings and noted that a debit

should flow through a particular expense. Id.; Test. of Lynn

Turner, Trial Tr. Dec. 12, 2012, A.M. Session 45-46. The closing

financial   statements   were    then    included     in   a   Form    8-K   that

Integral filed with the SEC. Id. at 45, 48. 26

26
    Although Prince argues that he was merely making a
recommendation in this email, Test. of Gary A. Prince, Trial Tr.
Jan. 2, 2013, P.M. Session 81, Brown’s response indicates that
Prince had final review over the financial statement before it
was filed. She wrote, “I’m assuming we’ll receive the revised
financial either today or tomorrow. I’ll await your review
before paying out the excess purchase price to former RT
shareholders. If you review/approve them while at RT, please let
me know so I can start processing the payments.” Pl.’s Ex. 54.
The last sentence indicates that Prince had the authority to
review and approve the financial statement containing the
disputed transactions without Brown’s review or approval. Thus,
although Integral’s general procedure gave Brown the final say
on accounting issues, see Findings of Fact ¶ 53, in this
instance Brown is giving Prince the authority and responsibility
to be the last Integral employee to review a financial statement
eventually filed with the SEC.

                                     –104–
       Other    documents   similarly     show   Prince   participating    in

determining the proper treatment of Integral’s financial data.

Prince prepared spreadsheets that calculated various scenarios

regarding what percentage of total revenue a particular contract

would    represent.    Pl.’s    Ex.   135.   Brown    then   evaluated    the

scenarios and chose one for use in the Form 10-KSB for fiscal

year    1999.   Id.   Prince   made   a   similar   calculation   for    Brown

regarding the Form 10-K for fiscal year 2001, and created a

spreadsheet with the “back-up for this calculation.” 27 Pl.’s Ex.

35. The subject lines and substance of the emails show that

Prince was fully aware that these calculations were going to be

used in SEC filings.

       Prince was also actively involved with the implementation

of Financial Accounting Standard 123 for fiscal year 2006. Pl.’s

Ex. 93; Test. of Lynn Turner, Trial Tr. Dec. 12, 2012, A.M.

Session 63. He sent a long email to Integral’s senior management

and accounting staff explaining what he called “my plan,” which

attempted to address “the prospect of [an] adverse [profit and

loss] effect].” Pl.’s Ex. 93. The profit and loss statements are

financial statements that are included in Integral’s filings.

27
  While the evidence and testimony was generally consistent that
Prince did not have “write” privileges with respect to
accounting data, see Findings of Fact ¶ 18, this exhibit shows
that, at least at one point, he had such privileges.
                              –105–
Test. of Lynn Turner, Trial Tr. Dec. 12, 2012, A.M. Session 64-

67. Thus, Prince's “plan” directly affected the way that stock

options    were    reported      to    the    SEC      in     Integral’s      financial

statements.

      In   general,      the     implementation         of     Generally       Accepted

Accounting Principles (“GAAP”) and the rules of the Financial

Accounting    Standards     Board      (“FASB”)      require     complex      decisions

involving the exercise of accounting judgment. Test. of Elaine

Brown, Dec. 18, 2012, P.M. Session 13; Test. of Lynn Turner,

Dec. 12, 2012, A.M. Session 36-37. Thus, part of functioning as

an    accountant,     and      “creating,       compiling,       or    editing”     the

information or data incorporated in a financial statement, is

making such decisions. The foregoing exhibits show that Prince

was actively engaged in this process.

      The SEC also emphasizes the significance of an email Prince

sent claiming to be “running the Accounting Dept” while Brown

was   on   maternity     leave.       See    Pl.’s     Ex.     79;    SEC’s    Proposed

Findings   of     Fact   and    Conclusions       of    Law    66;    Test.    of   Lynn

Turner, Dec. 13, 2012, P.M. Session 11-15, 50. The testimony was

consistent, and this Court finds, that Prince’s statement was

intended as a joke and that Brown and her second in command, Pat

Carey, remained in control of the Accounting Department during

her absence. See Findings of Fact ¶ 58; Test. of Gary A. Prince,
                                        –106–
Trial Tr. Jan. 3, 2013, P.M. Session 83 (“[I]f I was making a

coup    of   the    accounting       department,        I   probably    wouldn’t       have

copied Ms. [Brown] on it.”).

