(CN) - The SEC cannot penalize the CEO of Microtune, Douglas Bartek, for backdating stock options and failing to report $22.5 million by banning him from ever serving as a corporate officer again, the 5th Circuit ruled.
Microtune, a company founded in 1996 by Bartek, developed silicon tuners for cable digital TV reception and the company went public in 2000, according to the opinion.
In 2008, the SEC sued Bartek and CFO Nancy Richardson, claiming the officers backdated stock options that Microtune granted newly hired and existing employees.
Bartek allegedly used a "look-back procedure" to find the date of lowest stock price in the prior two weeks and used that date as the supposed option grant date. He also cancelled the options when the company's stock price dropped, in order to re-grant the options at the lower price, according to the judgment.
Microtune allegedly failed to report over $22.5 million due to understating expenses in filings with the SEC.
However, the company claimed that its policy was never secret, but was approved by its board, and that the SEC should have discovered the practice when it reviewed Microtune's public offering in 2000.
In addition to civil penalties, "the SEC requested that the district court permanently enjoin the defendants from violating any securities laws and bar the defendants from serving as officers or directors at any public company," the judgment says.
Finding the SEC's claims barred by the statute of limitations, the district court granted summary judgment to Bartek and Richardson and in an unpublished per curiam ruling, the 5th Circuit affirmed the lower court's decision.
The circuit court ruled that a permanent injunction or director bar is a penalty, not an equitable remedy, and is therefore subject to a statute of limitations.
"The term 'penalty' is not strictly used for monetary or property sanctions but rather encompasses a variety of punishments (e.g. death penalty)," the court said. "The SEC's sought-after remedies would have a stigmatizing effect and long-lasting repercussions. Neither remedy addresses past harm allegedly caused by the Defendants. Nor does either remedy address the prevention of future harm in light of the minimal likelihood of similar conduct in the future. ... Here, the SEC is essentially seeking a lifetime ban against the Defendants. Courts have held that such long term bans can be construed as punitive. Based on the severity and permanent nature of the sought-after remedies, the district court did not error in denying the SEC's request on grounds that the remedies are punitive, and are thus subject to time limitations."