The U.S. Securities and Exchange Commission suffered a resounding loss when a federal judge last week rejected the agency's fraud case against securities felon Gary Prince.
The SEC alleged that Prince's former employer, Integral Systems, illegally failed to disclose his position with the company and his prior criminal record in SEC filings. But after a three week bench trial, Judge Gladys Kessler of U.S. District Court for the District of Columbia on May 2 rejected six counts of fraud alleged by the government. However, she did find that Prince wrongly practiced accounting before the SEC.
"Judge Kessler’s decision vindicates not only Mr. Prince's conduct that the SEC said was fraudulent, but also his decision to persevere over the past seven years and ultimately to go to trial," said Zuckerman Spaeder partner C. Evan Stewart, who led the trial team.
Maryland-based Integral sells satellite ground systems and went public in 1988. In 1992, Prince became its vice president and chief financial officer. He resigned in 1995, when he pleaded guilty to criminal charges of conspiracy to commit securities fraud and bank fraud at another company. He was barred from appearing or practicing before the SEC as an accountant, and was sentenced to two months’ incarceration, two months of home detention, a $50,000 fine, and three years of probation.
Prince came back to Integral in late 1998, in a specially designed position that company CEO Steven Chamberlain believed would not require Integral to disclose his legal history in its public filings.
Chamberlain consulted with the company’s outside counsel, Venable, about the move. “The record shows that Integral requested and received nothing but ‘green flags’ from Venable regarding its choice to hire Prince as a full-time employee and structure his position in a way that was supposed to avoid disclosure of his legal history,” Kessler found.
The SEC disagreed, alleging in 2009 that Prince held executive officer responsibilities in the company’s accounting, financial reporting, and policy making functions and should have been disclosed in SEC filings as a company officer.
But Kessler in a 118-page order concluded that Prince was not a de facto officer. “Prince did not and could not make policy for Integral in any capacity,” she found. “While Prince had substantial influence and involvement with regard to mergers and acquisitions issues, he did not have final, policy making authority over that program.”
Kessler rejected the SEC’s other arguments as well. “The SEC points to the fact that Prince was one of the most highly paid employees at Integral and that his office was next to Chamberlain’s office. Such facts indicate nothing more than the fact that Prince was a highly valued employee who worked closely with Chamberlain,” she wrote.
She continued, “To decide that the regulations reach individuals involved in discussing company strategy and policy, but who do not have the authority to actually implement such policy, would expand the scope of de facto officer status far beyond what any court has to date recognized as policy making authority.”
Still, while Kessler found Prince was not an officer, she was critical of how Venable handled the matter.
“Venable attorneys never prepared any written document setting out what Prince could or could not do,” she wrote. “This is particularly troubling in light of several exhibits which show that Venable lawyers repeatedly raised concerns amongst themselves regarding the inherent risk involved in Integral’s choice to not disclose Prince.”
Kessler ruled in favor of the SEC on just one charge—that Prince practiced accounting before the Commission in violation of his accounting bar. The judge ordered him “permanently restrained and enjoined” from violating the order already in place barring him from appearing before the SEC as an accountant.