U.S. Securities & Exchange Commission v. Jensen
835 F.3d 1100
9th Cir.2016Background
- Basin Water went public in 2006; Jensen (CEO) and Tekulve (CFO) are accused by the SEC of causing materially false revenue recognition from 2006–2007, leading to restatements after they left in 2008.
- SEC alleged two recurring GAAP problems: recognition of contingent/unfinished sales and recognition of revenue from SPE transactions where collectibility was doubtful.
- SEC sought civil penalties and equitable relief (including disgorgement under SOX §304); district court granted partial summary judgment for defendants on Rule 13a-14, then held a bench trial and found for defendants on remaining claims.
- After trial the district court concluded SOX 304 requires personal officer misconduct to trigger disgorgement and that Rule 13a-14 did not create a cause of action for false certifications.
- On appeal the Ninth Circuit reversed: (1) Rule 13a-14 supports enforcement against officers who certify false or misleading reports; (2) SOX 304 disgorgement applies when the issuer’s misconduct (not necessarily officer-only misconduct) causes a restatement; (3) the SEC was entitled to a jury trial and the bench trial was erroneous; (4) exclusion of evidence about a decades‑old SEC injunction against Basin’s Director of Finance was affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Right to jury trial | SEC: sought legal remedies (civil penalties) for multiple claims → entitled to jury; objected to defendants’ unilateral withdrawal of jury demand | Jensen/Tekulve: defendants withdrew their demand and case properly set for bench trial; SEC didn’t timely insist | Ninth Circuit: SEC was entitled to a jury for Claims 1–6; defendants’ withdrawal required consent of all parties; bench trial order was erroneous and not harmless; vacated and remanded for jury trial |
| Scope of Rule 13a‑14 (certifications) | SEC: Rule 13a‑14 creates cause of action against CEOs/CFOs who file false or misleading certifications, not just failures to file | Defs: rule only creates liability for failing to file certifications, not for falsity beyond existing antifraud provisions | Ninth Circuit: Rule 13a‑14 includes an implicit truthfulness requirement; reversed district court and remanded Rule 13a‑14 claim |
| Mental state for Rule 13a‑14 liability | SEC: position not fully litigated on appeal | Defs: (implicitly) argued against imposing officer liability without appropriate scienter | Majority did not decide required mental state; concurrence (Bea, J.) would require knowledge or at least recklessness to prove a “false” certification and ties that to existing provisions (§10(b), aiding & abetting, §18) |
| Scope of SOX §304 disgorgement | SEC: disgorgement applies where issuer was required to restate due to issuer misconduct — officer need not have personally engaged in misconduct | Defs: §304 requires personal misconduct by the CEO/CFO to trigger reimbursement | Ninth Circuit: §304 applies where the issuer’s misconduct (not necessarily officer’s personal misconduct) caused the restatement; reversed district court’s narrower reading |
| Admission of prior SEC injunction against Finance Director | SEC: evidence of earlier SEC injunction against Hansen was relevant to intent/knowledge and credibility | Defs: prejudicial; remote in time; risk of undue prejudice | Ninth Circuit: affirmed exclusion under Fed. R. Evid. 403 — probative value low and danger of unfair prejudice high |
Key Cases Cited
- Palmer v. Valdez, 560 F.3d 965 (9th Cir.) (jury‑trial entitlement reviewed de novo)
- Tull v. United States, 481 U.S. 412 (U.S. 1987) (distinguishing legal vs. equitable remedies and right to jury)
- Fuller v. City of Oakland, 47 F.3d 1522 (9th Cir.) (non‑movant may rely on original jury demand)
- Solis v. County of Los Angeles, 514 F.3d 946 (9th Cir.) (narrow exception for waiver by participation)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (U.S. 1986) (directed‑verdict/summary judgment standard re conflicting evidence)
- Ponce v. SEC, 345 F.3d 722 (9th Cir.) (rules under §13 include implicit truthfulness requirement)
- SEC v. Colello, 139 F.3d 674 (9th Cir.) (equitable disgorgement powers to recover ill‑gotten gains)