Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_08-cv-01620/USCOURTS-casd-3_08-cv-01620-6/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

CASE NO. 08cv1620-WQH-RBB

ORDER

vs.

RETAIL PRO, INC. (fka Island Pacific,

Inc.), BARRY M. SCHECHTER, RAN

H. FURMAN, and HARVEY BRAUN,

Defendants.

HAYES, Judge:

The matter before the Court is the Motion for Reconsideration of Portions of Order

Dated November 18, 2009 (“Motion for Reconsideration”), filed by Defendant Ran H. Furman.

(Doc. # 50).

I. Background

On September 4, 2008, Plaintiff Securities and Exchange Commission (“SEC”) initiated

this action by filing a Complaint in this Court. (Doc. # 1). The Complaint alleges:

3. This case involves a fraudulent scheme by Island Pacific, Inc.

(‘Island Pacific’ or the ‘Company’) and its then senior management to overstate

the Company’s financial results for the quarters ended September 20, 2003 (‘Q2

2004’), and December 31, 2003 (‘Q3 2004’), and its fiscal year ended March 31,

2004 (‘FY 2004’). The Company’s senior management responsible for the fraud

were defendants Barry M. Schechter ..., a controlling person and de facto

officer; Ran H. Furman ..., the Chief Financial Officer; and Harvey Braun ..., the

Chief Executive Officer.

4. In Q2 2004, Schechter, Furman and Braun caused Island Pacific to improperly record and report $3.9 million in revenue from a sham transaction

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with an Australian software company, QQQ Systems Pty Limited (‘QQQ’). The

transaction had no economic substance or business purpose and instead was

entered into in order to artificially inflate Island Pacific’s revenues reported in

its financial statements. Subsequently, in the third quarter, Island Pacific

improperly recorded an offsetting transaction whereby it purchased from QQQ

$3.9 million of software. In fact, no contract finalizing this offsetting

transaction was signed until the fourth quarter. Island Pacific and QQQ never

exchanged any money as a result of these offsetting agreements. In addition,

neither Island Pacific nor QQQ made any effort to sell the other’s software or

to determine the fair market value of their software licensing rights as required

by applicable accounting principles.

5. As a result of improperly recognizing and reporting the $3.9

million as revenue, Island Pacific overstated its revenues by 140% for Q2 2004,

29% for the nine months ending Q3 2004, and 22% for the 2004 fiscal year, and

reported a small profit instead of a massive loss for Q2 2004. The defendants

also failed to disclose the sham nature of the QQQ transaction and actively

concealed their fraud from Island Pacific’s outside auditors, and the public, by

creating forged and/or fabricated documents which they used in an attempt to

demonstrate that the recognition of revenue from the transaction was proper.

Additionally, Furman fired a company whistleblower [i.e., Joseph Dietzler] who

expressed concern in an email that the offsetting transactions were ‘structured

in a manner that is intended to inflate revenues for the purpose of boosting the

corporation’s share price.’

6. As part of the fraudulent scheme, Schechter sold 637,750 shares of Island Pacific stock, receiving $488,410 in ill-gotten gains.

7. By engaging in this conduct, the defendants variously violated and

aided and abetted violations of the antifraud, issuer reporting and recordkeeping, internal controls, and prohibition against misrepresentations to

accountants provisions of the federal securities laws. The Commission seeks to

obtain injunctions from future violations, civil penalties, and officer and director

bars against Schechter, Furman, and Braun, and additionally to obtain

disgorgement of ill-gotten gains from Schechter.

(Doc. # 1 ¶¶ 3-7). The Complaint alleges the following claims against Furman: (1) fraud in

connection with the purchase or sale of securities pursuant to 15 U.S.C. § 78j(b); (2) recordkeeping violations pursuant to 15 U.S.C. § 78m(b)(2)(A) and related regulations; (3)

misrepresentations to accountants pursuant to 17 C.F.R. § 240.13b2-2; (4) internal control

violations pursuant to 15 U.S.C. § 78m(b)(2)(B) and related regulations; and (5) false

certification violations pursuant to 17 C.F.R. § 240.13a-14.

On August 10, 2009, the SEC filed a Motion for Summary Judgment against Furman,

the sole remaining Defendant. (Doc. # 33). 

