Appeal from the United States District Court for the Northern District of California James Ware, Chief District Judge, Presiding D.C. No. 5:07-cv-06122-JW
The opinion of the court was delivered by: Bea, Circuit Judge:
Argued and Submitted March 13, 2012-San Francisco, California
Before: J. Clifford Wallace, Dorothy W. Nelson, and Carlos T. Bea, Circuit Judges.
Defendant-Appellant Carl W. Jasper is the former Chief Financial Officer (CFO) of Maxim Integrated Products, Inc., a publicly-traded semiconductor company based in Silicon Valley. Following revelations that the company had issued backdated stock options without properly expensing them,*fn1 the SEC instituted this civil enforcement action against Jasper, alleging that Jasper violated various provisions of the securities laws.
The case proceeded to a seven-day jury trial; the jury found in favor of the SEC on most counts. As a result, the district court permanently enjoined Jasper from future violations of the same provisions of the securities laws, barred him from serving as an officer or director of a publicly traded company for two years, and imposed a civil penalty of $360,000. The court also ordered, pursuant to Section 304 of the SarbanesOxley Act of 2002 ("SOX 304"), codified at 15 U.S.C. § 7243, that Jasper reimburse Maxim for about $1.8 million in bonuses and profits from the sale of Maxim stock that Jasper received during the period that he certified Maxim's false financial statements.
Jasper appeals on three grounds. First, he contends that the district court made several evidentiary errors that require reversal. Second, he contends that the SEC's lawyers committed misconduct during the trial that requires reversal. Third, he contends that the reimbursement order pursuant to SOX 304 violated his Seventh Amendment right to a jury trial in civil cases. We affirm the district court in all respects.
I. Background on Options Backdating
The gravamen of the SEC's complaint in this case is the allegation that Jasper "engaged in a scheme to illegally back-date stock options granted to Maxim employees and directors, concealing millions of dollars in expenses from investors and significantly overstating the Company's income." Thus, before turning to the facts and history of this case, we briefly explain the practice known as stock "options backdating."
A stock option grants the recipient "the opportunity to purchase a certain number of shares of company stock at a given price [called the 'exercise price'] on or after a predetermined date." N.M. State Inv. Council v. Ernst & Young LLP, 641 F.3d 1089, 1093 (9th Cir. 2011). The recipient may exercise the option by purchasing stock from the company at the exercise price, and he is then free to sell the same stock at its current market price. If the option is issued at an exercise price equal to the current market price, the option is referred to as having been issued "at the money." Conversely, an "in the money" option is issued at an exercise price that is lower than the current market price. This latter type of option is "in the money" because it is immediately profitable: the price at which the stock may be bought is lower than the price at which it may be sold. Last, an "out of the money" option is issued at an exercise price that is higher than the current market price. Perhaps needless to say, none of the options at issue during trial were either "at the money" or "out of the money."
During the time period relevant to this case, "at the money" and "in the money" options were treated differently for accounting purposes pursuant to generally accepted accounting principles (GAAP). For "in the money" options, "accounting principles require the company to record an expense for the [option recipient's] 'profit,' " - i.e., the difference between the exercise price and the market price of an "in the money" option is "treated as compensation to the option recipient over the vesting period." Id. This is because the company could have sold its treasury stock at the market price, rather than grant an option on such stock to another. If the company does grant an option at a price below market, it is transferring a potential company profit to the option recipient. The difference between exercise price and market price must be added to the firm's costs, usually as "employee compensation," since the option recipients are usually employees.
Backdating of options occurs when the company official responsible for administering a company's stock option plan monitors the price of the company stock and awards an "at the money" stock option grant as of a certain date in the past when the share price was lowest. Id. This "lock[s] in the largest possible gain for the option recipient" but also does not require the company to recognize as an expense the difference between the backdated exercise price and the market price of the stock as of the "legitimate" date of the option's award. Id. This practice is therefore "akin to betting on a horse race after the horse has already crossed the finish line." Id. Backdating options is "not in and of itself improper under the law or accounting principles," but it often leads to violations of the securities laws because "[i]f the company does not properly record the back-dated options, then the company's reported net income is overstated for each of the years the options vest, potentially deceiving the market and investors." Id. That is what the jury found occurred here.
We relate the facts here in the way most favorable to the jury verdict. United States v. Hicks, 217 F.3d 1038, 1041 (9th Cir. 2000).
