Full opinion text
MEMORANDUM OPINION GLADYS KESSLER, District Judge. Plaintiff United States Securities and Exchange Commission (“SEC” or “the Commission”) brings this civil action against Defendant Gary A. Prince (“Prince”) alleging violations of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77a et seq., the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et seq., and various Rules promulgated under the Exchange Act. On December 10, 2012 through January 4, 2013, the Court held a bench trial in which fifteen witnesses testified. Based on the testimony presented by those witnesses, the voluminous number of exhibits admitted into evidence, the parties’ representations of what facts were not in dispute, and the applicable caselaw, the Court makes the following findings of fact and conclusions of law. TABLE OF CONTENTS I.FINDINGS OF FACT..................................................:. 113 A. Creation of Integral Systems, Inc.......................................113 B. Prince’s Duties and Activities Between 1982 and 1998.....................113 C. Prince’s Duties and Activities Between December 1998 and August 2006..............................................................114 1. Prince Becomes a Full-Time Employee at Integral..................114 2. Mergers and Acquisitions Program............... 115 3. Prince’s Compensation...........................................116 4. Prince’s Stock Options...........................................116 5. Executive Management Salaries/Bonuses...........................116 6. The “Gang of Six”/“Gang of Seven”................................116 7. Advisor to Chamberlain..........................................117 8. Prince’s Responsibility for the Contracts Department................117 9. Drafting the MD & A Section of Public Filings......................118 10. Reviewing and Commenting on Drafts of Public Filings..............118 11. Prince’s Role During Brown’s Maternity Leave......................119 12. Financial Press Releases.........................................119 13. Financial Forecasting............................................119 14. Financial Presentations..........................................120 15. Attendance at Board of Directors Meetings.........................120 16. Prince’s Involvement with the Accounting Department...............120 D. Integral’s Knowledge and Actions from December 1998 to August 2006.....120 E. Role and Involvement of Counsel.......................................121 1. Venable Becomes Corporate Counsel ..............................121 2. The Relationship Between Venable and Integral.....................121 3. Consultation with Venable Regarding Prince’s Hiring................122 4. Venable’s Knowledge of Prince’s Duties and Activities................122 5. Integral’s Conversations with Venable about Prince’s Possible Officer Status.................................................123 a. Fall of 1999 .................................................123 b. January 2001 ...............................................124 c. Spring and Summer of 2002...................................124 6. Venable’s Termination as Corporate Counsel........................125 7. Venable’s Rehiring by the Board of Directors Audit Committee.....125 8. DLA Piper’s Resignation as Corporate Counsel and Venable’s Rehire.......................................................126 9. In December 2005, Venable Again Researched Whether Prince Needed to Be Disclosed in Public Filings.........................126 10. Integral’s Filing of a Form 8-K Disclosing Waehtel’s Allegations.....127 11. NASDAQ and SEC Investigations.................................127 12. In August 2006, Prince Is Named an Executive Officer and Disclosed to the SEC.......................:..................129 13. Advice from Venable to Integral...................................129 F. Post-2006 Activities and Procedural History.............................130 II. CONCLUSIONS OF LAW................................................130 A. Legal Framework....................................................130 B. Prince’s De Facto Officer Status.......................................133 1.Prince’s Duties, Functions, and Responsibilities Did Not Involve Performing Policy Making Functions ............................134 C. Count VI: Liability under Section 16(a) and Rule 16a-3 of the Exchange Act.....................................................137 D. Count II: Liability Under Section 10(b) and Rule 10b-5 of the Exchange Act.....................................................137 1. Prince Did Not Act With Scienter When He Did Not File Section 16(a) Reports.................................................138 a. Integral Requested and Received Venable’s Advice After Making Complete Disclosure................................138 b. Integral Relied on Venable’s Advice in Good Faith...............140 c. In Subsequent Years, Venable Reiterated its Conclusion That Prince Could Work at Integral Without Disclosure.............140 2. The SEC Did Not Establish That a “Scheme to Defraud” Existed.....144 E. Count III: Liability under Section 13(a) and Rules 13a-l and 12b-20 of the Exchange Act..................................................144 1. Scienter..................................:.....................144 F. Count V: Liability Under Section 14(a) and Rule 14a-9 of the Exchange Act.....................................................145 G. Count VII: Practicing Accounting Before the Commission.................145 1. Prince Violated the Commission Rule 102(e) Order Barring Him from Appearing or Practicing Before the Commission as an Accountant...................................................145 2. Prince Did Not Obtain or Rely on Advice of Counsel Regarding Practicing Accounting Before the Commission.....................151 H. Relief..............................................................152 III. CONCLUSION..........................................................154 I.FINDINGS OF FACT A. Creation of Integral Systems, Inc. 1. Integral Systems, Inc. (“Integral”) is incorporated and headquartered in Maryland. It makes and sells satellite ground systems, including satellite communications systems and software products for satellite command and control. 2. Integral was founded in 1982. One of the founders was Steven R. Chamberlain, who served as Integral’s Chairman and Chief Executive Officer (“CEO”) from 1982 until 2006. 3. Integral became a public company in 1988. At all times relevant to this action, Integral was an issuer of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, 15 U.S.C. § 781. B. Prince’s Duties and Activities Between 1982 and 1998 4. In 1982, Prince was retained as a consultant by Integral to help set up its financial books and record systems. He also served as a Director on Integral’s Board. 5. In 1992, Prince became Vice President and Chief Financial Officer (“CFO”) of Integral during which he had the “final call” on accounting matters. He was not a full-time employee and performed his duties as a part-time consultant. 