United States Securities and Exchange Commission v. Brown
942 F. Supp. 2d 108
D.D.C.2013Background
- Integral Systems, Inc. is a Maryland public company; Prince served as a senior financial adviser and later full-time executive advisor with restricted authority.
- Prince previously pleaded guilty in 1995 to securities fraud-related charges and was barred from practicing as an SEC accountant (Rule 102(e)).
- Chamberlain controlled policy; Prince was a close advisor but not an officer, with carveouts restricting signing/contracts and accounting duties.
- From 1998–2006 Prince held the role of Director of Mergers & Acquisitions and supervised the Contracts Department; final policy rested with Chamberlain.
- Public filings repeatedly did not disclose Prince as an officer despite his substantial influence and involvement in MD&A, press releases, and financial statements.
- Venable LLP served as Integral’s corporate counsel; they advised on disclosures but did not disclose Prince’s status; later investigations questioned the disclosure decisions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was Prince a de facto officer under Rule 3b-7 / 16a-1? | SEC contends Prince acted as an officer via G6/G7 and M&A role. | Prince did not have policy-making authority; title alone not dispositive. | Not proven; Prince lacked policy-making authority to be a de facto officer. |
| Count II: Scheme to defraud under 10b-5 based on nondisclosure? | SEC alleges a scheme to conceal Prince’s officer status and past crimes. | No de facto officer; reliance on counsel negates scienter; no scheme established. | No scheme to defraud; scienter not proven. |
| Count III: Aiding/abetting 13(a) with Prince’s status? | Integral failed to disclose de facto status; Prince aided such failure. | No de facto officer; insufficient scienter for aiding/abetting. | No aiding/abetting liability; requires de facto officer status and scienter. |
| Count V: Aiding/abetting 14(a) with Prince’s status? | Same as Count III but for proxy statements. | No disclosure duty; no sufficient aiding/abetting proof. | Failure to prove aiding/abetting; no liability under 14(a). |
| Count VII: Prince violated Rule 102(e) by practicing accounting? | Prince violated 102(e) by participating in preparing financial data. | Defense of advice-of-counsel; dispute over breadth of “practicing.” | Prince engaged in practicing accounting; injunction issued. |
Key Cases Cited
- S.E.C. v. Goble, 682 F.3d 934 (11th Cir. 2012) (scheme liability; de facto officer analysis applicable to §10(b) claims)
- S.E.C. v. Savoy Indus., 587 F.2d 1149 (D.C. Cir. 1978) (advising on injunction factors and scienter standards)
- S.E.C. v. Brown, 740 F. Supp. 2d 148 (D.D.C. 2010) (advice-of-counsel and reliance considerations in scienter analysis)
- Enterprises Solutions, Inc., 142 F. Supp. 2d 561 (S.D.N.Y. 2001) (functional approach to officer status; policy-making function test)