Court Opinion

ID: 770687
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:37:45+00
Date Added: 2024-06-11T17:55:52.463033
License: Public Domain

228 F.3d 1057 (9th Cir. 2000)
JOAN C. HOWARD, Plaintiff-Appellant,v.EVEREX SYSTEMS, INC., Defendant, STEVEN L.W. HUI; MICHAEL C.Y. WONG; WONG'S INTERNATIONAL (HOLDINGS) LIMITED; GATCOMBE CORP. N.V., Defendants-Appellees.
No. 98-17324
United States Court of Appeals for the Ninth Circuit
Argued and Submitted February 17, 2000Filed September 29, 2000

[Copyrighted Material Omitted]
Charles R. Peifer,(argued), Browning & Peifer, P.A., Albuquerque, New Mexico, and James Browning, Patrick K. Slyne and Jules Brody (on brief). Stull, Stull & Brody, New York, New York, Joseph H. Weiss and David C. Katz (on brief), Kevin Yourman, Jordan Lurie, Weiss & Yourman, New York, New York, Michael Braun, Stull, Stull & Brody, Los Angeles, California, for the plaintiff-appellant.
Robert P. Varian, San Francisco, California, for defendant-appellee Steven L.W. Hui. Stephen R. Farrand, San Francisco, California, for defendants-appellees Wong's International (Holdings) Limited, and Gatcombe Corp., N.V.
Christopher Paik, Securities and Exchange Commission, Washington, D.C., for amicus curiae Securities and Exchange Commission.
Appeal from the United States District Court for the Northern District of California; Charles A. Legge, District Judge, Presiding. D.C. No. CV 92-3742 CAL
Before: Joseph T. Sneed, Mary M. Schroeder, and A. Wallace Tashima, Circuit Judges.
TASHIMA, Circuit Judge:

1
Joan C. Howard ("Howard") appeals from the district  court's decisions granting dismissal, summary judgment, and  judgment as a matter of law ("JMOL") in favor of defendants  Stephen L.W. Hui ("Hui"), Michael C.Y. Wong ("Wong"),  Wong's International (Holdings) Ltd. ("Wong's International"), and Gatcombe Corp. ("Gatcombe") in her action pursuant to '  10(b) and 20(a) of the Securities Exchange Act of  1934 ("Exchange Act"), 15 U.S.C. '  78j(b) and 78t(a). Howard, a purchaser of stock in the computer manufacturer, Everex Systems, Inc. ("Everex"), claims that defendants artificially inflated the price of Everex stock by falsely representing that the company had achieved profitability and  consecutive profit increases during the first three quarters of  fiscal year 1992. The district court had jurisdiction pursuant  to 15 U.S.C.  78aa and 28 U.S.C. '  1331 and 1337(a). We  have jurisdiction under 28 U.S.C.  1291. We affirm in part,  reverse in part, and remand.

I. Factual and Procedural Background

2
Everex was founded in 1983 and designed, manufactured, and sold computers and computer peripheral products. Hui served as the Everex's CEO and Chairman of the Board during the entirety of the "Class Period."1 Wong served as a  director for part of the class period. Wong indirectly owned a large amount of stock in Everex through his holdings in Wong's International.

3
In September 1992, Howard brought a class action2 pursuant to '  10(b) and 20(a) of the Exchange Act,3 claiming that Everex, Hui, and Wong made material misrepresentations to  the public during the first three quarters of fiscal year 1992  (July 1991-March 1992) regarding Everex's profitability.  Howard alleges that the misrepresentations were made to  secure bank financing, conceal alleged violations of a loan  covenant, and artificially inflate the price of Everex stock.

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

5
After discovery was completed, the district court granted  summary judgment in favor of Wong on the  20(a) claim. In  particular, the district court found that Wong did not participate in the preparation of the allegedly false financial statements and was not a control person within the ambit of   20(a).

6
During trial, the district court granted JMOL in favor of  Hui on the  10(b) claim on the ground that Hui did not make  a statement within the meaning of  10(b) and did not act with  the requisite level of scienter. Additionally, the district court granted JMOL to Hui on the  20(a) claim on the basis that  Hui was not a control person of Everex, essentially because  Hui did not supervise or participate in the preparation of the  financial statements at issue and did not think any of the numbers in the statements were incorrect.

