The Clawback provision of Sarbanes-Oxley: An underutilized incentive to keep the corporate house clean

Business Lawyer

Volumn 64, Issue 1, 2008, Pages 1-35

  Schwartz, Rachael E ^a  

^a United States Securities and Exchange Commission   (United States)

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EID: 58749107675     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (207)

1. Sarbanes-Oxley Act of 2002 ("SOX") § 304(a), 15 U.S.C. § 7243(a) (2006).
2. Id.
3. Id. (emphasis added).
4. In re InfoSonics Corp. Derivative Litig., No. 06cv1336 BTM (WMc), 2007 U.S. Dist. LEXIS 66043, at *23 (S.D. Cal. Sept. 4, 2007) ("Defendants contend that there is no explicit or implicit private right of action under section 304 of the Sarbanes-Oxley Act. The Court agrees."); In re Goodyear Tire & Rubber Co. Derivative Litig., No. 5:03CV2180, 2007 U.S. Dist. LEXIS 1233, at *23 (N.D. Ohio Jan. 5, 2007) ("The Court holds that no private right of action exists under Section 304 of the Sarbanes-Oxley Act of 2002."); In re Whitehall Jewellers, Inc. S'holder Derivative Litig., No. 05 C 1050, 2006 U.S. Dist. LEXIS 16635, at *27-28 (N.D. 111. Feb. 27, 2006); In re Digimarc Corp. Derivative Litig., No. 05-1324-HA, 2006 U.S. Dist LEXIS 56134, at *8 (D. Or. Aug. 11, 2006); Kagan v. Robinson, 432 F. Supp. 2d 1075, 1080 (S.D. Cal. 2006) ("Section 304, however, does not suffer from such an omission [of an enforcement provision]. In enacting the Sarbanes-Oxley Act, Congress addressed the issue of enforcement and provided the Securities and Exchange Commission with power to enforce all provisions of the Act. See 15 U.S.C. § []7202(b)(1)."); Mehlenbacher v. Jitaru, No. 6:04-cv-1118-Orl-22KRS, 2005 U.S. Dist. LEXIS 42007, at *30 (M.D. Fla. June 6,2005) ("Next, the Court examines the statutory framework within which § 304 is embedded to see if it contains a discernible enforcement mechanism. In fact, the Sarbanes-Oxley Act does contain such a mechanism: it contemplates judicial enforcement by the Securities and Exchange Commission."); Neer v. Pelino, 389 F. Supp. 2d 648, 652 (E.D. Pa. 2005). See Teachers' Ret. Sys. of La. v. Hunter, 477 F.3d 162, 189 (4th Cir. 2007) ("[P]laintiffs have not presented a convincing analysis that § 304 provides private litigants with a cause of action, although we do not now reach that issue.").
5. See supra note 4.
6. See infra notes 79-94 and accompanying text.
7. See, e.g., David Reilly, Restatements Still Bedevil Firms - Overall Total Hits a Record as Big Companies Improve; Backdating's Messy Wake, WALL ST. J., Feb. 12, 2007, at C7; Cassell Bryan-Low, Error-Driven Restatements Rose Again in 2003, but Pace Slowed, WALL ST. J., Jan. 13, 2004, at C3.
8. H.R. REP. NO. 107-414, at 12 (2002) [hereinafter "HOUSE REPORT"].
9. See SOX § 304(a), 15 U.S.C. § 7243(a) (2006).
10. See, e.g., S. REP. NO. 107-205, at 23-36 (2002) [hereinafter "SENATE REPORT"].
11. See Mike Allen, Bush Signs Corporate Reforms into Law; President Says Era of "False Profits" Is Over, WASH. POST, July 31, 2002, at A4.
12. See infra notes 64-71 and accompanying text.
13. The strongest statement on this point probably came from Senator Robert Byrd of West Virginia, who said that a CEO should be responsible for what the lowliest clerk in the company is doing. See 148 CONG. REC. S6603, S6606 (daily ed. July 11, 2002) (statement of Sen. Byrd).
14. Section 17 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. section 77q (2006), and section 10 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. section 78j (2006), for example, already prohibit fraudulent practices.
15. See supra note 10-13.
16. The subject of restatements was sufficiently important that, in section 704 of Sarbanes - Oxley, Congress required the SEC to "review and analyze all enforcement actions by the Commission involving violations of reporting requirements imposed under the securities laws, and restatements of financial statements, over the 5-year period preceding the date of enactment of the Act, to identify areas of reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management, such as revenue recognition and the accounting treatment of off-balance sheet special purpose entities." See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 704(a), 116 Stat. 745, 799. That report was published in January 2003 and the analysis included a review of restatements filed by 135 issuers in 227 enforcement matters. See U.S. SEC. & EXCH. COMM'N, REPORT PURSUANT TO SECTION 704 OF THE SARBANES-OXLEY ACT OF 2002 3 (2003), available at www.sec.gov/news/studies/sox704rEport. pdf.
17. SOX § 302(a), 15 U.S.C. § 7241(a) (2006).
18. John Patrick Kelsh, Section 304 of the Sarbanes-Oxley Act of 2002: The Case for a Personal Culpability Requirement, 59 BUS. LAW. 1005, 1022 (2004).
19. See infra notes 122-64 and accompanying text.
20. E.g., Exchange Act § 13, 15 U.S.C. § 78m (2006).
21. Id. § 16, 15 U.S.C. § 78p (2006).
22. SOX § 304(a), 15 U.S.C. § 7243(a) (2006).
23. Id. § 304Cb), 15 U.S.C. § 7243(b) (2006).
24. Id. § 304, 15 U.S.C. § 7243 (2006) ("Forfeiture of Certain Bonuses and Profits"). The heading to subsection (a), which refers to compensation "prior to" noncompliance, appears to be an erroneous carryover from the House bill. The text correctly calls for a clawback of compensation received "following" noncompliance.
25. The WSJ 350: A Survey of CEO Compensation, WALL ST. J., Apr. 9, 2007, at R1.
26. Id.
27. Id. The fact that incentive- or stock-based compensation typically makes up a far larger proportion of overall compensation than does base salary is also illustrated by a chart appearing a day before the Wall Street Journal survey in the New York Times. See C.E.O. Pay: The New Rules, N.Y. TIMES, Apr. 8, 2007, at BU10.
