Judge Approves SEC Settlement Despite Reservations
Tatiana Rodriguez | Bloomberg Law
The District Court for the Eastern District of Wisconsin approved the Securities and Exchange Commission’s (SEC) motion for entry of judgment against Koss Corporation (Koss) and Michael J. Koss (MJK) (together, Defendants) following initial reservations with the sufficiency of the settlement. The SEC’s case against Defendants was based on their alleged preparation of materially inaccurate financial statements and bookkeeping records, and lack of adequate internal controls.
The Court initially expressed concern with certain aspects of the SEC’s motion and requested further information on the proposed settlement. Among other things, the Court asked the SEC to provide a “written factual predicate for why it believes the Court should find that the proposed final judgments are fair, reasonable, adequate, and in the public interest.” For more on the Court’s request, see District Court Cites Judge Rakoff and Questions Its Role in Approving a Proposed SEC Settlement, Bloomberg Law Reports® – Securities Law, Vol. 6, No. 2 (Jan. 9, 2012).
The Court found that the SEC’s responses and revisions were sufficient to approve the judgment. Specifically, the SEC established that the proposed remedy under Section 304 of the Sarbanes-Oxley Act of 2002 was a reimbursement and not an equitable remedy of disgorgement, the Court stated. The SEC further distinguished the Section 304 remedy from equitable disgorgement, stating that it does not require returned funds to be ill-gotten. The SEC stated that, in fact, it was seeking monetary relief, not equitable relief. The Court held that the SEC provided sufficient information to determine that the reimbursement aspects of the settlement are appropriate.
The Court also found that the SEC established compliance with Rule 65 of the Federal Rules of Civil Procedure’s requirement for a certain amount of detail in an injunctive order. The SEC stated that unlike injunctions granted under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (Exchange Act) that cover a broad range of conduct, Exchange Act Section 13(b)(2) (the books and records provision that Defendants allegedly violated) is specific as to what is required for compliance. Moreover, following the SEC’s response, the Court was satisfied that the injunctions agreed to by the parties are sufficiently specific based on Koss and MJK’s implementation of the injunction terms prior to the entry of judgment (including the terms of a state court settlement), and changes in Koss’ SEC filings.
The SEC also revised the settlement agreement to comply with the Court’s request to include provisions of consent, instead of incorporating them by reference, and to remove certain unnecessary language regarding filing without delay. Lastly, while the Court expressed continued concern over the SEC’s absence of language indicating the judgment was a final action (i.e., dismissed with prejudice), the Court decided not to withhold its approval based on these grounds. Given this, the Court held that the proposed final judgment was fair, reasonable, adequate, and in the public interest.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
©2012 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.