ORDER PARTIALLY VACATING 10(B) AND RULE 10B-5 CLAIMS GRANT OF SUMMARY JUDGMENT AS TO SECTION
In this SEC enforcement action, the court has granted summary judgment on all but one of the SEC's claims. The court partially granted Defendants' motions for reconsideration on January 31, 2008. Pursuant to this order, the court will reconsider the grant of summary judgment on Plaintiff's claims under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The parties have submitted supplemental briefing applying the correct scienter standard to Defendants' conduct. The court now considers whether to modify its grant of summary judgment against defendants Platforms Wireless, William Martin, Francois Draper, and Robert Perry. For the reasons set forth below, the court hereby AFFIRMS the grant of summary judgment against Martin and Platforms based on the August 23, 2000 press release; VACATES the grant of summary judgment against Martin and Platforms based on the May 15, 2000 and September 19, 2000 press releases; and VACATES the grant of summary judgment against Draper, Perry, and Platforms based on the March 8, 2001 press release.
The SEC alleges that defendants Platforms Wireless, Martin, Draper, Charles Nelson, and 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 regard to the Rule 10b-5 claims, the SEC alleges that in 2000-2001, Defendants issued a series of press releases containing false and misleading statements to influence the price of Platforms stock, in violation of Rule 10b-5. Platforms issued these press releases on May 15, 2000, August 23, 2000, September 19, 2000, January 16, 2001, March 5, 2001, and March 8, 2001. The press releases touted Platforms' development of a product called the ARC System, which purportedly offered cost-efficient delivery of wireless communications services. The press releases also projected $1 billion in sales and a $330 million contract between Platforms and a Brazilian company for the purchase of the ARC System. The press releases further provided that Platforms was nearing completion of certain financial audits that would eventually result in Platforms being relisted on the public exchanges.
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, 105 ("Rule 10b-5 Order"), 108.) In the Rule 10b-5 Order, the court found liability based on press releases issued on four dates: (1) May 15, 2000 (against Martin, and Draper, and Platforms); (2) August 23, 2000 (against Martin and Platforms); (3) September 19, 2000 (against Martin and Platforms); and (4) March 8, 2001 (against Draper, Perry, and Platforms).
On July 2, 2007, the court further clarified the summary judgment 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.) They also moved for a stay of the judgment awarding injunctive and monetary relief. (Doc. no. 126.) 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. (See Doc. no. 157 ("Draper's Mot. for Recons.").) The SEC filed a timely opposition and Draper a timely reply. The court found this motion appropriate for submission on the briefs. See Civ. L.R. 7.1(d)(1).
On January 31, 2008, the court granted reconsideration of the Rule 10b-5 judgment and denied reconsideration of the § 5 judgment. (Doc. no. 166 ("Jan. 31, 2008 Recons. Order").) The court held that its Rule 10b-5 Order had neglected to evaluate scienter in light of the "deliberate recklessness" formulation set forth in In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970, 977 (9th Cir. 1999). (Jan. 31, 2008 Recons. Order at 5.) The court ordered additional briefing applying the correct scienter standard to Martin and Perry. After completion of the additional briefing, the court would determine whether application of the deliberate recklessness standard requires reversal or modification of any of the Rule 10b-5 rulings. The court granted a stay of all monetary relief until further notice, and declined to rule on the request for a stay of injunctive relief until after the ruling on the supplemental briefing.
The court also vacated the grant of summary judgment against Draper based on the May 15, 2000 press release, in light of the SEC's concession that Draper should not be liable for this press release since he did not join Platforms until June 2000. (Recons. Order at 6.) Accordingly, the court reduced the civil penalty against Draper 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. (Id.)
Pursuant to the order granting partial reconsideration, the parties submitted supplemental briefing applying the Silicon Graphics scienter standard to Martin and Perry.*fn2 The court determined that the briefing on Draper's separate motion for reconsideration made further briefing regarding Draper unnecessary.
A motion for summary judgment shall be granted where "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." FRCP 56(c); British Airways Bd. v. Boeing Co., 585 F.2d 946, 951 (9th Cir. 1978), cert. denied, 440 U.S. 981 (1979). The moving party bears the initial burden of informing the court of the basis for its motion and identifying those portions of the file which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Rule 56 contains "no express or implied requirement . . . that the moving party support its motion with affidavits or other similar materials negating the opponent's claim." Id. The opposing party cannot rest on the mere allegations or denials of a pleading, but must "go beyond the pleadings and by [the party's] own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file' designate 'specific facts showing that there is a genuine issue for trial.'" Id. at 324 (citation omitted). The opposing party also may not rely solely on conclusory allegations unsupported by factual data. Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989).
The court must examine the evidence in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962). Any doubt as to the existence of any issue of material fact requires denial of the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). On a motion for summary judgment, when "'the moving party bears the burden of proof at trial, it must come forward with evidence which would entitle it to a directed verdict if the evidence were uncontroverted at trial.'" Houghton v. South, 965 F.2d 1532, 1536 (9th Cir. 1992) (quoting International Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th Cir. 1991), cert. denied, 502 U.S. 1059 (1992)).
Section 10(b) of the Securities Exchange Act makes it unlawful [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5 in turn makes it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, . . . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, . . . in connection with the purchase or sale of any security.
To establish a prima facie case under § 10(b), the SEC must show that Defendants made a misstatement or omission of a material fact with scienter. See SEC v. Fehn, 97 F.3d 1276, 1289 (9th Cir. 1996). A fact is material if "there is a reasonable likelihood that a reasonable shareholder would consider it important" in making an investment decision. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Zweig v. Hearst Corp., 595 F.2d 1261, 1266 (9th Cir. 1979). Scienter is "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The scienter of a corporation can be imputed from that of its officers. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972).
In the § 10(b) context, scienter requires "proof that the defendant acted knowingly or recklessly." Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990) (en banc). 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." Id. at 1569. The Ninth Circuit explained this standard in Silicon Graphics. The Silicon Graphics court held that "deliberate recklessness" is the requisite state of mind for a § 10(b) violation. 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. Thus, as this court explained in the January 31, 2008 order partially granting reconsideration, Silicon Graphics clarified Hollinger in an important way: Silicon Graphics made clear that recklessness, as defined in Hollinger, has a subjective component. (Jan. 31, 2008 Recons. Order at 5.) 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 ...