A Matter of Public Record
Gabor Sandor ACS
625 Rabbit Ridge Court
Reno, Nevada 89511
Telephone No.: (775)-338-5550
FACSimile: (775)-201-1242
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEVADA
____________________________________
:
Gabor S. ACS (ACS) :
Penny King Holdings Corporation (PKH) :
: CV-N-03-0463-ECR-VPC
Defendants, : MOTION TO DISMISS
: MOTION FOR STIPULATIONS
: SUMMARY MOTIONS
v. :
:
Securities and Exchange Commission :
:
Plaintiffs. :
MOTION TO DISMISS
On October 16th, 2003 Plaintiffs sent a letter to Defendant ACS by Federal Express stating that a corporation may not appear in federal court other than through a licensed attorney. The Citation quoted by the Plaintiffs, and which this Court accepted on October 22, 2003, was Rowland v. California Men’s Colony, Unit II Men’s Advisory Council, 506 US 194, 201-02, 113 S. Ct 716, 721, (1993).
Defendants have been quoted legal fees of $100,000 by local counsel to defend itself in this matter. Defendant has assets but in order to pay for legal Counsel in this Court it must have more time to liquidate or market those assets. ACS is attorney-in-fact for Corporation PKH.
Plaintiff has noticed ACS that it had until October 31, 2003, by federal express mail and fax dated October 16th, 2003, before it would move to file a motion of default against it. Plaintiff Claims that PKH is the alter ego of ACS. ACS is in fact Attorney-in-Fact of PKH. ACS owns no shares of PKH and PKH is a wholly owned subsidiary of a legally incorporated public benefit not for profit organization.
Plaintiff agreed to extend the time for Defendant PKH to find a lawyer till November 8th but did not include that agreement made in a teleconference on Monday, October 27th, 2003 in the Stipulated Discovery Plan and Scheduling Order Case filed with the Court on October 30th, 2003.
Plaintiff may have filed certain documents with the Court in this case, which neither the Court, the clerk of the Court or the Plaintiff has provided or delivered to the Defendants or properly served upon them.
The issue of legal jurisdiction is questioned by the fact that PKH is a Delaware Corporation with a representative office in Nevada, with its main operations managed out of Gaithersburg, Maryland and Washington D.C. through a parent organization, which in turn is managed by its unincorporated upper management body which is domiciled in Budapest, Hungary.
The citation provided by the Court and the Government Attorneys applies to a case of an unincorporated organization pleading in forma pauperis.
http://supct.law.cornell.edu/supct/html/91-1188.ZO.html
In 1959 Congress passed a one-sentence provision that "section 1915(a) of title 28, United States Code, is amended by deleting the word `citizen' and inserting in place thereof the word `person.' " Pub. L. 86-320, 73 Stat. 590. For this amendment, the sole reason cited in the legislative history was to extend the statutory benefits to aliens.
Defendant ACS is a registered alien Canadian Citizen born in Budapest, Hungary living in the United States since 1967, and residing in Nevada since August 2002. Defendant ACS has not pleaded in forma pauperis, and all Free and Clear organizations and PKH are deemed persons under USC TITLE 1 > CHAPTER 1 > Sec. 1.
Sec. 1. - Words denoting number, gender, and so forth
In determining the meaning of any Act of Congress, unless the context indicates otherwise - words importing the singular include and apply to several persons, parties, or things; words importing the plural include the singular; words importing the masculine gender include the feminine as well; words used in the present tense include the future as well as the present; the words ''insane'' and ''insane person'' and ''lunatic'' shall include every idiot, lunatic, insane person, and person non compos mentis; the words ''person'' and ''whoever'' include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals; ''officer'' includes any person authorized by law to perform the duties of the office; ''signature'' or ''subscription'' includes a mark when the person making the same intended it as such; ''oath'' includes affirmation, and ''sworn'' includes affirmed; ''writing'' includes printing and typewriting and reproductions of visual symbols by photographing, multigraphing, mimeographing, manifolding, or otherwise; further under USC TITLE 28 > PART V > CHAPTER 111 > Sec. 1654. - Appearance personally or by counsel:
In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are permitted to manage and conduct causes therein.
By the rules of such courts, in this case Nevada District Court, Local Rules of Practice for the United States District Court for the District of Nevada effective June 1, 1995, as amended effective May 1, 1998, and further amended effective December 1, 2000:
http://www.nvd.uscourts.gov/nvd/localrules.nsf/Local+Rules?OpenFrameset
Under LR IA 8-1. PLACE OF FILING. (a) Civil actions shall be filed in the clerk's office for the division of the court in which the action allegedly arose. The actions, which allegedly took place according to Plaintiff, occurred while Defendant ACS and PKH, were living in and doing business out of the State of Maryland. Defendant ACS relocated to Reno following the events of 911 and prior to the sniper incidents in and around Maryland, Virginia and Washington D.C.
Defendant PKH is a wholly owned Delaware subsidiary of Washington D.C. based, The Free and Clear Foundations of America, Inc. Defendant ACS is the Founder, Senior Trustee and principal benefactor of the Foundations.
Defendant ACS is also the Chairman and Chief Executive of Defendant PKH. The actual trading in securities, which Plaintiff alleges occurred in California, and the actual place of authorization and release of certain press releases, alleged to contain false and misleading information, was also composed, reviewed and authorized out of California. Neither Acs nor PKH authorized the release of information publicly concerning the transactions proposed and/or pending at the time between PKH, Eurotrend and Quintek.
Defendant PKH is a “person”. Neither Court nor Plaintiff has cited to Defendant PKH or to ACS a local rule, which is contrary to the intent of Congress in determining the right of “persons” to defend them selves in any civil or criminal action. Plaintiffs claim that Defendant PKH can be heard in Nevada District court in direct contradiction to the Courts local rules. ACS cannot determine the truth of jurisdiction without the Courts opinion.
The citation quoted applies to unincorporated organizations, which Defendant PKH is not and is therefor qualified as a “person” by definition ruled by Congress, not the Court. Where the rules of a Court contradict the rules of Congress, the Rules of Congress shall prevail upon appeal to a higher Court. Unincorporated associations or persons are not deemed “persons” under the intent of Congress, however all corporations under Congressional intent are deemed to be “persons” and all persons have the legal right to defend themselves in any civil or criminal actions in any Court in the United States, pro se.
If the Court determines that Defendant PKH is the alter ego of Defendant ACS, ACS would be allowed to defend both himself and Defendant PKH both as “persons” under the original intent of Congress. If the Court determines that Defendant PKH is not an alter ego of Defendant ACS then this Court must follow its own rules and dismiss the case against Defendant PKH as without legal jurisdiction in the State of Nevada.
On October 28th, 2003, Plaintiff filed a reply to Defendants Objection to Motion to Strike and a Response to Other Various Motions.
Defendants will take up their Claims and Counter Claims previously filed and held on record with this Court with the Court of Federal Claims in Washington D.C. as amended.
It is noticed to this Court that Elizabeth E. Krupa and Polly A. Atkinson, current legal counsel for the Plaintiff are each individually named and have been added in as Defendants in the ancillary case, lis pendens.
On October 30, 2003, a Discovery Plan and Scheduling Order was sent by facsimile and federal express to Defendants Penny King Holdings Corporation (PKH) and Gabor S. ACS (“ACS”), after teleconference with Plaintiff Attorneys Elizabeth E. Krupa and Polly Atkinson of the Denver Office of the SEC.
PKH and ACS have not agreed to the [proposed] Discovery Plan and Scheduling Order as filed by Plaintiff with this Court.
ACS as its attorney-in-fact represented PKH in fact during the teleconference. ACS was also represented by himself pro se during the teleconference. ACS has in the past paid a Washington D.C. lawyer to settle this matter and incurred costs over $8,000 however the lawyer was not able to convince the SEC to settle this matter out of Court as previous lawyers for the Plaintiff insisted on pressing fraud charges against Defendants and continue to do so but have not proven fraud despite their statements in Court filings to the contrary. Plaintiff has not proven the intent to defraud and cannot based on the merits of the pleadings alone.
During the teleconference Plaintiff’s attorneys disclosed to Defendants that it had in its possession over 6,000 pages of documents related to the SEC investigation of Defendants. Defendant has previously under oath provided cooperative testimony with the stipulation by Plaintiffs that Defendants were not the target of any investigation but rather the companies involved. Later Plaintiffs acted in bad faith, and the two original attorneys’s recused themselves from this case after it was filed in August. See original filing by Tracey Tirey et seq. Those 6,000 plus pages of documents include material which is and may be irrelevant and extraneous to the main issue of this case which is: did the Defendants commit a fraud in violation of Securities Laws, which they did not.
The Supreme Court sharply limited secondary actor liability in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1993). The Court there noted that neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 expressly provided for a private cause of action against those who aid and abet primary violators of those statutes. Accordingly, the Court held that there was no basis for aiding and abetting liability for securities fraud claims under §10(b) of the 1934 Act.
Although Judge Harmon agreed that aiding and abetting a securities violation would not give rise to liability for securities fraud, she noted that the Supreme Court also acknowledges that secondary actors are not immune from primary liability. Observing that the SEC was expressly delegated the authority to promulgate rules to implement § 10(b), Judge Harmon adopted the middle-ground SEC-proposed standard. The district court rejected the Second Circuit’s bright-line test, stating that the test allowed secondary actors to escape primary liability by merely concealing their role from the public. The court concluded that the Second Circuit failed to interpret the SEC rules so as to effectuate their purpose. The “substantial participation” test was, however, too broad, according to the court. Without a more precise definition of “substantial participation” or “intricate involvement,” the test left open a large gray area between primary and accessory liability.
Judge Harmon viewed the SEC interpretation as providing sufficient flexibility of enforcement while avoiding the vagueness of the substantial participation test. Under the SEC test, the secondary actor need not be the initiator of the misrepresentation, although it must have drafted the disclosure at issue. A party who prepares a truthful statement would not be liable for misrepresentations elsewhere in the document, even if he or she knew the other statements were false, according to the SEC.
