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Securities and Exchange Commission v. Platforms Wireless International Corp.

January 31, 2008


The opinion of the court was delivered by: Hon. Jeffrey T. Miller United States District Judge


In this SEC enforcement action, the court has granted summary judgment on all but one of the SEC's claims. Before the court are Defendants' motions for reconsideration of these summary judgment rulings and Defendants' motions for stay of the judgment. For the reasons set forth below, the court hereby GRANTS IN PART and DENIES IN PART the motions for reconsideration and motions for stay.


The SEC alleges that defendants Platforms Wireless, William Martin, Francois Draper, Charles Nelson, and Robert Perry made false and misleading statements to the public to influence the price of Platforms Wireless stock. At the pertinent period of time, Martin, Nelson, Perry, and Draper were alleged officers and/or directors of Platforms Wireless. The complaint asserts violations of § 5 of the Securities Act of 1933, 15 U.S.C. § 77e; § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); and Rule 10b-5 promulgated under § 10(b), 17 C.F.R. § 240.10b-5.*fn1

In a sequence of orders, the court granted summary judgment on all of the SEC's claims against all of the defendants with the exception of the Rule 10b-5 claim against defendant Nelson. (See Doc. nos. 75 ("§ 5 Order"), 105 ("Rule 10b-5 Order"), 108 ("Supp. § 5 Order").) On July 2, 2007, the court further clarified these orders in a grant of partial reconsideration. (Doc. no. 112.) Nelson subsequently entered into a stipulated judgment with the SEC (Doc. no. 130), and on July 31, 2007, the court entered a final judgment as to Nelson (Doc. no. 131) and as to Platforms, Martin, Perry, and Draper (Doc. no. 128). The court entered an amended final judgment against Platforms, Martin, Perry, and Draper on August 6, 2007. (Doc. no 138.)

On July 25, 2007, Platforms, Martin, and Perry collectively moved for reconsideration of the court's summary judgment rulings under Federal Rules of Civil Procedure ("FRCP") 59 and 60. (Doc. no. 125 ("Platforms' Mot. for Recons.").) They also moved for a stay of the judgment awarding injunctive and monetary relief. (Doc. no. 126 ("Platforms' Mot. for Stay").) The court held a hearing on these motions on August 24, 2007. Defendant Draper thereafter filed a motion for reconsideration under FRCP 60 and for a stay under FRCP 62.*fn2 (See Doc. no. 157 ("Draper's Mot.").) The SEC filed a timely opposition and Draper a timely reply.*fn3 The court found this motion appropriate for submission on the briefs. See Civ. L.R. 7.1(d)(1).


A. Motions for Reconsideration

1. Legal Standards

"A district court may reconsider its grant of summary judgment under either Federal Rule of Civil Procedure 59(e) (motion to alter or amend a judgment) or Rule 60(b) (relief from judgment)." Sch. Dist. No. 1J, Multnomah County, Or. v. ACandS, Inc., 5 F.3d 1255, 1262 (9th Cir. 1993).

Reconsideration under Rule 59(e) is proper when the court "(1) is presented with newly discovered evidence, (2) committed clear error or the initial decision was manifestly unjust, or (3) if there is an intervening change in controlling law." Sch. Dist. No. 1J, 5 F.3d at 1263. Highly unusual circumstances also warrant reconsideration. Id. "A Rule 59(e) motion may not be used to raise arguments or present evidence for the first time when they could reasonably have been raised earlier in the litigation." Carroll v. Nakatani, 342 F.3d 934, 945 (9th Cir. 2003). Accordingly, "[a] district court has discretion to decline to consider an issue raised for the first time in a motion for reconsideration." Novato Fire Protection Dist. v. United States, 181 F.3d 1135, 1142 n.6 (9th Cir. 1999).

Under Rule 60(b), a court may grant reconsideration on the grounds of, inter alia, "mistake, inadvertence, surprise, or excusable neglect." FRCP 60(b)(1). The "mistake" component of Rule 60(b)(1) allows a court to correct its own error of law. See Kingsvision Pay-Per-View v. Lake Alice Bar, 168 F.3d 347, 350 (9th Cir. 1999) (citing Liberty Mut. Ins. Co. v. Equal Employment Opportunity Comm., 691 F.2d 438, 441 (9th Cir. 1982)). The "excusable neglect" component of Rule 60(b)(1) includes cases of negligence, carelessness, and inadvertent mistake by counsel. Bateman v. United States Postal Serv., 231 F.3d 1220, 1223-24 (9th Cir. 2000) (citing Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 381 (1993)). In determining whether neglect is excusable, courts employ an equitable test "that depends on at least four factors: (1) the danger of prejudice to the opposing party; (2) the length of the delay and its potential impact on the proceedings; (3) the reason for the delay; and (4) whether the movant acted in good faith." Bateman, 231 F.3d at 1223-24 (9th Cir. 2000) (citing Pioneer, 507 U.S. at 395); see also Briones v. Riviera Hotel & Casino, 116 F.3d 379, 381 (9th Cir. 1997). Generally, "parties are bound by the actions of their lawyers, and alleged attorney malpractice does not usually provide a basis to set aside a judgment pursuant to Rule 60(b)(1)." Casey v. Albertson's Inc., 362 F.3d 1254, 1260 (9th Cir. 2004).