On November 18, 2009, the Court issued an Order granting in part and denying in part

the SEC’s Motion for Summary Judgment. (Doc. # 47). The Court ordered: “The SEC’s

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Motion for Summary Judgment is GRANTED as to the following claims against Furman:

Section 13(b)(5), Rule 13b2-1, and Rule 13b2-2. The SEC’s Motion for Summary Judgment

is DENIED as to the following claims against Furman: Section 10(b), Rule 10b-5, Section

20(e), and Rule 13a-14.” (Doc. # 47 at 45). In the Order, the Court addressed evidence of a

February 4, 2004 email sent by Joseph Dietzler, who was then Island Pacific’s Contract

Administrator. The email, which was sent to Furman and others at Island Pacific, stated: 

I have continuing concern[] that certain transactions involving the company

QQQ appear to be structured in a manner that is intended to inflate revenues for

the purpose of boosting the corporation’s share price. The ‘sale’ to QQQ under

the agreement entered into in late September 2003 creates such an appearance

for the following reasons:

• Substantial up-front fee for a distribution license, rather than a

royalty stream

• Revenue from the transaction comprises approximately 50% of

entire quarter’s revenue

• Entered into at the close of a quarter in which revenues would

have been far short of estimates, if not for the single transaction

with QQQ

• Extended payment terms were granted

• To date, no payments have been received and are well past due

Under another transaction, QQQ is selling product ownership and

distribution rights to Island Pacific, and QQQ is to be compensated, in part,

through debt forgiveness in amount roughly equal to the amount of the

uncollected revenue that was recognized from the September sale to QQQ.

Irrespective of the legitimacy of the foregoing transactions, the totality of the

surrounding circumstances creates the appearance that the transactions were

intended merely to boost the reportable revenue of Island Pacific in the quarter

ended September 2003. Further, the timing of the second QQQ transaction is

in fact in the current quarter, not the quarter ended December 31, 2003. While

the second transaction is not revenue, it must be reported in the current quarter

(ending March 31, 2004), as it substantially impacts the corporation’s

receivables.

To ensure compliance with financial reporting rules, it would seem

prudent that revenue recognition policies err on the conservative side, so as to

avoid even the appearance of irregularity. Such practices will help ensure that

the activities of the company do not precipitate potential allegations of improper

accounting. I believe the transactions involving QQQ should be restructured in

a manner that makes each entirely independent of the other. As payment has not

[been] received for the September 2003 sale, that situation should be dealt with

in accordance with routine accounting standards. I recommend that these

transactions be given careful reconsideration by both senior management and the

company’s outside audit firm prior to release of any earnings report for the

quarter ended December 31, 2003.

(Pl.’s Ex. 28 at 906). 

In the November 18, 2009 Order, the Court stated:

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The SEC has produced uncontroverted evidence establishing that Furman

knew that Dietzler had alleged “potential fraud” with regard to the QQQ

transactions (Furman Dep. at 78, Pl.’s Ex. 3), but Furman nevertheless

represented to the auditors eight days later that he had no knowledge of any

allegations of “suspected fraud ... received in communications from employees

[or] former employees.” (Pl.’s Ex. 32 at 923). This evidence warrants summary

judgment on the SEC’s books and records claims against Furman, see infra, and

prevents application of the defense of reliance on professional assistance, see

SEC v. Goldfield Mines, 758 F.2d 459, 467 (9th Cir. 1985) (in order to establish

the defense, a defendant must show he “made complete disclosure” to the

professional). However, it is insufficient to establish, as a matter of law, scienter

for the SEC’s Section 10(b) and Rule 10b-5 claim against Furman.

(Doc. # 47 at 39). With respect to the claims as to which summary judgment was granted, the

Court stated:

1. Section 13(b)(5)

Section 13(b)(5) of the Exchange Act provides that “[n]o person shall

knowingly circumvent or knowingly fail to implement a system of internal

accounting controls or knowingly falsify any book, record, or account.” 15

U.S.C. § 78m(b)(5). Section 13(b)(5) requires a showing of scienter. See SEC

v. Hilsenrath, No. C03-3252, 2008 U.S. Dist. LEXIS 50021, at *19 (N.D. Cal.,

May 30, 2008). Evidence showing that a person misled company auditors can

support a claim that the person knowingly circumvented a company’s system of

internal accounting controls. Cf. SEC v. Shapiro, No. 4:05cv364, 2008 U.S.

