Court Opinion

ID: 9497851
Source: CourtListenerOpinion
Date Created: 2023-08-05 17:01:46.470569+00
Date Added: 2024-06-11T17:58:27.588983
License: Public Domain

REINHARDT, Circuit Judge,
concurring in the result, with whom GRABER, Circuit Judge, joins:
I agree that the severance packages in question are “extraordinary payments.” I do not believe, however, that Congress intended courts to apply a vague and mul-ti-faceted test that requires consideration of the purpose, circumstances, and size of the benefits, as well as other more complex factors, when determining whether to grant a temporary order escrowing such one-time payments for a short period of time while the SEC makes its decision regarding the filing of formal charges. Rather, employing a well-established meaning of the word “extraordinary,” I would hold that all severance packages due top corporate officers and officials, and any other substantial non-routine payments to which they may be entitled, constitute “extraordinary payments” that the district court may order placed in escrow temporarily.
Section 1103 is a prophylactic provision intended to maintain the financial status quo of companies under investigation. As *1049Senator Lott, sponsor of the provision, explained, its purpose is to “freeze[] payments of potential wrongdoers ... [by] imposing a 45-day freeze on extraordinary payments to corporate executives.” Floor Statement of then Senate Majority Leader Lott, 148 Cong. Rec. S6545 (July 10, 2002) (emphasis added). In order to effectuate the broad remedial purpose of the Sar-banes-Oxley Act, section 1103 authorizes the SEC to freeze any payments that are not made in the course of ordinary business operations and that might adversely affect the SEC’s ability to protect the shareholders of a company under investigation. The freeze is intended to ensure that disgorgement and other remedies will be available should corporate financial wrongdoing be established. Complementing section 1103’s “freezing” of certain funds of a company under investigation, the “extraordinariness” requirement ensures that individuals will continue to receive their regular salaries and benefits and that the company will not be restricted in its usual and ordinary day-to-day operations during the pendency of the investigation. In contrast, the severance of a corporate executive, such as a CEO or a CFO, and the payment of benefits related to that severance, is, by definition, “extraordinary”: it is uncommon, unusual, and, ultimately, not a part of the regular day-today business of the company.1
This interpretation of section 1103 is well-supported. It accords with a common and well-established definition of “extraordinary.” See e.g., Black’s Law Dictionary 406 (6th ed. (abridged) 1991) (defining “extraordinary,” inter alia, as “employed for an exceptional purpose or on a special occasion”); Oxford English Dictionary (2d ed.1989) (defining “extraordinary,” inter alia, as being “[o]ut of the usual or regular course of order ... exceptional; unusual; singular.”). It is corroborated by the Congressional record. See, e.g., Floor Statement of Senator Lott, 148 Cong. Rec. S6545 (daily ed. July 10, 2002) (complaining that executives were receiving “rewards,” “corporate assets ... [for] personal benefit,” and “increased payments,” “[w]hile an SEC investigation is underway”); Floor Statement of Representative Sensenbrenner 148 Cóng. Rec. H4685 (daily ed. July 16, 2002) (stating that under this legislation, “top executives will not be allowed to pilfer the assets of the company by giving themselves huge bonuses and other extraordinary payments if the company is subject to [an] SEC investigation. Their pay and benefits are frozen when the investigation starts”).2 Lastly, a bright-line rule comports with the purpose of the Act, particularly in light of the early stage of the investigation' at which the SEC would ordinarily need to invoke section 1103, a stage at which the agency is yet to develop much of the relevant information. See Floor Statement of Representative Baker, 148 Cong. Rec. H4683-01 (daily ed. July 16, 2002) (noting that section 1103 allows “the SEC to freeze extraordinary payments until appropriate investigation may be concluded to determine whether such payments were warranted or not.” (emphasis added)). As the SEC puts it, “complex proceedings are inimical ... *1050to the purposes of Section 1103” when the “investigation remains nascent or incomplete, and on an expedited (often emergency) basis.”3