6. In June 1993, as a consequence of Prince’s conduct as CFO of the public company Financial News Network, the SEC filed suit against Prince for violation of the federal securities laws. 7. On July 9, 1993, Integral issued a Form 8-K (a filing that a company is required to make disclosing any material event important to shareholders or the SEC) disclosing that Prince had been charged by the SEC. 8. On August 18, 1994, Judge Charles R. Richey of the U.S. District Court for the District of Columbia entered an Order of Final Judgment of Permanent Injunction against Prince. S.E.C. v. Gary A. Prince, Civ. No. 93-1331 (D.D.C.1994). That Judgment prohibited Prince from violating the securities laws in the future, including Section 10(b) and Rule 10b-5 of the Exchange Act. 9. On March 31, 1995, Prince resigned as a Director and CFO of Integral. 10. On May 10, 1995, Integral filed a Form 10-Q (a quarterly financial report filed with the SEC) disclosing that Prince had resigned his Director and Officer positions at Integral and noting that Integral would continue to use his services as a consultant. 11. After Prince’s resignation, Prince continued to act as a consultant to Integral from April 1995 until he joined the company on a full-time basis in December 1998. In this capacity, Prince reported directly to Chamberlain. His work included performing financial analyses, evaluating companies for purposes of acquisition and/or merger, drafting the “Management Discussion and Analysis” (“MD & A”) section of the Form S-l (a registration statement filed with the SEC to register a company’s securities), making revenue forecasts, drafting press releases, offering bonus suggestions for members of executive management, and helping to prepare public filings. Prince ceased to be responsible for day-to-day accounting decisions and no longer had the “final call” on accounting matters. 12. On September 5, 1995, Prince entered a plea of guilty to two felony counts in the District Court for the Central District of California charging him with conspiracy under 18 U.S.C. § 371 and making a false statement to the SEC in violation of 18 U.S.C. § 1001. The charges also arose from Prince’s conduct as CFO of Financial News Network. He was sentenced in late 1995 to two months’ incarceration, two months of home detention, a $50,000 fine, and three years of probation. 13. On June 24, 1997, the Commission issued an Order pursuant to Commission Rule 102(e), 17 C.F.R. § 201.102(e), permanently prohibiting Prince from exercising “the privilege of appearing or practicing before the Commission as an accountant.” (“Accounting Bar”). Pl.’s Ex. 2. The Commission provided no further guidance to Prince on what the Accounting Bar permitted him to do and not do. C. Prince’s Duties and Activities Between December 1998 and August 2006 1. Prince Becomes a Full-Time Employee at Integral 14. In December 1998, Prince and Chamberlain began discussing how to structure a role for Prince as a full-time employee at Integral. 15. Chamberlain wanted to create a position for Prince that would not require Integral to disclose Prince’s legal history in its public filings. Since Chamberlain knew that officers had to be disclosed in a public company’s filings, Prince could not serve as ah officer. Chamberlain also wanted to create procedures ensuring that Prince would not be involved with the accounting department and the accounting data. 16. Moreover, Chamberlain was clear that he did not want Prince to become an officer because the bylaws gave all officers the ability to sign contracts and bind the company. Chamberlain did not want Prince to have that sort of unchecked authority because Chamberlain, though very appreciative of Prince’s skills and experience, also believed that Prince had an inflated sense of his own worth and a propensity to meddle in areas beyond his responsibilities. 17. A series of “carveouts” were created to “fence in” Prince’s roles and duties. Prince was not allowed to sign contracts or checks or bind the company in any way; he was not allowed to hire or fire staff without permission; and he was not allowed to hold himself out to be a vice president or officer of Integral. 18. Prince was not allowed to participate in accounting staff meetings and was not allowed to work on preparation of Integral’s financial statements. In general, he was also denied “write” privileges to the network drives where the accounting numbers were stored, and at times he was denied “read” access to the interim numbers. 19. Around the time Prince was hired as a full-time employee, Chamberlain communicated these “carveouts” in person to Elaine Brown, the company’s Chief Financial Officer, and Thomas Gough, the company’s President and Chief Operations Officer. Although these “carveouts” were never put in writing, they were well-known and understood throughout the company, and were monitored by Chamberlain. 20. Prince’s primary responsibility was development of a mergers and acquisitions program. Prince would also continue the work he had been doing as a consultant including drafting the MD & A, making revenue forecasts, drafting press releases, offering bonus suggestions for members of executive management, and helping to review and prepare public filings. Finally, Prince would also function as a general advisor and staff member to Chamberlain, as well as to other members of management. 21. As part of his general advisory role, Prince would regularly share his opinion on a variety of subjects beyond those directly related to his financial background and experience. This activity was consistent with the broader culture established by Chamberlain, who encouraged all employees to share their opinions on any subject. Prince, a bit of a gadfly, was particularly likely to share his opinions, except on technical details to which he admitted total lack of knowledge. His considerable business acumen and experience and his close relationship to Chamberlain meant that he had a significant amount of influence. However, the other employees regularly disagreed with and disregarded his opinions, if and when they thought necessary. Moreover, Chamberlain retained control over all final decisions. 22. On December 30, 1998, Prince was hired as a full-time employee and given the title “Director of Mergers and Acquisitions.” 2. Mergers and Acquisitions Program 23. As the Director of Mergers and Acquisitions, Prince investigated possible acquisitions of other companies for Integral and reported his findings directly to Chamberlain. Chamberlain would then negotiate the price and the contract details based on Prince’s information. 24. Once a subsidiary was acquired, Prince’s primary responsibility was to assess the financial health of the business and effectiveness of its existing management. After acquisition or merger, Prince was in charge of overseeing the operations of the subsidiaries. After acquisition, he also supervised the activities of those companies who were acquired and in some cases later shut down. 25. Prince served as Board Chairman and/or a Director for the corporations created to acquire various subsidiaries. 26. Prince also played a role in assessing officer compensation for the subsidiaries and recommended whether certain subsidiaries’ officers should be promoted, demoted, or terminated. The ultimate decision on those issues, however, remained with Chamberlain. 27. As part of his assessment of the financial health of newly-acquired subsidiaries, Prince interacted with their accounting staffs. He investigated their financial statements, made suggestions on how they should record certain transactions, and consulted with Integral’s accounting staff on how the subsidiaries’ financial statements would be consolidated with Integral’s statements. Prince also consulted with outside auditors about financial questions related to subsidiaries. 