28. H.R. 3763, 107th Cong. (2002).
29. See HOUSE REPORT, supra note 8, at 44. That bill was reported by the House Committee and approved by the full U.S. House of Representatives in April 2002. See id.
30. See id. at 12.
31. See id.
32. Id.
33. Id.
34. Id.
35. Id.
36. Prior to Sarbanes-Oxley, the Supreme Court had decided that some provisions of the securities laws require proof of scienter, while others do not. The SEC is required to establish that the defendant acted with scienter in order to prove violations of the antifraud provisions of section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and section 17(a)(1) of the Securities Act, but does not have to do so to establish violations of subsections (a)(2) or (a)(3) of section 17. Aaron v, SEC, 446 U.S. 680, 691, 701-02(1980).
37. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).
38. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2507 n.3 (2007). The Supreme Court in Tellabs noted in dicta that every court of appeals that has considered the issue has held that proof of reckless behavior, rather than intentional conduct, also suffices to meet the scienter requirement, though the circuits differ on the degree of recklessness required. Id. The Supreme Court did not resolve this issue. See id.
39. HOUSE REPORT, supra note 8, at 44.
40. Representatives John J. LaFalce, Paul E. Kanjorski, Bernard Sanders, Luis V. Gutierrez, and Janice D. Schakowsky signed the Minority Views section of the House Report. See id. at 54.
41. Id. at 50.
42. Id. at 51.
43. The White House, President George W. Bush, President's Ten-Point Plan, http://www.whitehouse.gov/mfocus/corporateresponsihility/index2.html (last visited Oct. 4, 2008). The other point of the President's proposed corporate responsibility plan relevant to interpretation of section 304 is "3. CEOs should personally vouch for the veracity, timeliness, and fairness of their companies' public disclosures, including their financial statements." See id.
44. HOUSE REPORT, supra note 8, at 50.
45. Id. at 50-51.
46. Aaron v. SEC, 446 U.S. 680, 686 & n.5 (1980). Subsections 17(a)(2) and (3) of the Exchange Act make it unlawful, in connection with the offer or sale of securities, "to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances... not misleading" or "to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." 15 U.S.C. § 77q(a)(2), (3) (2006).
47. See HOUSE REPORT, supra note 8, at 51.
48. Id.
49. Id.
50. S. 2673, 107th Cong. (2002) [hereinafter "S. 2673"].
51. See id.
52. SENATE REPORT, supra note 10, at 23.
53. Id. at 25.
54. Id. at 26 (alteration in original).
55. Senator Sarbanes described section 304 as follows: "We have a provision that the CEO and the CFO who make large profits by selling company stock or receiving company bonuses while management is misleading the public about the financial health of the company would have to forfeit their profits and bonuses realized after publication of a misleading report." 148 CONG. REC. S6237, S6332 (daily ed. July 8, 2002) (statement of Sen. Sarbanes).
56. H.R. REP. NO. 107-610, at 1 (2002) (Conf. Rep.), as reprinted in 2002 U.S.C.C.A.N. 542, 542 (stating that the House recedes from its disagreement with the Senate bill, and it agrees to the Senate bill, with certain amendments) [hereinafter "Conference Report"]. For a summary of the Conference amendments to the Senate bill, as described in a press release by Rep. Oxley issued upon passage of the Conference Report, see Press Release, Michael Oxley, U.S. House of Representatives, Sarbanes-Oxley Act (July 25, 2002) (Congressional Press Releases). The press release noted that one provision of the amendments "removes the Chairman of the Board from the list of individuals who must certify the financial statements of an issuer, thus limiting liability to persons who have actual responsibility for the financial statements." Id. For further indication that the House essentially adopted the Senate version of Sarbanes-Oxley, see Congress Sends Corporate Responsibility Bill to President, CONGRESS DAILY, July 26, 2002, at 14 ("The final bill essentially mirrors a comprehensive Senate-passed accounting reform bill, including several reforms vehemently resisted by House GOP leaders during consideration of the original House measure.").
57. SOX § 302(a), 15 U.S.C. § 7241(a) (2006).
58. Id. § 304(a), 15 U.S.C. § 7243(a) (2006).
59. See, e.g., Elisabeth Bumiller, Bush Signs Bill Aimed at Fraud in Corporations, N.Y. TIMES, July 31, 2002, at A1.
60. See, e.g., id.; Allen, supra note 11, at A4 ("The sponsor, Senate banking committee Chairman Paul S. Sarbanes (D-Md.), had wondered only a few weeks ago whether his measure would survive. After the collapse of WorldCom Inc. made clear the Enron Corp. debacle was no anomaly, the bill by Maryland's senior senator provided a ready way for the White House and Congress to show they were on the job.").
61. See, e.g., Bumiller, supra note 59, at Al; Allen, supra note 11, at A4. The 423-3 House vote is referenced in Rep. Oxley's press release, supra note 56. The unanimous Senate vote is described in Vote Report, Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002, CONG. INFO. SERV., July 25, 2002.
62. See Pub. L. No. 107-204, 116 Stat. 745 (2002) (codified as amended in scattered sections of 11,15,18, 28, and 29 U.S.C.).
63. See The White House, President George W. Bush, News & Policies, Policies in Focus, Corporate Accountability Reform, http://www.whitehouse.gov/infocus/achievement/chap9.html (last visited Oct. 4, 2008).
64. The Financial Collapse of Enron - Part II: Hearing Before the Subcomm. on Oversight and Investiga tions of the H. Comm. on Energy and Commerce, 107th Cong. 91-93 (2002) (testimony of Jeffrey Skilling) [hereinafter "Enron Hearing"].
65. Enron Files Chapter 11, Sues Ex-Suitor Dynegy, L.A. TIMES, Dec. 9, 2001, at C2.
66. Wrong Numbers: The Accounting Problems at WorldCom: Hearing of the H. Comm. on Financial Services, 107th Cong. 20 (2002) (testimony of Bernard Ebbers) [hereinafter "WorldCom Hearing"].
67. Marcy Gordon, Nasdaq Will Drop Worldcom, CHI. SUN TIMES, July 2, 2002, at 47 (quoting Ebbers as standing up in his church in early July and stating: "I don't know what all is going to happen or what mistakes have been made.... No one will find me to have knowingly committed fraud."); Jessica Sommar, WorldCom Web - Top Execs Knew of Cooked Books in 2000, N.Y. POST, July 15, 2002, at 29 (noting that "Ebbers' attorney has insisted Ebbers had no knowledge of the [accounting] errors").