For a secondary party to be liable, the court emphasized that a plaintiff must still plead and prove scienter and reliance on the false statement (although not on the fact that the secondary actor drafted the statement). Further, the court observed that under the Private Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737 (codified in scattered sections of 15 U.S.C.), a reckless secondary actor will only be liable for the damage caused by his or her misstatement, and not for damages caused by others’ misstatements. A knowing participant in a fraudulent scheme, however, might face greater liability.
Although the court adopted the SEC interpretation, backed by the state Attorneys General, it refused to accept the Attorneys General’s argument that conspiracy liability still existed.
The burden on the plaintiff asserting a claim in a civil action is to prove every essential element of its claim by only a preponderance of the evidence. [Interstate Petroleum Corporation v. Morgan, 249 F.3d 215 (4th Cir. 05/01/2001)]
The United States Supreme Court has explained that under "[c]onventional rules of civil litigation . . . parties . . . need only prove their case by a preponderance of the evidence ...and that exceptions to this standard are uncommon. Price Waterhouse v. Hopkins, 490 U.S. 228, 253 (1989) "Because the preponderance-of-the evidence standard results in a roughly equal allocation of the risk of error between litigants, we presume that this standard is applicable in civil actions between private litigants unless particularly important individual interests or rights are at stake. "Grogan v. Garner, 498 U.S. 279, 286 (1991) (quoting Herman & McLean v. Huddleston, 459 U.S. 375, 389 (1983)).
The clear and convincing evidence standard has been applied in certain cases involving fraudulent or bad faith conduct like Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir. 1999) (clear and convincing evidence required to prove intent to defraud in civil tax fraud case under the Internal Revenue Code); Shepherd v. ABC, 62 F.3d 1469, 1477-78 (D.C. Cir. 1995) (litigation misconduct must be proven by clear and convincing evidence in order for the district court to enter default judgment as a sanction for such misconduct). But while clear and convincing evidence is required for some fraud-based claims, in many instances a heightened burden of proof is not required. Grogan, 498 U.S. at 288-89 (listing federal fraud-related statutes to which the preponderance standard applies.)
In summary, no principled reason exists to justify application of differing standards of proof for the defenses of fraud and concealment or misrepresentation. Therefore, we hold that the concealment or misrepresentation policy defense is a specie of fraud that must be proven by clear and convincing evidence. The trial court did not err by so instructing the jury.
The clear and convincing standard is reserved for cases where substantial interests at stake require an extra measure of confidence by the fact finders in the correctness of their judgment, though not to such degree as is required to convict of crime. Cf. Addington, 441 U.S. at 424, 99 S.Ct. at 1808, 60 L.Ed.2d at 330.
A common usage is in law of fraud, where the clear and convincing standard demonstrates the value society attributes to untarnished reputation. ... Similarly our supreme court now requires that factfinders be confident that a tortfeasor's culpable state of mind be shown by clear and convincing evidence before the tortfeasor is made a public example through the imposition of extra-compensatory punitive damages.
Defendants have asked Plaintiff for copies of all documents and that all previous transcripts of testimony be sent to Defendants. Plaintiff advised Defendants that it could hire a copy service to go to the Denver Office at Defendants expense to make whatever copies it chose. Plaintiff refused to supply copies to Defendants at its own expense, despite Plaintiffs earlier representations that Defendants were not the targets of an investigation. Defendants have previously filed a Freedom of Information Request and Plaintiff has failed to provide the information required under the Freedom of Information Act.
During the same teleconference Defendants asked Plaintiffs attorneys what it would take to settle this matter out of Court. Plaintiffs stated $40,000 in disgorgement, and $40,000 in punitive damages, a penny stock bar, and other regulatory stipulations. This proposed settlement is $170,000 less than the amounts previously quoted to Defendants when Defendant was represented by legal counsel in Washington D.C. Plaintiff has failed to prove fraud, and failed to prove that Defendants have profited from any actions related to the two companies which Plaintiff claims Defendants bought or sold stock positions in private or public transactions.
This Civil Suit commenced in August 2003 as SEC v. PKH and ACS. ACS is the President and CEO of PKH and its’ attorney in fact since March 4th, 2001 and represents the corporation in all legal matters brought before it in perpetuity. PKH is a Delaware Corporation with its headquarters in Gaithersburg, Maryland. The District Court of Nevada does not have jurisdiction over a Delaware Corporation.
PKH is a wholly owned subsidiary of The Free and Clear Foundations of America, Inc. a Washington D.C. not for profit organization. Gabor Sandor ACS is the Senior Trustee with his principal place of residence in Reno, Nevada. PKH is not the alter ego of ACS. ACS is not a promoter or a publicist of stocks. PKH is neither a promoter nor a publicist of stocks.
On October 28th Plaintiff filed a motion with this Court for Leave to Amend Complaint. Defendants object to the motion. Defendants have not agreed to Discovery or the Stipulated Discovery Plan and Scheduling Order. Plaintiffs Attorneys have given false and misleading information to the Court in regards to Defendants agreeing to any such Stipulated Discovery Plan and Scheduling Order as on the date such statements were filed such statements were in fact untrue, inaccurate and misleading.
Plaintiff may have understood that Defendants Acs and PKH were not represented by Counsel, however legal counsel in Washington D.C. was never formally terminated and Plaintiff should not have been talking to either Defendants without checking if Defendants were represented by Counsel.
Legal Counsel for Defendant was retained on or about October 10th, 2002 and to the best of Defendants knowledge such relationship has not been formally terminated between Defendants and Counsel. Plaintiff has acted with prejudice and assumed that Defendants were in agreement the day after the teleconference regarding the Stipulated Discovery Plan and Scheduling Order, however since Plaintiffs did not include sufficient time for Defendant to reconfirm with Counsel its representation of Defendants Acs and PKH, the Stipulated Discovery Plan and Scheduling Order filed with the Court was false and misleading and invalid. Legal Counsel for the Defendant is not licensed to practice in Nevada District Court, however Legal Counsel for Defendant is licensed to practice in Washington D.C. where the alleged actions by the Plaintiff and accusations of Plaintiff against Defendants purportedly took place. Plaintiff has to the best of Defendants knowledge not had any contact with Defendants Attorney in Washington D.C. since January 24th, 2003.
On October 31st, 2003 Plaintiff sent a Notice of Deposition to Defendants, which was received by Defendant ACS on November 1, 2003. ACS as Deponent appeared at Bonanza Reporting in Reno at 9a.m. on November 12, 2003 against his will and was asked by the Court Reporter ‘Do you swear to tell the truth, the whole truth, and nothing but the truth? to which Deponent responded, “I don’t know”. Attorney for Plaintiff then asked for Court Reporter to put Deponent’s response on the record and asked Deponent, “Are you refusing to take the oath?” Deponent responded with his answer “No”. Deponent answered the question of the Court Reporter again with “I don’t know”. Deponent does not know the truth so cannot determine if it can tell the truth, the whole truth and nothing but the truth because Deponent has previously stated his version of the truth which was not accepted by the previous lawyers of the SEC, otherwise this civil suit would not be taking place. Attorney Krupa then terminated the Deposition stating she would take the matter up with the Court. Bonanza Reporting charges $130 per day plus $3.60 per page for depositions.
On November 4th, 2003, Plaintiff under Fed R. Civ P. 26(a) sent to Defendant ACS Disclosures, which contained a list titled “Persons with Knowledge” and another list titled “Document Index”. Plaintiff did not provide to Defendants specific documents in the “Document Index” or any statements from the list of “Persons with Knowledge.” Defendants were denied access to knowledge, which Plaintiff is using to present its case to this Court.
Defendant could not answer Court Reporter’s question regarding making an oath to the Court without the knowledge and information contained in Plaintiffs “Document Index” and affidavits and/or statements of the list of “Persons with Knowledge”. The response of Deponent “I don’t know” was and remains a true statement of Defendants for this reason. Therefore Deponent answered the question of oath truthfully, accurately and with no malice aforethought. It is a wise man that knows that he does not know.
In United States v. Henke, 222 F.3d 633, 642 (9th Cir. Aug. 25, 2000), an appellate court reversed the criminal securities fraud and insider trading convictions of the former CEO and CFO of California Micro Devices, on the basis that a conflict of interest prevented their counsel from cross-examining a key government witness who had attended joint defense meetings. In preparing for a possible retrial, the appellate court also considered whether the district court judge had properly admitted the CEO's out-of-court response - "next question please" - to an accusation in a press conference that the defendants were "cooking the books." The district court had found that the response was not unduly prejudicial and that, under the circumstances, the natural response to such an accusation would be to address or deny it. It therefore admitted the statement as an adoptive admission. The appellate court agreed the district court acted within its discretion
Henke does not stand for the proposition that a non-denial automatically constitutes an admission. Nevertheless, at least one court thought that it did, albeit in the extreme circumstance of an admitted revenue recognition fraud by a company. This may raise problems for the honest executive. One can imagine that a harried or indignant CEO may snap, "next question please," under the belief that it is a denial of impropriety.
The following portions of an interview with Microstrategy's CEO "contributed significant weight to an inference of scienter in this case":
In the public world there's a difference between 11:59 and 12:01, the last day of March . . . One of them is, you go to jail if the thing gets signed at 12:01 . . . One of them is, the stock is up $500 million. And the other one is, you've just torched the life and livelihood of a thousand families. "Would you sacrifice a thousand people's lives for one minute of integrity, or would you, like, put the clock back?" It was a dilemma he [the CEO] now had to "deal with . . . every quarter."