28. While Prince “wouldn’t hesitate to ask questions and review [a subsidiary’s] financial results,” the accounting itself was done by the subsidiary’s accountants, who were supervised by and reported to Brown as Integral’s CFO. Test, of Elaine Brown, Trial Tr. Dec. 14, 2012, P.M. Session 24-25. 29. Prince regularly made presentations to Integral’s Board of Directors regarding potential acquisitions and issues regarding subsidiaries. 3.Prince’s Compensation 30. Between December 1998 and August 2006, Prince was consistently one of the five highest paid individuals at Integral. 4. Prince’s Stock Options 31.Prince was granted Integral stock options in 2000, 2001, 2002, 2003, and 2004. 32. Prince did not file a Form 3 (an initial statement to the SEC regarding beneficial ownership of securities), Form 4 (a statement to the SEC of changes in beneficial ownership of securities), or Form 5 (an annual statement to the SEC of changes in beneficial ownership of securities) between December 1998 and July 2006. 5. Executive Management Salaries/Bonuses 33. At various times, Prince proposed what bonus amounts members of executive management should receive. This was done in collaboration with others. The bonuses recommended by the group would then go to Chamberlain for final approval. After he approved, Brown or Gough would present the recommendations to the independent Directors for approval. 34. Prince also collaborated with members of executive management in recommending salary increases for Chamberlain. 6.The “Gang of Six”/“Gang of Seven” 35.Chamberlain, Gough, Brown, and Prince, as well as two or three additional executive-level employees, were referred to as the “Gang of Six” or “Gang of Seven,” or “G6” or “G7” (“G6/G7”). 36. The group was formed by Chamberlain in order to discuss companywide policies on a variety of issues, including human resource decisions, benefits, personnel, and mergers and acquisitions. Prince participated in G6/G7 meetings as an equal member. 37. Brown, Gough, Peter Gaffney, Prince, and Chamberlain all testified consistently and credibly that G6/G7 served as an advisory vehicle to assist Chamberlain in making policy for the company, and that Prince did not have authority to make policy as a member of G6/G7. 7. Advisor to Chamberlain 38. In addition to advising Chamberlain in his capacity as a member of G6/G7, Prince also served as a general advisor to Chamberlain. His office was located immediately next to Chamberlain’s office. 39. Prince could not and did not make policies or rules or standards within the company. Until the summer of 2005, see infra ¶¶ 41-49 (describing Prince’s authority over Contracts Department), he did not have a Group that reported to him and therefore had no staff to direct, hire, or fire. Generally, Prince would advise and make recommendations to Chamberlain, who would then accept or reject them. Once Chamberlain made a decision, Prince or the relevant Group head would then implement it. 40. Prince’s influence with Chamberlain was well-recognized throughout the company. For example, because of Prince’s relationship with Chamberlain, people would often consult him to get a sense of how Chamberlain might react to a particular idea or suggestion. However, despite his significant influence, the Integral employees testified consistently that they felt free to disagree with Prince and regularly did disagree with him. 8. Prince’s Responsibility for the Contracts Department 41. Prior to July 2005, Brown was head of the Contracts Department at Integral. 42. In the first half of 2005, at least two contracts were signed by Group heads containing significant errors which injured Integral financially. Chamberlain concluded that further review of contracts was needed before any contracts were finalized. 43. On July 6, 2005, Brown emailed the staff of Integral, telling them that only officers, including Prince, had the authority to sign contracts. She testified that she did not mean to suggest that Prince was an officer, and that after this email was sent she spoke to Prince and confirmed he was not in fact an officer and did not have authority to sign off on contracts. No formal correction was ever disseminated. 44. In the same email, Brown stated that Prince had been “designated by [executive management] to review/approve contracts and subcontracts” relating to specific business areas, and that individuals must “obtain and retain proof that [Prince] ha[d] reviewed/approved” a contract before it could be finalized. Pl.’s Ex. 95. The contracts that Prince had to approve were the “high value” or “primary” contracts. 45. Even after this email was sent, Prince did not execute or sign any contracts on behalf of Integral. 46. On August 1, 2005, Chamberlain sent an email to Integral managers stating that “effective immediately and until further notice, no contract with our customers, nor any subcontract with our teammates, is to be executed until approved by either Gary Prince or myself.” Pl.’s Ex. 96; Def.’s Ex. 109. Thus, the system that emerged was that all major contracts were reviewed by Prince and required either Prince or Chamberlain’s approval. 47. Albert Alderete, a contracts administrator at Integral, Gaffney, Brown, Gough, Chamberlain, and Prince all testified consistently that, while Prince reviewed contracts, the final decisions remained with the heads of the various Groups. Prince was never given the authority to sign off on contracts. Rather, he performed a screening role to ensure that contracts were properly drawn and, in particular, that all financial calculations were correct. 48. On August 12, 2005, the Contracts Department was notified that it was to be placed under Prince’s direction. Prince began to supervise the two employees in the Contracts Department, including exercising hiring and firing power. He also made salary decisions and did performance reviews. 49. In this time period, Prince was named “Managing Director of Operations.” 9. Drafting the MD & A Section of Public Filings 50. One of Prince’s responsibilities included writing a first draft of the MD & A section of Integral’s Form 10-Q and 10-K (an annual financial report filed with the SEC) filings. 51. The MD & A is a business discussion which attempts to explain the financial results for a particular period of time. It may include comparisons to prior periods and/or forecasts or projections for future periods. Before Prince took responsibility for the MD & A, Chamberlain, Steve Carchedi, Gaffney, and Gough all contributed to writing it. None of these individuals was an accountant. 52. Prince would update the prior filing’s MD & A only after the accounting department had closed its books “for all intents and purposes.” Test, of Elaine Brown, Trial Tr. Dec. 14, 2012, P.M. Session 22-23. His narratives were edited, and ultimately, it was Chamberlain who approved the final version of the MD & A that was filed. 10. Reviewing and Commenting on Drafts of Public Filings 53. When a reporting period ended, the accounting department would close its books, and then, using the prior reporting period’s filing as a template, would update the numbers and language. Brown would then circulate this draft “among the management team, among the outside directors, and just solicit comments and feedback.” Test, of Elaine Brown, Trial Tr. Dec. 14, 2012, P.M. Session 18. Brown served as the “gatekeeper” of the various comments she received from these individuals, and would incorporate the comments she believed were appropriate and ignore the ones she believed were not appropriate. Id. at 18-19. 