Dist. LEXIS 17039, at *15 (E.D. Tex., Mar. 5, 2008) (“[A]llegations that

Abbood misled the accountants or auditors about the existence of side

agreements sufficiently supports the claim that he knowingly circumvented

Fleming’s system of internal accounting controls....”); SEC v. Solucorp Indus., 274 F. Supp. 2d 379, 421 (S.D.N.Y. 2003) (“Mantia ... misrepresented the

veracity of Solucorp’s books and records to Solucorp’s auditor during the course

of its audit of Solucorp for fiscal year 1997. As a result, Mantia ... violated

Section 13(b)(5) of the Exchange Act....”).

Furman testified that he understood that in Dietzler’s February 4, 2004

email, Dietzler was “alleging that there was a potential fraud.” (Furman Dep.

at 78, Pl.’s Ex. 3). On February 12, 2004 and July 11, 2004, Furman signed

management representation letters to Island Pacific’s auditors, stating that he

had “no knowledge of any allegations of fraud or suspected fraud affecting the

Company received in communications from employees, [or] former employees.”

(Pl.’s Ex. 32 at 923-24; Pl.’s Ex. 36 at 951). The SEC has shown, as a matter of

law, that Furman signed the management representation letters knowing they

contained a false and/or misleading statement concerning “allegations of ...

suspected fraud affecting the Company.” (Id.) By knowingly submitting false

and/or misleading management representation letters to Island Pacific’s auditors,

Furman “knowingly circumvent[ed] ... a system of internal accounting

controls....” 15 U.S.C. § 78m(b)(5). The SEC’s Motion for Summary Judgment

as to the claim that Furman violated Section 13(b)(5) is granted.

2. Rule 13b2-1

Rule 13b2-1 provides that “[n]o person shall directly or indirectly, falsify

or cause to be falsified, any book, record or account.” 17 C.F.R. § 240.13b2-1.

The SEC does not need to show that Furman acted with scienter in order to show

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he violated Rule 13b2-1. See McConville v. SEC, 465 F.3d 780, 789 (7th Cir.

2006); SEC v. Hilsenrath, No. C03-3252, 2008 U.S. Dist. LEXIS 50021, at *19

(N.D. Cal., May 30, 2008); SEC v. Softpoint, Inc., 958 F. Supp. 846, 865-66

(S.D.N.Y. 1997).

The term “records” includes “correspondence.” 15 U.S.C. § 78c(a)(37).

As discussed above, on February 12, 2004 and July 11, 2004, Furman signed

management representation letters to Island Pacific’s auditors, which contained

the false statement that Furman had “no knowledge of any allegations of fraud

or suspected fraud affecting the Company received in communications from

employees, [or] former employees.” (Pl.’s Ex. 32 at 923-24; Pl.’s Ex. 36 at

951). Therefore, the SEC has shown, as a matter of law, that Furman falsified

a “record” in violation of Rule 13b2-1.

The SEC’s Motion for Summary Judgment as to the claim that Furman

violated Rule 13b2-1 is granted.

3. Rule 13b2-2

Rule 13b2-2 provides: “No director or officer of an issuer shall, directly

or indirectly ... make or cause to be made a materially false or misleading

statement to an accountant in connection with ... [a]ny audit, review or

examination of the financial statements of the issuer....” 17 C.F.R. §

240.13b2-2.

As discussed above, on February 12, 2004 and July 11, 2004, Furman

signed management representation letters to Island Pacific’s auditors, which

contained the materially false and/or misleading statement that Furman had “no

knowledge of any allegations of fraud or suspected fraud affecting the Company

received in communications from employees, [or] former employees.” (Pl.’s Ex.

32 at 923-24; Pl.’s Ex. 36 at 951). The evidence establishes that, as matter of

law, Furman violated Rule 13b2-2. The SEC’s Motion for Summary Judgment

as to the claim that Furman violated Rule 13b2-2 is granted.

