9th Circuit Says Yes to Restatement, Yes to the SEC, and a Big No to Backdating Maxim CFO

On May 15, 2012, the Ninth Circuit Court of Appeals affirmed the decision of the district court finding in favor of the Securities Exchange Commission (“SEC”) on allegations that Carl Jasper, the former Chief Financial Officer of Maxim Integrated Products, Inc., violated various provisions of the securities laws in connection with the company’s stock options backdating scheme.  SEC v. Jasper, Case No. 10-17064 (9th Cir. May 15, 2012).  The court found that for ten consecutive quarters, Maxim granted backdated options with an exercise price equal to the lowest price of Maxim stock for each quarter. 

Significantly, the Ninth Circuit upheld the lower court’s decision to admit into evidence Maxim’s financial restatement, which documented a $838.3 million reduction in revenue for 2000-2005, stemming from the backdating.  During pre-trial motion practice, Jasper had objected to the admission of Maxim’s financial restatement under the business records exception to the hearsay rule.  Jasper argued that the business records exception applies only to those records created in the routine course of everyday business, and the restatement should not be covered because it was more properly considered a document prepared by specialty accountants in anticipation of litigation.  The district court rejected that argument, noting that the report was “made at or near the time of the accounting review by those with knowledge of Maxim’s books,” and “[t]he circumstances of its creation do not indicate that it lacks trustworthiness.”

On appeal, the Ninth Circuit agreed, explicitly rejecting Jasper’s argument that the restatement was prepared in anticipation of litigation: “In today’s litigation-heavy climate, the filing of any 10-K can always subject companies to legal exposure. . . . Were this court to accept Jasper’s contention, virtually every document a public company releases to the public would be inadmissible as a business record merely because companies are worried about litigation risks.  That is not the law under the Federal Rules of Evidence.”

The Ninth Circuit’s decision in Jasper is also significant because it upheld the trial court judge’s authority to order reimbursement under the Sarbanes-Oxley Act.  Jasper argued that reimbursement under SOX is a legal rather than an equitable remedy, and thus reimbursement should be a question for the jury.  The Ninth Circuit disagreed.  “Ninth Circuit law is clear that the reimbursement provision of SOX 304 is considered an equitable disgorgement remedy and not a legal penalty.  Thus, Jasper is not entitled to have a jury find all of the facts necessary to support the reimbursement.”  Therefore, the trial court’s judgment that Jasper reimburse Maxim $1.8 million, as well as pay a civil penalty of $360,000, was affirmed.