54. Prince regularly reviewed and commented on these draft filings. Prince’s comments included asking questions, asking for backup related to particular figures, pointing out internal inconsistencies, suggesting additional language, deletions, or rephrasings, adding information or correcting information related to mergers and acquisitions, and changing numbers related to future forecasts. In addition to reviewing and commenting on the drafts themselves, he occasionally raised questions about the accuracy of materials related to the public filings and made suggestions in email exchanges with Brown and others while the company was preparing its filing. 55. Prince’s comments were not always accepted, and even when his suggestions were good ones, they were not always incorporated verbatim. Brown testified credibly that she did not feel any particular pressure to accept or reject suggestions made by Prince. 11.Prince’s Role During Brown’s Maternity Leave 56. Brown was on maternity leave in the fall of 2004 and early 2005 when Integral prepared its Form 10-K for fiscal year 2004 and its Form 10-Q for the first quarter of fiscal year 2005. 57. On October 27, 2004, Prince sent an email asking questions about the fourth quarter of fiscal year 2004 to Pat Carey, Integral’s Controller, and A1 Smith, Integral’s Assistant Controller. Prince copied Brown on this email. The email began, “Now that I’m running the Accounting Dept.,:)...” Pl.’s Ex. 79. 58. Brown and Prince both testified that they understood this phrase to be a joke. As Prince observed, “if I was making a coup of the accounting department, I probably wouldn’t have copied Ms. [Brown] on it.” Test, of Gary A. Prince, Trial Tr. Jan. 3, 2013, P.M. Session 83. Brown and Prince concurred, as did Chamberlain, that Prince was not running the accounting department during this period. Brown testified that she continued to be involved from home, and delegated ultimate responsibility to Carey, her second in command. 59. While Prince was more involved than usual in the preparation of these filings, he testified, as did Chamberlain, that his role was, primarily, to coordinate the gathering of all the required information from various subsidiaries for preparation of the Form 10-K and Form 10-Q. 12.Financial Press Releases 60. Another of Prince’s responsibilities was drafting financial press releases, particularly pre-earnings press releases. A pre-earnings press release discusses a company’s financials before the actual numbers are released. Press releases are incorporated into Form 8-K filings. 61. Prince wrote the press releases after the numbers had been finalized by the accounting department. He was not engaged in the actual calculation of the numbers. 13.Financial Forecasting 62. Prince regularly engaged in financial forecasting, which were projections of future earnings. Although Prince would circulate internal emails which would predict earnings per share, the official number released to the street was generated by the operating Groups and the accounting department. 14. Financial Presentations 63. Prince gave two presentations to the Board of Directors focusing on financial forecasts. He also gave a presentation to the Board of Directors on the “core business” at the request of an independent Director. Def.’s Ex. 133. 64. Brown testified that it was her responsibility to make reports to the Board of Directors on overall company financial performance. She gave numerous such presentations. 65. Prince also gave financial presentations and tutorials to fellow staff members. 15. Attendance at Board of Directors Meetings 66. Prince regularly attended Board meetings, even when he was not making a presentation. Other non-Board members and non-officers were periodically invited to and did attend Board meetings. 16.Prince’s Involvement with the Accounting Department 67. Prince occasionally interacted with the accounting department in various ways. This included commenting on payroll analyses, discussing incentives, comparing results to forecasts, assessing Integral’s core profitability, analyzing general and administrative costs, reviewing Defense Contract Audit Agency (“DCAA”) submissions, evaluating legal costs, investigating how capital losses had been booked, creating a software development amortization plan, assessing how the company should adopt new financial accounting standards, proposing and evaluating segment reporting structure, and assessing whether any particular operating group was spending in an unusual or inappropriate fashion. 68. All of these activities were part of Prince’s role as Chamberlain’s “watchdog.” Test, of Peter Gaffney, Trial Tr. Dec. 10, 2012, P.M. Session 41^42; Test, of Gary A. Prince, Trial Tr. Jan. 2, 2013, P.M. Session 13-14. Again, this was part of the culture established by Chamberlain that encouraged everyone to participate and voice their opinions in areas outside their assigned duties and responsibilities. Prince, in particular, was known for “not [being] shy about giving his opinions, or thoughts, or ideas, or advice.” Test, of Elaine Brown, Trial Tr. Dec. 14, 2012, A.M. Session 90. 69. Prince’s suggestions were not always followed, and the final call on virtually all decisions was made by Chamberlain. As Prince summarized, referring to Chamberlain’s ultimate decisionmaking authority, “Integral was not a democracy; it was a dictatorship.” Test, of Gary A. Prince, Trial Tr. Jan. 2, 2013, P.M. Session 16-17. D. Integral’s Knowledge and Actions from December 1998 to August 2006 70. The fact that Prince was convicted of a felony in 1995 was well-known among Integral staff members and the Board of Directors. 71. The fact that Prince was barred from practicing accounting before the Commission was also known by many individuals within Integral. 72. The duties and activities discussed above, infra, ¶¶ 23-69, were also widely known throughout Integral. 73. There was never any effort to keep Prince’s legal problems or his actions, duties, or responsibilities from the Board of Directors, the company’s lawyers, or the SEC. 74. Gaffney, Gough, Brown, and Prince all testified that Prince was not named an officer because Chamberlain strongly preferred not to disclose his biography and past legal troubles. Chamberlain, however, testified that he was not concerned with disclosure per se, noting that Integral had disclosed Prince’s conviction in its public filings in 1995. Chamberlain testified that his primary concern regarding disclosure was the possibility of shareholder lawsuits. 75. When Integral named its executive officers in February 2000, Prince was not named an executive officer. 76. Between December 1998 and August 2006, Integral filed six Form 10-Ks with the SEC. None of these Form 10-Ks identified Prince as an officer. 77. Between December 1998 and August 2006, Integral filed seven proxy statements prior to annual meetings. These proxy statements did not identify Prince as an executive officer. 