Maxim is a semiconductor company listed on the NASDAQ stock exchange. It is therefore required to file with the SEC Form 10-Q quarterly reports and Form 10-K annual reports, both of which must include audited financial statements, prepared in accordance with GAAP. See 15 U.S.C. § 78m. From 1999 until 2007, Jasper was Maxim's Principal Accounting Officer, CFO, and Vice President, and he was responsible for Maxim's accounting, including the accuracy of its financial statements and internal controls. During that time, Maxim's CEO, Jack Gifford, served as the "interim option committee" and had sole authority to grant stock options to directors and non-officer employees. Approximately seventy percent of Maxim employees received stock options when they were hired or as part of an annual review process.
The evidence showed that, from 2000 through 2005, Maxim employees and officers, including Jasper, regularly backdated stock options granted to employees and directors, and that they created false paperwork to conceal the true grant dates for those options. For instance, for ten consecutive quarters, Maxim granted backdated options with an exercise price equal to the lowest price of Maxim stock for each quarter. Sheila Raymond, the manager of Maxim's stock administration program, testified that in that time period "[t]he processes at the company, the way the company worked was to grant options at the lowest possible price without taking . . . expense for it."
In September 2006, following an internal investigation prompted by an analyst's report, Maxim announced that it was unable to file timely periodic reports because of the back-dating investigation. In January 2007, both Jasper and CEO Gifford resigned. After a lengthy investigation, on September 30, 2008, Maxim announced that "[p]reviously filed financial statements for our fiscal years ended in 1997 through 2005 . . . should no longer be relied upon," and that earnings for those years had to be restated. In the restated document, known as the 2006 10-K, Maxim disclosed an $838.3 million reduction in its pre-tax income for the period 2000-2005, which resulted primarily from the inclusion of $515 million in additional pre-tax expenses incurred as a result of stock-based compensation. Of the $515 million in misstated compensation expenses, the SEC's expert accountant testified that Maxim's operating income for fiscal years 2003, 2004, and 2005 alone had been overstated by a minimum of $135 million and as much as $357 million due solely to failure to recognize the true expense of unrecorded, backdated stock options.
Jasper was the CFO of Maxim during this entire period, and, on appeal, he does not dispute his knowledge of or involvement in this fraudulent scheme. Perhaps that is because the evidence is overwhelming. To take one specific example: the record shows that in late February or early March of 2003, when Maxim stock was over $30 per share, Jasper sent a memorandum to CEO Gifford proposing that to "ensur[e]" that a certain employee "stays with Maxim," Gifford should "grant [the employee] an option now at the Oct price so that he gets a favorable price." The employee received an "at the money" options grant backdated to October 9, 2002 with an exercise price of $21.35. Because of the roughly 50% increase in the company's stock price between October 2002 and March 2003, the grant was immediately profitable for the employee, and therefore truly a company expense for employee compensation, but the difference between $21.35 and $30.00 per share was never recorded as a transfer of money otherwise readily available to Maxim.
Jasper signed all of Maxim's SEC filings in that time period. The filings all stated that Jasper had reviewed the 10-K or 10-Q in question, and that the filings all "fairly present in all material respects the financial condition, results of operations and cash flows of" the company and "do[ ] not contain any untrue statement[s] of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading." Jasper himself received more than $2 million in bonuses from 2000-2005 tied to the company's profitability, including year-over-year growth in stock price and earnings per share.
The case proceeded to a jury trial. The jury found that Jasper: 1) committed fraud in violation of 15 U.S.C. §§ 77q(a)(1), 78j(b), and SEC Rule 10b-5, codified at 17 C.F.R. § 240.10b-5, when he participated in a scheme to overstate Maxim's net income by failing properly to account for the issuance of backdated stock options; 2) aided and abetted Maxim's filing of materially false and misleading reports with the Commission in violation 15 U.S.C. § 78m(a); 3) aided and abetted Maxim's failure to keep accurate books and records in violation of 15 U.S.C. § 78m(b)(2)(A); 4) aided and abetted Maxim's failure to devise and maintain sufficient internal accounting controls in violation of 15 U.S.C. § 78m(b)(2)(B); 5) falsified Maxim's books and records in violation of 17 C.F.R. § 240.13b2-1; 6) made false statements or omissions to an accountant or auditor in connection with a required audit of Maxim's financial statements in violation of 17 C.F.R. § 240.13b2-2; and 7) signed false certifications included with Maxim's quarterly or annual reports in violation of 17 C.F.R. § 240.13a-14. The jury also found Jasper not liable on three counts.
As a result of the jury's findings, the district court permanently enjoined Jasper from future violations of the same provisions of the securities laws, barred him from serving as an officer or director of a publicly traded company for two years, imposed a civil penalty of $360,000, and ordered, pursuant to SOX 304, that Jasper reimburse Maxim for $1.8 million in bonuses and profits from the sale of ...