Opposition Brief — Yuen v. Securities & Exchange Commission

7

petition for rehearing en banc, see SEC v. Yuen, 384

F.3d 1090 (2004). On rehearing, the court of appeals

affirmed the district court’s entry of the escrow. Pet.

App. 68a-1238a.

The court of appeals rejected petitioners’ contention

that their negotiated termination payments were not

“extraordinary payments” within the meaning of Section

1103. The court explained that “‘[e|xtraordinary’

means, in plain language, out of the ordinary.” Pet. App.

92a-93a. The court further observed that “extraordi-

nary” “means a payment that would not typically be

made by a company in its customary course of business,”

id. at 93a. Because “|t]he standard of comparison is the

company’s common or regulcr behavior,” ?bid., the court

reasoned that “the determination of whether a payment

is extraordinary will be a fact-based and flexible in-

quiry,” ibid. That inquiry, the court explained, should

take into account “the circumstances under which the

payment is contemplated or made,” its purpose, and its

size. /bid. The court identified a “nexus between the

suspected wrongdoing and the payment,” and the prac-

tices of similarly situated businesses as additional fac-

tors that a court could consider. /d. at 93a-94a.

The court of appeals further held that the district

court had correctly applied this analysis in finding that

the proposed termination payments were extraordinary.

It observed that the termination payments to petitioners

were far greater than their respective annual salaries;

differed from the amounts of the severance payments

under their employment agreements; appeared to be at

least in part the fruit of Gemstar’s “alleged fraudulent

financial results”; were arrived at as part of petitioners’

ouster from Gemstar management; and were reported

by Gemstar in a Form 8-K filing with the SEC. Pet.

8

App. 95a-96a. The court of appeals also cited the “glar-

ing fact” that Yuen invoked the Fifth Amendment rather

than testify about his compensation. /d. at 95a.

Finally, the court of appeals rejected petitioners’

Fourth and Fifth Amendment challenges to the escrow.

The court held that the escrow procedures were reason-

able under the Fourth Amendment and that Section

1103 was not unconstitutionally vague because it neither

fails to provide people of ordinary intelligence a reason-

able opportunity to understand what conduct it prohib-

its, nor authorizes arbitrary and discriminatory enforce-

ment. /d. at 70a n.1, 98a-99a.

ARGUMENT

The decision of the court of appeals is correct and

does not conflict with any decision of this Court or any

other court of appeals. Further review is not warranted.

1. Petitioners contend (Pet. 17-21) that the court of

appeals adopted an overly broad definition of the phrase

“extraordinary payments” as used in Section 1105 of the

Sarbanes-Oxley Act of 2002, 15 U.S.C. T8u-5(¢)(3). That

contention is incorrect, and in any event does not merit

review.

a. The court of appeals interpreted Section 1103

consistently with the plain meaning of the phrase “ex-

traordinary payments,” the historical context in which

it was enacted, the legislative history, and the broader

purposes of the federal securities laws. See //ousehold

Credit Servs, luc. v. Pfennig, 541 US. 232, 239 (2004)

(in ascertaining statute’s plain meaning, courts “must

look to the particular statutory language at issue, as well

as the language and design of the statute as a whole”).

As the court of appeals explained, “extraordinary” sim-

ply means “out of the ordinary; . . . employed for an

9

exceptional purpose or on a special occasion.” Pet. App.

93a (quoting Black's Law Dictionary 586 (6th ed. 1990));

see also Owford English Dictionary 614 (2d ed. 1989)

(defining “extraordinary” to mean, ivfer alia, “|ojut of

the usual or regular course of order * * * exceptional;

unusual; singular”). The court of appeals’ reliance on

factors such as the circumstances in which the payments

would be made (here, in connection with petitioners’

termination as officers), the size of the payments in rela-

tion to other benchmarks such as petitioners’ base sal-

ary, and the purpose of the payments (here, as a settle-

ment of disputed matters) is consistent with the plain-

meaning understanding of “extraordinary.”'

The flexible approach adopted by the court of ap-

peals is consistent with this Court's observation that the

Securities and Exchange Act of 1934, 15 U.S.C. 78a ef

seq., into which Section 1105 was incorporated, should be

construed “flexibly to effectuate its remedial purposes.”