78. John Flaherty, a member of the accounting department, Gaffney, Brown, Gough, and Prince all testified credibly that Brown was firmly in control of the accounting department and the financial statements between December 1998 and August 2006. This was also acknowledged by outside auditors in 2002. E. Role and Involvement of Counsel 1. Venable Becomes Corporate Counsel 79. In the spring of 1998, John Sullivan, a corporate partner at the law firm of Venable LLP (“Venable”), and Wallace Christner, a senior associate at Venable, “made a pitch” to Integral to serve as corporate counsel in connection with a securities offering. Test, of John Sullivan, Trial Tr. Dec. 17, 2012, A.M. Session 12-13. 80. After that discussion, Gough informed Sullivan and Christner that Integral had a part-time consultant, namely Prince, with a criminal background. 81. Chamberlain decided to hire Venable and the firm began working on the Form S — 1 filing in early June 1998. 82. At that point, Sullivan was the senior member of a four-person team at Venable handling Integral’s business, and served as the relationship partner with Integral. Christner was the “second-in-command.” Test, of Thomas Gough, Trial Tr. Dec. 20, 2012, A.M. Session 81. The third was an associate, Andrea Kaufman, and the fourth was another associate, James Dvorak. W. Craig Dubishar, a government contracts associate at Venable, also worked on Integral issues in 1998. 83. Between December 1998 and August 2006, at least eight additional Venable lawyers worked on Integral matters: Treazure Johnson, a former SEC attorney; Anita Finkelstein, a partner in the DC office who specialized in SEC matters; David Levenson, a senior partner in the securities group; Brian Dunn, an associate in the litigation group; Geoffrey Garinther, a partner; Ron Ben-Menachem; Herbert Smith; and Philip Harvey, a litigator who specialized in investigations. 84. When Sullivan left Venable in May 2001, Christner became the relationship partner and served in that role until at least October of 2006. 2. The Relationship Between Venable and Integral 85. To reduce legal costs, Chamberlain decided that Brown would be the conduit between Integral and Venable, and that she would contact Dvorak with any questions or problems Integral had. Dvorak would then consult the more senior members of the Venable team if needed. 86. Venable advised Integral on public filings, securities law compliance, financing matters, mergers and acquisitions, and government contracts. 87. The Venable attorneys understood themselves to be Integral’s general corporate counsel, including on disclosure issues, and Integral’s Board of Directors understood that Venable was their general corporate counsel on those issues. 88. There was no formal or informal protocol in place by which the Venable lawyers gathered information from Integral about its activities or problems. There was also no system or protocol whereby Venable lawyers who represented Integral later in time became familiar with the work that had been performed for Integral in the past by other Venable attorneys. 89. There was no evidence presented that any employee at Integral ever failed to provide information requested by a Venable lawyer. 3. Consultation with Venable Regarding Prince’s Hiring 90. Chamberlain, who had no legal training, testified that he spoke to Sullivan at some point before Prince was hired and discussed Prince’s legal background and Accounting Bar. Chamberlain insisted that he had given the SEC’s Order containing the Accounting Bar to Venable to review in an attempt to try to figure out what the meaning of “practicing accounting before the Commission” was and what activities it covered. 91. Brown, Gough, and Prince all testified credibly that they understood that Chamberlain had spoken to Venable about Prince’s employment, and that, as a result of that conversation, the “carveouts” and “fencing in” discussed above at ¶¶ 14-19 were put in place. 92. Sullivan, however, testified that he never discussed hiring Prince with Chamberlain, that Chamberlain never told him about Prince’s criminal conviction or Accounting Bar, and that he never provided advice about how to structure Prince’s role. 93. The Court finds that the consistent testimony of Brown, Gough, and Prince was accurate, and that Sullivan, who admitted to not having a clear memory of many of the events which occurred over fourteen years ago, was not accurate. 94. Venable never prepared any written document describing what Prince could or could not do. Any legal advice given by Venable attorneys was generally transmitted informally to Brown, who then transmitted it to other members of management. 4. Venable’s Knowledge of Prince’s Duties and Activities 95. Venable was corporate counsel for Integral for several months in 1998 before Prince became a full-time employee. During that time, Venable lawyers knew that Prince was drafting the MD & A portion of the fiscal year 1998 Form S-l, participating in the preparation of the fiscal year 1998 Form 10-KSB (an abbreviated version of the annual financial 10-K report for small businesses), and that Prince was working on mergers and acquisitions issues. 96. Between December 1998 and August 2006, Venable lawyers regularly worked with Prince on issues related to mergers and acquisitions. They knew that, in that capacity, Prince was drafting offer letters, reviewing consulting agreements with employees of subsidiaries, asking questions about financial issues pertaining to the subsidiaries, serving as a Board Chairman and/or Director for corporations created to acquire subsidiaries, drafting press releases, and making presentations to Integral’s Board of Directors. 97. Christner and Dvorak knew that Prince interacted with outside auditors on behalf of Integral in his role as Director of Mergers and Acquisitions. 98. Christner knew that Prince worked on drafting the MD & A section of public filings. 99. Sullivan, Christner, and Dvorak knew that Prince drafted press releases. 100. Christner and Dvorak knew that Prince reviewed and commented on drafts of public filings. 101. On April 12, 2000, reports by two financial analysts were issued which contained lower projections for Integral’s revenues than previously-issued reports. The price of Integral’s common stock dropped significantly and Integral issued a press release in response to the release of those reports. On November 1, 2000, the SEC ■wrote an inquiry letter to Integral asking for information regarding the events that led up to the press release. 102. On December 8, 2000, Venable sent a letter to the SEC on behalf of Integral in response to its inquiry of November 1, 2000. The letter stated that Prince had interacted with outside financial analysts on behalf of Integral, generated financial projections, and drafted the press release in question. Sullivan, the relationship partner at the time, reviewed this letter before it was sent to the SEC. 103. The SEC never responded to Venable’s December 8, 2000, letter. Nor did anyone at the SEC ever contact anyone at Integral or Venable to inform them that Prince’s activities, as described in Venable’s letter, required him to be disclosed as an executive officer or violated his Accounting Bar. 5. Integral’s Conversations with Venable About Prince’s Possible Officer Status 104. Integral and Venable interacted on three separate occasions between 1999 and 2002 regarding Prince’s desire to become an Integral officer. a. Fall of 1999 105. In October of 1999, Flaherty and Brown consulted Dvorak and Sullivan about whether to include Prince’s compensation and biographical information in the Form 10-KSB for fiscal year 1999. Brown faxed Dvorak various provisions from the Code of Federal Regulations referencing “significant employee” disclosure requirements and excerpts from Integral’s public filings related to Prince. Dvorak did not recall following up on this fax with Brown or with Sullivan. 