68. Few Surprised by WorldCom's Bankruptcy Filing, DOW JONES INT'L NEWS, July 21, 2002.
69. See infra note 70.
70. For examples of press reports and opinions reflecting such reactions, see, for example, Jim Hopkins, CFOs Join Their Bosses on the Hot Seat, USA TODAY, July 16, 2002, at 3B (quoting Warren Bennis, management professor at the University of Southern California, as saying the following about lawyer Reid Weingartens assertions that Ebbers was in the dark: "I don't think he's qualified, or is so mindless that it's a case of malfeasance."); Editorial, Accountable Executives, BANGOR DAILY NEWS, Mar. 11, 2002, at A6 ("The standard defense for those seven, even eight-figure CEO salaries has always been that these individuals deserve such robust compensation in return for their all-encompassing knowledge of the business at hand. This defense took a sharp blow late last month with the appearance by former Enron CEO Jeffrey Skilling before a Senate committee. Mr. Skilling knew nothing on so many matters it is a miracle he knew the name of the company he steered into the biggest bankruptcy in history."); Enron Analysis, CNNFN, Mar. 1, 2002 (transcript) (former SEC chief accountant Lynn Turner responding to Skilling's testimony by saying: "[I]t's very difficult to understand how these people who just a few short months, even a year ago, were saying they were some of the best management in corporate America, now basically say, We knew nothing, which-how can you run a $100 billion a year company if you knew nothing?"). At the WorldCom hearing, Representative Maxine Waters of California noted that: "The founder, Mr. Ebbers, the board of directors, and certainly the auditor of record, the now infamous Arthur Andersen, should have known and should be held responsible." WorldCom Hearing, supra note 66, at 180 (statement of Rep. Waters). At the same hearing, Representative Michael Capuano of Massachusetts said, "We have a CEO who made hundreds of millions, who apparently didn't have any idea what was going on in the financial world of his own multi-billion-dollar corporation. I guess all he did know was how to borrow $400 million from the corporation." Id. at 97 (statement of Rep. Capuano).
71. Senator Byrd commented on the Skilling testimony when S. 2673 was being considered by the Senate, expressing the sentiment that such a highly paid CEO should have known not only about the fraud that was occurring, but far more: "If CEOs are worth their generous pay, one would think they could take the time to make sure that the company's chief financial officer is not padding earnings by omitting costs from the balance sheet. In fact, one finds disconcerting the acute lack of shame - the acute lack of shame - S-H-A-M-E - on the part of some of these corporate executives. Former Enron CEO Jeffrey Skilling told the House Energy and Commerce Oversight Subcommittee that Enron had tight controls on financial risk, but that he could not be expected to oversee everything and 'close out the cash drawers... every night.' Can you imagine that kind of statement? I think it was Wordsworth who said: No matter how high you are in your department, you are responsible for what the lowliest clerk is doing.... Let's take that and put it beside the statement of former Enron CEO Jeffrey Skilling [just quoted]...." See 148 CONG. REC. S6603, S6606 (daily ed. July 11, 2002) (statement of Sen. Byrd). With a touch of irony, Senator Byrd concluded, regarding Skilling: "Oh, that poor man. What a heavy burden he carried. That poor man. We can all shed crocodile tears for someone who is put into that very difficult position and then consider the kinds of salaries these people draw down." Id.
72. Conference Report, supra note 56, at 63.
73. SOX § 906(a), 18 U.S.C. § 1350 (2006).
74. Id. § 906(a), 18 U.S.C. § 1350(c)(1) (2006).
75. Id. § 906(a), 18 U.S.C. § 1350(c)(2) (2006).
76. Id. § 304(b), 15 U.S.C. § 7243(b) (2006).
77. See supra note 4.
78. See id.
79. Former United Health Group CEO/Chairman Settles Stock Options Backdating Case for $468 Million, Litigation Release No. 20387 (Dec. 6, 2007), available at http://www.sec.gov/litigation/litreleases/2007/lr20387.htm.
80. Id.
81. See id.
82. See id.
83. See id.
84. See id. For the critical paragraphs of the complaint filed by the SEC against McGuire, see Complaint at 1-3, 6-9, SEC v. McGuire, No. 0:07cv4779 (D. Minn. Dec. 6, 2007), available at www.sec.gov/litigation/complaints/ 2007/comp20387.pdf. For news coverage about the complaint and settlement, see Lewis Krauskopf & Martha Graybow, Ex-UnitedHealih CEO McGuire to Forfeit over $400 Million, REUTERS, Dec. 6, 2007, http://www.reuters.com/article/ousivMolt/idUSKUA68488720071206; Avram Goldstein & Margaret Cronin Fisk, UnitedHealth's McGuire Keeps $800 Million in Options, BLOOMBERG.COM, Dec. 7, 2007, http://www.bloomberg.com/ apps/news?pid=20601087&sid=a_.lq.5Hs Mvc&rrefer=home; Stephen Taub, The $468 Million Clawback, CFO.COM, Dec. 6, 2007, http://www.cfo.com/article.cfm/10272959/c_10250664; Posting of Debra Cassens Weiss to ABA Journal Law News Now, http://abajournal.com/news/ forgotten_sarbanes_clawback_clause_used_against_unitedhealth_ ex_ceo/ (Dec. 7, 2007, 9:17 EST) ("'Forgotten' Sarbanes Clawback Clause Used Against UnitedHealth Ex-CEO").
85. Press Release, U.S. Sec. & Exch. Comm'n, Former UnitedHealth Group CEO/Chairman Settles Stock Options Backdating Case for $468 Million (Dec. 6, 2007) (No. 2007-255), available at www. sec.gov/news/press/2007/2007- 255.htm.
86. See, e.g., SEC v. Banner Fund Int'l, 211 F.3d 602, 617 (D.C. Gr. 2000); SEC v. Warde, 151 F.3d 42, 50 (2d Cir. 1998); SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978).