SEC v. Zandford, 555 U.S. 813, 819 (2002) (internal quo-

tation marks omitted); SEC v. Capital Gaius Research

Bureau, Ine., 375 U.S. 180, 195 (1963). As the court of

appeals recognized, Congress enacted Section 1105 to

address the concern that the SEC’s traditional remedies

against corporate wrongdoers—disgorgement, civil pen-

alties, and restitution—were of limited, if not illusory,

value when the wrongdvers received corporate funds

and were able to hide or spend them before the SEC

could finish its investigation and file suit. Pet. App. 72a-

75a. By eschewing “a specific litmus test that deter-

mines what is or is not an ‘extraordinary payment,” id.

at 99a, the court of appeals’ flexible approach effectuates

| : : ial . :

bv adopting this multi-factor approach, the court of appeals clearly

did not establish a standard that “encompassles} aay payment to be

made by a company under investigation by the SEC.” Pet. 16.

10

Congress's intent to combat the dissolution of corporate

assets in anticipation of an enforcement action.

The court of appeals’ reading of Section 1103 is also

supported by the statute's legislative history. For ex-

ample, Senator Lott, Section 1103's sponsor, stressed

that corporate executives had been receiving “rewards”

“{wlhile an [SEC] investigation is underway,” and that

“corporate executives |were]| taking increased payments,

extraordinary payments, while they are being investi-

gated.” 148 Cong. Rec. 56542, $6545 (daily ed. July 10,

2002). Others members of Congress noted that if corpo-

rate executives “have manipulated the books and bene-

fitted themselves,” the SEC could use Section 1103 to

freeze extraordinary payments “until appropriate inves-

tigation may be concluded to determine whether such

payments were warranted or not.” /d. at H4687 (daily

ed. July 16, 2002) (statement of Rep. Baker); see gener-

ally Pet. App. 75a-74a, 101a-102a.

b. Petitioners urge (Pet. 17) an interpretation of

“extraordinary payments” advanced by the dissent be-

low, which would require the SEC to offer evidence of

what constitutes “usual or ordinary” payments to a CEO

and a CFO at a “comparable compan|y |" under “compa-

rable circumstances.” See Pet. App. Ll5a. Nothing in

the text of Section 1105 suggests, however, that the SEC

must establish that the payment is extraordinary in

comparison to some general industry standard. More-

over, such an approach ignores the congressional pur-

pose in enacting Section 1105 and would seriously un-

dermine its utility.

As the court of appeals observed, “|oldd it would be

indeed to shield payments from escrow simply because

an ousted insider at some other corporation has been

similarly enriched.” Pet. App. 96a. An “industry prac-

1]

tice” appre +h would not only unjustifiably shield

wrongdoers, buat it would also multiply the complexities

and burden of applying Section 1103. While the SEC

may possess some information regarding the amount of

compensation paid to executives at other companies, any

consideration of “industry practice” would require the

SEC to obtain, both from the company under investiga-

tion and from companies that could possibly serve

as a basis for comparison (and that might not cooperate),

information bearing on whether those other execu-

tives are indeed “similarly situated.” The question of

what constitutes a “comparable” corporation—including

whether comparability should be judged by industry,

revenues, assets, return-on-investment, corporate gov-

ernance structure, or some other factors—is fraught

with ambiguity, as is the question of how many compari-

sons the SEC would have to present to show that a pay-

ment to a corporate insider deviates sufficiently from

the “ordinary.”

Such ancillary investigations and proceedings are

anathema to the aim of Section 1103. By congressional

design, Section 1103 temporarily preserves the status

quo while an SEC investigation continues. Thus, Section

1105 escrows will often be sought on an expedited (or

emergency) basis. See Pet. App. 102a (Reinhardt, J.,

concurring in the result). Congress would not enact a

provision designed to provide short-term protection to

corporate assets in fluid circumstances, while simulta-

neously imposing such crippling constraints on its use.

Cf. SEC ve McCarthy, 322 F.3d 650, 659 (9th Cir.

2005) (noting importance of SEC's ability to use con-

gressionally enacted summary proceedings for vigorous

fulfillment of its enforcement functions).

ja

Equally unavailing is petitioners’ contention that

Section 1103 should be applied only when the payments

are “improper * * * in some proven respect,” Pet. 17,

which they equate with embezzlement or payments oth-

erwise lacking formal corporate approval. Pet. 17-20.