Surely the court drew the wrong inference. Unlike the CEOs in Premiere Technologies and Henke, the Microstrategy CEO did not admit, suggest, or fail to deny that he had acted improperly. On a simple level, the CEO, at least according to this interview, recognized that he faced the ethical choices in deciding whether to follow the law. On a deeper level, the fact that a CEO would recognize that he faced choices with serious consequences, and give voice to this realization, suggests respect for the law more than it does fraud.
In re e.spire Communications, Inc. Sec. Litig., No. CIV. H-00-1140, 2001 WL 85167, ___ F. Supp. 2d ___ (D. Md. Jan. 29, 2001), illustrates how one should discuss the serious matter of compliance with the law. In this case, the Court granted a motion to dismiss with prejudice in a lawsuit alleging GAAP violations by a telecommunications company. After rejecting several arguments presented by plaintiffs, the Court asked whether the complaint was saved by a statement from the company's new CEO "[t]here's absolutely zero tolerance for any lying, cheating, or stealing in any way, shape, or form here." The Court decided that this statement would give rise to at most a "strained and tenuous" inference of fraud, not the strong inference required under the Reform Act, as it did not discuss or refer to prior practices or management.
It is possible to imagine that had the new CEO been more colorful or effusive on this topic, he could have led his company into trouble. That the CEO did not do so illustrates the benefits of serious language for serious subjects.
Financial fraud claims occupy a special place in securities litigation. One reason is that financial statements are important. According to the SEC, complete and accurate financial reporting by public companies is of paramount importance to the disclosure system underlying the stability and efficient operation of our capital markets. Investors need reliable financial information when making investment decisions Defendants were at all times acting with the intent of providing investors with reliable financial information during the period in question. Another reason is that it is difficult to reduce exposure to financial fraud claims. Consider by contrast, claims based on forward-looking statements.
A company may choose not to issue such statements at all. Or, if it chooses otherwise, it may accompany its projections with meaningful cautionary disclosures of the factors that could cause actual results to differ, and the Safe Harbor prohibits a securities fraud lawsuit. See Securities Exchange Act of 1934 § 21E(c)(1)(A)(i), 15 U.S.C. § 78u-5(c)(1)(A)(i) (written forward-looking statements); Securities Exchange Act of 1934 § 21E(c)(2), 15 U.S.C. § 78u-5(c)(2) (oral forward-looking statements). Cautionary disclosures were made in all public statements issued by the Defendants. Private emails do not qualify as public statements and all private emails were made under the understanding of confidentiality in executing a business plan for the expansion and support of the company for the benefit of the stockholders, not for the benefit of naked short sellers.
Even if a company does not do this, plaintiffs must plead and prove that the forward-looking statements were made with actual knowledge of their falsity. See Securities Exchange Act of 1934 § 21E(c)(1)(B)(i), 15 U.S.C. § 78u-5(c)(1)(B)(i) (forward-looking statement made by natural person); Securities Exchange Act of 1934 § 21E(c)(2)(1)(ii), 15 U.S.C. § 78u-5(c)(1)(B)(ii) (forward-looking statement made by business entity).
The Reform Act (and perhaps also Fed. R. Civ. P. 9(b)) require dismissal if plaintiffs do not plead the circumstances of the alleged financial fraud with sufficient detail. Courts may dismiss a financial fraud complaint against all defendants on this basis. See, e.g., Wilson v. CKS Group, No. C98-4229 MMC, slip op. at 9-11 (N.D. Cal. Mar. 21, 2000); In re Versant Object Tech. Corp. Sec. Litig., No. C 98-00299 CW, slip op. at 22-24 (N.D. Cal. May 18, 2000); Ree v. Pinckert, No. C99-0562 MMC, slip op. at 16-18 (N.D. Cal. Mar. 28, 2000); Branca v. Paymentech, Inc., No. Civ. A 3:97-CV-2507-L, 2000 WL 145083(N.D. Tex. Feb. 8, 2000).
The Reform Act also requires plaintiffs to set forth the basis of any allegations made on information and belief, although the contours of this duty are in dispute. Compare In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 985 (9th Cir. 1999) (In the Ninth Circuit, a plaintiff must plead, "in great detail, all the relevant facts forming the basis of [its] belief."); and Novak v. Kasaks, 216 F.3d 300, 313 (2d Cir. 2000) (need not name sources of allegations).
For these reasons, a complaint that may have sufficed to plead financial fraud under pre-Reform Act law, e.g., Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1996), may not satisfy Reform Act standards. See Hockey v. Medhekar, 30 F. Supp. 2d 1209, 1216 (N.D. Cal. 1999).
There are also special rules that apply to pleading financial fraud claims. Most courts have held that it does not suffice to allege that financial statements were not prepared in accordance with generally accepted accounting principles ("GAAP"). See In re Milestone Sec. Litig., 103 F. Supp. 2d 425, 472-73 (D.N.J. 2000) (quoting Stevelman v. Alia Research, Inc., 174 F.3d 79, 84-85 (2d Cir. 1999)); see also Head v. Netmanage, Inc., No. C 97-4385 CRB, 1998 WL 917794, *6 (N.D. Cal. Dec. 30, 1998) ("the mere fact that [a company] changed its publicly-disclosed accounting policy that may have violated GAAP, and that the change led to lower reported revenues in the following quarter, does not support any inference of scienter, let alone the required strong inference.").
This makes eminent sense, for, as one court explained, the failure to follow GAAP could have resulted from an incorrect accounting judgment rather than an intent to defraud. See Mortensen v. Americredit Corp., No. Civ. A. 3:99-CV-0789, 2000 WL 472865, *6 (N.D. Tex. Apr. 21, 2000); see also Mathews v. Centex Telemanagement, Inc., [1994-95 Tr. Binder] Fed. Sec. L. Rep. (CCH) 98,440, at 91,037 (N.D. Cal. June 8, 1994) (so long as defendants method of projection used in setting accounts receivable reserves was reasonable, summary judgment is appropriate).
At the same time, as one court opined, GAAP violations may be probative of scienter, depending on the nature of the alleged violations. In re the Baan Co. Sec. Litig., 103 F. Supp. 2d 1, 21 (D.D.C. 2000); accord, In re Reliance Sec. Litig., MDL No. 1304 (C.D. Del. Apr. 19, 2000) (alleged violations of GAAP gave rise to an inference of recklessness).
It also does not suffice to allege that a company restated its financials. Mortensen, 2000 WL 472865; In re Evans Sys., Inc. Sec. Litig., No. H-99-2182, slip op. (S.D. Tex. May 31, 2000); Alabaster v. Bastiaens, Civ. No. 99-10237-NG, slip op. (D.Mass. July 27, 2000).
Were the rule otherwise, a company could not reassess the estimates used in financial statements or its accounting methodologies, and adjust its financial statements accordingly, without being accused of fraud. This would apply to estimates of income based on signed and executed contracts that are stated as forward looking statements in a press release to the general public.
Below these aggregate level principles, the law becomes murkier when it comes to pleading claims against particular defendants. Some district courts, ruling before appellate courts had started to interpret the Reform Act, assumed without separate analysis that if a financial fraud claim had been pleaded against a company, a claim also was stated against senior executives. See Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246 (N.D. Ill. 1997) (claim stated against CEO, President, and CFO); In re Wellcare Mgm't Group Sec. Litig., 964 F. Supp. 632 (N.D.N.Y. 1997) (CEO and CFO); In re Ancor Communications, Ins. Sec. Litig., No. 97-1696, 1998 U.S. Dist. LEXIS 10988 (D. Minn. July 14, 1998) (CEO and CFO); Epstein v. Itron, Inc., 993 F. Supp. 1314 (E.D. Wash. 1998) (CEO); Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297 (C.D. Cal. 1996) (CEO).
This cannot be the law. A particular officer may not have made (or even participated in the making of) financial statements. If that is the case, under Central Bank v. First Interstate Bank, 511 U.S. 164 (1994), he or she cannot be liable. See Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998) ("If Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable under Section 10(b).") (quotations omitted); cf. In re Software Toolworks Sec. Litig., 50 F.3d 615, 628 n.3 (9th Cir. 1994) (auditing firm that co-authored letter to SEC may be liable for statements contained therein).
Moreover, the Reform Act requires plaintiffs to plead and prove fraud on an individualized basis; that is, defendant-by-defendant. See Brinker Capital Holdings, Inc. v. Imagex Services, Inc., No. 96-CV-0038 (FJS), 1998 WL 139416, *2 (N.D.N.Y. Mar. 26, 1998) ("Additionally, to create a strong inference of scienter on the part of a defendant the [Reform Act] requires that facts be alleged with particularity as to that defendant.").
Absent particularized allegations against a particular defendant, no claim may be stated against that defendant.
At about the same time, a trilogy of Second Circuit court cases, relying in part on pre-Reform Act law, held that financial fraud within an organization may not automatically be attributed to a corporate defendant. In Chill v. General Electric Co., 101 F.3d 263 (2d Cir. 1996), Glickman v. Alexander & Alexander Services, Inc., No. 93 Civ. 7594 (LAP), 1996 WL 88570 (S.D.N.Y. Feb. 29, 1996), and In re Baesa Securities Litigation, 969 F. Supp. 238 (S.D.N.Y. 1997), plaintiffs sought to hold parent corporations liable for financial frauds at their subsidiaries. In each case, the fraud resulted in improper revenue recorded on the parent’s consolidated financial statements. In each case, the court dismissed the complaint because it did not plead facts giving rise to an inference that the parent companies knew of, or consciously disregarded, the subsidiaries’ frauds.
This initial period of post-Reform Act financial fraud jurisprudence culminated in In re Comshare, Inc. Securities Litigation, 183 F.3d 542 (6th Cir. 1999). In that case, the complaint alleged that a foreign subsidiary had committed financial fraud by issuing side letters that precluded revenue recognition of certain contracts. The Court held that the complaint did not plead a securities claim against the parent company and its officers and directors. In reaching this conclusion, the Court explicitly followed Chill and Baesa in holding that scienter could not be presumed from the parent’s purported reliance on its subsidiary’s internal financial controls; and found that the complaint had not pled specific facts that "illustrate ‘red flags’ that should have put Defendants on notice of the revenue recognition errors, or that demonstrate reasons for Defendants to have questioned the revenue reporting of its . . . subsidiary." 183 F.3d at 553-54.
