Exch. Comm'n v. Jenkins, CV-09-1510-PHX-GMS.

• Decision Date: 09 June 2010
• Docket Number: No. CV-09-1510-PHX-GMS.,CV-09-1510-PHX-GMS.
• Citation: 718 F.Supp.2d 1070
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Maynard L. JENKINS, Defendant.
• Court: U.S. District Court — District of Arizona

718 F.Supp.2d 1070

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Maynard L. JENKINS, Defendant.

No. CV-09-1510-PHX-GMS.

United States District Court,D. Arizona.

June 9, 2010.

COPYRIGHT MATERIAL OMITTED.

Catherine Oriordan, Donald Werner Searles, Lorraine B. Echavarria, Robert Conrrad, Securities & Exchange Commission, Los Angeles, CA, for Plaintiff.

Gregory J. Weingart, Jenny Jiang, John W. Spiegel, Melinda E. Lemoine, Munger Tolles & Olson LLP, Los Angeles, CA, for Defendant.

ORDER

G. MURRAY SNOW, District Judge.

Four motions are pending before the Court:(1) Defendant Maynard L. Jenkins's (“Jenkins” or “Defendant”) Motion to Dismiss (Dkt. # 17), (2) Plaintiff Securities and Exchange Commission's (“SEC” or “Plaintiff”) Motion for Ruling Regarding Request for Judicial Notice (Dkt. # 24), (3) the SEC's Motion for Leave to File a Response to Defendant's Notice of Supplemental Authority (Dkt. # 33), and (4) the SEC's Motion for Leave to File [a] Reply to Defendant's Response to the SEC's Submission Regarding Defendant's Notice of Supplemental Authority (Dkt. # 37). For the following reasons, the Court denies the Motion to Dismiss, denies the SEC's Motion for Ruling Regarding Judicial Notice, and denies as moot both parties' Motions regarding supplemental authority, except to the extent otherwise explained in this Order.

BACKGROUND

During the time relevant to this action, CSK Auto Corporation (“CSK”) was a publicly-traded retail company of automotive parts and accessories, operating under three brand names: Checker Auto Parts, Schucks Auto Supply, and Kragen Auto Parts. From January 1997 through August 2007, Jenkins was CSK's CEO and the chairman of its board of directors, receiving a base salary, bonuses, and stock option grants.

While Jenkins worked for CSK, the company engaged in a vendor allowance program called “Let's Work Together.” The Complaint alleges that, by intentionally failing to properly account for receivables under this program, CSK reported greater pretax income than the company actually earned during fiscal years 2002, 2003, and 2004. Although the SEC does not allege that Jenkins personally was aware of the fraudulent concealment perpetrated by various CSK officers, Jenkins did certify the company's inaccurate financial statements for those years.

Eventually, to correct these overstatements, CSK filed two accounting restatements as required by federal securities laws, which Jenkins also certified. In 2004, CSK released its first restatement. That restatement, however, failed to write-off all known uncollectible vendor allowance receivables and incorrectly indicated that the errors were mistakes rather than fraudulent misstatements by CSK. In 2007, CSK filed a second restatement, which restated the financial statements for fiscal years 2002-2004. The Complaint does not allege that Jenkins played any role in perpetuating the scheme. In fact, the SEC has filed both civil complaints and criminal indictments against other CSK officers, alleging that those officers concealed the scheme from Jenkins. ¹

From May 2003 through May 2005, Jenkins received over $2 million in compensation in the form of bonuses and other incentive-based and equity-based compensation. During the same period, Jenkins realized over $2 million from the sale of CSK securities. Jenkins has not reimbursed CSK for any portion of these bonuses, incentive-based compensation, equity-based compensation, or stock sale profits.