Section 1103 contains no indication that its application

should be so limited. It does not use the term “im-

proper”; rather, it uses the term “extraordinary,”

and expressly states that “extraordinary payments”

may include “compensation.” 15 U.S.C. T8u-5(e)(5)( A)

(Supp. II 2002). The term “extraordinary payments”

admits of no reading that is limited to “pilfered” pay-

ments or those otherwise not authorized by the board of

directors. See Pet. 20. If Congress had intended such

a meaning, it could easily have included such a limit in

the statute. Moreover, since Section 1103 comes into

play only when an SEC investigation is ongoing, the

SEC could not be expected to have already reached a

conclusion regarding the “proper” or “improper” nature

of a particular payment.

c. In any event, petitioners pvint to nothing in the

court of appeals’ interpretation of Section 1105 that

would merit this Court’s intervention. Petitioners do

not assert the existence of a circuit conflict; indeed, they

do not cite any other appellate decision construing Sec-

tion 1105 in any respect. Nor do petitioners suggest any

other basis for the exercise of certiorari jurisdiction,

This question is therefore not worthy of review.

2. Petitioners also err in contending (Pet. 21-25)

that Section 1103 violates the Fourth Amendment's pro-

scription against unreasonable seizures. As the court of

appeals held, the Section 1105 escrow process is reason-

able and does not offend Fourth Amendment principles.

See Pet. App. 70a n.1.

15

The Fourth Amendment’s warrant requirement and

its concomitant probable-cause standard do not apply to

Section 1103 escrows. As this Court has repeatedly em-

phasized, the touchstone of the Fourth Amendment is

“reasonableness.” Board of Educ. v. Barls, 536 U.S.

822, 828 (2002); L/linois v. McArthur, 531 U.S. 326, 330

(2001); Soldal v. Cook County, 506 U.S. 56, 71 (1992).

Warrantless administrative searches and seizures di-

rected at “closely regulated” businesses are reasonable

under the Fourth Amendment if the government's inter-

est is substantial, the process is necessary to further the

regulatory scheme, and the program is “a constitution-

ally adequate substitute for a warrant.” Pet. App. 70a

n.l (citing New York v. Burger, 482 U.S. 691, 702-703

(1987)).” Such is the case here.

First, the SEC has a substantial interest in investi-

gating the persons and entities it regulates without risk-

“ Petitioners contend (Pet. 24) that Buryer is inapposite, because it

involved “searches” rather than seizures, and the “time, place and

scope” of the searches Was limited there. But this Court has never sug-

gested that seizures are subject to more rigorous standards than

searches. See, e.g.. McArthur, 5381 U.S. at 330-531 (discussing the

Court's flexible approach to “warrantless search| es| or seizure|s]" in

cases involving “special law enforcement needs, diminished expecta-

tions of privacy, minimal intrusions, or the like”). If anything, the

Section 1103 regime is farther removed from the criminal process than

the administrative inspection at issue in Barger. See 482 U.S. at 716-

717 (inspecting officers may discover evidence of crimes during admin-

istrative inspection, and police officers may conduct the inspection).

Moreover, the Section 1105 process is limited in time, place, and scope:

the escrow order may last no more than 90 days in the absence of an

SEC enforcement action, and, in the event an action is filed, the order

may not last bevond the conclusion of the proceeding; the escrow order

may only be entered by a federal district court; and the order may

extend only to “extraordinary payments.” 15 U.S.C. 7S8u-s(e3 Supp.

I] 202).

14

ing the dissipation of funds that may compensate victims

of securities violations; indeed, courts have long held

that measures to prevent such dissipation further an

important public interest. See, e.g... SEC v. lufinity

(rroup Co., 212 F.3d 180, 197 (3d Cir. 2000), cert. denied,

532 U.S. 905 (2001); SEC v. Laver, 52 F.3d 667, 671 (7th

Cir. 1995) (asset freeze “was and is essential to prevent

the dissipation of assets”). Second, by permitting the

SEC to seek the temporary escrow of corporate assets

while it conducts its investigation into possible violations

of the securities laws, Section 1105 “add|s| necessary

teeth to the Commission's ability to perform its mission”

to protect investors by “ensur|ing| that recovery by way

of disgorgement, etc., is effective rather than empty.”