Under Comshare, at a minimum, a complaint must plead, with factual specificity, that each defendant either intentionally published materially false financial statements, or published financial statements with awareness of facts that put them on notice of the falsity of those statements. This is not to say that it is impossible to plead a financial fraud claim against either individual or corporate defendants, at least in some courts’ assessments of Reform Act pleading standards. For example, In re Imperial Credit Indus., Inc. Sec. Litig., Nos. CV 98-8844 SWV et al., slip op. (C.D. Cal. Feb. 23, 2000), was, like Chill and its progeny, a suit brought by shareholders of the parent company.
In this case, however, the subsidiary had made its own statements directly to the public. The court found that the complaint pleaded a strong inference of scienter because it quoted alleged e-mail messages showing the parent’s actual awareness of the true financial facts. In In re System Software Associates, Inc., No. 97 C 177, 2000 WL 283099, *14 (N.D. Ill. Mar. 8, 2000), the court found that the complaint pleaded scienter by alleging that the officers had rejected the company’s outside auditors’ advice that the company’s revenue recognition practices and decisions did not conform to GAAP.
Nor is Comshare the final word. The decision may be questioned to the extent that it allows a lawsuit based on what a defendant objectively "should have" known about financial statements, as distinguished from the subjective, actual intent to defraud that is in the author’s opinion the only form of recklessness that may qualify as intentional misconduct, i.e., scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). In this case SEC v Gabor S. Acs and Penny King Holdings Corporation made every effort to get Quintek to publish amended and updated information after the deal with Eurotrend fell apart in an attempt to adhere to the laws relating to the foreign corrupt practices act on the part of the Defendants. Clearly scienter is unprovable.
And Comshare did not need to distinguish between the company and the individual defendants in dismissing the complaint at bar.
Assume that, based on whatever standard a court has applied; a financial fraud claim has been pleaded against a company and certain of its officers. If no person at the company (including the defendants) engaged in financial fraud, then liability is an easy question: no one may be held liable. This almost certainly also would apply to any independent auditors named or corporate attorneys as defendants; it is difficult to imagine a company and its officials that did not intend to defraud, with auditors or attorneys who did and who were able to effect their intent.
Now assume that a financial fraud claim has been pleaded, and at least one person did intend to defraud and accomplished his or her intention. If plaintiffs cannot prove that a particular defendant possessed the intent to defraud, then he or she cannot be held liable. But when may the company be held liable? This question raises the difficult topic of corporate scienter law. A corporation’s knowledge and action can encompass only the knowledge and action of its directors, officers and employees; that is, it cannot encompass any other person’s knowledge or actions. Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 780 (3d Cir. 1976).
But no court has analyzed precisely which persons’ knowledge and actions may be imputed to a corporation, and when they may be imputed. Indeed, there are questions as to whether this enterprise is legitimate. As one commentator noted, even before Central Bank eliminated all non-statutory forms of secondary liability, "it [was] unclear whether agency concepts will be invoked to impute to a corporation knowledge of its officers, board of directors or employees." 5 Arnold S. Jacobs, Litigation & Practice Under Rule 10b-5, §63 at 3-339 (1982).
Under Central Bank, one may argue that the (non-statutory) agency basis for imputing liability no longer exists. The same commentator also opined that even if the knowledge of a corporation’s officers, directors, or employees may be imputed to a corporation, the specific intent to defraud — i.e., the conscious element of scienter — probably cannot be imputed. Jacobs, §63 n.76 (discussing Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973)). This assumes for heuristic purposes only that recklessness suffices as scienter. In this instance the attempts of Defendants to accurately inform the investing public dismisses any act or intent of recklessness.
With this background in mind, as an analytical construct, this argument examines outcomes based on two variables:
1. The state of mind – either (a) no intent to defraud, (b) recklessness, or (c) an actual intent to defraud – of and for each of
2. Three particular persons: the (a) the Chief Executive Officer of Quintek, (b) the Chief Executive Officer of Defendant, or Acs or (c) any lower-level officer, agent, or the Chief Executive Officer of Eurotrend ( a foreign corporation) or its agents and employees.
The permutation of these variables produces a matrix of 27 different outcomes. For example, the Chief Executive Officer of Quintek or any of its agents or employees may have acted with recklessness, (who has previously settled with the Plaintiff for $25,000 without admitting or denying guilt in this case) the Chief Executive Officer of Defendant and Defendant Acs, with no intent to defraud, and the CEO of Eurotrend with actual intent to defraud; the CEO of Quintek, agents or employees and the CFO may have acted with no intent to defraud, while the CEO of Eurotrend or its agents acted recklessly; and so on.
Fortunately, many of the outcomes may be grouped together for analytical purposes. In recognition of this point, the remainder of this argument analyzes the matrix of outcomes in what is believed to be sufficient detail, by first examining outcomes based on the second variable above. This method is deemed a "partial derivative" approach.
The first partial derivative subset of outcomes in the matrix depends on the state of mind of the Chief Executive Officer of Quintek or any of its agents or employees allegedly engaged in financial fraud. There are good reasons to conclude if the Chief Executive Officer of Quintek or any of its agents or employees acted with recklessness or an actual intent to defraud, that variable may affect that person’s individual liability, but cannot by itself render the Defendants liable. These same variables apply in the case of eKnowledge and Gary Saunders. As shown in the final subsection, the Chief Executive Officer of Quintek or any of its agents or employees state of mind may affect the extent of the company's liability.
First, to the extent case law has imputed scienter from an individual to a company, courts appear to have restricted this mechanism to senior officers and directors. See, e.g., Nordstrom v. Chubb & Son, Inc., 54 F.3d 1424, 1435 (9th Cir. 1995) (insurance dispute following settlement of securities case) ("a corporation may be liable for actions by senior management personnel that are 'intrinsically corporate and bear the imprimatur of the corporation itself.'") (quotation omitted).
This makes sense. As contended below, there is a more focused and natural target than the Chief Executive Officer of Quintek or any of its agents or employees in ascertaining a company’s conscious intent to issue true or false financial statements or press releases containing false or misleading statements. In the case of Quintek, the pro forma financial projections announced in the press releases were based on potential and contracted for orders, signed and executed by a foreign buyer who needed to obtain credit in order to conclude its obligations under a contract with a third party, namely the Defendants.
Second, the significance of focusing on senior executives has been buttressed by the Reform Act. In deciding how to treat forward-looking statements made on behalf of an entity, Congress decided that a plaintiff must prove that the statement was "made by or with the approval of an executive officer of that entity . . . with actual knowledge by that officer that the statement was false or misleading." Securities Exchange Act of 1934 § 21E(c)(1)(B)(ii), 15 U.S.C. § 78u-5(c)(1)(B)(ii) (emphasis added).
There is no reason why this reasoning should not apply to financial statements, press releases and forward-looking statements too. Congress apparently decided that even though many persons within a company may be responsible for preparing forward-looking statements, it is not fair to blame the company if lower-level officers, agents, or employees made false representations (either within the company, to the persons who actually made the forward-looking statements; or directly to the public, or from outside agents as in the case of Mr. Ferenc Galgocsy who represented to both Quintek and Defendants that Eurotrend was in agreement with the issuance of the press release and both Quintek and Defendants were relying on Galgocsy’s statements and the evidence of a signed contract with Eurotrend indicated that such a statement was for all intents and purposes accurate and not misleading) in that context.
But financial statements, as are press releases, are the responsibility of many employees within a company, and in the case of a development stage company such as Quintek or eKnowledge, due to lack of resources, manpower, and cheap capital, oftentimes the duty and responsibility for the creation of accurate statements which reflect the current status of a company in development as in this case must be delegated to outside sources to execute, conclude and disseminate to stockholders.
Thus, if there is no scienter on the part of any executive officer of the company, or its outside agents, or its outsourced service providers who made or approved the financial statements or press releases and forward looking statements– i.e., if only lower-level officers or employees possessed either recklessness or an actual intent to defraud – then there should not be liability for the company.
The Plaintiff did not charge Quintek and/or eKnowledge as a corporate entities for this reason, yet both CEO’s of each company agreed to resign and accept a settlement with Plaintiff without admitting or denying the charges for two main reasons:
1. They could not afford to defend themselves if a civil action were brought against them.
2. They did not believe that justice would be served by going to Court nor did they understand the laws that would have prevented them from neither admitting or denying the allegations of Plaintiff, but rather provide them with equal protection under the law.
Third, it would be anomalous under corporate governance law to hold senior officers responsible for their good faith reliance on the representations of lower level officers, outside agents and employees – even if those lower level officials misled the senior officers, and as a result caused false financial statements or misleading press releases to be issued. As one court stated, where high level officials of a corporation were not aware of the improprieties committed by lower-level officials, they "cannot be faulted," even if the improprieties severely harmed the corporation. In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (1996) (approving settlement of derivative claim for zero dollars during pendency of motion to dismiss). See related information at http://www.10b-5.com/caremark.html.
If senior management’s lack of knowledge of improprieties cannot give rise to a breach of fiduciary duty claim, it should not suffice to establish liability for securities fraud (which, after all, requires scienter). Then, if there are no individually liable senior managers, there is no sufficiently senior person whose liability may be imputed to the company (assuming that liability may be imputed at all). The only exception to this syllogism may be if a senior officer issued financial statements in reckless disregard of the lower level officials’ financial fraud – which is probably the type of liability Comshare attempted to acknowledge.
