Cohen v. Viray

622 F.3d 188 (2010)

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Cohen v. Viray

United States Court of Appeals for the Second Circuit
622 F.3d 188 (2010)

Facts

Per § 304 of the Sarbanes-Oxley Act (SOX), a covered company’s chief executive officer (CEO) and chief financial officer (CFO) had to return certain incentive-based compensation and the proceeds of any sales of the company’s securities if the company issued an accounting restatement due to the financial reporting requirements of the federal securities laws. However, the Securities and Exchange Commission (SEC) could exempt a CEO or CFO from this repayment requirement if the SEC deemed an exemption to be necessary and appropriate. In the fall of 1985, the stock price of DHB Industries, Inc. (DHB) (defendant) plummeted after the public learned that a DHB product was made with an inferior material. As a result, DHB shareholders (plaintiffs) brought derivative and class-action suits against DHB and DHB’s former directors and officers (defendants), including David Brooks (DHB’s former CEO) and Dawn Schlegel (DHB’s former CFO). The district court consolidated those actions. In December 2006, the parties presented a proposed settlement to the district court. The proposed settlement provided that DHB would indemnify Brooks and Schlegel if either were required to make any reimbursement pursuant to SOX § 304. In October 2007, while the district court was considering the proposed settlement, DHB restated its financial results for 2003, 2004, and a portion of 2005. Shareholder D. David Cohen (plaintiff) intervened to object to the proposed settlement. The United States Department of Justice (United States), in consultation with the SEC, also objected to the proposed settlement. Cohen and the United States argued, among other things, that the SEC had sole authority to exempt someone from liability under § 304 and that the proposed settlement improperly would limit the SEC’s ability to obtain § 304 disgorgement against Brooks and Schlegel. In July 2008, the district court approved the proposed settlement. Cohen appealed.

Rule of Law

Issue

Holding and Reasoning (Hall, J.)

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