       Throughout the course of his employment at Integral, Prince

reviewed and commented on draft filings and made a variety of

editorial suggestions. See Findings of Fact ¶ 54. His comments,

however,     were       not   generally     substantive       recommendations         about

how to book particular entries or how to treat financial data.

Pl.’s Exs. 18, 29, 30, 36, 37, 52, 53, 61, 64, 69, 119. While

Brown    was       on    maternity     leave,       however,       Prince      did     make

accounting judgments that affected the actual numbers that went

into the financial statements.

       The   Court        finds    that     Prince      did      take   on     additional

responsibilities          regarding        Integral's       filings     with    the     SEC

during this time period. See id. ¶ 59. Prince admitted that he

assisted     the        accounting    staff        in   gathering       and    compiling

information while Brown was on maternity leave. Test. of Gary A.

Prince, Trial Tr. Jan. 2, 2013, P.M. Session 36, 38; Test. of

Gary A. Prince, Trial Tr. Jan. 3, 2013, A.M. Session 42.

       Two exhibits demonstrate the type of recommendations Prince

was making during Brown’s absence. First, he suggested that a

particular     reserve        be   taken    and    noted    in    the   Form    10-K    for

fiscal year 2004. Pl.’s Ex. 79 (“I’d say take the remaining
                                           –107–
license revenue on ATNAGE but set up a reserve for a similar

amt.”) In response, Al Smith, the assistant controller, informed

Prince that “[t]his change would ripple through the sheets.” Id.

Second, Prince, in conjunction with others in the accounting

department, determined how a particular contract dispute should

be booked. Pl.’s Ex. 80 (“The Boys, Stuart and I have discussed

the matter and . . . [i]t is our collective judgment that we

should    reserve       $260K       of       the    $460K    leaving       us    with    a    $200K

“exposed”    receivable         for          this     job.”)     These     were     substantive

financial        judgments           that           affected         Integral’s         financial

statements and, eventually, its Form 10-K for fiscal year 2004.

     The    emails      demonstrate            Prince       “practicing         accounting”      by

determining      how     particular                data   should      be    treated      in     the

financial    statements         of       Integral         and   its    subsidiaries.          Those

statements       were        then    incorporated               in    filings      before       the

Commission. While there is no need to address the SEC’s broader

definition of accounting, the Court finds that these particular

incidents        fall        well        within           Armstrong’s           definition       of

“preparation” as “encompass[ing] the preparation of data to be

included    in    a     document         filed       with   the      Commission,        at    least

where, as here, the data was prepared for the express purpose of

being    included       in    such       a    document.”        See    Armstrong,        2005    WL

1498425, at *11. Thus, since Prince was practicing accounting by
                                               –108–
preparing financial data that was filed with the Commission, he

violated the terms of his Accounting Bar.

              2.       Prince Did Not Obtain or Rely on Advice of
                       Counsel Regarding Practicing Accounting Before
                       the Commission

      Prince       notes     in       his    Post-Trial       Brief   that    if    he    did

practice accounting before the Commission, he “did so in good

faith     reliance        upon    the       advice    of   counsel.”      Def.     Gary    A.

Prince's Post-Trial Br. 47. However, Prince did not identify any

caselaw requiring scienter to establish a violation of a Rule

102(e)     Order.         Even        if    an   advice-of-counsel           defense      was

available, Prince has failed to establish the elements of such a

defense on this issue.

      As discussed above, the elements of an advice-of-counsel

defense require the defendant to establish that he: “(1) made

complete disclosure to counsel; (2) requested counsel’s advice

as   to   the      legality      of    the    contemplated      action;      (3)   received

advice that it was legal; and (4) relied in good faith on that

advice.” Zacharias, 569 F.3d at 467.