This moved the focus of the company’s liability towards where it should be: the state of mind of the CFO who in both the cases of Quintek and eKnowledge, those hats were worn by the CEOs of each company respectively under the guidance of outside legal counsel and outside certified public accountants. In both instances, all public press releases and their content were represented to be as approved by the CEO’s and their official agents, employees and those responsible for overseeing the implementation and release of the information to the public in a timely and accurate fashion. The fact that information changed, or that someone backed out of a contract the following day or week, and thereafter was not officially and publicly made known to the public, was the duty and responsibility of the CEO’s who also doubled as CFO’s.
It makes sense to assign this primacy to the CFO. If it ever may be proper to impute the conscious element of scienter from an individual to a company, the company’s conscious intent to issue financial statements and press releases that are either true or false should depend on the person charged with preparing the financial statements or press releases: the CFO or PRO (Public Relations Officer) and in most instances of development stage companies such functions are completely outsourced under the guidance of the CEO.
This functionalist principle corresponds with investors’ expectations: investors know that a company’s CFO is charged with the responsibility for preparing its financial statements. They know that Press Releases are typically approved by legal counsel and the CEO of the company and prepared by outside public relations firms particularly with development stage companies where a full time in house PR person would be cost prohibitive.
It also corresponds with the pre-Reform Act group pleading doctrine, now abrogated, which allowed plaintiffs to plead a claim against particular individuals based on the functional roles that those individuals fulfilled within the company. The best analyses confirm that as the Reform Act requires that falsity and scienter be pleaded on an individualized basis, it "codifies a ban against group pleading." Coates v. Heartland Wireless Communications, Inc., 26 F. Supp. 2d 910, 916 (N.D. Tex. 1998); Calliot v. HFS, Inc., No. Civ. A. 3:97CV0924I (N.D. Tex. Mar. 31, 2000) (doctrine does not survive Reform Act); Branca v. Paymentech, Inc., No. Civ. A.3:97-CV-2507-L, 2000 WL 145083, *8 (N.D. Tex. Feb. 8, 2000) (same); Marra v. Tel-Save Holdings, Inc., Master File No. 98-3145, 1999 WL 317103, *5 (E.D. Pa. May 18, 1999) (same); In re Ascend Communications Sec. Litig., No. CV 97-8861 MRP, slip op. at 12 (C.D. Cal. Feb. 2, 1999) (same); see also Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350 (S.D. Cal. 1998) ("To permit a judicial presumption as to particularity simply cannot be reconciled with the statutory mandate that plaintiffs must plead specific facts as to each act or omission by the defendant."). When the group pleading doctrine was the law, it applied only to a "narrowly defined group of officers who had direct involvement not only in the day-to-day affairs of [the company] in general but also in [the company's challenged] financial statements in particular." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987).
If a claim is based on false financial statements or false and misleading public press releases containing missing, inaccurate or misleading information, it makes sense to look at the Finance and public relations and legal advisory officials. It further is consistent with the SEC’s administrative mission to regulate accounting practices and the accounting profession as well as its enforcement of the Act. While the SEC may sanction any person who issues false financial statements, the Commission appears to pay particular attention to the accountant or auditor who engages in such misconduct.
A recent uncontested enforcement action illustrates this point. In In the Matter of Micro Warehouse, Inc., 1999 WL 548531 (S.E.C. July 28, 1999), charges were brought against a company's corporate controller \ chief accounting officer, and a senior accounting manager. The SEC found by consent decree that these persons "knew, or were reckless in not knowing, that they were engaged in a fraudulent scheme that caused the financial statements to be materially false and misleading. Their state of mind may be imputed to [the company]." Id. at *5. While it is doubtful that a court would impute scienter from such lower-level officials to a company in a private securities action, this SEC case shows that when it comes to financial statements, a company's Finance department is crucial. In a private securities action against any development stage company that can ill afford a full time CFO let alone a Controller, the intersection of the sets "Finance department" and "senior executives" is one person: the CEO.
And the Commission recently directed companies to adopt Audit Committee charters, again signaling the special significance of the Finance function in a company (and up through its directors).
The primacy of the CFO also makes sense because another actor is important in insuring the integrity of a company’s financial statements: the independent auditors. Investors often look to a company’s independent auditors (among others) to fulfill this role; and case law establishes that if a company follows the informed advice of its independent auditors, it may not be liable because it lacks scienter. In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1426 (9th Cir. 1994). There undoubtedly are other questions regarding auditors' responsibility for financial fraud that are not discussed in this article. The same would hold true if press releases which a CEO or outside legal counsel or the PRO approved prior to their official public dissemination. The significance of the independent auditors buttresses the primacy of the company officer most likely to be responsible for the company’s relationship with the auditors, i.e., the CFO, or in development stage companies, the CEO.
It follows from the primacy of the CFO that if a company issued false financial statements and liability is proven against the CFO individually, this is the situation in which it is most likely that a company also may be responsible for financial fraud. In contrast, if the CFO had no intent to defraud, the company should not be liable for issuing false financial statements, even if someone else at the company was reckless or had the actual intent to defraud. Where that other, fraudulent person is a lower-level officer or employee (i.e., both the CFO and the CEO lacked an intent to defraud), this should be a relatively non-controversial conclusion for the reasons set forth in the previous section. Where that other person is the CEO, the question is more difficult. It is to that question that this argument now turns.
Another subset of partial derivative outcomes in the matrix depends on the state of mind of the company’s Chief Executive Officer. If CEO had no intent to defraud, he or she may not be liable, and liability rests solely on the state of mind of the CFO, outside agents and employees or the contracting other foreign party. But what if the CEO intended to defraud, via either recklessness or the actual intent to defraud? How should this affect the company’s liability?
It may seem counterintuitive that a CEO may be liable for issuing false financial statements but his or her company may not be liable. In an ideal(istic) world, it is never appropriate to say that it is someone else’s responsibility to follow proper accounting policies, or to conduct sufficient due diligence prior to issuing a press release. Rather, if an employee or outside agent has any information relevant to insuring that the company’s rules are followed, that employee or agent should communicate that information to the persons responsible for preparing or reviewing the financial statements or in this case, public statements to the investing community. This renders the CEO important, for the CEO is in a superior position to make it clear that responsibility and honesty in the preparation of financial statements and press releases is an integral part of a company’s ethics. Moreover, a purpose of the private securities lawsuit is to compensate investors damaged by fraud. If a company is not liable for issuing false financial statements, then there is one fewer defendant from whom compensation may be obtained.
But as counterintuitive as it may be to find that a company is not automatically responsible for financial fraud when the CEO is liable, the converse proposition is worse. For it may be the case that while the CEO intended to issue false financial statements or make false statements in press releases, or was negligence in not knowing that statements made were false and misleading, even though both contributed to the preparation of such publicly disseminated news articles, the Defendants did not, and could not have known the internal financial impact on the financial statements of the company as Defendants were not privy to such information and maintained at all times an arms length association with the CEO.
Some would argue that financial frauds require the intervention of a CFO (although, in any event, a CFO’s complicity must be pleaded and proven, not assumed). Yet it is easy to imagine an alternative scenario. Consider, for example, Comshare under a slightly different set of facts. In reality, the complaint did not plead any specific facts from which it could be inferred that any person within the company’s management was aware of the subsidiary’s side letters. But what if it could be pleaded and proven that the CEO authorized the side letters, but that the CFO did not? What if it also was the case that CFO had no specific reason to suspect that there were side letters, or even that the CFO had been told by the CEO that there were no side letters? In all of these scenarios, the most logical conclusion is that the company – through the CFO charged with preparing its financial statements – did not intend to issue false financial statements, and hence may not be liable for lack of scienter. If false financial statements nevertheless were issued, it was only by the CEO’s circumvention of the intent of the CFO and the company’s internal controls.
Put in other terms, the reasons why the CFO’s state of mind should be paramount in a financial fraud case also mean that the CEO’s state of mind is not dispositive of the company’s liability. To find the intent underlying a company’s financial statements, look to the head Finance officer. At the very least, it should be the case that as between the CEO and CFO, the CFO’s state of mind is more important. To be certain, one of a CEO’s responsibilities is to insure that a company issues true financial statements. But for a CFO, issuing true financial statements is the prime responsibility, and both investors and the SEC expect a CFO to fulfill this responsibility. The same holds true when the hat of the CFO is worn from above by the CEO, outside counsel or outside auditors.
There is one other factor by which to fine-tune the analysis of a company’s liability for financial fraud. Securities fraud liability is no longer an all-or-nothing proposition. The Reform Act now distinguishes between knowing violators of the securities laws – those persons who "make[] an untrue statement of a material fact, with actual knowledge that the representation is false; or omit[] to state a fact necessary in order to make the statement not misleading, with actual knowledge that, as a result of the omission, one of the material representations of the person is false; Securities & Exchange Act of 1934 §21D(g)(10)(A)(i), 15 U.S.C. § 78u-4(g)(10)(A)(i). It must also be the case that "persons are likely to reasonable rely on that misrepresentation or omission."
And non-knowing violators, which is everyone else. Only knowing violators are jointly and severally liable. Securities & Exchange Act of 1934 §21D(g)(2)(A), 15 U.S.C. § 78u-4(g)(2)(A).
Non-knowing violators are liable solely for that portion of the judgment that corresponds to their percentage of responsibility. Securities & Exchange Act of 1934 §21D(g)(2)(B)(i), 15 U.S.C. § 78u-4(g)(2)(B)(i).
Each defendant is entitled to pose special interrogatories on these topics to the trier of fact. Therefore the defendants first question to the trier of fact in this case is:
“What is all the information do you have regarding this matter and may we have a copy in order to analyse the facts in the matter so as to validly be able to state the truth, the whole truth and nothing but the truth. Securities & Exchange Act of 1934 §21D(g)(3)(A), 15 U.S.C. § 78u-4(g)(3)(A).