Irrespective of how common the termination of a CEO, CFO, or any key employee may be in the business world at large, or even at the particular company under investigation, the termination itself, and more important, the substantial severance package that so frequently accompanies it, is “extraordinary” under section 1103, because the event is not part of the regular day-to-day operations of the enterprise and the payments tend to disturb the financial status quo that the SEC is seeking to maintain. I see no need to weigh the amount of the severance package relative to the petitioners’ base salary, or to assess whether the severance negotiations were suspicious or carried out in an “extraordinary” manner; nor do I see any need to examine any of the other factors the majority suggests may in some circumstances be relevant, such as the severance benefits of officers of other companies. Like the majority, I believe that Congress intended to “provide a strong shield for third-party creditors and corporate investors once the SEC begins an investigation of corporate malfeasance,” ante at 1036. Contrary to the majority, however, I believe that whether there are suspicions of additional wrongdoing in the negotiation of the severance package, and whether the SEC can prove that any severance payments are connected with the pending investigation, is irrelevant to the question whether severance payments are “extraordinary” under the Act. If the purpose of section 1103 is, as the majority agrees, to prevent wrongdoers from depleting the corporate treasury and to ensure that there are adequate funds to provide for disgorgement should the allegations of fraud prove to be true, then an “extraordinary” payment would still be extraordinary even though it simply matched the executive’s base annual salary, which in most cases would be in the millions. Similarly, the payment would be extraordinary even though the terms and amount were established entirely and unambiguously by pre-negotiated provisions incorporated in an employment contract long before the investigation commenced and even though no further negotiations whatsoever transpired after the first hint of scandal. In short a severance payment is an extraordinary payment regardless of the circumstances.
Of course, just because all severance payments are extraordinary does not mean that all such payments will be automatically frozen when an investigation starts. Indeed, the SEC has the discretion to decide whether a particular extraordinary payment should be placed in escrow, and whether to request an escrow order from a federal judge. In making that decision it will undoubtedly consider whether, on the basis of the limited facts available to it, a particular freeze order is necessary or desirable to protect the public interest. Also, if, ultimately, the investigation does not lead to a charge by the SEC, any escrowed payment is released, while if a charge against the company is filed, the individual affected by such a freeze may petition a federal court for review of the order.
The clear-cut rule established by section 1103 provides an orderly and efficient method of effectuating Congress’ intent while giving firm guidance to companies that are under investigation. The risk that in the absence of a freeze the SEC will be unable to achieve its objective of protecting the public interest because it cannot recoup the extraordinary payments made to high-ranking corporate officers or officials substantially outweighs the limited *1051inconvenience a temporary freeze imposes upon the issuer and the would-be recipient of the extraordinary payment. In my opinion, Congress did not intend that before the SEC may freeze a severance payment for 45 or 90 days, it must satisfy the “extraordinariness” standard by presenting a substantial body of evidence to a court regarding the purpose, circumstances, and size of the particular payment. I would hold that under section 1103, all severance packages due to corporate executives fall into the category of “extraordinary payments” and are subject to a temporary freeze when the company in question, or those acting on its behalf, are under investigation for serious securities violations. For this reason, I agree that the order freezing the severance payments of Yuen and Leung must be affirmed.

. As Judge Trott’s opinion for the court points out, see ante at 1035, we have recently experienced a tidal wave of corporate accounting scandals. Although the government tends, unabashedly, to give medals to high-ranking officials whose missions have ended in disaster, corporations are more likely to give extravagant bonuses to such individuals, while inviting them to leave so as to avoid further public embarrassment.

. As the above statements from Congress illustrate, Congress referred to "bonuses,” "rewards,” and "increased payments,” as "extraordinary payments.” All are payments beyond a corporate executive’s ordinary and customary salary or other compensation.

. Petition of the SEC for Rehearing and Rehearing En Banc, at 15.