      There      was    some      indication      that     Chamberlain       and   Sullivan

discussed Prince’s Accounting Bar at their initial meeting in

1998, and that the “carveouts” put in place were intended to

prevent Prince from violating that Bar. See Findings of Fact

¶¶ 18,     90.      For     that       reason,       Prince     was   not     allowed      to
                                              –109–
participate in accounting staff meetings and was denied access

to accounting data. Id. ¶ 18.

       However,       there     is   no    evidence        in     the   record      that

Chamberlain      indicated      to   Sullivan      that    he     intended     to   have

Prince participate in the preparation of financial data to the

extent that Prince did. In fact, it is unclear that Chamberlain

ever    knew     that    Prince      engaged      in    recommending         particular

financial determinations as discussed above. See supra II.G.1.

Thus, the evidence does not support a finding that Chamberlain

and    Integral       fully    disclosed     the       relevant    information       and

requested the type of specific advice on the issue that would

support an advice-of-counsel defense. 28

       Moreover, Prince’s testimony contradicts his argument that

he relied on the advice of counsel. He testified that, in 1997,

he    spoke    with   his     then-attorney,       Roger    Spaeder     of    Zuckerman

Spaeder, regarding the Accounting Bar. Test. of Gary A. Prince,

Trial Tr. Jan. 2, 2013, P.M. Session 11. He related that Spaeder

28
   The Court notes that Venable did know that Prince interacted
with accounting personnel and outside auditors on financial
issues, helped draft the MD&A section of public filings,
reviewed and commented on drafts of public filings, and
generated financial projections as part of his employment at
Integral. Id. ¶¶ 96-98, 100, 102. However, because there is such
scant evidence to support whether Chamberlain actually asked and
received approval for Prince to engage in such actions,
Venable’s tacit awareness of these tasks is insufficient to
allow such a defense.

                                          –110–
told him to “stay away from the preparation or participation in

the preparation of financial statements that would be filed with

the   SEC.”   Id.   Prince   clearly   did   not   “stay   away”   from   such

financial statements, but participated in drafting and reviewing

portions of Integral’s statements as well as the preparation of

the underlying data. See supra II.G.1; see also Findings of Fact

¶¶ 50, 54, 59, 67. He did not ask for any more specific advice

from Spaeder or from Venable at any time. 29 Thus, even if our

Court of Appeals recognized an advice-of counsel defense as a

29
  In the spring of 2006, Christner of Venable advised Integral’s
independent Directors that the firm had “not seen any evidence”
that would lead it to believe Prince had practiced accounting
before the Commission. See Findings of Fact ¶ 149. This is the
first evidence that this issue was discussed between Integral
and Venable after Chamberlain’s initial meeting with Sullivan.
The advice was given approximately two years after the latest
incidents that the Court found were practicing accounting before
the Commission. See supra II.G.1.

     However, the Court notes that in the spring of 2006,
Christner asked Treasure Johnson to research the Accounting Bar,
and she concluded that the company should take “special care . .
. to ensure that [Prince] has nothing to do of an accounting
nature and particularly that he has no involvement in the
preparation of the company’s financial statements,” Def.’s Ex.
229, and that Integral “has to be very careful that he has no
responsibility at all for any accounting functions at Integral
and nothing to do with the preparation of the financials, other
than provide information when asked,” Def.’s Ex. 226. In
addition, a week later, Johnson again advised Christner that
Prince should “stay[] away from the financials.” Def.’s Ex. 235.
Despite the fact that Integral’s Directors had clearly asked for
guidance on this issue, no one at Venable sent these emails or
conveyed the substance of them to anyone at Integral. See
Findings of Fact ¶¶ 159, 162.
                              –111–
complete defense to securities violations, Prince did not adduce

enough evidence to establish that he would be entitled to such a

defense.

       H.     Relief

       The SEC has prevailed only on Count VII of its Complaint,

which       alleged    that    Prince     practiced      accounting    before    the

Commission in violation of his Accounting Bar. The requested

relief for this claim is a permanent injunction “restrain[ing]

and enjoin[ing]” Prince from violating the Accounting Bar by

appearing or practicing before the Commission as an accountant.