While there is little, if any, analysis of these terms in the legislative history of the Reform Act, it would not be surprising to find courts concluding that the distinction between knowing and non-knowing violators is analogous to the distinction between liability based on the actual intent to defraud and recklessness liability. In either case Defendants did not act recklessly nor with any intent to defraud but were relying on facts and data which Defendants believed to be true at the time such statements were made.
The distinction between types of liability means that if the CFO is found personally liable for issuing false financial statements, and the company’s liability derives from the CFO’s liability, it matters if the CFO was reckless or possessed an actual intent to defraud. If the CFO was reckless, a company may contend that a lower-level officer or employee also was involved in and responsible for the financial fraud, and hence that the company’s liability should be apportioned to reflect the lower-level employee’s responsibility. Securities & Exchange Act of 1934 §21D(g)(3)(A)(ii), 15 U.S.C. § 78u-4(g)(3)(A)(ii) (defendant entitled to special jury interrogatories with respect to each defendant "and each of the other persons claimed by any of the parties to have caused or contributed to the loss incurred by the plaintiff" concerning "[t]he percentage of responsibility of such person, measured as a percentage of the total fault of all persons who caused or contributed to the loss incurred by the plaintiff"); Harold S. Bloomenthal, Private Securities Litigation Reform Act: Special Update 61 (Clark Boardman Callaghan 1996) (under this provision, defendants may "try the empty chair").
The empty chair in this instance is the foreign corporation, which duly signed a contract and failed to perform, and its agents, including the Hungarian government agencies, which assisted in the introduction and negotiations of the contract on behalf of the foreign corporation that sought to purchase the products of Quintek. The fact that the foreign empty chair failed to place its first order as agreed to in the contract, and that foreign buyer attempted to coerce and extort funds from Defendants prior to placing its first order under a bona fide and notarized contract, which payment by Defendants would have been a violation of the Foreign Corrupt Practices Act, does not conclude that Defendants intended to defraud or intended to commit any fraud or were in any way negligent in its duties or the carrying out of its real intent, which was to assist in production and sales for the benefit of stockholders, not for its sole benefit let alone profit which did not materialize and is yet to materialize in this case of Quintek.
(Thus, while the state of mind of a lower-level officer or employee should not influence whether the company may be responsible, it may affect the extent of liability.) Conversely, a court may conclude – and this is a particularly difficult question – that under particularly egregious factual circumstances, if the CEO had the intent to defraud and the CFO was reckless in issuing false financial statements that reflected the CEO’s dishonest intent, the company’s state of mind reflected an actual intent to defraud.
The final question (and the analysis in this argument) may well lead us to a reversal in the common perspective of corporate scienter. Typically, plaintiffs are the party who contends that scienter may be pleaded and proved under "collective scienter" analysis. Thus, plaintiffs contend that Nordstrom , 54 F.3d 1424, endorsed such an analysis, when it did not.
Under plaintiffs' approach, a company's scienter is defined to be the collective product of all of its directors', officers', and employees' states of mind (or, in some variants, of the directors and officers); and, hence, if any one of those directors, officers, or employees intended to defraud, then so did the company. But if the question in financial fraud cases is whether a company's key Finance officials intended to defraud; or, as theorized in the previous paragraph, whether the company's internal controls intentionally or recklessly allowed false financial statements or false and misleading statements, which could not have been known to the Defendants to be false and misleading unless Defendants were insiders, meaning Officers or Directors of the company; then "collective scienter" has a very different meaning. A company's scienter (if that theory applies at all) may well be ascertained on a collective basis -- not in plaintiffs' sense, in which any single person's intent to defraud dooms the company to liability; but in a new sense, in which the company's core or majority intent not to issue false financial statements or misleading press releases saves the company and the Defendants from any liability.
In Plaintiffs filing of Disclosures on November 4th, 2003 Plaintiff States that “Fed R Civ P 26(a)(1)(c) and (D) are not applicable in this action.”
Fed. R. Civ. P. 26(a)(1): Initial Disclosures. Unless otherwise stipulated by the parties or ordered by the court, or unless a party objects to making the disclosures or to the timing of the disclosures, the parties must make the Federal Rule of Civil Procedure 26(a)(1) initial disclosures within 14 days after the conference held pursuant to Federal Rule of Civil Procedure 26(f) and section (d) of this rule. Any objections to making the initial disclosures or to the timing of the initial disclosures must be made during the Rule 26(f) conference and memorialized with particularity in a document served and filed within 10 days after the scheduling order and discovery plan is filed. The Parties have not stipulated to anything to date.
Initial disclosures must not be filed with the Clerk of Court unless filing is required specifically by the Federal Rules of Civil Procedure, LR 37.1(b), LR 56.1, or an order of the court. Defendants have asked the Court to Order the Defendant to product evidence and documents, which Motion for Defendant Acs has not been denied. Plaintiff has not complied with this request.
The Clerk of Court will return any initial disclosures submitted for filing to the submitting party promptly, together with a copy of LR 5.2. Initial disclosures are not required in cases where, under LR 16.1(d), no scheduling order and discovery plan is required to be submitted.
b. Fed. R. Civ. P. 26(a)(2)(A) and (B): Disclosure of Expert Testimony. Unless otherwise stipulated by the parties or ordered by the court, the parties must, on or before the deadlines for disclosing expert witnesses established by the Rule 16(a) and 26(f) scheduling order and discovery plan, disclose their expert witnesses in accordance with the requirements of Federal Rule of Civil Procedure 26(a)(2)(A) and (B).
The list of “Persons with Knowledge” is not a list of expert witnesses and any one or all of them may become enjoined in this action on behalf of the Defendants. Plaintiff has not called upon the expert independent witnesses of public relations counsel, outside securities counsel, and/or a certified public accountant in its disclosure of “Persons with Knowledge”. The parties have not stipulated or disclosed any expert witnesses.
Expert witness disclosures must not be filed with the Clerk of Court unless filing is required specifically by the Federal Rules of Civil Procedure, LR 37.1(b), LR 56.1, or an order of the court. The Clerk of Court will return any expert disclosures submitted for filing to the submitting party promptly, together with a copy of LR 5.2. The Defendants are asking the Court to order expert witnesses, namely independent counsel, independent certified public accountants, and independent public relations personnel in order to serve proper Justice.
c. Fed. R. Civ. P. 26(a)(3): Pretrial Disclosures. The Federal Rule of Civil Procedure 26(a)(3)(A), (B), and (C) witness and exhibit disclosures must be served at least 21 days before the final pretrial conference, as required by LR 16.2(c). Unless otherwise ordered by the court, these disclosures need not be filed. Objections to these disclosures must be made in the proposed final pretrial order submitted pursuant to LR 16.2(b).
d. Fed. R. Civ. P. 26(f): Meeting of Parties. At least 14 days before the proposed scheduling order and discovery plan is due pursuant to LR 16.1(a), the parties must, as required by Federal Rule of Civil Procedure 26(f), confer to do the following:
1. Consider the nature and bases of their claims and defenses and the possibilities for a prompt settlement or resolution of the case;
2. Make or arrange for the disclosures required by Federal Rule of Civil Procedure 26(a)(1); and
3. Develop a proposed discovery plan.
The parties in this action have not done 1-3 above as of the date of this motion to dismiss.
Unless otherwise stipulated by the parties, the Rule 26(f) discovery plan conference should be combined with the Rule 16(b) scheduling order conference. This has not been done.
e. Discovery Plan. The Federal Rule of Civil Procedure 26(f) requirement that the parties submit to the court a written report outlining their discovery plan is satisfied by the submission to the Clerk of Court of a properly completed scheduling order and discovery plan form. The parties have not stipulated this.
Rule 26. General Provisions Governing Discovery; Duty of Disclosure
(a) Required Disclosures; Methods to Discover Additional Matter.
(1) Initial Disclosures. Except in categories of proceedings specified in Rule 26(a)(1)(E), or to the extent otherwise stipulated or directed by order, a party must, without awaiting a discovery request, provide to other parties:
(A) the name and, if known, the address and telephone number of each individual likely to have discoverable information that the disclosing party may use to support its claims or defenses, unless solely for impeachment, identifying the subjects of the information;
Plaintiff failed to disclose and/or provide the names of the initial complainants and all information obtained from Hartley T. Bernstein et ux, a disbarred securities lawyer, Stock Patrol, StockPatrol.com, Bernstein and Wasserman. Defendants hereby ask the Court to issue subpoenas to the above named parties for depositions on behalf of the Defendants in seeking justice at the expense of the Plaintiff. Defendants cannot discover the truth or swear to tell the truth without all relevant facts, witnesses and the ability to face their accusers being brought to bear in this case. Plaintiff has failed to clearly identify the subjects which each individual having discoverable information may have.
Plaintiff was aware of the involvement of Ferenc Galgoczy, an agent of both PKH and Eurotrend Informatics in reference to the negotiations and authorization of Eurotrend to issue a press release on behalf of Quintek and its intended business dealings and orders for Quintek products for the Central European Market, but failed to include that person on the list of “Persons with Knowledge”. Plaintiff is prejudiced in its claims and actions against Defendants.
Plaintiff has named Amber T. Samaroo as a person with knowledge on the basis of interaction with ACS, whereas Defendants object to this person testifying on behalf of Plaintiff in Court and will request that said person testify on behalf of Defendants and as an expert witness.
(B) a copy of, or a description by category and location of, all documents, data compilations, and tangible things that are in the possession, custody, or control of the party and that the disclosing party may use to support its claims or defenses, unless solely for impeachment; Plaintiff has failed to list certain documents, particularly those which would lead to a conclusion and finding by this Court and a Jury that Defendants did not engage in any fraud nor did Defendants intend to engage in any fraud or issue any false and misleading statements on behalf of any public company, including certain depositions taken under oath in its possession.