(Doc. # 47 at 42-44).

On December 18, 2009, Furman filed the Motion for Reconsideration. (Doc. # 50).

Furman moves for reconsideration of the following portions of the November 18, 2009 Order:

(1) “the portion of the Order at page 39, lines 6 through 10, whereby the Court finds that the

evidence prevents the application of the defense of reliance on professionals”; (2) “the portion

of the Order at page 42, line 8, through page 43, line 6, whereby the Court grants the SEC’s

Motion for Summary Judgment as to the claim that Furman violated Section 13(b)(5)”; (3) “the

portion of the Order at page 43, lines 7 through 22, whereby the Court grants the SEC’s

Motion for Summary Judgment as to the claim that Furman violated Rule 13b2-1”; and (4) “the

portion of the Order at page 43, line 23, through page 44, line 6, whereby the Court grants the

SEC’s Motion for Summary Judgment as to the claim that Furman violated Rule 13b2-2.”

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(Doc. # 50 at 1). Furman contends that reconsideration is appropriate for two reasons:

First, a triable issue of fact exists as to whether Island Pacific, Inc.’s ...

independent auditors, SingerLewak, received full disclosure of the information

contained in the February 4, 2004 e-mail authored by Joseph Dietzler ..., a

former employee of Island Pacific. Second, a triable issue of fact exists as to

whether SingerLewak’s trained accounting professionals and experts would

consider Dietzler’s conclusory and unsubstantiated February 2004 e-mail to be

of any material value in light of the information the auditors already had

available to them (the sum of which substantially outweighed the limited amount

of information to which Dietzler had access).

(Doc. # 50 at 2).

On January 22, 2010, the SEC filed an opposition to the Motion for Reconsideration.

(Doc. # 55). The SEC contends that the Motion for Reconsideration should be denied because

“there is no genuine issue of material fact as to the materiality to a reasonable auditor of

Dietzler’s allegations,” and “Furman has failed to establish that there is a triable issue of fact

establishing his reliance on auditors defense.” (Doc. # 3, 8).

On February 1, 2010, Furman filed a reply brief. (Doc. # 57).

II. Standard of Review

“Reconsideration is appropriate if the district court (1) is presented with newly

discovered evidence, (2) committed clear error or the initial decision was manifestly unjust,

or (3) if there is an intervening change in controlling law.” Sch. Dist. No. 1J v. ACandS, Inc.,

5 F.3d 1255, 1263 (9th Cir. 1993) (citations omitted). Furman contends: “[T]he

reconsideration standard is satisfied because the Court, through its Order, committed clear

error and made manifestly unjust decisions by improperly granting summary judgment where

triable issues of fact exist.” (Doc. # 50-1 at 3).

III. Discussion

A. Dietzler’s Email

Furman contends that “the Court erred in ruling that the reliance on professionals

defense is inapplicable because there are triable issues of fact as to whether the information

contained in Dietzler’s February 4, 2004 email was fully disclosed to Island Pacific’s

auditors.” (Doc. # 50-1 at 6).

In order to establish the affirmative defense of reliance on professional assistance, a

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defendant “must show that [he] (1) made a complete disclosure to [the professional]; (2)

requested [the professional]’s advice as to the legality of the contemplated action; (3) received

advice that it was legal; and (4) relied in good faith on that advice.” SEC v. Goldfield Mines,

758 F.2d 459, 467 (9th Cir. 1985) (citation omitted).

Furman has presented no evidence that he—or anyone else—disclosed to Island

Pacific’s auditors the existence of Dietzler’s February 4, 2004 email. The email states

Dietzler’s “concern[] that certain transactions involving the company QQQ appear to be

structured in a manner that is intended to inflate revenues for the purpose of boosting the

corporation’s share price.... [T]he timing of the second QQQ transaction is in fact in the

current quarter, not the quarter ended December 31, 2003.... [T]he second transaction ... must

be reported in the current quarter (ending March 31, 2004)....” (Pl.’s Ex. 28 at 906). These

allegations are sufficient to be considered allegations of fraud or suspected fraud. Cf. In re