Pet. App. 97a. Third, the Section 1105 escrow pro-

cess—by which the SEC must apply to a district court

for an escrow order and anyone affected by the escrow

has an opportunity to respond—adequately substitutes

for a warrant.

Finally, the facts that a Section 1105 escrow order (1)

is not part of a criminal prosecution; (2) is temporary;

and (3) does not reveal private information further sup-

port the court of appeals’ conclusion that Section 1105 is

reasonable. See Karls, 556 U.S. at 828 (probable-cause

standard “is peculiarly related to criminal investiga-

tions”); United States v. Place, 462 U.S. 696, 705 (1985)

(discussing “exception to the probable-cause require-

ment for limited seizures” and observing that whether

a seizure is reasonable turns on a balancing of “the na-

ture and quality of the intrusion * * * against the impor-

tance of the governmental interests”).

Petitioners suggest that the burden on them is sub-

stantial because the termination payments have been

escrowed until resolution of the SEC's case against

15

them, which could last “months or years.” Pet. 24.

But that argument goes only to the post-complaint con-

tinuation of the escrow, and petitioners consented in the

district court to the continuing escrow, see note 3, si-

pra. In any event, the continuation of the escrow is at-

tributable to the fact that the SEC has filed a lawsuit

charging petitioners with federal securities law viola-

tions. See 15 U.S.C. 78u-3(¢e)(3)(B)G). In those cireum-

stances, the balancing of interests even more strongly

favors the government, and the escrow remains subject

to judicial oversight. Petitioners’ Fourth Amendment

challenge is thus entirely without merit.

3. Petitioners contend (Pet. 25-27) that Section 1105,

as applied to them, is unconstitutionally vague under the

Fifth Amendment's Due Process Clause. Their vague-

ness challenge is based on their claim that, before they

and Gemstar agreed in November 2002 to postpone the

termination payments, the SEC allegedly “did not clar-

ify its position on the breadth of Section 1105." Pet. 25.

That fact-bound contention does not merit further re-

view.

Although petitioners suggest (Pet. 25) that the “SEC

|mlisled” them, their underlying factual contention is

merely that the SEC “appeared” to admit that it would

not seek an escrow of that part of the termination pay-

ments purportedly attributable to vacation pay, and that

the SEC at that time “did not clarify its position.” Pet.

25. In reality, the SEC consistently maintained that the

termination payments in their entirety were potentially

subject to a Section 1103 escrow. Indeed, petitioners’

agreements with Gemstar expressly recognized that the

SEC might ask that “all or a portion” of the $37 million

be placed “into an escrow pursuant to the Sarbanes-

Oxley Act.” C.A.E.M. 7-8; see Pet. App. 26a.

16

Moreover, the SEC had no obligation to inform peti-

tioners whether it would seek a Section 1103 escrow of

the entire $37 million before it actually applied for the

escrow. The SEC did not breach any agreement with

petitioners and did not cause them to incur any liability

they might otherwise have escaped. The only case on

which petitioners rely, Chalmers v. City of Los Angeles,

762 F.2d 753 (9th Cir. 1985), is readily distinguishable.

There, faced with one city ordinance that appeared to

bar a vendor's T-shirt sales and another ordinance that

appeared to allow her sales, the vendor consulted the

City Clerk’s Office, which “assured her that her planned

activities were permitted.” /d. at 756. When the vendor

tried to sell her shirts, however, “she was harassed,

threatened with arrest and prosecution, and ultimately

prevented from selling the T-shirts” by police who con-

tended the sale was illegal. /bid. The Chalmers court

held that the city deprived the vendor of due process by

taking action against her for activity that the city had

assured her was legal. /d. at 759. Nothing remotely

analogous occurred here.

17

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

PAUL D. CLEMENT

GIOVANNEP. PREZIOsSO Solicitor General

General Conusel

RichaArD M. HUMES

Associate General Conusel

MELINDA LLARDY

Assistant Geveral Conusel

THOMAS J. KARR

Special Trial Counsel

Securities aud Evchauge

Commission

SEPTEMBER 2005