The former Vice President of Finance and CFO of a publicly traded company unsuccessfully moved to dismiss claims asserted against him by the Securities and Exchange Commission for, among other things, violations of Rule 10b-5 based upon the inclusion of allegedly false and misleading statements in the company’s Form 10-K and Form 10-Q.
The SEC alleged that the company falsely represented in its annual report and SEC filings that a $9.8 million write-off was attributable entirely to activities of a limited segment of the company occurring in 2001. As asserted in the complaint, the defendant knew at the time he signed the SEC filings in issue that the write-offs concerned activities spanning at least a three year period and involving activities of many of the company’s business units. Rejecting the defendant’s challenge to the adequacy of these allegations under Rule 9(b), the court determined that the “fraud with particularity” pleading requirements were met because the SEC identified contemporaneous statements and information that were available to the defendant at the time he signed the SEC filings that contradicted representations contained in the filings.
The Court also ruled that the SEC’s allegations that defendant’s execution of documents filed with the SEC and of “representation letters” sent to the company’s auditors without disclosing “alarming information” concerning the company’s financial condition of which he was aware (e.g., the existence of significant unsubstantiated account balances and significant internal accounting discrepancies) sufficiently established scienter for pleading purposes. (SEC v. Baxter, 2007 WL 2013958 (N.D.Cal. July 11, 2007))