Howard v. Everex Sys., Inc.

• Decision Date: 29 September 2000
• Docket Number: No. 98-17324,98-17324
• Parties: (9th Cir. 2000) JOAN C. HOWARD, Plaintiff-Appellant, v. EVEREX SYSTEMS, INC., Defendant, STEVEN L.W. HUI; MICHAEL C.Y. WONG; WONG'S INTERNATIONAL (HOLDINGS) LIMITED; GATCOMBE CORP. N.V., Defendants-Appellees
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1057

228 F.3d 1057 (9th Cir. 2000)

JOAN C. HOWARD, Plaintiff-Appellant, v. EVEREX SYSTEMS, INC., Defendant, STEVEN L.W. HUI; MICHAEL C.Y. WONG; WONG'S INTERNATIONAL (HOLDINGS) LIMITED; GATCOMBE CORP. N.V., Defendants-Appellees.

No. 98-17324

United States Court of Appeals for the Ninth Circuit

Argued and Submitted February 17, 2000

Filed September 29, 2000

[Copyrighted Material Omitted] Charles R. Peifer,(argued), Browning & Peifer, P.A., Albuquerque, New Mexico, and James Browning, Patrick K. Slyne and Jules Brody (on brief). Stull, Stull & Brody, New York, New York, Joseph H. Weiss and David C. Katz (on brief), Kevin Yourman, Jordan Lurie, Weiss & Yourman, New York, New York, Michael Braun, Stull, Stull & Brody, Los Angeles, California, for the plaintiff-appellant.

Robert P. Varian, San Francisco, California, for defendant-appellee Steven L.W. Hui. Stephen R. Farrand, San Francisco, California, for defendants-appellees Wong's International (Holdings) Limited, and Gatcombe Corp., N.V.

Christopher Paik, Securities and Exchange Commission, Washington, D.C., for amicus curiae Securities and Exchange Commission.

Appeal from the United States District Court for the Northern District of California; Charles A. Legge, District Judge, Presiding. D.C. No. CV 92-3742 CAL

Before: Joseph T. Sneed, Mary M. Schroeder, and A. Wallace Tashima, Circuit Judges.

TASHIMA, Circuit Judge:

Joan C. Howard ("Howard") appeals from the district court's decisions granting dismissal, summary judgment, and judgment as a matter of law ("JMOL") in favor of defendants Stephen L.W. Hui ("Hui"), Michael C.Y. Wong ("Wong"), Wong's International (Holdings) Ltd. ("Wong's International"), and Gatcombe Corp. ("Gatcombe") in her action pursuant to ' 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. ' 78j(b) and 78t(a). Howard, a purchaser of stock in the computer manufacturer, Everex Systems, Inc. ("Everex"), claims that defendants artificially inflated the price of Everex stock by falsely representing that the company had achieved profitability and consecutive profit increases during the first three quarters of fiscal year 1992. The district court had jurisdiction pursuant to 15 U.S.C. 78aa and 28 U.S.C. ' 1331 and 1337(a). We have jurisdiction under 28 U.S.C. 1291. We affirm in part, reverse in part, and remand.

I. Factual and Procedural Background

Everex was founded in 1983 and designed, manufactured, and sold computers and computer peripheral products. Hui served as the Everex's CEO and Chairman of the Board during the entirety of the "Class Period."¹ Wong served as a director for part of the class period. Wong indirectly owned a large amount of stock in Everex through his holdings in Wong's International.

In September 1992, Howard brought a class action ² pursuant to ' 10(b) and 20(a) of the Exchange Act,³ claiming that Everex, Hui, and Wong made material misrepresentations to the public during the first three quarters of fiscal year 1992 (July 1991-March 1992) regarding Everex's profitability. Howard alleges that the misrepresentations were made to secure bank financing, conceal alleged violations of a loan covenant, and artificially inflate the price of Everex stock.

In January 1993, Everex filed for bankruptcy and all actions against it were automatically stayed. Later, Howard amended her complaint and alleged ' 10(b) and 20(a) violations by Wong's International and Gatcombe, which were dismissed for lack of personal jurisdiction.⁴ The district court also dismissed the 10(b) claim against Wong for lack of particularity.

After discovery was completed, the district court granted summary judgment in favor of Wong on the 20(a) claim. In particular, the district court found that Wong did not participate in the preparation of the allegedly false financial statements and was not a control person within the ambit of 20(a).

During trial, the district court granted JMOL in favor of Hui on the 10(b) claim on the ground that Hui did not make a statement within the meaning of 10(b) and did not act with the requisite level of scienter. Additionally, the district court granted JMOL to Hui on the 20(a) claim on the basis that Hui was not a control person of Everex, essentially because Hui did not supervise or participate in the preparation of the financial statements at issue and did not think any of the numbers in the statements were incorrect.

On November 9, 1998, the district court entered a final judgment that dismissed all claims with prejudice. Howard timely appealed.

