For more than three years, the U.S. Securities and Exchange Commission has pursued a civil fraud case in Washington against former executives of a Maryland-based satellite ground systems company.
The allegations? Commission lawyers contend senior officials at Integral Systems, Inc. fraudulently concealed from the SEC—and thus duped investors—the fact that a de facto officer, Gary Prince, was a convicted securities felon. The SEC didn't allege a market manipulation scheme.
SEC lawyers sought in the case, filed in 2009 in U.S. District Court for the District of Columbia, to permanently bar Elaine Brown, the company's former chief financial officer, from serving as an officer or director of a publicly-held company. Brown held the position from 1997 to 2007.
Brown, represented by Crowell & Moring, today settled with the commission. The civil penalty: $25,000. The SEC, however, didn't get the permanent bar. A federal district judge this summer removed that penalty from the table, ruling against the commission. In the settlement, Brown didn't admit or deny any of the SEC's allegations.
"After the court dismissed a significant portion of the SEC’s case and claims for relief on pre-trial motions, Ms. Brown was able to resolve this matter and avoid a time consuming trial without being subject to an injunction or an officer and director bar," Brown's lawyer, Crowell white-collar defense partner Thomas Hanusik, said in an email this afternoon. "This was an obvious choice that puts an end to an SEC inquiry that started almost seven years ago."
Brown's lawyers said in court papers that she sought advice from management and from attorneys at Venable about whether Gary Prince, the felon, was an Integral officer whose role at the company needed to be disclosed in SEC filings.
In court filings, SEC lawyers argue that Prince was a functional officer at Integral even if he didn't have a matching title. SEC attorneys said Prince held a "broad and dominant role" in accounting decisions at Integral.
The SEC sought—but was denied this summer—an injunction and permanent bar against Brown.
U.S. District Judge Gladys Kessler this summer said the SEC failed to demonstrate "that there is a reasonable likelihood that Brown will engage in future violations of the securities laws." The judge's opinion is here.
Kessler said the SEC "never questioned the integrity of Integral's financials, Brown's principal area of responsibility" when she worked at the company. The commission also didn't allege in its fraud suit that Brown personally benefitted or that investors lost any money.
"There is also no allegation that Brown engaged in repeated affirmative misconduct, self-dealing, insider trading or financial fraud," Kessler said.
The case against Prince is pending. The SEC in 2010 dismissed charges against Integral's former chairman and chief executive officer, Steven Chamberlain, after his death.