106. A month later, Flaherty asked Brown “about the verdict from [her] discussions with Venable regarding Gary Prince and whether or not he [would] be included” as a highly-paid employee in the executive compensation table in the Form 10-K for fiscal year 1999. Pl.’s Ex. 11. Brown responded to Flaherty and told him not to include Prince in the table. 107. The next day, Dvorak and Flaherty spoke about “16(A) disclosure issues.” Def.’s Ex. 46. Section 16(a) of the Securities Exchange Act, 15 U.S.C. § 78p(a), requires certain officers and directors to file beneficial ownership reports with the SEC, including Forms 3, 4, and 5. -See supra ¶ 32. 108. A few days later, on December 3, 1999, Brown faxed Dvorak Prince’s biography and asked him how she could “avoid including” the biography in the Form 10-KSB for fiscal year 1999, as this was Chamberlain’s preference. She referenced a previous discussion she had had with Dvorak where Dvorak suggested removing the word “strategic” from Prince’s title and having Chamberlain write a memorandum stating that Prince did not play a key role in the decisionmaking of the company. In addition, she stated in her fax that she did not “intend to include [Prince] in the Compensation Table since he is not an executive officer.” PL’s Ex. 13; Def.’s Ex. 23. 109. Dvorak understood Brown’s fax to imply that she saw the publication of Prince’s biography and his inclusion in the compensation table as separate issues. 110. That same day, Brown sent Dvorak a draft of the Form 10-KSB for fiscal year 1999, and asked to speak to him about the fax she had sent him that morning. Again, there was no record of how, when, and if Dvorak followed up with Brown. 111. When Chamberlain discovered that Brown and Flaherty had been consulting Dvorak about disclosing Prince in the public filings, he was upset that legal costs had been wasted on something Chamberlain believed had been addressed the previous year in his initial consultation with Sullivan. Brown apologized to Chamberlain and Prince for the additional legal costs incurred, and Prince responded, noting that he “believe[d] that changing [his] title [would] do absolutely nothing in terms of protecting the Company in the unlikely event of shareholder litigation.” PL’s Ex. 15; PL’s Ex. 16. 112. Sullivan testified that at or around this time, he spoke with Chamberlain and Gough about Prince’s role in the company and Prince’s high level of compensation. Sullivan said that they told him that Prince could not make policy and did not have staff reporting to him. On the basis of this information, Venable concluded that Prince did not need to be disclosed as an executive officer. b. January 2001 113. In early 2001, Prince raised the issue of becoming a named executive officer. He set up a meeting with Sullivan and Dvorak, noting that Chamberlain was “amenable to allow [sic] me to reclaim my VP title provided I can do so without any adverse public disclosures in our filings. I plan to present all of this to Venable to ensure that this would be the case.” Def.’s Ex. 55. 114. On January 23, 2001, Chamberlain, Prince, Sullivan, and Dvorak met to discuss this issue. At that point, Prince was under the impression that, after five years had passed, he would no longer need to disclose his legal background. Thus, the question put to Venable was when the five years would expire. 115. Sullivan testified that he spoke with Chamberlain about why the issue was being raised. He advised Chamberlain that giving Prince the title of Vice President would indicate that he was an executive officer. 116. Venable concluded that the five-year limit had not yet expired, because the latest triggering event, the issuing of the Accounting Bar, took place in June of 1997. Prince decided that he would re-raise the issue when the five years expired in the summer of 2002. c. Spring and Summer of 2002 117. In March and April of 2002, Prince again raised the issue of becoming a named officer. 118. At the end of April, Venable began researching the officer disclosure question and discussing it with Brown and Prince. Christner asked Anita Finkelstein, a partner who specialized in SEC matters, to research the issue. 119. On April 30, 2002, Finkelstein emailed Christner, suggesting that Prince’s conviction might require disclosure beyond the five-year period. 120. On May 1, 2002, Finkelstein emailed Christner again, concluding that Prince’s conviction and Accounting Bar would have to be disclosed if he was named an executive officer. She stated: “My bottom line is that if Prince is an executive officer his history needs to be disclosed and will need to be disclosed for the foreseeable future. If one wants to be really compulsive, he or she should also keep in mind that the Rule 405 definition of ‘executive officer’ includes any folks who perform ‘policy making functions’ for the registrant. This means that Integral is open to the complaint that, no matter what his title, Integral should have made disclosure about Prince due to the nature of his activities at Integral.” Def.’s Ex. 75. No one at Integral received a copy of this email, nor was the second sentence of this email ever conveyed to anyone at Integral. 121. On May 10, 2002, Christner emailed Prince informing him that his conviction would have to be disclosed in the foreseeable future. 6.Venable’s Termination as Corporate Counsel 122.Sometime between June 2003 and mid-2004, Chamberlain became upset at the fee Venable charged in a particular matter and decided to fire the firm as corporate counsel. Venable was replaced by the law firm DLA Piper. 7.Venable’s Rehiring by the Board of Directors Audit Committee 123.In October of 2005, Bonnie Wachtel, an independent Director, raised various corporate governance concerns to the other members of the Board’s Audit Committee, Doss McComas and Dominic Laiti. In particular, Wachtel was deeply concerned about Chamberlain’s failure to disclose to the Board a recent criminal investigation into his alleged sexual misconduct with an underage female. 124. On November 2, 2005, a Subcommittee, consisting of McComas and Laiti, was created to conduct an internal review of the allegations raised in Wachtel’s October 2005 letter. Laiti proposed retaining Venable to conduct an investigation into Chamberlain’s actions. Wachtel objected to hiring Venable, alleging that the firm was not independent. Laiti responded by stating that Venable would not risk its reputation by being involved in a “coverup.” Def.’s Ex. 116. 125. The motion to hire Venable was passed by the Board of Directors, and Laiti stated that he would coordinate the review with Garinther of Venable. The firm was given a $40,000 budget, but no other restrictions were placed upon it. 126. Venable lawyers interviewed Prince and Gough. While the focus of the investigation was on Chamberlain’s activities, the lawyers obtained information regarding Prince’s duties and activities. In particular, they discovered and/or confirmed that Prince was a member of the G6/G7, that he worked on mergers and acquisitions, and that he reviewed company press releases and portions of SEC filings. See supra ¶¶ 95-100. 127. On November 30, 2005, the results of the independent investigation were presented to the Board of Directors. McComas proposed implementing recommended changes and not pursuing any further investigation. The Board adopted that proposal. 