Compl. 20; SEC’s Proposed Findings of Fact & Conclusions of Law

43.

        In Savoy Industries, 587 F.2d at 1168, our Court of Appeals

stated that “where the SEC seeks an injunction regarding future

conduct (rather than to halt an ongoing violation) [which is the

situation      in     this    case],    its   ultimate    test   is    whether   the

defendant's past conduct indicates . . . there is a reasonable

likelihood of further violation(s) in the future.” The Court set

forth the following factors for assessing whether an injunction

is    warranted:        (1)    whether    the    violation    was     “an   isolated

incident;” (2) whether the defendant has “demonstrated that he

understands his conduct to have been wrongful;” (3) whether he

gives “sufficient assurances against future violations;” and (4)
                                         –112–
whether    his      “business     activities       may    present      him    further

temptations      to   violate     the     law.”    Id.;    see    also      S.E.C.   v.

Bilzerian, 29 F.3d 689, 695 (D.C. Cir. 1994) (quoting S.E.C. v.

First City Fin. Corp., 890 F.2d 1215, 1228 (D.C. Cir. 1989)).

       While   it     is   true    that     the     issuance      of    a    permanent

injunction against future securities violations is a “drastic

remedy and not a mild prophylactic,” S.E.C. v. Yun, 148 F. Supp.

2d 1287, 1293 (M.D. Fla. 2001), vacated on other grounds, 327

F.3d 1263 (11th Cir. 2003), the Court concludes that the SEC has

proven, by a preponderance of the evidence, that imposition of

an injunction is warranted.

       As to the first Savoy factor, there is simply no question

that    Prince's      violation     of    his      Bar    against      appearing     or

practicing as an accountant before the Commission was not “an

isolated   incident.”      As     the    Court's    lengthy      Findings     of   Fact

indicate, from December 1998 when he became a full-time employee

at Integral, to 2007 when his employment was terminated, Prince

was deeply involved in the preparation of financial statements,

in the writing of the MD&A section of Integral's Form 10-Q and

10-K filings with the Commission, in reviewing and commenting in

detail on drafts of the financial statements, in questioning the

accuracy of data, in adding and/or correcting information, and

making suggestions about internal inconsistencies and specific
                                         –113–
language. See Findings of Fact ¶¶ 50, 52, 54, 59, 67. The Court

did   not   specifically           conclude     that       each    element      of   Prince's

participation in the preparation of the financial statements was

inappropriate in light of his Accounting Bar. However, the Court

identified        seven    specific        examples,        spanning       several       years,

where Prince clearly violated the Bar. Thus, Prince cannot argue

that his violations were “isolated incident(s).”

      As    to    the     second    Savoy     factor,       it    is     unclear     from   the

testimony whether Prince “has demonstrated that he understands

his   conduct       to     have     been      wrongful.”          While    he      has   given

assurances       that     he   will    not    do     any    accounting       work    for    any

public company, see Test. of Gary A. Prince, Trial Tr. Jan. 3,

2013, P.M. Session 23-24, he has certainly not shown that he

considers his past conduct to be a violation of the existing Bar

against     his    practicing         accounting      before       the    Commission.       The

Court understands full well that he is entitled to present a

vigorous defense, as his counsel have done, but that does not

preclude consideration of Savoy's ruling that the defendant's

understanding that his conduct was wrong is a legitimate factor

to be considered.

      As to the third and fourth factors, Prince has failed to

give “sufficient assurances against future violations,” and has

not demonstrated that his future business activities will not
                                             –114–
“present him with future temptations to violate the law.” See

Savoy, 587 F.2d at 1168. While Prince testified that he would

never commit the kind of conduct he is guilty of in this case,

his “assurance” rings hollow.

       At this time, Prince holds himself out on the internet as

the Founder and CEO of Fiscal Management Associates, LLC. Pl.’s

Ex. 187. His website is both instructive and troubling.