Daou Sys., Inc., 411 F.3d 1006, 1016 (9th Cir. 2005) (“[O]verstating of revenues may state a

claim for securities fraud, as under GAAP, revenue must be earned before it can be

recognized.”) (quotation omitted). More importantly, Furman testified at his deposition that

he “underst[oo]d” Dietzler to be “alleging that there was a potential fraud.” (Furman Dep. at

78, Pl.’s Ex. 3). There is no evidence in the record contradicting this testimony. It is

Furman’s state of mind that is relevant to establishing the defense of reliance on professionals

and scienter. See Goldfield Mines, 758 F.2d at 467 (“If a company officer knows that the

financial statements are false or misleading and yet proceeds to file them, the willingness of

an accountant to give an unqualified opinion with respect to them does not negate the existence

of the requisite intent or establish good faith reliance.”) (quotation omitted). The Court

concludes that Furman has failed to create an issue of fact as to whether, at least as of February

4, 2004, Furman “made a complete disclosure” to Island Pacific’s auditors. Id.

Furman also contends: “[A] triable issue of fact exists as to whether SingerLewak’s

trained accounting professionals and experts would consider Dietzler’s conclusory and

unsubstantiated February 2004 e-mail to be of any material value in light of the information

the auditors already had available to them (the sum of which substantially outweighed the

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limited amount of information to which Dietzler had access).” (Doc. # 50 at 2).

The materiality of Dietzler’s email to the auditors is relevant to the defense of reliance

on professional assistance and to the Court’s summary judgment ruling on Rule 13b2-2. See

Provenz v. Miller, 102 F.3d 1478, 1491 (9th Cir. 1996) (“If it is true that defendants withheld

material information from their accountants, defendants will not be able to rely on their

accountant’s advice as proof of good faith.”) (citation omitted); see also 17 C.F.R. §

240.13b2-2 (“No director or officer of an issuer shall, directly or indirectly: (1) make or cause

to be made a materially false or misleading statement to an accountant in connection with ...

(i) [a]ny audit, review or examination of the financial statements of the issuer.”); McConville

v. SEC, 465 F.3d 780 (7th Cir. 2006) (affirming finding that a chief financial officer was in

violation of federal securities law for omitting material information from management

representation letters issued to auditors). “The ... materiality element is satisfied only if there

is a substantial likelihood that the disclosure of the omitted fact would have been viewed by

the reasonable [auditor] as having significantly altered the total mix of information made

available.” SEC v. Phan, 500 F.3d 895, 908 (9th Cir. 2007) (quotation omitted). “Materiality

and scienter are both fact-specific issues which should ordinarily be left to the trier of fact.

However, summary judgment may be granted in appropriate cases.” In re Apple Computer

Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989) (citations omitted).

The SEC regulations in effect at the time provide: “Prior to filing, interim financial

statements included in quarterly reports on Form 10-Q ... must be reviewed by an independent

public accountant using professional standards and procedures for conducting such reviews,

as established by generally accepted auditing standards, as may be modified or supplemented

by the Commission.” 17 C.F.R. § 210.10-01(d). The relevant generally accepted auditing

standards at the time instructed accountants to inquire of management “who have responsibility

for financial and accounting matters concerning ... [w]hether they are aware of allegations of

fraud or suspected fraud affecting the entity, for example, received in communications from

employees [or] former employees....” AICPA Professional Standards (Jan. 2004), Auditing

(“AU”) § 722.18(c); see Moser Decl., Ex. 1, Doc. # 55. An auditor was also instructed to

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obtain written representations from management relating to, among other matters, “knowledge

of any allegations of fraud or suspected fraud affecting the entity received in communications

from employees [or] former employees....” Id. at § 722.24(f); see also AU § 316.19, 316.20,

316.24 (same). Because independent auditors were required to inquire and obtain written

representations concerning employee allegations of fraud or suspected fraud, the Court

concludes that there is no issue of fact as to whether Dietzler’s allegations in the February 4,

2004 email would have been material to the independent auditors.

Furman contends that the materiality determination should be influenced by the fact that

Dietzler “held a lower level position.” (Doc. # 50-1 at 5). The generally accepted auditing

standards cited above do not identify an employee’s job title as being a relevant consideration.