(C) a computation of any category of damages claimed by the disclosing party, making available for inspection and copying as under Rule 34 the documents or other evidentiary material, not privileged or protected from disclosure, on which such computation is based, including materials bearing on the nature and extent of injuries suffered; Plaintiff has failed to provide any computation of damages claimed and in fact the only persons who were damaged by any action on the part of Defendants in connection with business dealings with Quintek and Eknowledge were broker/dealers who illegally and nakedly shorted the stock of both firms, and some of which have since gone out of business as a result of a failure to cover their naked short positions and to which issue the Plaintiff has finally come around to correcting through Regulation SHO. The public stockholders were not damaged in any way by the actions of Defendants and therefore no claim for damages are valid; Plaintiffs claims for damages, both punitive and compensatory are without merit and based solely on arbitrary conclusions which are prejudiced against the Defendants; and
(D) for inspection and copying as under Rule 34 any insurance agreement under which any person carrying on an insurance business may be liable to satisfy part or all of a judgment which may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment.
(E) The following categories of proceedings are exempt from initial disclosure under Rule 26(a)(1):
(i) an action for review on an administrative record;
(ii) a petition for habeas corpus or other proceeding to challenge a criminal conviction or sentence;
(iii) an action brought without counsel by a person in custody of the United States, a state, or a state subdivision;
(iv) an action to enforce or quash an administrative summons or subpoena;
(v) an action by the United States to recover benefit payments;
(vi) an action by the United States to collect on a student loan guaranteed by the United States;
(vii) a proceeding ancillary to proceedings in other courts; and
(viii) an action to enforce an arbitration award.
This proceeding is ancillary to pending proceedings in other courts, specifically the Court of Federal Claims; therefore the Defendants Request to order the Plaintiffs to provide information as filed with this Court under Defendants Objection to Plaintiffs Motion to Strike et seq. dated October 17th, 2003, which has not been denied by this Court in relation to Defendant Acs has not been complied with.
These disclosures must be made at or within 14 days after the Rule 26(f) conference unless a different time is set by stipulation or court order, or unless a party objects during the conference that initial disclosures are not appropriate in the circumstances of the action and states the objection in the Rule 26(f) discovery plan. Defendants have hereby stated their objections.
In ruling on the objection, the court must determine what disclosures if any are to be made, and set the time for disclosure. Any party first served or otherwise joined after the Rule 26(f) conference must make these disclosures within 30 days after being served or joined unless a different time is set by stipulation or court order. A party must make its initial disclosures based on the information then reasonably available to it and is not excused from making its disclosures because it has not fully completed its investigation of the case or because it challenges the sufficiency of another party's disclosures or because another party has not made its disclosures. Defendants hereby request this Court to enjoin all of the persons listed on Plaintiffs “Persons with Knowledge” list except Amber T. Samaroo, who has agreed to state his knowledge of Defendants if requested. Defendants reserve the right to add their own list of “Persons with Knowledge” in reference to counter claims previously filed and made with this Court.
(2) Disclosure of Expert Testimony.
(A) In addition to the disclosures required by paragraph (1), a party shall disclose to other parties the identity of any person who may be used at trial to present evidence under Rules 702, 703, or 705 of the Federal Rules of Evidence. Plaintiff has not provided this information to Defendants.
(B) Except as otherwise stipulated or directed by the court, this disclosure shall, with respect to a witness who is retained or specially employed to provide expert testimony in the case or whose duties as an employee of the party regularly involve giving expert testimony, be accompanied by a written report prepared and signed by the witness. The report shall contain a complete statement of all opinions to be expressed and the basis and reasons therefor; the data or other information considered by the witness in forming the opinions; any exhibits to be used as a summary of or support for the opinions; the qualifications of the witness, including a list of all publications authored by the witness within the preceding ten years; the compensation to be paid for the study and testimony; and a listing of any other cases in which the witness has testified as an expert at trial or by deposition within the preceding four years.
(C) These disclosures shall be made at the times and in the sequence directed by the court. In the absence of other directions from the court or stipulation by the parties, the disclosures shall be made at least 90 days before the trial date or the date the case is to be ready for trial or, if the evidence is intended solely to contradict or rebut evidence on the same subject matter identified by another party under paragraph (2)(B), within 30 days after the disclosure made by the other party. The parties shall supplement these disclosures when required under subdivision (e)(1).
(3) Pretrial Disclosures. In addition to the disclosures required by Rule 26(a)(1) and (2), a party must provide to other parties and promptly file with the court the following information regarding the evidence that it may present at trial other than solely for impeachment:
(A) the name and, if not previously provided, the address and telephone number of each witness, separately identifying those whom the party expects to present and those whom the party may call if the need arises;
(B) the designation of those witnesses whose testimony is expected to be presented by means of a deposition and, if not taken stenographically, a transcript of the pertinent portions of the deposition testimony; and
(C) an appropriate identification of each document or other exhibit, including summaries of other evidence, separately identifying those which the party expects to offer and those which the party may offer if the need arises.
Unless otherwise directed by the court, these disclosures must be made at least 30 days before trial. Within 14 days thereafter, unless a different time is specified by the court, a party may serve and promptly file a list disclosing (i) any objections to the use under Rule 32(a) of a deposition designated by another party under Rule 26(a)(3)(B), and (ii) any objection, together with the grounds therefor, that may be made to the admissibility of materials identified under Rule 26(a)(3)(C). Objections not so disclosed, other than objections under Rules 402 and 403 of the Federal Rules of Evidence, are waived unless excused by the court for good cause.
(4) Form of Disclosures. Unless the court orders otherwise, all disclosures under Rules 26(a)(1) through (3) must be made in writing, signed, and served.
(5) Methods to Discover Additional Matter. Parties may obtain discovery by one or more of the following methods: depositions upon oral examination or written questions; written interrogatories; production of documents or things or permission to enter upon land or other property under Rule 34 or 45(a)(1)(C), for inspection and other purposes; physical and mental examinations; and requests for admission.
(b) Discovery Scope and Limits. Unless otherwise limited by order of the court in accordance with these rules, the scope of discovery is as follows:
(1) In General. Parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(i), (ii), and (iii).
(2) Limitations. By order, the court may alter the limits in these rules on the number of depositions and interrogatories or the length of depositions under Rule 30. By order or local rule, the court may also limit the number of requests under Rule 36. The frequency or extent of use of the discovery methods otherwise permitted under these rules and by any local rule shall be limited by the court if it determines that: (i) the discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive; (ii) the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or (iii) the burden or expense of the proposed discovery outweighs its likely benefit, taking into account the needs of the case, the amount in controversy, the parties' resources, the importance of the issues at stake in the litigation, and the importance of the proposed discovery in resolving the issues. The court may act upon its own initiative after reasonable notice or pursuant to a motion under Rule 26(c).
(3) Trial Preparation: Materials. Subject to the provisions of subdivision (b)(4) of this rule, a party may obtain discovery of documents and tangible things otherwise discoverable under subdivision (b)(1) of this rule and prepared in anticipation of litigation or for trial by or for another party or by or for that other party's representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent) only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party's case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. In ordering discovery of such materials when the required showing has been made, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.
A party may obtain without the required showing a statement concerning the action or its subject matter previously made by that party. Upon request, a person not a party may obtain without the required showing a statement concerning the action or its subject matter previously made by that person. If the request is refused, the person may move for a court order. The provisions of Rule 37(a)(4) apply to the award of expenses incurred in relation to the motion. For purposes of this paragraph, a statement previously made is (A) a written statement signed or otherwise adopted or approved by the person making it, or (B) a stenographic, mechanical, electrical, or other recording, or a transcription thereof, which is a substantially verbatim recital of an oral statement by the person making it and contemporaneously recorded.
(4) Trial Preparation: Experts.
(A) A party may depose any person who has been identified as an expert whose opinions may be presented at trial. If a report from the expert is required under subdivision (a)(2)(B), the deposition shall not be conducted until after the report is provided.
(B) A party may, through interrogatories or by deposition, discover facts known or opinions held by an expert who has been retained or specially employed by another party in anticipation of litigation or preparation for trial and who is not expected to be called as a witness at trial, only as provided in Rule 35(b) or upon a showing of exceptional circumstances under which it is impracticable for the party seeking discovery to obtain facts or opinions on the same subject by other means.
(C) Unless manifest injustice would result, (i) the court shall require that the party seeking discovery pay the expert a reasonable fee for time spent in responding to discovery under this subdivision; and (ii) with respect to discovery obtained under subdivision (b)(4)(B) of this rule the court shall require the party seeking discovery to pay the other party a fair portion of the fees and expenses reasonably incurred by the latter party in obtaining facts and opinions from the expert.
(5) Claims of Privilege or Protection of Trial Preparation Materials. When a party withholds information otherwise discoverable under these rules by claiming that it is privileged or subject to protection as trial preparation material, the party shall make the claim expressly and shall describe the nature of the documents, communications, or things not produced or disclosed in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the applicability of the privilege or protection.
(c) Protective Orders. Upon motion by a party or by the person from whom discovery is sought, accompanied by a certification that the movant has in good faith conferred or attempted to confer with other affected parties in an effort to resolve the dispute without court action, and for good cause shown, the court in which the action is pending or alternatively, on matters relating to a deposition, the court in the district where the deposition is to be taken may make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense, including one or more of the following:
(1) that the disclosure or discovery not be had;
(2) that the disclosure or discovery may be had only on specified terms and conditions, including a designation of the time or place;
(3) that the discovery may be had only by a method of discovery other than that selected by the party seeking discovery;
(4) that certain matters not be inquired into, or that the scope of the disclosure or discovery be limited to certain matters;
(5) that discovery be conducted with no one present except persons designated by the court;
(6) that a deposition, after being sealed, be opened only by order of the court;
(7) that a trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a designated way; and
(8) that the parties simultaneously file specified documents or information enclosed in sealed envelopes to be opened as directed by the court.