       In   it     he    emphasizes      that    he    has    over      thirty    years    of

experience in financial management, that he has been the Chief

Financial Officer for at least four public companies which he

names,      that    he     has    been    the     Chief       Financial        Officer    for

“numerous” private companies, naming four of them, that he has

“been involved in the preparation of financial statements for

more   than      100     companies,”     and    that     he    has   an    MBA    from    the

University of Maryland and is a non-practicing C.P.A. To any

member of the public reading this material, it would be apparent

that   Prince       is    extremely      experienced         in   handling       accounting

matters for both public and private companies.

       Prince      testified      that     Fiscal       Management        Associates      is

currently     “inactive”         and   that     it    existed     for    the    purpose    of

soliciting business and explaining his areas of expertise. Test.

of Gary Prince, Trial Tr. Jan. 3, 2013, P.M. Session 18-20. He

also testified that it was now used to buy and sell classic
                                          –115–
cars, but that he would consider taking on work for a public

company if the opportunity arose. Id. at 20-23.

        There    is    nothing       to     indicate   that      Fiscal     Management

Associates does not still exist for the activities and financial

management consulting that it was originally created for. The

fact that the contact number is currently “inactive,” as Prince

testified,      id.    at   18,    would     certainly    not    be   apparent      to   a

member of the public scanning the internet for the kinds of

financial management services Prince advertised. The bottom line

is that whether this company is active or not, Prince has never

taken down this advertisement, it does not say a word about

trading of classic cars, and no member of the public would know

those    facts.       The   fact     that    this   company      is   now    used    for

purchasing and selling classic cars in no way gives “sufficient

assurance       against     future    violations,”       and    certainly    does    not

reassure the Court that no business activities may present him

with temptation to violate the law.

        In addition to the analysis of Savoy factors justifying

imposition of an injunction, the Court takes into consideration

-- even though it is not dispositive -- Prince's prior violation

of the securities law. As the Findings of Fact indicate, he

violated the securities laws before joining Integral as a full

time employee in 1998 and served a short jail term. See Findings
                                            –116–
of   Fact    ¶¶    8,   12.    Three    years     after   being    released       from

incarceration, he began violating the Rule 102(e) Order. See

Pl.'s Ex. 135 (creating spreadsheets for use in public filings

in 1999).

       Finally, in 1997, shortly before joining Integral as a full

time    employee,       Prince    spoke    with    his    then-attorney,      Roger

Spaeder of Zuckerman Spaeder, regarding the limitations under

the Accounting Bar. He testified that Spaeder told him to “stay

away from the preparation or participation in the preparation of

financial statements that would be filed with the SEC.” Test. of

Gary A. Prince, Trial Tr. Jan. 2, 2013, P.M. Session 11.

       However, Prince did no such thing. Again, as set forth in

detail in the Findings of Fact, Prince participated extensively

in the preparation of financial statements, the reviewing of the

underlying data supporting those financial statements, and in

suggesting how certain accounting decisions should be made. The

fact that he failed to follow the explicit advice of his own

counsel,     the    fact   that    he   maintains     a    website   which    could

mislead     the    investing     public,   the    fact    that   analysis    of    the

Savoy factors does not suggest that there will be no future

conduct in violation of his Bar Order, and the fact of his prior

violation of the Securities Act, convinces the Court that there

                                        –117–
is   a    “reasonable    likelihood”       of    future    violations    by   the

Defendant. Savoy, 587 F.2d at 1168.

     Therefore, the Court concludes that the SEC has proven by a

preponderance       of   the    evidence       that   an   injunction    against

violating     Prince's    Bar    on    practicing     accounting   before     the

Commission     is   necessary     in    order    to   protect   the     investing

public.

III. CONCLUSION

     For the foregoing reasons, the Court grants judgment in

favor of the SEC on its claim that Prince practiced accounting

before the Commission in violation of his Accounting Bar and

grants the SEC's request for injunctive relief. The Court grants

judgment in favor of Prince on all other claims. An Order will

accompany this Memorandum Opinion.

                                                /s/________________________
May 2, 2013                                    Gladys Kessler
                                               United States District Judge

Copies to: attorneys on record via ECF

                                       –118–