Even if it is a relevant consideration, it is undisputed that Dietzler was Island Pacific’s

Contracts Administrator, and he reported directly to Furman. (Dietzler Test. at 17-18, 22, Pl.’s

Ex. 30; Furman Test. at 155, Pl.’s Ex. 5). The Court concludes that Dietzler’s job title does

not create an issue of fact as to materiality.

In the Motion for Reconsideration, Furman contends that an issue of fact as to

materiality exists because Dietzler’s opinions were “uninformed” and “the auditors had access

to substantially more information than Dietzler regarding the two transactions.” (Doc. # 50-1

at 4). Furman’s testimony contradicts this assertion. Furman testified that, “based on” the

documentary evidence, it does not “seem possible that there could have been a final agreement

[as to the second transaction with QQQ] on December 31, 2003.” (Furman Test. at 143, Pl.’s

Ex. 5). The documentary evidence is contrary to Furman’s “belie[f]” at the time that the

second QQQ transaction “was finalized prior to December 31, 2003.” (Furman Decl. ¶ 18,

Doc. # 36-3). Dietzler’s February 4, 2004 email states: “[T]he timing of the second QQQ

transaction is in fact in the current quarter, not the quarter ended December 31, 2003.... [T]he

second transaction ... must be reported in the current quarter (ending March 31, 2004)....”

(Pl.’s Ex. 28 at 906). Furman has presented no evidence that the auditors were informed that

“the timing of the second QQQ transaction is in fact in the [quarter ending March 31, 2004],

not the quarter ended December 31, 2003.” (Id.) Instead, the evidence indicates that the

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auditors were told on February 11, 2004—a week after Dietzler’s email—that the second QQQ

transaction occurred “[o]n 12/31/03.” (Furman Ex. 25 at 482; Aubury Dep. at 108-11, Furman

Ex. 13). The undisputed evidence indicates that, in February of 2004, Dietzler was better

informed than either the auditors or Furman concerning the timing of the second QQQ

transaction.

The Court concludes that Furman has failed to show that the Court committed clear

error or made manifestly unjust decisions regarding the reliance on professionals defense or

the materiality of Dietzler’s February 4, 2004 email.

In the Motion for Reconsideration, “Furman requests that the Court clarify its Order to

make clear that the reliance of professionals defense is available to Furman with respect to all

of the Commission’s claims pertaining to Furman’s conduct prior to his receipt of Dietzler’s

email (e.g., prior to February 4, 2004).” (Doc. # 50-1 at 2). The Court declines to rule on this

request at this time. Either party may raise this issue in a motion in limine.

B. Scienter

Furman contends that “[t]he Court’s scienter rulings with respect to Section 10(b) and

Rule 10b-5, on the one hand, and Section 13(b)(5), on the other hand, are contradictory. Given

the Court’s scienter conclusions with respect to Section 10(b) and Rule 10b-5, the Court should

have denied the Commission’s Motion for Summary Judgment with respect to Section

13(b)(5).” (Doc. # 50-1 at 5 n.3). 

Section 13(b)(5) of the Exchange Act provides that “[n]o person shall knowingly

circumvent or knowingly fail to implement a system of internal accounting controls or

knowingly falsify any book, record, or account.” 15 U.S.C. § 78m(b)(5). 

There is significant authority that Section 13(b)(5) does not impose a scienter

requirement. See Ponce v. SEC, 345 F.3d 722, 737 n.10 (9th Cir. 2003) (“A plain reading of

section 13(b) reveals that it ... does not impose a scienter requirement.”); McConville v. SEC,

465 F.3d 780, 789-90 (7th Cir. 2006) (finding no scienter requirement under Section 13 or

regulations thereunder); SEC v. McNulty, 137 F.3d 732, 740 (2d Cir. 1998) (explaining that

the legislative history of Section 13(b) “plainly impl[ies]” that the word “knowing” does not

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impose a scienter requirement in civil actions); SEC v. Leslie, No. C07-3444, 2008 WL

4183939, at *1 (N.D. Cal., Sept. 9, 2008) (collecting cases); but see SEC v. Hilsenrath, No.

