A federal district court denied defendant’s motion for summary judgment in a Securities and Exchange Commission enforcement action seeking civil penalties for claims that the defendant, the former President and COO of a public company, violated Section 10(b) of the Securities Exchange Act of 1934 in connection with the Company’s failure to disclose, among other things, the company’s practice of backdating stock options in its 2002 Form 10-K. The Form 10-K was filed in January 2003, the same month in which defendant’s employment ended.
Defendant moved to dismiss the claim, arguing that the SEC had not identified any conduct that could subject him to liability within the five year statute of limitations period preceding its filing of the lawsuit in June 2007. In denying the motion, the Court first ruled that the defendant’s reliance on Second Circuit precedent requiring the SEC to show that defendant, as the primary actor, violated Section 10(b) was, misplaced. The Court noted that, under Ninth Circuit precedent, the SEC’s claim would succeed if the SEC established that the defendant aided and abetted a violation of Section 10(b).
Applying the Ninth Circuit standard, the Court ruled that the SEC should be afforded the opportunity to “flesh out” its allegation that the defendant maintained responsibility for the accuracy of the 2002 Form 10-K and that such assistance supported the conclusion that the defendant aided and abetted “those who committed the primary violation by failing to disclose evidence of backdating.” Because the 2002 Form 10-K was not filed until January 2003, the court reasoned that evidence could be produced to demonstrate that the defendant engaged in actionable conduct in connection with the preparation and review of the Form 10-K within the applicable statute of limitations. (SEC v. Reyes, 2008 WL 410614 (N.D. Cal. Feb. 12, 2008))