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United States Securities and v. Elaine M. Brown

July 19, 2012


The opinion of the court was delivered by: Gladys Kessler United States District Judge


Plaintiff United States Securities and Exchange Commission ("SEC") brings this action against Defendants Elaine M. Brown and Gary A. Prince*fn1 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 Rules promulgated under the Exchange Act. This matter is before the Court on Brown's Motion for Summary Judgment [Dkt. No. 95] and Prince's Motion for Partial Summary Judgment [Dkt. No. 94]. Upon consideration of the Motions, Oppositions, Replies, and the entire record herein, and for the reasons stated below, Brown's Motion for Summary Judgment is granted in part and denied in part and Prince's

Motion for Partial Summary Judgment is granted in part and denied in part.

I. Background

A. Factual Background*fn2

Defendants Brown and Prince are former employees of Integral Systems, Inc. ("Integral"), a publicly traded Maryland corporation. Integral makes and sells satellite ground systems, including satellite communications systems and software products for satellite command and control.

Defendant Brown was the Chief Financial Officer and Principal Accounting Officer of Integral from 1997 until May of 2007, and the Vice President of Administration from 2007 until she resigned from that position in July 2008. During her tenure with Integral, Brown signed the company's annual reports. Other members of Integral's management and the members of its Board of Directors also signed Integral's annual reports.

Defendant Prince was hired in 1982 by Integral to perform part-time accounting services for the company. In 1993, Prince was appointed Integral's Vice President and Chief Financial Officer. Prince resigned his position as Integral's CFO in 1995, shortly before pleading guilty in the Central District of California to a conspiracy to commit securities fraud and to making false statements in connection with his conduct as an officer of another corporation. United States v. Prince, No. 95-cr-00771 (C.D. Cal. Sept. 5, 1995).

In 1994, the United States District Court for the District of Columbia enjoined Prince from violating the antifraud and lying-to-auditors provisions of the Exchange Act based on the conduct underlying his guilty plea in the Central District of California. SEC v. Bolen, No. 93-cv-01331 (D.D.C. Aug. 18, 1994). In 1997, the SEC issued, and Prince agreed to comply with, an Order ("1997 Order") permanently barring Prince from appearing before the Commission as an accountant. In re Gary A. Prince, Release No. 38,765, 64 S.E.C. Docket 2074, 1997 WL 343054 (June 24, 1997).

In 1998, Prince was re-hired by Integral. Until his termination from Integral on March 30, 2007, Prince held various titles, including Director of Mergers and Acquisitions, Director of Strategic and Financial Planning, and Managing Director of Operations. The SEC alleges that Prince had "substantial authority and responsibilities" during this nine-year period that made him a de facto officer of Integral in violation of its 1997 Order. It claims that this "substantial authority and responsibilities" included Prince's authority to approve major contracts, attendance at Integral's Board of Director meetings, and evaluation of potential mergers. Prince was a member of a policy-making group of senior executive officers and was compensated at levels equal to Integral's top-ranking officers.

In the period between 1998 and August 2006, when Integral named Prince as an officer, Prince's alleged status as a de facto officer of the company was never disclosed in periodic filings with the SEC or in proxy statements. It was not until August 2006, that Integral filed a Form 8-K stating that Prince had been appointed Executive Vice President and Managing Director of Operations for the company and disclosing Prince's violation of the securities laws and inability to appear before the Commission as an accountant. Integral terminated Prince in March 2007, after the SEC's Enforcement Division commenced the investigation that led to this proceeding.

The SEC claims that the failure to disclose was a material omission in violation of provisions of the Securities Act, the Exchange Act, and related Rules. Specifically, the SEC alleges that both Defendants (1) violated § 17(a) of the Securities Act, (2) violated § 10(b) of the Exchange Act and Rule 10b-5, (3) aided and abetted Integral's violations of Exchange Act § 13(a) and Rules 12b-20 and 13a-1, (4) violated Exchange Act Rule 13a-14, and (5) aided and abetted violations of Exchange Act § 14(a) and Rule 14a-9 by Steven Chamberlain, Integral's former Chief Executive Officer. Defendant Prince is also charged with violations of Exchange Act § 16(a), Rule 16a-3, and the 1997 Order.

B. Procedural Background

On July 30, 2009, the SEC filed this lawsuit against Defendants Brown and Prince alleging violations of the Securities Act, the Exchange Act, and related Rules [Dkt. No. 1]. On October 12, 2010, Defendants Brown and Prince filed Answers to the SEC's Complaint [Dkt. Nos. 61 and 62].

On September 28, 2009, Defendants Brown and Prince filed Motions to Dismiss [Dkt. Nos. 13 and 14]. On September 27, 2010, the Court granted in part and denied in part Brown's Motion to Dismiss and denied Prince's Motion to Dismiss. Order [Dkt. No. 55].

On January 27, 2012, Defendant Prince filed his Motion for Partial Summary Judgment. [Dkt. No. 94]. On March 2, 2012, the SEC filed its Opposition to Prince's Motion for Partial Summary Judgment. [Dkt. No. 100]. On March 23, 2012, Prince filed his Reply in Support of his Motion for Partial Summary Judgment. [Dkt. No. 110].