C03-3252, 2008 WL 2225709, at *5 (N.D. Cal., May 30, 2008) (“In contrast to Section

13(b)(5), [Rule 13b2-1] does not require a showing of scienter.”).

But even if scienter is required to prove a violation of Section 13(b)(5), the 13(b)(5)

scienter requirement would involve a different showing than the scienter requirement to prove

violations of Section 10(b) and Rule 10b-5. Compare 15 U.S.C. § 78m(b)(5) (Section

13(b)(5)), with 15 U.S.C. § 78j(b) (Section 10(b)), and 17 C.F.R. § 240.10b-5 (Rule 10b-5).

As the Court stated in the November 18, 2009 Order:

A reasonable jury could find that, despite Furman’s misrepresentation to the

auditors regarding Dietzler’s email, Furman did not make misrepresentations

with scienter in Island Pacific’s annual and quarterly reports (Forms 10-K and

10-Q), press releases and conference calls.... The ‘in connection with the

purchase or sale of any security’ requirement for Section 10(b) and Rule 10b-5

liability can [be] satisfied by ‘fraud ... involv[ing] public dissemination in a

document such as a press release, annual report, investment prospectus or other

such document on which an investor would presumably rely....’ The SEC has

not shown that the ‘in connection with’ requirement would be satisfied when the

misrepresentation is made in a non-public letter to auditors.

(Doc. # 47 at 40 (citations omitted)).

As set forth in the November 18, 2009 Order, the SEC has produced uncontroverted

evidence that Furman “knowingly circumvent[ed] ... a system of internal accounting controls”

by knowingly submitting a false and/or misleading management representation letter to Island

Pacific’s auditors. 15 U.S.C. § 78m(b)(5); see Doc. # 47 at 42-43. The undisputed evidence

shows that Furman “underst[oo]d” Dietzler to have alleged “potential fraud” on February 4,

2004. (Furman Dep. at 78, Pl’s Ex. 3). On February 12, 2004, Furman signed a management

representation letter to Island Pacific’s auditors, stating that he had “no knowledge of any

allegations of fraud or suspected fraud affecting the Company received in communications

from employees, [or] former employees.” (Pl.’s Ex. 32 at 923-24; Pl.’s Ex. 36 at 951). The

undisputed evidence shows that Furman signed the management representation letter with a

knowing or at least reckless “intent to deceive” the auditors. Ernst & Ernst v. Hochfelder, 425

U.S. 185, 193 n.12 (1976); see also Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69

(9th Cir. 1990) (defining “reckless” in the Section 10(b) context).

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IV. Conclusion

IT IS HEREBY ORDERED that the Motion for Reconsideration is DENIED. (Doc.

# 50).

IT IS FURTHER ORDERED that all remaining dates set the November 18, 2009 Order

(Doc. # 47 at 45-46) are reset as follows.

Counsel shall serve and file their memoranda of contentions of fact and law in

compliance with Local Rule 16.1(f)(2) on or before June 11, 2010. On or before June 11,

2010, all parties or their counsel shall also fully comply with the pretrial disclosure

requirements of Rule 26(a)(3) of the Federal Rules of Civil Procedure.

Counsel shall confer and take the action required by Local Rule 16.1(f)(4) on or before

June 18, 2010. The parties shall meet and confer and prepare a proposed pretrial order. At

this meeting, counsel shall discuss and attempt to enter into stipulations and agreements

resulting in simplification of the triable issues. Counsel shall cooperate in the preparation of

the proposed final pretrial conference order.

The proposed final pretrial conference order, including written objections, if any, to any

party’s Federal Rule of Civil Procedure 26(a)(3) pretrial disclosures, shall be prepared, served,

and filed on or before July 2, 2010 and shall be in the form prescribed in and in compliance

with Local Rule 16.1(f)(6). Any objections shall comply with the requirements of Federal

Rule of Civil Procedure 26(a)(3). The failure to file written objections to a party’s pretrial

disclosures may result in the waiver of such objections, with the exception of those made

pursuant to Rules 402 and 403 of the Federal Rules of Evidence.

The Final Pretrial Conference shall be held on July 9, 2010, at 10:00 a.m. in

Courtroom 4.

DATED: April 9, 2010

WILLIAM Q. HAYES

United States District Judge

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