II. Standards of Review

Dismissal of claims on the pleadings are reviewed de novo, see Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295 (9th Cir. 1998), treating the complaint's allegations as true and drawing all reasonable inferences in the plaintiff's favor, see Fajardo v. County of Los Angeles, 179 F.3d 698, 699 (9th Cir. 1999).

We conduct a de novo review of the district court's grant of summary judgment. See Morris v. Newman (In re Convergent Techs. Sec. Litig.), 948 F.2d 507, 512 (9th Cir. 1991). In so doing, we must be mindful that "[a]lthough materiality and scienter are both fact-specific issues which should ordinarily be left to the trier of fact, summary judgment may be granted in appropriate cases. Summary judgment may be defeated in a securities fraud derivative suit only by showing a genuine issue of fact with regard to a particular statement by the company or its insiders." Hanon v. Dataproducts Corp., 976 F.2d 497, 500 (9th Cir. 1992)(internal quotation marks and citations omitted).

District court rulings made in support of a JMOL are reviewed de novo. See Saman v. Robbins, 173 F.3d 1150, 1155 (9th Cir. 1999). In reviewing a JMOL, we must view the evidence in the light most favorable to the non-moving party and draw every reasonable inference therefrom in the nonmoving party's favor. See Amarel v. Connell, 102 F.3d 1494, 1521 (9th Cir. 1996). "If conflicting inferences may be drawn from the facts, the case must go to the jury." Pierce v. Multnomah County, 76 F.3d 1032, 1037 (9th Cir. 1996) (internal quotation marks and citations omitted).

Evidentiary rulings are reviewed for an abuse of discretion. See Gilbrook v. City of Westminster, 177 F.3d 839, 858 (9th Cir. 1999). Finally, we review determinations of personal jurisdiction de novo. See Panavision Int'l L.P. v. Toeppen, 141 F.3d 1316, 1319-20 (9th Cir. 1998).

III. Discussion

A. The district court erred by granting JMOL on the 10(b) claim against Hui on the ground that he did not "make" a statement within the meaning of 10(b) and Rule 10b-5.

As the Securities and Exchange Commission ("SEC") notes in its amicus curiae brief, the issue presented is whether a corporate official (here, the CEO) who, acting with scienter, signs a SEC filing containing misrepresentations, "make[s]" a statement so as to be liable as a primary violator under 10(b). See Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. , 511 U.S. 164, 177-78, 191-95 (1994) (holding that only the SEC can bring aiding and abetting actions under 10(b)). Although not totally clear on the issue, the district court appeared to hold that because Hui did not participate in the drafting of the allegedly false financial statements, he did not make a statement within the meaning of 10(b). We conclude that the district court erred in making this determination.⁵

First, when a corporate officer signs a document on behalf of the corporation, that signature will be rendered meaningless unless the officer believes that the statements in the document are true. In AUSA Life Ins. Co. v. Dwyer (In re JWP Inc., Sec. Litig.), 928 F. Supp. 1239 (S.D.N.Y. 1996), for example, the court held that a director who has the requisite level of scienter and signs a fraudulent Form 10-K can be liable as a primary violator of 10(b) for making a false statement. See id. at 1255-56; cf. F.N. Wolf & Co., Inc. v. Estate of Neal , No. 89 Civ. 1223 (CSH), 1991 WL 34186, at *8 (S.D.N.Y. 1991) (holding that a "director signing a document filed with the SEC . . . `makes or causes to be made' the statements contained therein" under 18(a) of the Exchange Act).

Second, we have held in analogous contexts that signers of documents should be held responsible for the statements in the document. See United States v. Gomez-Gutierrez, 140 F.3d 1287, 1288-89 (9th Cir.) (noting that "the affixing of a signature is not a mere formality, but rather signifies that the signer has read the document and attests to its accuracy"), cert. denied , 199 S. Ct. 206 (1998).

Third, by placing responsibility in corporate officers to ensure the validity of corporate filings, investors are further protected from misleading information. See Central Bank, 511 U.S. at 171 ("Together, the Acts embrace a fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor."). Granted, Central Bank held that private causes of action could not be brought against aiders and abettors, as opposed to primary violators. See id. at 191. There is a significant difference, however, between mere participation in a scheme to misrepresent and those directly attesting to the truth of a statement by making (in the ordinary sense) that very statement. By standing behind a statement, the public assumes that they can trust the word of the maker of that statement. See Great Sweet Grass Oils, Ltd., 37 S.E.C. 683, 684 n.1 (1957) (finding that the requirement that issuers file reports with the SEC "necessarily embodies the requirement that such reports be true and correct"), aff'd, 256 F.2d 893 (D.C. Cir. 1958); see also SEC v. IMC Int'l, Inc. , 384 F. Supp. 889, 893 (N.D. Tex.) ("The reporting provisions of the Exchange Act are clear and unequivocal, and they are satisfied only by the filing of complete, accurate, and timely reports."), aff'd, 505 F.2d 733 (5th Cir. 1974).

Key corporate officers should not be allowed to make...