On January 27, 2012, Defendant Brown filed her Motion for Summary Judgment. [Dkt. No. 95]. On March 5, 2012, the SEC filed its Corrected Opposition to Brown's Motion for Summary Judgment. [Dkt. No. 108]. On March 23, 2012, Brown filed her Reply in Support of her Motion for Summary Judgment. [Dkt. No. 109]. On April 16, 2012, the SEC filed its Sur-Reply in Opposition to Brown's Motion for Summary Judgment. [Dkt. No. 116].

II. Standard of Review

Under Federal Rule of Civil Procedure 56, summary judgment may be granted "only if" the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c), as amended Dec. 1, 2007; Arrington v. United States, 473 F.3d 329, 333 (D.C. Cir. 2006). In other words, the moving party must satisfy two requirements: first, that there is no "genuine" factual dispute and, second, if there is, that it is "material" to the case. "A dispute over a material fact is 'genuine' if 'the evidence is such that a reasonable jury could return a verdict for the non-moving party.'" Arrington, 473 F.3d at 333 (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). A fact is "material" if it might affect the outcome of the case under the substantive governing law. Liberty Lobby, 477 U.S. at 248.

As the Supreme Court stated in Celotex Corp. v. Catrett, "the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." 477 U.S. 317, 322 (1986). The Supreme Court has further explained, [a]s we have emphasized, "[w]hen the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.'" Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S. Ct. 1348, 89 L.Ed.2d 538 . . . (1986) (footnote omitted). "'[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.'"

Scott v. Harris, 550 U.S. 372, 380 (2007) (quoting Liberty Lobby, 477 U.S. at 247-48) (emphasis in original).

However, the Supreme Court has also consistently emphasized that "at the summary judgment stage, the judge's function is not . . . to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial." Liberty Lobby, 477 U.S. at 249. In both Liberty Lobby and Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150 (2000), the Supreme Court cautioned that "[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts, are jury functions, not those of a judge" deciding a motion for summary judgment. Liberty Lobby, 477 U.S. at 255.

III. Analysis

A. Brown's Motion for Summary Judgment

1. Brown's Liability for Violations of Section 10(b) and Rule 10b-5

Section 10(b) "prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act." Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177 (1994). Primary liability under § 10(b) may be found for any person who: directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ... use[s] or employ[s], in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j. On the basis of this statute, the SEC promulgated Rule 10b-5, which makes it unlawful for: any person, directly or indirectly, . . . (a)

[t]o employ any device, scheme, or artifice to defraud, (b) [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c)

[t]o 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. 17 C.F.R. § 240.10b-5.

The SEC alleges that Brown committed fraud in her role as Integral's principal financial and accounting officer. Specifically, the SEC contends that Brown made false statements in violation of Rule 10b-5(b) by signing and certifying as true Integral's public filings, when in fact she knew that those filings were false because they concealed that Prince was functioning as an executive officer of Integral. Brown argues that the SEC's claim fails because, in light of the Supreme Court's recent decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296(2011),*fn3 it cannot establish that she was the "maker" of the alleged omission.

The SEC further contends that the record establishes that Brown violated Rule 10b-5(a) and (c) by substantially participating, with Chamberlain and Prince, in a fraudulent scheme to conceal Prince's true status as a de facto officer. Brown argues that the SEC's scheme liability claim fails because the SEC has not alleged that she is liable for anything other than Integral's omission of Prince.

a. Genuine Issues of Material Fact Preclude Summary Judgment on the SEC's Claim Against Brown Under Rule 10b-5(b)

Brown argues that Janus requires summary judgment on the SEC's claim charging her with primary violations of Rule 10b-5. Brown relies on the holding in Janus that one is a "maker" of a false statement or omission for purposes of Rule 10b-5(b) only if that person had "ultimate authority" over the statement. Janus, 131 S. Ct. at 2302 ("[T]he maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it."). Brown contends that, as a matter of law, the SEC cannot establish that she was the "maker" of the alleged omission with "ultimate authority" over its content and whether and how to communicate it. Brown further argues that the SEC has already determined that Integral was the "maker" of the omission, and has already alleged in the Third Claim for Relief that Brown merely aided and abetted Integral's omission.

The SEC responds that Brown's implicit contention that "there is only one 'ultimate authority' over a statement and therefore, after Janus, there can be only one 'maker'" is not supported by Janus or its progeny. SEC's Opp'n to Brown's Mot. for Summ. J. at

12. The SEC further argues that the signer of a corporate filing is always its "maker."

In Janus, the Supreme Court addressed a situation in which one legal entity, Janus Capital Management, served as mutual fund investment adviser for another legal entity, Janus Investment Fund. The Court concluded that investment adviser Janus Capital Management had not "made" any actionable misrepresentations or omissions, even though plaintiffs alleged that Janus Capital Management had been significantly involved in preparing, but not signing, the prospectus. The Court reasoned that "nothing on the face of the prospectus indicate[d] that any statements" came from the investment adviser, and "none of the statements in the prospectuses were attributed, explicitly or implicitly, to [the adviser]." Id. at 2305, 2305 n. 11.

The facts in Janus are very different from those in this case. Janus involved two distinct legal entities, and addressed the issue of whether statements of one could be attributed to the other. Brown's role in the omission attributed to her in this case is not analogous to Janus Capital Management's relationship to the statements issued by Janus Investment Fund. It is undisputed here that Brown was ...

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