87. See supra note 86.
88. See id.
89. Exchange Act § 21(d)(5), 15 U.S.C. § 78u(d)(5) (2006). This provision states: "In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors." Id. More explicit is the SEC's authority under section 21C(e) to order disgorgement in administrative cease-and-desist proceedings. See Exchange Act § 21C(e), 15 U.S.C. § 78u-3(e) (2006) ("In any cease-and-desist proceeding under subsection (a) of this section, the Commission may enter an order requiring an accounting and disgorgement, including reasonable interest.").
90. Section 3 of Sarbanes-Oxley 15 U.S.C. section 7202 (2006), gives authority to the SEC to enforce section 304 and other provisions of the Act. For cases discussing the SEC's right to sue to enforce section 304, see supra note 4. The federal courts have jurisdiction, under section 27 of the Exchange Act, over "all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder." Exchange Act § 27, 15 U.S.C. § 78aa (2006).
91. See Complaint at 2-3, SEC v. Sycamore Networks, Inc., No. 08 CA 11166 DPW (D. Mass. July 9, 2008), available at www.sec.gov/litigation/complaints/ 2008/comp20638.pdf [hereinafter "Sycamore Networks Complaint"].
92. Press Release, U.S. Sec. & Exch. Comm'n, SEC Charges Sycamore Networks, Former Executives in Stock Options Backdating Case (July 9, 2008) (No. 2008-136), available at http://www.sec.gov/news/press/2008/2008-136.htm.
93. Sycamore Networks Complaint, supra note 91, at 30 (Item VII, Prayer for Relief).
94. See id. at 4. In 2008, the SEC has filed complaints seeking section 304 clawbacks in other options backdating cases. See Press Release, U.S. Sec. & Exch. Comm'n, SEC Charges Microtune and Former Officers for Stock Option Backdating and Other Fraudulent Conduct (July 1, 2008) (No. 2008-128), available at http://www.sec.gov/news/press/2008/2008-128.htm; Suzanne Deffree, SEC Charges Broadcom Co-Founders for Stock-Options Backdating; Samueli Resigns as Chairman, EDN, May 19, 2008, http://www.edn.com/article/CA6561125.html?industryid=48811; Complaint, SEC v. Nicholas, No. SACV08-539 CJC (RNBx) (C.D. Cal. May 13, 2008), available at http://sec.gov/litigation/complaints/2008/comp20574.pdf (complaint against Broadcom CEO); SEC Sues Former Executives of Embarcadero Technologies, Inc. in Stock Option Backdating Scheme, Litigation Release No. 20710 (Sept. 9, 2008), available at http://www.sec.gov/litigation/litreleases/2008/ lr20710.htm; Complaint, SEC v. Sabhlok, No. CV 08 4238 BZ (N.D. Cal. Sept. 9, 2008), available at www.sec.gov/litigation/ complaints/2008/comp20710- sabhlok_pattison.pdf (complaint against Embarcadero CFO). Like the UnitedHealth and Sycamore matters, the Microtune, Broadcom, and Embarcadero cases involve alle-gations that the officers being sued under section 304 actively participated in fraudulent conduct.
95. See, e.g., SEC v. Unioil, 951 E2d 1304, 1306-08 (D.C. Cir. 1991) (Edwards, J., concurring) (listing cases); SEC v. Miller, No. 1:04-CV-1655-JEC, 2006 U.S. Dist. LEXIS 56413, at *38-47 (N.D. Ga. July 31, 2006).
96. See SOX § 304(a), 15 U.S.C. § 7243(a) (2006).
97. See id.
98. See, e.g., Unioil, 951 F.2d at 1306.
99. See, e.g., SEC v. Antar, 97 F. Supp. 2d 576, 578-79 (D.N.J. 2000) (citing cases).
100. See id.
101. See, e.g., SOX § 302(a), 15 U.S.C. § 7241(a).
102. The term "misconduct" is used here to include an executives failure to correct and disclose the misconduct of others when he or she knows about it.
103. Lamie v. U.S. Tr, 540 U.S. 526, 534 (2004).
104. Id. (internal quotation marks omitted).
105. See id. at 536.
106. SOX § 304(a), 15 U.S.C. § 7243(a) (emphasis added).
107. See supra note 24.
108. Kelsh, supra note 18, at 1023.
109. See id. Kelsh cites a statute stating that: "Each public housing agency shall utilize leases which... provide that... any drug-related criminal activity on or off such premises, engaged in by a public housing tenant, any member of the tenant's household, or any guest or other person under the tenant's control, shall be cause for termination of tenancy." Id. at 1023 n.111 (quoting 42 U.S.C. § 1437d(l)(6) (2000)) (omissions in original). If one removes the word "any" before the phrase "drug-related criminal activity on or off such premises," however, the language has exactly the same meaning. In the U.S. Supreme Court case cited by Kelsh, Department of Housing and Urban Development v. Rucher, 535 U.S. 125, 130-31 (2002), the Court did not rely merely on the use of the word "any" in the statute. Rather, it said that "Congress' decision not to impose any qualification in the statute, combined with its use of the term 'any' to modify 'drug-related criminal activity,' precludes any knowledge requirement." Rucker, 533 U.S. at 125-26. Like the law at issue in Rucker, section 304 does not qualify the word "misconduct" and thus, by the reasoning in that case, precludes a knowledge requirement.
110. Rucker, 535 U.S. at 131 (internal quotation marks omitted).
111. See SOX § 304(b), 15 U.S.C. § 7243(b) (2006).
112. This is not to say that the meaning of every word in section 304 is clear on its face. There is, for example, a real question about the precise scope of the word "misconduct."
113. See supra Part H.A.
114. See id.
115. See id.
116. SOX § 302, 15 U.S.C. § 7241 (2006).
117. Although headings cannot substitute for the operative text of a statute, statutory titles and section headings are tools available for resolution of doubt about a meaning of a statute. See Fla. Dep't of Revenue v. Piccadilly Cafeterias, Inc., 128 S. Ct. 2326, 2336 (2008); Porter v. Nussle, 534 U.S. 516, 527-28 (2002). A statute's caption, however, cannot undo or limit its text's plain meaning. See Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 256 (2004).
118. SOX § 302(a), 15 U.S.C. § 7241(a) (2006).
119. Knowing and willful fake certifications are also subject to criminal sanctions under section 906. See SOX § 906(a), 18 U.S.C. § 1350 (2006).