The SEC now seeks an order compelling Jenkins to reimburse CSK for this income pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or the “Act”), 15 U.S.C. § 7243 (2006). Section 304 of the Act requires that, if an issuer, such as CSK, must prepare an accounting restatement because of its material noncompliance with financial-reporting securities laws, and if that noncompliance was caused by CSK's misconduct, then the CEO or CFO must provide certain reimbursement to the issuer. 15 U.S.C. § 7243(a). Under the Act, such reimbursement includes any bonuses, incentive-based, and equity-based compensation received during the twelve-month period following the first improper public issuance or filing. Id. Because the Complaint does not allege that Jenkins was personally responsible for either the Let's Work Together scheme or the incorrect SEC filings, except to the extent that Jenkins certified the SEC filings, Jenkins's liability depends on whether Section 304 requires a CEO to reimburse an issuer even where the CEO committed no personal wrongdoing. The Court is unaware of any cases discussing this issue, but the Court concludes that the Complaint properly states a claim under the statute.

STANDARD OF REVIEW

To survive dismissal for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint must contain factual allegations sufficient to “raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The task in a motion to dismiss “is to evaluate whether the claims alleged can be [plausibly] asserted as a matter of law.” See Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir.2004); see also Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). When analyzing a Rule 12(b)(6) motion, all plausible “allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party.” Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir.1996). However, “conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir.1998).

DISCUSSION

Section 304 of Sarbanes-Oxley provides:

(a) Additional compensation prior to noncompliance with Commission financial reporting requirements

If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for-

(1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and

(2) any profits realized from the sale of securities of the issuer during that 12-month period.

(b) Commission exemption authority

The Commission may exempt any person from the application of subsection (a) of this section, as it deems necessary and appropriate.

15 U.S.C. § 7243.

I. Section 304 Does Not Require Personal Misconduct.

The overarching issue is whether the Complaint alleges facts sufficient to raise a plausible claim under Section 304. Because a motion to dismiss turns not on what facts ultimately may be proven, but rather on what the complaint plausibly alleges, the Court need not reach issues that depend on factual disputes. Accordingly, based on traditional rules of statutory interpretation, the Court concludes that the Complaint has alleged facts sufficient to state a claim under Section 304.

“The purpose of statutory construction is to discern the intent of Congress in enacting a particular statute.” United States v. Daas, 198 F.3d 1167, 1174 (9th Cir.1999). “The starting point for the interpretation of a statute is always its language,” and “[a]ny inquiry must cease if the statutory language is unambiguous and the statutory scheme is coherent and consistent.” Alvarado v. Cajun Operating Co., 588 F.3d 1261, 1268 (9th Cir.2009) (citation omitted). Applying these steps of statutory interpretation, the Court holds that the text and structure of Section 304 require only the misconduct of the issuer, but do not necessarily require the specific misconduct of the issuer's CEO or CFO. Moreover, Section 304's legislative history supports this textual reading. Because Congress's intent is evident from these main methods of statutory interpretation, the Court need not resort to the additional canons raised by Defendant.

A. The Text of the Statute Requires Misconduct Only by the Issuer.

When discerning Congress's intent from a statute's text, “courts must presume that a legislature says in a statute what it means and means in a statute what it says there[.]” Alvarado, 588 F.3d at 1268 (citation omitted). When possible, a statute's plain meaning is determined according to its terms' “ordinary, contemporary, common meaning[,]” Cooper v. F.A.A., 596 F.3d 538, 544 (9th Cir.2010), and by “look[ing] to the entire statutory scheme [,]” Daas, 198 F.3d at 1174.

The relevant statutory phrase specifies that the reimbursement obligation is triggered if an issuer has to prepare an accounting restatement “due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws.” 15 U.S.C. § 7243(a). The ordinary, contemporary and common meaning of that language is that the misconduct of the issuer is the misconduct that triggers the reimbursement obligation of the CEO and the CFO. In this case, the issuer is a corporation. In general, a corporation acts through its officers, agents or employees and is liable for the actions of such persons acting within the scope of their agency. In re Am. Int'l Group, Inc., 965 A.2d 763, 802, 823 (Del.Ch.2009). Thus, the plain language of the statute indicates that the misconduct of corporate officers, agents or employees acting within the scope of their agency or employment is sufficient misconduct to meet this element of the statute. See 15 U.S.C. § 7243(a). Before reimbursement can be required, however, the issuer's misconduct must also be sufficiently serious to result in material noncompliance with a financial reporting requirement under the securities laws, and must...