128.Despite having definitive evidence of the range of Prince’s responsibilities, including his participation in G6/G7, Venable did not tell Integral at this time that Prince’s duties and activities required him to be disclosed as an executive officer or violated his Accounting Bar. 8. DLA Piper’s Resignation as Corporate Counsel and Venable’s Rehire 129.Sometime between November 2, 2005 and December 5, 2005, DLA Piper resigned as Integral’s corporate counsel, at least in part because of frustration over not receiving “full communication about events that may be material to the Company and that require disclosure considerations under the federal securities laws,” presumably in reference to Chamberlain’s silence about the criminal investigation and charges pending against him. Defi’s Ex. 144. Venable was rehired as corporate counsel in late November or December of 2005, either during the independent investigation or shortly after it was completed. 9. In December 2005, Venable Again Researched Whether Prince Needed to Be Disclosed in Public Filings 130. On December 5, 2005, Wachtel sent Brown comments on the draft Form 10-K for fiscal year 2005, and suggested that Prince’s biography be included. 131. Executive management decided to confirm with Venable that Prince’s biography did not need to be disclosed. Brown then forwarded Wachtel’s email to Dvorak and asked him to “guide us on how best to respond.” Pl.’s Ex. 112; Def.’s Ex. 136. 132. On December 7, 2005, Dvorak and Brown had a conversation in which Dvorak asked Brown whether Prince had policy making authority, what his title was, whether he could bind the company, and whether his position had evolved or changed. Brown described Prince as an advisor to Chamberlain. 133. On December 8, 2005, Brown emailed Dvorak “as a follow-up to our conversation yesterday.” She noted that Prince could not sign contracts and did not have check signing or wire transfer authority. She described Prince as “a staff person reporting to Steve and fill[ing] an advisory role, advising Steve, Tom, Pete and me on company policy and PMs and division heads on contracts.” Brown concluded that Prince did not need to be disclosed, but asked to speak with Dvorak to “make sure Venable agrees with our position” before she responded to Wachtel. PL’s Ex. 112; Def.’s Ex. 140. 134. There is no evidence that Venable ever responded to Brown’s concern. 135. On December 9, 2005, Brown emailed Wachtel, telling her that Prince “is not a named executive officer and does not meet the criteria to be a named exec, officer.” Def.’s Ex. 142; Def.’s Ex. 144. Wachtel responded on December 12, 2005, reiterating her “preference” that Prince be disclosed. PL’s Ex. 104. 136. Executive management forwarded the entire exchange between Brown and Wachtel to McComas and Laiti, the independent Directors. McComas responded, disagreeing with Wachtel’s preference. He observed, ‘We have followed legal and accounting advice on so many issues because of the complexity and need to be up to date expertise [sic] that only they can provide in the 10K as a whole. The specific issues that Bonnie raises are her personal preferences on issues which have previously been covered with our advisors and the 10K has been approved by them so I suggest we move forward with its release.” PL’s Ex. 104; Def.’s Ex. 143. Laiti emailed the next day indicating that he agreed with McComas. Def.’s Ex. 148. 137. Venable did not tell Integral at this time that Prince should be disclosed, and Integral did not disclose Prince’s employment or background in the Form 10-K for fiscal year 2005. 10. Integral’s Filing of a Form 8-K Disclosing Wachtel’s Allegations 138. Wachtel declined to stand for reelection to the Integral Board of Directors. A Form 8-K was filed with the SEC to disclose this fact. See Hewlett-Packard Co., Exchange Act Release No. 55,801, 90 S.E.C. Docket 1865 (May 23, 2007) (noting that Exchange Act requires public companies to file a Form 8-K when a director resigns because of a disagreement with the company relating to its “operations, policies, or practices”). 139. Integral filed its Form 8-K on January 9, 2006, but did not address Wachtel’s corporate governance concerns. Instead, at Chamberlain’s request, the Form 8-K attached Wachtel’s correspondence and summarily stated that Integral disagreed with the content of her letters. 11. NASDAQ and SEC Investigations 140. Two days later, on January 11, 2006, officials from NASDAQ contacted Gough seeking a meeting to discuss “issues raised in the Company’s Form 8K.” Def.’s Ex. 152. 141. At some point in early 2006, the SEC contacted Integral indicating that it also was going to investigate the events surrounding the filing of the Form 8-K. Christner asked Treazure Johnson, a Venable partner who had previously worked at the SEC, to work on the case. 142. On February 15, 2006, Prince attended an interview with NASDAQ, accompanied by Garinther of Venable. 143. NASDAQ requested any emails between Prince and the Audit Committee. On March 29, 2006, Garinther responded to NASDAQ, on behalf of Integral, noting that Venable had “not seen any communications ... between Mr. Prince and Integral’s outside auditors.” Def.’s Ex. 175. The firm made this claim despite knowing that such communications existed. See supra ¶¶ 97,102. 144. On February 3, 2006, Integral staff emailed Venable lawyers an organizational chart which showed Prince on the same level with the other executive managers, identified him as the “Managing Director of Operations,” and showed that he supervised employees in the Contracts Department. 145. On April 7, 2006, Dunn of Venable prepared a memorandum that was circulated internally within the firm addressing whether Prince was a de facto officer of Integral. The memorandum concluded that, “[g]iven Prince’s role at the Company, the SEC could reasonably take the position that he was a de facto officer and should have been disclosed as such in the company’s SEC filings.” Def.’s Ex. 183; Def.’s Ex. 184. 146. Neither this conclusion nor this email was ever conveyed to anyone at Integral. 147. Later in April, Chamberlain retired as CEO, at least in part because of the criminal charges pending against him. Gaffney eventually replaced him as CEO. 148. On April 23, 2006, McComas wrote to Christner on behalf of the independent Directors, asking “some questions regarding the NASDAQ/SEC discussions” about Prince. 149. Christner drafted, and Garinther and Johnson approved, a response to the independent Directors noting that “whether or not he has been acting as an officer seems to be in a gray area,” and informing them that the best strategy was to emphasize Prince’s “no-officer attributes” and “hope that in light of the company’s current status,” the SEC would “essentially lose interest in the matter.” In addition, Christner noted that the firm “ha[d] not seen any evidence so far that would lead us to believe he has practiced accounting before SEC.” Def.’s Ex. 189; Def.’s Ex. 204. 150. Integral’s employees were never told directly that whether Prince was an officer was “in a gray area.” 151. In June of 2006, Venable began to prepare a letter to the SEC addressing Prince’s position in the company. 