120. Id. 304(b), 15 U.S.C. § 7243(b) (2006).
121. See id.
122. Exchange Act § 20(a), 15 U.S.C. § 78t(a) (2006).
123. See id.
124. See Securities Act § 3(a)(9), 15 U.S.C. § 77c(a)(9) (2006) (defining the term person to include a "company"); Kalin v. Xanboo, Inc., 526 F. Supp. 2d 392, 404 (S.D.N.Y. 2007) ("Typically, a control person is a parent corporation, the employer of the primary violator, or a director or officer of the primary violator corporation."); see also Harrison v. Dean Witter Reynolds, Inc., 79 F.3d 609, 618 (7th Gr.) (holding Dean Witter liable for the violations of its registered representatives), cert. denied, 519 U.S. 825 (1996); In re Van Der Moolen Holding N.V Sec. Litig., 405 F. Supp. 2d 388, 413 (S.D.N.Y. 2005) (holding that the plaintiff sufficiently pled a control person liability claim under section 20(a) against VDM Holding, a limited liability company).
125. For cases holding that culpable participation need not be shown, see In re Royal Ahold N.V. Securities & ERISA Litigation, 351 F. Supp. 2d 334, 408 (D. Md. 2004); In re Homestore.com, Inc. Securities Litigation, 347 F. Supp. 2d 769, 788 (C.D. Cal. 2004); and In re Baan Co. Securities Litigation, 103 F. Supp. 2d 1, 23 (D.D.C. 2000). The Second Circuit has included culpable participation as an element of a prima facie case of control person liability. SEC v. First Jersey Sec., Inc., 101 E3d 1450, 1472 (2d Cir. 1996). The district court in In re AOL Time Warner, Inc. Securities &• "ERISA" Litigation required a showing of "particularized facts as to the controlling person's culpable participation in the fraud perpetrated by the controlled person," stating that "[d]espite some District Court opinions to the contrary, the Second Circuit has yet to eliminate the culpable participation requirement for control person claims." 381 F. Supp. 2d 192, 233 Ss n.42 (S.D.N.Y. 2004). Other cases in the Southern District of New York that have required culpable participation include Kalin, 526 E Supp. 2d at 406-07 (recognizing a split of opinion within the Second Circuit and finding "that the weight of Second Circuit precedent favors the view that a Plaintiff plead 'culpable participation' to state a section 20(a) claim"); and In re Alstom SA Securities Litigation, 454 F. Supp. 2d 187, 209-10 (S.D.N.Y. 2006) (holding that the plaintiff must show that the controlling person knew of or should have known that the primary violator was engaging in fraudulent conduct). A showing of culpability by the control person was also stated as an element of a section 20 claim in a district court case in the Third Circuit. See In re Ravisent Techs., Inc. Sec. Litig., No. 00-CV-1014, 2004 U.S. Dist. LEXIS 13255, at *59 (E.D. Pa. July 12, 2004).
126. Baan, 103 E Supp. 2d at 24.
127. See, e.g., Royal Ahold, 351 F. Supp. 2d at 409-10.
128. See, e.g., Homestore.com, 347 F. Supp. 2d at 789.
129. See, e.g., id. (listing cases).
130. See, e.g., First Jersey, 101 F.3d at 1461, 1473.
131. As quoted above, section 20(a) of the Exchange Act provides that the control person shall be liable "jointly and severally with and to the same extent as such controlled person." Exchange Act § 20(a), 15 U.S.C. § 78t(a) (2006). Commission authority to obtain injunctive relief, director and officer bars, and fines is contained in section 21 of the Exchange Act. 15 U.S.C. § 78u (2006).
132. See Kelsh, supra note 18, at 1022.
133. See infra notes 134-49.
134. 320 U.S. 277, 278 (1943).
135. Id. at 287.
136. Id. at 281.
137. Id.
138. Id. at 285-86 (Murphy, J., dissenting).
139. Id.
140. See id.
141. Id. (emphasis added).
142. See id. at 287.
143. See id. at 286.
144. 421 U.S. 658, 676-78 (1975).
145. Id. at 661-63.
146. Id. at 663.
147. Id. at 673.
148. Id. at 683 (Stewart, J., dissenting) (internal quotation marks omitted). Justices Stewart, Marshall, and Powell dissented in the case because, "[a]lthough agreeing with much of what is said in the Court's opinion," they felt that the trial court's instructions "were not consistent with the law as the Court today expounds it." Id. at 678. Specifically, the dissent found problematic the judge's instruction that "the fact that the Defendant is pres[id]ent and is a chief executive officer of the Acme Markets does not require a finding of guilt." Id. at 679 (alteration in original). Following a correct instruction that "[t]he issue is, in this case, whether the Defendant, John R. Park, by virtue of his position in the com-pany, had a position of authority and responsibility in the situation out of which these charges arose," the offending statement effectively gave the jury "unguided discretion" and rendered the definition of responsibility a "tautology" in which the jury was essentially told, "'You must find the defendant guilty if you conclude that he is guilty.'" Id. at 666 n.9; id. at 679 (Stewart, J., dissenting). According to the dissent "a jury must find - and must be clearly instructed that it must find - evidence beyond a reasonable doubt that he engaged in wrongful conduct amounting at least to common-law negligence." Id. at 683 (Stewart, J., dissenting).
149. Id. at 673 (quoting U.S. v. Wiesenfeld Warehouse Co., 376 U.S. 86, 91 (1964)).
150. The interpretation and exemption put forth by this Article is compatible with SEC Rule 13a-15, which sets forth responsibilities of an issuer to maintain, and of an issuer's management to evaluate, "disclosure controls and procedures" and "internal control over financial reporting." 17 CER. § 240.13a-15 (2008). Subsection (e) of that rule defines "disclosure controls and procedures" as those designed to "ensure" that information required to be disclosed by an issuer is communicated to the issuer's management. Id. § 240.13a-15(e). Subsection (f) of that rule defines "internal control over financial reporting" as a process to provide "reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles." Id. § 240.13a-15(f). The use of the word "reasonable" indicates that the level of internal controls required by the securities laws will not provide absolute assurance of perfect accuracy in a company's financial statements. Consequently, Rule 13a-15 can coexist with application of the clawback under section 304 when a CEO or CFO does not live up to his or her responsibility to establish and maintain internal controls that will ensure that he or she is made aware of "material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws" and that is further limited by the exemption proposed. See SOX § 304(a), 15 U.S.C. § 7243(a) (2006). In other words, section 304(a) does not apply the clawback in all cases in which a restatement is required, but only in those where there has been material non-compliance that is due to misconduct. Furthermore, the proposed exemption under section 304(b) recognizes that, notwithstanding Senator Byrd's statements about the responsibilities of a CEO with respect to the actions of the lowliest clerk in the company, some instances of material noncompliance due to misconduct by non-management employees may be beyond the control of a CEO or CFO. Nevertheless, the exemption power should not be used in a way that undermines the general rule of section 304(a).
