Publications

(Article from Securities Law Alert, September 2016) 

For more information, please visit the Securities Law Alert Resource Center

Pursuant to Rule 13a-14 of the Securities Exchange Act,[1] an issuer’s CEO and CFO must certify the accuracy of the issuer’s financial reports filed with the SEC. On August 31, 2016, the Ninth Circuit held Rule 13a-14 “provides the SEC with a cause of action not only against CEOs and CFOs who do not file the required certifications, but also against CEOs and CFOs who certify false or misleading statements.” SEC v. Jensen, 2016 WL 4537377 (9th Cir. 2016) (Clifton, J.).

The Ninth Circuit also considered the reach of Section 304 of the Sarbanes-Oxley Act (“SOX 304”),[2] which permits the SEC to seek disgorgement of certain CEO and CFO compensation and stock sale profits when the issuer is required to prepare an accounting restatement “as a result of misconduct.” The Ninth Circuit held SOX 304’s disgorgement remedy “applies regardless of whether a restatement was caused by the personal misconduct of an issuer’s CEO and CFO or by other issuer misconduct.” Jensen, 2016 WL 4537377.

Rule 13a-14 Includes an Implicit Truthfulness Requirement for CEO and CFO Certifications of Issuer Financial Statements 

The Ninth Circuit held that “Rule 13a-14, like other rules promulgated under Section 13 of the Exchange Act, includes an implicit truthfulness requirement.” Relying on the dictionary definition of the word “certify,” the court determined “one cannot certify a fact about which one is ignorant or which one knows is false.” The court also reasoned that “[s]igners of documents should be held responsible for the statements in the document.”

The Ninth Circuit found “a mere signature is not enough for compliance” with Rule 13a-14. The court stated that CEOs and CFOs cannot simply “sign their names to a document certifying that SEC filings include no material misstatements or omissions without a sufficient basis to believe that the certification is accurate.”

The Ninth Circuit concluded Rule 13a-14 creates a cause of action against CEOs and CFOs who certify false or misleading statements, as well as a claim against CEOs and CFOs who do not sign or file the required certifications.

SOX 304’s Disgorgement Remedy Applies Whenever the Issuer’s Misconduct Triggers a Restatement 

The Ninth Circuit then considered the reach of SOX 304, which permits the SEC to seek disgorgement of certain CEO and CFO compensation and profits from the sale of issuer stock if a restatement is required “as a result of misconduct, with any financial reporting requirement under the securities laws.” The court held “SOX 304 allows the SEC to seek disgorgement from CEOs and CFOs even if the triggering restatement did not result from misconduct on the part of those officers.”

The Ninth Circuit determined that “the plain language of the statute” supported its interpretation. The court explained that “[t]he clause ‘as a result of misconduct’ modifies the phrase ‘the material noncompliance of the issuer,’ suggesting that it is the issuer’s misconduct that matters, and not the personal misconduct of the CEO or CFO.”

The Ninth Circuit found its interpretation “bolstered by the history of the statute,” which was designed “to craft a broad remedy that focused on disgorging unearned profits rather than punishing individual wrongdoing.” Finally, the Ninth Circuit observed that most district courts to consider the issue have similarly concluded that SOX 304 “does not require CEOs or CFOs to have personally engaged in misconduct before they are required to disgorge profits.”