If the motion for a protective order is denied in whole or in part, the court may, on such terms and conditions as are just, order that any party or other person provide or permit discovery. The provisions of Rule 37(a)(4) apply to the award of expenses incurred in relation to the motion.
(d) Timing and Sequence of Discovery. Except in categories of proceedings exempted from initial disclosure under Rule 26(a)(1)(E), or when authorized under these rules or by order or agreement of the parties, a party may not seek discovery from any source before the parties have conferred as required by Rule 26(f). Unless the court upon motion, for the convenience of parties and witnesses and in the interests of justice, orders otherwise, methods of discovery may be used in any sequence, and the fact that a party is conducting discovery, whether by deposition or otherwise, does not operate to delay any other party's discovery.
(e) Supplementation of Disclosures and Responses. A party who has made a disclosure under subdivision (a) or responded to a request for discovery with a disclosure or response is under a duty to supplement or correct the disclosure or response to include information thereafter acquired if ordered by the court or in the following circumstances:
(1) A party is under a duty to supplement at appropriate intervals its disclosures under subdivision (a) if the party learns that in some material respect the information disclosed is incomplete or incorrect and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing. With respect to testimony of an expert from whom a report is required under subdivision (a)(2)(B) the duty extends both to information contained in the report and to information provided through a deposition of the expert, and any additions or other changes to this information shall be disclosed by the time the party's disclosures under Rule 26(a)(3) are due.
(2) A party is under a duty seasonably to amend a prior response to an interrogatory, request for production, or request for admission if the party learns that the response is in some material respect incomplete or incorrect and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing.
(f) Conference of Parties; Planning for Discovery. Except in categories of proceedings exempted from initial disclosure under Rule 26(a)(1)(E) or when otherwise ordered, the parties must, as soon as practicable and in any event at least 21 days before a scheduling conference is held or a scheduling order is due under Rule 16(b), confer to consider the nature and basis of their claims and defenses and the possibilities for a prompt settlement or resolution of the case, to make or arrange for the disclosures required by Rule 26(a)(1), and to develop a proposed discovery plan that indicates the parties' views and proposals concerning:
(1) what changes should be made in the timing, form, or requirement for disclosures under Rule 26(a), including a statement as to when disclosures under Rule 26(a)(1) were made or will be made:
(2) the subjects on which discovery may be needed, when discovery should be completed, and whether discovery should be conducted in phases or be limited to or focused upon particular issues;
(3) what changes should be made in the limitations on discovery imposed under these rules or by local rule, and what other limitations should be imposed; and
(4) any other orders that should be entered by the court under Rule 26(c) or under Rule 16(b) and (c).
The attorneys of record and all unrepresented parties that have appeared in the case are jointly responsible for arranging the conference, for attempting in good faith to agree on the proposed discovery plan, and for submitting to the court within 14 days after the conference a written report outlining the plan. A court may order that the parties or attorneys attend the conference in person. If necessary to comply with its expedited schedule for Rule 16(b) conferences, a court may by local rule (i) require that the conference between the parties occur fewer than 21 days before the scheduling conference is held or a scheduling order is due under Rule 16(b), and (ii) require that the written report outlining the discovery plan be filed fewer than 14 days after the conference between the parties, or excuse the parties from submitting a written report and permit them to report orally on their discovery plan at the Rule 16(b) conference.
(g) Signing of Disclosures, Discovery Requests, Responses, and Objections.
(1) Every disclosure made pursuant to subdivision (a)(1) or subdivision (a)(3) shall be signed by at least one attorney of record in the attorney's individual name, whose address shall be stated. An unrepresented party shall sign the disclosure and state the party's address. The signature of the attorney or party constitutes a certification that to the best of the signer's knowledge, information, and belief, formed after a reasonable inquiry, the disclosure is complete and correct as of the time it is made.
(2) Every discovery request, response, or objection made by a party represented by an attorney shall be signed by at least one attorney of record in the attorney's individual name, whose address shall be stated. An unrepresented party shall sign the request, response, or objection and state the party's address. The signature of the attorney or party constitutes a certification that to the best of the signer's knowledge, information, and belief, formed after a reasonable inquiry, the request, response, or objection is: Plaintiff called for a Deposition, a process of discovery, without prior consultant with Defendants.
(A) consistent with these rules and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law;
(B) not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; and
(C) not unreasonable or unduly burdensome or expensive, given the needs of the case, the discovery already had in the case, the amount in controversy, and the importance of the issues at stake in the litigation. Plaintiff can save the Court, the Government, and the taxpayers needless expense by providing copies at a cost 1/10th the cost quoted by “approved outside copying agencies” in order to deliver Defendants previously requested and ordered documents.
If a request, response, or objection is not signed, it shall be stricken unless it is signed promptly after the omission is called to the attention of the party making the request, response, or objection, and a party shall not be obligated to take any action with respect to it until it is signed. The Defendants request that this Court Order all filings made by Plaintiff after October 27th, 2003 be STRICKEN.
(3) If without substantial justification a certification is made in violation of the rule, the court, upon motion or upon its own initiative, shall impose upon the person who made the certification, the party on whose behalf the disclosure, request, response, or objection is made, or both, an appropriate sanction, which may include an order to pay the amount of the reasonable expenses incurred because of the violation, including a reasonable attorney's fee. Plaintiff has failed to provide previously requested information, which would have saved Plaintiff unnecessary expense. Defendants hereby request this Court deny any motions of Plaintiff for recovery of any expenses expended to date in this matter. Plaintiff has rejected all previous offers of settlement with Defendants. Further Plaintiff has spent in excess of $250,000 in taxpayer money in its investigation of this case, and collected less than 10% of that sum from the President of Quintek and the President of Eknowledge, both of whom settled out of court without admitting or denying any of the allegations of the Plaintiff.
On October 17th, 2003 Defendants requested an Expedited Hearing. The intent of that request was to save both the Court and the Plaintiff additional costs in this matter and to bring the case to a quick resolution according to the intent of the Rules of Civil Procedure.
On October 22, this Court Ordered that the request for expedited hearing filed on behalf of Defendant Acs be denied. Defendants hereby object to this denial on the basis that the Court and the taxpayers would have saved money by having a fair and quick hearing before the Judge to accurately establish the merits or lack thereof in this case.
On October 28, 2003 Plaintiff filed a Response to ACS’ Request for Expedited Hearing wherein Plaintiff stated that it “has no objection to the trial in the matter commencing as soon as possible”. Plaintiff on the other hand did not schedule in advance a deposition with Defendants or give adequate time for Defendants to prepare for such Deposition, and Plaintiff has refused to provide evidence it is using to state its claims of fraud and damages against the Defendants in a timely fashion to be consistent with the above statement.
Defendants hereby requests a face-to-face meeting with the Judge in this Court at the Courts convenience in order to adjudge the merits of the Plaintiffs claims, to determine proper jurisdiction and venue, and to present documents before the Judge which are of a highly sensitive and confidential nature but which cannot be filed with this Court or made public under the existing rules of the United States Securities and Exchange Commission.
On November 7th, 2003, Plaintiff filed with this Court a Motion for Discovery and Scheduling Order and a [Proposed] Discovery Plan and Scheduling Order. Defendants are not in agreement with said Motion and object thereto and are further not in Agreement with any Proposed Discover Plan and Scheduling Order unless Plaintiff first provides at its own expense copies of the 7,000 plus pages of documents regarding this matter to Defendants. The burden of proof in this matter is upon the Plaintiff.
On October 22, 2003 this Court denied Defendant PKH Objection to Document #15 dated October 17th, 2003 and the document was ordered STRICKEN insofar as it was filed on behalf of Defendant PKH, the document nevertheless was ordered retained in the file of the Court.
Defendants hereby ask the Court to dismiss the case against PKH as the Court has no jurisdiction over a “person” legally domiciled under the laws and jurisdiction of the State of Delaware and this Court should order Plaintiff to file its case against Defendant PKH in the proper jurisdiction, and or remand the case under its own rules to the District Court of California and or Delaware where the alleged fraud took place according to Plaintiff.
Defendants hereby object to the Motion for Leave and to the Amended Complaint filed by Plaintiff in this Court on October 28th, 2003.
Insofar as the Motion to Dismiss ACS in this case, the court has not ruled on this motion. Defendant ACS hereby requests this Court to dismiss this case against ACS, an individual, under the following stipulations:
STIPULATIONS
That ACS and PKH agree to settle this matter outside this Court with Plaintiff for the sum of one Lincoln Penny ($.01) payable to Plaintiff within 24 hours of the dismissal of ACS.
That PKH, through its affiliate, the Bank Activities Reform Commission, shall over the course of twelve (12) months from the date of the dismissal of ACS in this case turn over to Plaintiff all information it has developed or shall further develop during that same period related to investigations of the United States Government, the Securities and Exchange Commission, and the present and former employees of Plaintiff, and shall provide 69 hours of services to Plaintiff in concluding those investigations related to stock market manipulations by Pension Funds, Stock Brokers and Dealers, Mutual Funds, Money Managers, past and present attorneys working under the employ of the Plaintiff at its regular hourly consulting rate of $1.00 per second, or $3,600 per hour which shall be the equivalent of $250,000 in services to Plaintiff.
That Plaintiff will agree to this settlement without prejudice and no further stipulations except those stated below, and shall retain the right to file any action against Defendant PKH, but not Defendant ACS in the District Court of Delaware or California.
Without admitting or denying any guilt or innocence in this case, and with prejudice, the Defendants ACS and PKH will agree to a permanent injunction restraining and enjoining ACS and PKH from violating Section 17(b) of the Securities Acs and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Plaintiff will agree to provide copies of all 7,000+ pages of information gathered in the investigation of this case at no further expense to Defendants within ten (10) business days by regular mail, postage prepaid, to the Defendants address first stated above.
Dated: November 13th, 2003 Respectfully submitted
_________________________
Gabor Sandor ACS
For Defendants Gabor S. ACS
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