2. Rule 10b-5 Liability

Defendants claim that the court committed clear error in granting summary judgment on the Rule 10b-5 claims.

a. Scienter Standard

Defendants first argue that the court used the wrong scienter standard. Citing Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990) (en banc), the court stated that "[s]cienter is established upon proof that the defendant acted knowingly or recklessly." (Rule 10b-5 Order at 4.) Hollinger defined recklessness as "a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Hollinger, 914 F.2d at 1569. Defendants contend that the correct formulation of the standard is "deliberate recklessness," which requires proof of a conscious disregard and awareness of the risk of harm. (See Platforms' Mot. for Recons. at 22.) The Ninth Circuit explained this standard in In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970, 977 (9th Cir. 1999). The Silicon Graphics court held that "deliberate recklessness" was the requisite state of mind for a § 10(b) violation. See Silicon Graphics, 183 F.3d at 977. "[R]ecklessness only satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious misconduct." Id.

The parties give fullest expression to the debate over Silicon Graphics in the briefing on Draper's separate motion. The SEC argues that Silicon Graphics did not change the scienter standard established in Hollinger. (See SEC's Oppo. to Draper's Mot. at 3.) According to the SEC, the Ninth Circuit continues to cite Hollinger as the leading authority regarding recklessness in the § 10(b) context, and "Silicon Graphics itself clearly reaffirmed Hollinger" by similarly adopting the language of Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1044-45 (7th Cir. 1977). (SEC's Oppo. to Draper's Mot. at 3 (citing Howard v. Everex Systems, Inc., 228 F.3d 1057, 1064 (2000), in support of SEC's interpretation).) Rather than creating a heightened scienter standard for summary judgment in SEC enforcement actions, the SEC claims, Silicon Graphics only established a heightened pleading standard for private plaintiffs under the Private Securities Litigation Reform Act of 1995 ("PSLRA").

Defendants disagree that Silicon Graphics' only real impact was on the pleading standard under the PSLRA. Instead, while agreeing that Silicon Graphics did not elevate the § 10(b) scienter standard, Defendants contend that Silicon Graphics clarified Hollinger in an important way: Silicon Graphics made clear that recklessness, as defined in Hollinger, has a subjective component. (See Draper's Reply at 4-7.*fn4 ) Defendants further contend that the Ninth Circuit case law following Silicon Graphics confirms this interpretation. See, e.g., SEC v. Rubera, 350 F.3d 1084, 1094-96 (9th Cir. 2003) (citing both Hollinger and Silicon Graphics in affirming district court's finding that defendant lacked intent or recklessness); Ponce v. SEC, 345 F.3d 722, 731 (9th Cir. 2003) (citing only Hollinger but employing largely subjective analysis); Ronconi v. Larkin, 253 F.3d 423, 430 (9th Cir. 2001) (applying Silicon Graphics' "deliberate recklessness" standard).

The court agrees with Defendants. In granting summary judgment on the Rule 10b-5 claims, the court relied only on Hollinger in analyzing scienter. The parties also failed to mention Silicon Graphics or "deliberate recklessness" in their briefing. In any event, the court neglected to evaluate scienter in light of Silicon Graphics' "deliberate reckless" formulation. Even if "deliberate recklessness" is not a higher standard but merely a clarification of or gloss on Hollinger, it still emphasizes the requirement of "some degree of intentional or conscious misconduct" -- a degree of scienter not contemplated by the court's 10b-5 Order. See Silicon Graphics, 183 F.3d at 977. This error calls for reconsideration under Rules 59(e) and 60(b)(1).

In light of this error, the court orders the parties to submit further briefs applying the correct scienter standard in regard to Martin and Perry, as set forth at the end of this order. The court does not require additional briefing as to Draper. After the additional briefing is complete, the court will determine whether application of the deliberate recklessness standard requires reversal or modification of any of the Rule 10b-5 rulings.

b. "Bespeaks Caution" Defense

Defendants also argue that the court's materiality analysis failed to account for their "bespeaks caution" defense. Defendants contend that they impliedly asserted this defense when they argued various statutory and regulatory safe harbors under the securities laws -- namely, Rule 175 of the Securities Act of 1933 and Rule 3b-6 of the Securities Exchange Act of 1934. (See Platforms' Mot. for Recons. at 23:8-11.) Contrary to this claim, Defendants never argued the common-law bespeaks caution defense during summary judgment. While they had the opportunity to argue the defense, their references to Rules 175 and 3b-6 were insufficient to raise the defense by implication. Moreover, the court finds that its original order adequately addressed why the Rules 175 and 3b-6 defenses were unavailable to Defendants. (See Rule 10b-5 Order at 9 n.4.) The court therefore denies reconsideration on this basis.

c. Draper's Liability for May 15, 2000 Press Release

In his separate motion, Draper additionally asks the court to reconsider the ruling against him based on Platforms' May 15, 2000 press release. (See Draper's Mot. at 10; see also Platforms' Mot. for Recons. at 7-8 (raising same issue).) The court had found Draper liable for both the May 15, 2000 and March 8, 2001 press releases. (See Rule 10b-5 Order at 5-6.) Based on these two violations, the court imposed against Draper a permanent injunction, a seven-year officer bar and penny-stock bar, and an $80,000 civil penalty under 15 U.S.C. §§ 77t(d) and 78u(d)(3). At the hearing on Platforms' motion for reconsideration, the SEC conceded that Draper should not have been held liable for the May 15, 2000 press release because Draper did not join Platforms until June 2000. (See Aug. 24, 2007 Tr. at 23:25-25:7.)

In light of this concession and the corresponding mistake of fact in the Rule 10b-5 order, the court hereby vacatesthe grant of summary judgment against Draper based on Rule 10b-5 liability for the May 15, 2000 press release. Accordingly, the court also reduces the civil penalty from $80,000 (based on two press releases) to $40,000 (based on one press release), without prejudice to a determination that Draper should not bear liability for the March 8, 2001 press release. The court will also consider ...

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