152. Venable directed Prince to put together a memorandum that described his roles and functions in the company. Christner wanted the memorandum to focus on what Prince was “not doing, not signing contracts, not VP on bus. cards.” Def.’s Ex. 198 (emphasis in original); Test, of Elaine Brown, Dec. 14, 2012, A.M. Session 52-55; Test, of Elaine Brown, Dec. 18, 2012, P.M. Session 52-53. 153. Prince’s memorandum to Venable indicated that he occasionally had individuals reporting to him directly, participated in G6/G7, made proposals and suggestions related to corporate organization and financial spending and controls, led the Contracts Department, and had been given the added title Managing Director of Operations. 154. On June 21, 2006, Smith, yet another Venable lawyer, emailed Johnson a draft of the proposed letter to the SEC. In his cover email, Smith made several observations. First, he noted that he took an approach in drafting the letter that highlighted “what Prince couldn’i/didn’t do at ISI.” Second, he noted the similarities between Integral’s issues and a legal case where a company had been held liable for not disclosing as a defacto officer a significant management figure. Third, he raised the possibility that Prince might be a “significant employee” under item 401(c) of Regulation S-K. Def.’s Ex. 211. 155. No one at Venable ever shared any of these observations with Integral. 156. On June 29, 2006, a special Board of Directors meeting was held in which Christner participated by teleconference. Gough suggested naming Prince an executive officer “in light of the recent changes within the Company.” Def.’s Ex. 219. The Board took the matter under consideration and decided to put it to vote at a later date. 157. On July 25, 2006, McComas wrote to Christner on behalf of the independent Directors, noting that they had sought advice and a written statement from Venable regarding possible liability, if any, as to the naming of new executive officers. 158. That same day, Christner asked Johnson to research whether Prince’s Accounting Bar prevented him from being an officer. Johnson responded, observing that she didn’t “see anything to prevent Prince from serving as an officer,” noting that the Accounting Bar was not an officer or director bar. Def.’s Ex. 229. She then noted that the “company will have to [sic] special care, however, to ensure that he has nothing to do of an accounting nature and particularly that he has no involvement in the preparation of the company’s financial statements.” Id. Johnson then sent another email, this time to both Garinther and Christner, wherein she reiterated that she had told Christner “that the company has to be very careful that he has no responsibility at all for any accounting functions at Integral and nothing to do with the preparation of the financials, other than provide information when asked.” Def.’s Ex. 226. 159. No one at Venable ever sent either of these emails or conveyed the substance of Johnson’s conclusions to Integral. 160. Later that day, Christner emailed McComas, informing him that Venable “[c]oncluded that while the order does prohibit Gary from practicing accounting before the SEC, it does not prohibit him from becoming a director or officer of a registrant such as Integral System [sic]. If Gary does become an executive officer, however, Integral should take appropriate actions to insure that his work for the company does not constitute practicing accounting before the SEC.” Def.’s Ex. 232. 161. On July 31, 2006, McComas responded to Christner’s email, asking him for a definition of “practicing accounting before the SEC” that the Board could use as guidance to “make sure that the appropriate action is taken to not allow this to occur.” Def.’s Ex. 235. 162. The same day, Christner responded to McComas’s email, noting that “there is not a clear and useful definition” of practicing accounting before the Commission. He forwarded his response to Johnson and asked for “any further insight.” Again, Johnson reiterated that if Prince “stays away from the financials he should be fine.” Def.’s Ex. 235. There was no evidence presented that Venable ever passed that information on to Integral management or in any other way provided more guidance to the independent Directors after their email request for a clear and useful definition of practicing accounting before the Commission. 12. In August 2006, Prince Is Named an Executive Officer and Disclosed to the SEC 163. On August 2, 2006, the Board of Directors named Prince an executive officer, after agreeing that his “duties and role in the Company” did not include practicing accounting before the SEC. Def.’s Ex. 237. Venable began preparing a Form 8-K to disclose this fact. 164. On August 4, 2006, Prince filed a Form 3 with the SEC, reporting his ownership of Integral stock options. On August 16, 2006, Prince filed another Form 3 with the SEC, reporting additional Integral stock options. 165. On August 8, 2006, Integral filed a Form 8-K with the SEC identifying Prince as “Executive Vice President and Managing Director of Operations” and disclosing his legal history. 166. On August 14, 2006, Venable sent a letter to the SEC in response to the SEC’s inquiry about the January 9, 2006, Form 8-K, stating that it “strongly believe[d]” that Prince was not an executive officer between December 1998 and March 17, 2006. Pl.’s Ex. 129; Def.’s Ex. 241. 167. In September of 2006, SEC lawyers called Johnson and said they had reviewed Venable’s submission and were still of the opinion that Prince’s employment should have been disclosed. The SEC indicated that they were going to recommend filing an enforcement action. They also told Johnson to let them know if there were any additional facts they should consider before they made their recommendation. 168. Johnson spoke with Brown to assess whether there were any additional relevant facts to disclose to the SEC. 169. On October 2, 2006, Johnson faxed another letter to the SEC, stating that she had no additional facts to report. 13. Advice from Venable to Integral 170. At no point between December 1998 and August 2006 did anyone at Venable ever advise anyone at Integral that Prince needed to be disclosed to the SEC regardless of his title. 171. At no point between December 1998 and August 2006 did anyone at Venable advise anyone at Integral that any of the activities that Prince was engaging in were activities that might trigger a disclosure obligation. 172. At no point between December 1998 and August 2006 did anyone at Venable advise anyone at Integral that any of the activities that Prince was engaging in were activities that might violate his Accounting Bar. F. Post-2006 Activities and Procedural History 178. On March 28, 2007, Prince filed a Form 4 with the SEC disclosing changes in his beneficial ownership of Integral securities. 174. On March 30, 2007, Integral terminated Prince’s employment. 175. Since his termination, Prince has worked for two private companies and served as executor of Chamberlain’s estate. He has also done some consulting work for non-public companies. Brown and Gough testified credibly that they knew of nothing that Prince was currently doing or intended to do which would violate his Accounting Bar now or in the future. 176. On July 30, 2009, the SEC issued an Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order in In the Matter of Integral Systems, Inc., Respondent (Admin. Proceeding File No. 3-13566). 177. On the same day, the SEC filed its Complaint in this Court against Chamberlain, Brown, and Prince. [Dkt. No. 1] 178. On February 18,