151. No. CIV-S-00-1967 MCE/PAN, 2005 U.S. Dist. LEXIS 43006, at *43 (E.D. CaI. Aug. 19, 2005).
152. Id. at *36-37.
153. Id. at *37.
154. Id. Although less than perfectly clear, the court seemed to be saying that such knowledge need not be shown to establish RCO liability. The court did not say that such knowledge was a disputed issue of fact, or that the plaintiff would need to prove it at trial.
155. 759 E2d 557, 565 (6th Cir. 1985). The statute under which the regulations were promulgated denned "manufacturer" as "any person engaged in the business of manufacturing, assembling, orim- porting of electronic products." Id. at 560.
156. I.R.C. § 6672(a) (2006).
157. Id. § 6671(b).
158. Id. § 6672(a).
159. See, e.g., Moulton v. United States, 429 E3d 352, 356 (1st Cir. 2005); Lyon v. United States, 68 F. App'x 461, 468 (4th Cir. 2003).
160. Moulton, 429 E3d at 356 & n.8.
161. United States v. Chapman, 7 F. App'x 804, 805 (9th Cir. 2001) (internal quotation marks omitted).
162. See, e.g., Phillips v. 1RS, 73 E3d 939, 942 (9th Cir. 1996); Malloy v. United States, 17 F.3d 329, 332 (1th Cir. 1994) (internal quotation marks omitted); U.S. v. Nutt (In re Nutt), No. 6:01-Cv-1223-06-JGG, 2002 U.S. Dist. LEXIS 11831, at *6 (M.D. Fla. June 5, 2002).
163. See Wright v. United States, 809 E2d 425, 427-28 (7th Cir. 1987).
164. See infra Part H.C.3.
165. See supra notes 60-71 and accompanying text.
166. See Kelsh, supra note 18, at 1011 n.41.
167. Id.
168. Id. at 1024.
169. Id. at 1024-25.
170. See id. at 1026.
171. Exchange Act § 13, 15 U.S.C. § 78m (2006).
172. Id. § 13(a), 15 U.S.C. § 78m(a) (2006). 173. Id.
173. Id. § 13(b)(2), 15 U.S.C. § 78m(b)(2) (2006).
174. Id.
175. See, e.g., McConville v. SEC, 465 F.3d 780, 789-90 (7th Cir. 2006), cert, denied, 128 S. Ct. (2007); SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir.), cert denied sub nom. Shanklinv. SEC, 525 U.S. 931 (1998); SEC v. World-Wide Coin Invs., Ltd., 567 F. Supp. 724, 749 (N.D. Ga. 1983).
176. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 774 (2008) (stating general rule but declining to impose liability where majority believed that respondents had no duty to disclose and there was no reliance by investors).
177. See, e.g., SEC v. Adelphia Commc'ns Corp., 02 Civ. 5776 (PKC), slip op. at 20-21 (S.D.N.Y. Nov. 16, 2006) ("Findings of Fact and Conclusions of Law"). In this case, Michael Mulcahey, a former Vice President and Assistant Treasurer of cable company Adelphia Communications, was sued by the SEC for violations that included fraud under section 10(b) of the Exchange Act and Rule 10b-5. Id. at 24-25. Among his transgressions, Mulcahey signed management representation letters to the company's auditors, stating that the financial statements of the company were in conformity with generally accepted accounting principles ("GAAP"). Id. at 20. Yet, he did not read the financial state-ments (which in fact were not in conformity with GAAP) before signing the letters. Id. The court found that to be evidence of scienter because he made material false statements "without investigation or without knowledge of the truth." Id. at 27. One can say that the signing of the letters constituted an act (i.e., making false statements to auditors), and that would certainly be correct. Such statements are not required under section 304 (although both the CEO and CFO will have given section 302 certifications). But what section 304 has in common with section 10(b) and Rule 10b-5 as applied in Adelphia and similar cases is that the defendant's own failure to act is wrongful; the defendant is not being punished vicariously for another person's acts. Sometimes inaction by itself creates liability (as under section 304), and sometimes it is a combination of action and inaction (as it was in Adelphia), but inaction has legal significance under the federal securities laws.
178. See, e.g., Roger Lowenstein, A Boss for the Boss, N.Y. TIMES MAG., Dec. 14, 2003, at 42; Porus P. Cooper, Imagine Stock Market Without 2002 Scandals, PHILA. INQUIRER, Dec. 29, 2002, at E01.. 180. See Kelsh, supra note 18, at 1029-30.
179. See id. at 1030-33. Many of the cases cited by Kelsh are inapposite for various reasons. Some are criminal cases involving imprisonment. See, e.g., United States v. X-Citement Video, Inc., 513 U.S. 64 (1994). Others involve forfeitures by innocent parties who did not benefit from the behavior that led to the forfeiture, such as a wife whose car was seized by the government because her husband had sex with a prostitute in it. See Bennis v. Michigan, 516 U.S. 442, 443 (1996).
180. See HOUSE REPORT, supra note 8, at 12, 44; SENATE REPORT, supra note 10, at 26, 53.
181. See supra notes 86-88 and accompanying text.
182. See SEC v. Texas Gulf Sulphur Co., 446 E2d 1301, 1307-08 (2d Qr), cert. denied, 404 U.S. 1005 (1971).
183. See Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 333 (1999). The four dissenting justices, however, believed that this characterization represented an unprecedented narrowing of the federal courts' equity power, and stated that the correct rule is that the scope of such power is defined by the "principles of equity existing at the separation of [the United States] from England" rather than "the specific practices and remedies of the pre-Revolutionary Chancellor." Id. at 336 (Ginsburg, J., dissenting).
184. SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006).
185. Id.
186. THOMAS LEE HAZEN, TREATISE ON THE LAW OF SECURITIES REGULATION § 16.2[4], at 46 (4th ed. 2002).
187. U.S. SEC. & EXCH. COMM'N, SEC REPORT PURSUANT TO SECTION 308(c) OF THE SARBANES OXLEY ACT OF 2002 4 (2003), available at www.sec.gov/news/studies/sox308creport.pdf.
188. SEC v. Lorin, 869 F. Supp. 1117, 1122 (S.D.N.Y. 1994).
189. SOX § 304(a)(2), 15 U.S.C. § 7243(a)(2) (2006).
190. Executives frequently establish Rule 10b5-1 trading plans under which they sell stock at periodic intervals for the purpose of diversification and to avoid an inference that they may be trading on inside information. See, e.g., Mark Schwanhausser, Agency: Probe of Stocks Plan ßï Continue," SAN JOSE MERCURY NEWS, Oct. 11,2007, at 6C ("Financial planners and brokers tout the plans as a smart way for executives to take money off the table and diversify their portfolios. The plans are designed to insulate executives from allegations of insider trading."); Metzler Inv. GmbH v. Corinthian Colls., Inc., 530 F.3d 1049, 1067 n. 11 (9th Cir. 2008). Rule 10b5-1 plans may also be used to purchase company stock.
191. See Exchange Act § 16(b), 15 U.S.C. § 78p(b) (2006).
192. Id.
193. See id.
194. Dreiling ex rel Infospace, Inc. v. Jain, 281 F. Supp. 2d 1234, 1238 (W.D. Wash. 2003) (quoting Magma Power Co. v. Dow. Chem. Co., 136 F.3d 316, 320-21 (2d Cir. 1998)). Although section 16(b), unlike section 304, specifically makes reference to the fact that no bad intent on the part of the seller need be shown, there are other sections of the securities laws, such as section 13 of the Exchange Act (discussed above) and section 5 of the Securities Act (prohibiting the sale of unregistered securities), that impose liability without intent and yet do not specifically mention an absence of intent in the statute. See Securities Act § 5, 15 U.S.C. § 77e (2006); Exchange Act § 13, 15 U.S.C. § 78m (2006). Moreover, as discussed above, the legislative history of section 304 makes clear that inclusion of a scienter requirement was considered and rejected. See supra Part II.A.
195. Accounting Reform and Investor Protection: Hearings Before the S. Comm. on Banking, Housing, and Urban Affairs, 107th Cong. 67 (2002) (testimony of Richard C. Breeden).
196. 148 CONG. REC. S6327, S6344 (daily ed. July 8, 2002); 148 CONG. REC. S6734, S6742 (daily ed. July 15, 2002). Senator Dorgan's amendment was not debated, and the reason for its rejection appears to have been procedural limits on amendments.
197. See Dreiling, 281 F. Supp. 2d at 1240 (declining to hold section 16(b) unconstitutional). Kelsh refers to section 16(b) as "[t]he paradigmatic example of his second category of securities law offenses, which impose liability on a person for his or her own action but provide no state of mind defense. See Kelsh, supra note 18, at 1024-25. He attempts to distinguish section 16(b) from section 304 on the ground that "any insider can avoid liability by not engaging in the underlying conduct." See id. at 1025. That perhaps proves too much; section 304(a)(2) liability for trading profits can also be avoided by not taking the action of selling company stock for a profit.
198. See Justin Lahart, Ahead of the Tape: Black Boxes, WALL ST. J., Apr. 13, 2005, at C1.
199. Id. For the study, see John R. Graham, Campbell Harvey & Shivaram Rajgopal, The Economic Implications of Corporate Financial Reporting, J. ACCT. & ECON., Dec. 2005, at 3. Professor Harvey gave comments on this phenomenon at the World Economic Forum in Davos, Switzerland, in 2005 and reported there that in one of the interviews for his study: a CFO described a situation where the (very prominent company) had an unexpected $300 million gain on an investment near the end of the quarter. They feared reporting this gain in the current quarter because they would exceed the market consensus for earnings. They were concerned that analysts would "ratchet up" future quarters' expectations, leading to the possibility of future earnings disappointments. The CFO described how he contacted his investment bank and the following deal was negotiated. The company would give the $300 million to the investment bank. Over each of the next 10 quarters, the investment bank would pay back to the corporation $30 million. "What kind of deal is that? Invest $300 million and get $300 million back? This is a blatant sacrifice of shareholder value to smooth earnings," I said. Press Release, The Fuqua Sch. of Bus., Duke Univ., That's Davos: Campbell Harvey's World Economic Forum Journal (Feb. 2, 2005), http://www.fuqua.duke.edu/news_events/archive/2005/36713/. For a similar situation involving the use of reinsurance and an assignment agreement to smooth earnings by deferring $50 million in income from 2001 to 2002, see Press Release, U.S. Sec. & Exch. Comm'n, SEC Charges Former CEO and Two Former Executives Affiliated with RenaissanceRe Holdings Ltd. with Securities Fraud (Sept. 27, 2006) (No. 2006-164), available at http://www.sec.gov/ news/press/2006/2006-164.htm [hereinafter "Renaissance Reinsurance Press Release"]. In that case, the transaction was considered a sham-contrary to applicable accounting principles-and the financials were restated. See id. In an additional violation of the securities laws, the company then misrepresented to the public the reason for the restatement. See id.
