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United States Securities and Exchange Commission v. Fisher

May 13, 2008

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
THOMAS FISHER, KATHLEEN HALLORAN, AND GEORGE BEHRENS, DEFENDANTS.



The opinion of the court was delivered by: James B. Zagel United States District Judge

Judge James B. Zagel

MEMORANDUM OPINION AND ORDER

I. BACKGROUND

The United States Securities and Exchange Commission (SEC or Commission) filed this complaint on August 9, 2007. The Commission asserts four counts against each of the three defendants: Thomas Fisher, Kathleen Halloran, and George Behrens (collectively, Defendants). Defendants are all former officers of Nicor, Inc. and its main subsidiary, Nicor Gas.

The Commission alleges that Defendants engaged in a scheme to falsify Nicor's financial reporting. The allegations center around Nicor's activities under its performance-based rate plan (PBR).*fn1 The SEC further alleges that Defendants made or authorized false and misleading financial statements about the company's financial performance to the company's investors, the public, the SEC and the Illinois Commerce Commission (ICC). The SEC points to a number of the financial statements Nicor issued between 1999 and 2002 and argues that they contain false and misleading statements.

On July 18, 2002, Nicor issued a press release disclosing that allegations had been made concerning potential impropriety in connection with the company's accounting for the PBR plan. The press release indicated that the ICC was investigating the allegations and that Nicor's board of directors had appointed a committee of independent, non-management directors to conduct an inquiry. The company supplemented the July 18 release with another press release the following day (July 19, 2002). The July 19 release indicated that "the Nicor Gas performance-based rate plan may have a material adverse effect on earnings in a particular period." Also on July 19, 2002, Nicor's stock price declined by roughly 40%. In the months after Nicor issued these July press releases, a number of private plaintiffs filed securities class action lawsuits.

On August 14, 2002, Nicor filed additional documents with the SEC, which the Commission argues contain actionable misstatements. In particular, the Commission points to a Form 8-K*fn2 and a Form 10-Q.*fn3 The 8-K provided certifications regarding the accuracy of Nicor's 2001 filings. The SEC says that these 2001 filings were not, in fact, accurate, and thus says that these certifications are actionable. Defendants point out that Mr. Fisher and Ms. Halloran provided the certifications in the Form 8-K "except as corrected or supplemented in a subsequent covered report."*fn4 Defendants assert that this language, coupled with the disclosures made in the "covered reports," insulates the August 14 certifications from being false or misleading.

In the Form 10-Q filed on August 14, 2002, Nicor explained that "[t]he company's new independent public accountant . . . was unable to complete the review of the condensed unaudited financial statements included herein . . . due to uncertainties surrounding the current review of the gas distribution segment's [PBR] plan referred to in the Contingencies note beginning on page 8." The Contingencies note went on to include cautionary language about the allegations of improprieties in connection with the PBR plan. The note also listed some of the inquiries that were ongoing.

On October 28, 2002, a consultant that Nicor's special committee had retained to look into the allegations of impropriety regarding the accounting for the PBR plan issued a report detailing his findings and conclusions. The next day, Nicor issued a press release accepting the findings and conclusions outlined in the report.

The Commission filed its complaint in this case on August 9, 2007. The Commission seeks, among other things, an order of permanent injunction, an order prohibiting Defendants from acting as officers or directors of certain issuers, an order requiring Defendants to disgorge all ill-gotten gains, and civil penalties under 15 U.S.C. §§ 77t(d) and 78u(d)(3).

Defendants filed two motions to dismiss. One [Docket #27] sought dismissal of the complaint based on the applicable statute of limitations, or, in the alternative, to have certain of the allegations stricken. The other [Docket #30] sought dismissal of the complaint pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6). The Commission filed one response addressing both motions. It also, pursuant to my invitation, amended its complaint. In their reply brief, Defendants really only address the statute of limitations arguments.

Both because of the amendments the Commission made to the complaint and because Defendants did not address the 9(b) arguments in their reply brief, Defendants' Motion To Dismiss The Complaint Pursuant To Federal Rules of Civil Procedure 9(b) and 12(b)(6) [Docket #30] is denied. For the reasons outlined below, Defendants' Joint Motion to Dismiss The Complaint Or, In The Alternative, To Strike Certain Allegations [Docket #27] is granted in part.

II. THE COMMISSION'S REQUEST FOR CIVIL PENALTIES

Defendants assert that the Commission's complaint is time-barred. The various securities laws under which the Commission brings this action do not contain their own statute of limitations. There is, however, a catch-all five-year statute of limitations found in 28 U.S.C. § 2462. In pertinent part, that code section provides that: an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued . . . .

28 U.S.C. § 2462.

Courts have found that this five-year period applies to government actions to enforce administrative penalties. See, e.g., Johnson v. SEC, 87 F.3d 484, 492 (D.C.Cir. 1996) (finding that 28 U.S.C. § 2462 applies to an action under Exchange Act § 15(b)); United States v. Meyer, 808 F.2d 912, 914 (1st Cir. 1987) (applying § 2462 to an action under 8 U.S.C. § 801 et seq.); SEC v. Misner, 07-cv-01640, 2008 WL 638387 (D. Colo. March 5, 2005) (holding that the SEC's "claims are barred by the five-year statute of limitations found at 28 U.S.C. § 2462, insofar as Plaintiff seeks civil penalties"); SEC v. Caserta, 75 F.Supp.2d 79, 89 (E.D.N.Y.1999) (finding that 28 U.S.C. § 2462 applies to SEC civil penalty claims). Thus, to the extent the SEC seeks civil penalties,*fn5 the five-year statute of limitations does apply.

Having established that a five-year statute of limitations governs the civil penalties portion of the Commission's complaint, the salient issues become: (A) when should I deem the clock to have started running; and (B) which of Defendants' alleged misstatements are ...


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