200. In one classic formulation, a "business corporation is organized and carried on primarily for the profit of the stockholders." Dodge v. Ford Motor Co., 170 N.W 668, 684 (Mich. 1919). For other formulations, see Thomas Lee Hazen, The Short-Term/Long-Term Dichotomy and Investment Theory: Implications for Securities Market Regulation and for Corporate Law, 70 N.C. L. REV. 137, 178 (1991) ("Managers and directors of publicly held companies in the United States properly have identified shareholder wealth maximization as one of their goals."); Adolf A. Berle, For Whom Corporate Managers Are Trustees, 45 HARV. L. REV. 1365, 1367 (1932) ("Historically, and as a matter of law, corporate managements have been required to run their affairs in the interests of their security holders."). The principle that shareholder wealth maximization is the most important goal for management decisions is also enshrined in financial management textbooks; however, some of these sources state that maximizing share price is the same as maximizing shareholder wealth. See, e.g., EUGENE F. BRIGHAM, FUNDAMENTALS OF FINANCIAL MANAGEMENT 12-13 (5th ed. 1989). Artificially raising the share price by taking non-economic (or less than fully wealth-maximizing) smoothing actions provides an example of the firms economic value and its stock price diverging, because the stock price has been manipulated. Of course, deference, in the form of the business judgment rule, is given to management decisions in the absence of a conflict of interest between managers and shareholders. See, e.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Such conflicts, however, can arise when management smoothes earnings because the Companys executives have an incentive to manipulate the stock price in order to maximize their equity-based compensation in the short term, knowing that they will be able to keep that money even if they move on (voluntarily or otherwise) to other opportunities a few years down the road. There is a significant body of finance literature finding that executives smooth reported income over time in order to reach bonus targets and achieve other objectives. See, e.g., David L. Eckles, Martin Halek & Rongrong Zhang, Earnings Smoothing, Executive Compensation, and Corpo-rate Governance: Evidence from the Property-Liability Insurance Industry 5-7 (July 2007), www.aria.org/meeungs/2007papers/IC%20-%202%20-%20Eckles.pdf (citing authorities) (finding that insurance company executives manipulate loss reserves in order to increase their compensation); Michelle Hanlon & Gopal V. Krishnan, Do Auditors Use the Information Reflected in Book-Tax Differences? 2-4 (Jan. 2, 2006), www.business.uiuc.edu/accountancy/events/symposium/audit/2006/papers/ Hanlon_ Krishnan_Auditfeepaper_10206.pdf (citing authorities) (finding that differences between book earnings and tax earnings due to use of corporate tax shelters can be attributable to earnings management). Such conflict between the interests of management and those of shareholders, of course, is one of the problems that section 304 of Sarbanes-Oxley addresses. Some caveats exist to the idea that shareholder wealth maximization is the legal duty of manage-ment. Under Delaware law, management is under a duty to maximize the share price in the immediate term only when the company has been put up for sale. See, e.g., McMullin v. Beran, 765 A.2d 910, 914 (Del. 2000) (applying the Revlon duty to require selling company to maximize stock price in the short term). Moreover, management has the authority to act in ways that benefit other constituencies, such as employees and charitable organizations, even if the legal system (e.g., laws for protection of employees from unsafe work conditions, excessive hours, and unacceptably low pay) does not require managers to do so. See, e.g., Adolf A. Berle, Corporate Decision-Making and Social Control, 24 BUS. LAW. 149,150-53 (1968). Often, however, such actions do also maximize shareholder wealth, as when they are touted in public relations campaigns designed to expand the customer base or obtain favorable regulatory treatment.
201. I am not aware of any decision in which a court used non-section 304 disgorgement principles to cause a disgorgement of incentive compensation paid to executives because they understated earnings. The Renaissance Reinsurance case referred to in note 201 involved an overstatement, as well as an understatement of income. See Renaissance Reinsurance Press Release, supra note 201. The understatement occurred in 2001 and the overstatement occurred in 2002. Id. As stated in the press release, one of the defendants agreed to cooperate, and disgorgement was deferred to a later date. Id. A second defendant settled for a civil penalty of $130,000 in November 2007. See SEC v. Stanard, No. 06-CV-7736 (S.D.N.Y. Nov. 2, 2007) (final judgment of SEC in favor of Michael W. Cash). But a penalty is a different remedy than disgorgement. The case is still pending against the third defendant.
202. For cases in which disgorgement of base salary was ordered, see SEC v. Rogers, Nos. 98-56339, 98-56341, 96-56342, 2000 U.S. App. LEXIS 11830, at *6 (9th Cir. May 18, 2000) ("[B]ecause the district court did not err in finding that Comparator did not engage in substantial business activities, the district court did not abuse its discretion in finding that appellants' compensation should be disgorged."), cert. denied, 532 U.S. 921 (2001); and SEC v. Drexel Burnham Lambert Inc., 837 F. Supp. 587, 612 (S.D.N.Y. 1993) (ordering disgorgement of compensation for services as officers and directors where positions were achieved as a result of fraudulent arrangement and "[a]ny contention they might make that their services were of real value to the company is belied by the results reported in Fischbach's public filings"), aff'd sub nom. SEC v. Posner, 16 F.3d 520 (2d Cir. 1994), cert. denied, 513 U.S. 1077 (1995).
203. For cases in which the court declined to order disgorgement of base salary, see SEC v. Wills, 472 F. Supp. 1250, 1276 (D.D.C. 1978) (refusing to order disgorgement of compensation because "the SEC would at least have had to demonstrate the following: (1) that, had the required disclosures been made, some likelihood existed that the defendants would have lost all or pan of their jobs [at] the point in time when this would in all probability have occurred; Or (2) the extent to which the defendants' compensation during 1974 and 1975 can be attributed to their securities law violations as distinguished from those legitimate services which they did render to the GAC complex"); and SEC v. Galaxy Foods, Inc., 417 F Supp. 1225,1249 (E.D.N.Y. 1976) (allowing defendant to keep salary, noting that for one-and-one-half years, he "worked full-time and long hours"), aff'd, 556 F.2d 559 (2d Cir), cert. denied sub. nom. Kirschenblatt v. SEC, 434 U.S. 855 (1977).
204. See SEC v. Lorin, 869 F. Supp. 1117, 1123 (S.D.N.Y. 1994) (finding that payments are remedial and not punitive where they are limited to either the damage caused by the wrongdoer or the proceeds he or she wrongfully obtained). Moreover, as the Second Circuit has noted in finding that restitution was not punitive because it served to compensate the corporation for harm, "a corporate enterprise may well suffer harm when officers and directors abuse their position to obtain personal profits since the effect may be to cast a cloud on the corporation's name, injure stockholder relations and undermine public regard for the corporation's securities." SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.) (internal quotation marks omitted), cert. denied, 404 U.S. 1105 (1971).
205. See, e.g., SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996).
206. See supra notes 79-85 and accompanying text.
207. Such a statement was used, for example, in connection with the Foreign Corrupt Practices Act of 1977, which first mandated a system of internal controls for issuers. Foreign Corrupt Practices Act of 1977, Exchange Act Release No. 34-17500 (Jan. 29, 1981), available at 1981 WL 36385. The Statement of Policy took the form of an address given by the Chairman of the SEC. Through issuance of the Statement of Policy, the SEC incorporated it by reference into 17 C.F.R. pt. 241.