7
On November 9, 1998, the district court entered a final judgment that dismissed all claims with prejudice. Howard timely appealed.

II. Standards of Review

8
Dismissal of claims on the pleadings are reviewed de novo, see Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295 (9th Cir. 1998), treating the complaint's allegations as true and drawing all reasonable inferences in the plaintiff's favor, see Fajardo v. County of Los Angeles, 179 F.3d 698, 699 (9th Cir.  1999).

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

10
District court rulings made in support of a JMOL are  reviewed de novo. See Saman v. Robbins, 173 F.3d 1150,  1155 (9th Cir. 1999). In reviewing a JMOL, we must view the  evidence in the light most favorable to the non-moving party  and draw every reasonable inference therefrom in the nonmoving party's favor. See Amarel v. Connell, 102 F.3d 1494,  1521 (9th Cir. 1996). "If conflicting inferences may be drawn  from the facts, the case must go to the jury." Pierce v. Multnomah County, 76 F.3d 1032, 1037 (9th Cir. 1996) (internal  quotation marks and citations omitted).

11
Evidentiary rulings are reviewed for an abuse of discretion.  See Gilbrook v. City of Westminster, 177 F.3d 839, 858 (9th  Cir. 1999). Finally, we review determinations of personal  jurisdiction de novo. See Panavision Int'l L.P. v. Toeppen,  141 F.3d 1316, 1319-20 (9th Cir. 1998).

III. Discussion

12
A. The district court erred by granting JMOL on the   10(b) claim against Hui on the ground that he did  not "make" a statement within the meaning of   10(b) and Rule 10b-5.

13
As the Securities and Exchange Commission ("SEC")  notes in its amicus curiae brief, the issue presented is whether  a corporate official (here, the CEO) who, acting with scienter,  signs a SEC filing containing misrepresentations, "make[s]"  a statement so as to be liable as a primary violator under   10(b). See Central Bank of Denver, N.A. v. First Interstate  Bank of Denver, N.A. , 511 U.S. 164, 177-78, 191-95 (1994)  (holding that only the SEC can bring aiding and abetting  actions under  10(b)). Although not totally clear on the issue, the district court appeared to hold that because Hui did not participate in the drafting of the allegedly false financial statements, he did not make a statement within the meaning of   10(b). We conclude that the district court erred in making this determination.5

14
First, when a corporate officer signs a document on  behalf of the corporation, that signature will be rendered  meaningless unless the officer believes that the statements in  the document are true. In AUSA Life Ins. Co. v. Dwyer (In re  JWP Inc., Sec. Litig.), 928 F. Supp. 1239 (S.D.N.Y. 1996), for  example, the court held that a director who has the requisite  level of scienter and signs a fraudulent Form 10-K can be liable as a primary violator of  10(b) for making a false statement. See id. at 1255-56; cf. F.N. Wolf & Co., Inc. v. Estate  of Neal , No. 89 Civ. 1223 (CSH), 1991 WL 34186, at *8  (S.D.N.Y. 1991) (holding that a "director signing a document  filed with the SEC . . . `makes or causes to be made' the statements contained therein" under  18(a) of the Exchange Act).

15
Second, we have held in analogous contexts that signers  of documents should be held responsible for the statements in  the document. See United States v. Gomez-Gutierrez, 140  F.3d 1287, 1288-89 (9th Cir.) (noting that "the affixing of a  signature is not a mere formality, but rather signifies that the  signer has read the document and attests to its accuracy"),  cert. denied , 199 S. Ct. 206 (1998).

16
Third, by placing responsibility in corporate officers to  ensure the validity of corporate filings, investors are further  protected from misleading information. See Central Bank,  511 U.S. at 171 ("Together, the Acts embrace a fundamental  purpose . . . to substitute a philosophy of full disclosure for  the philosophy of caveat emptor."). Granted, Central Bank  held that private causes of action could not be brought against  aiders and abettors, as opposed to primary violators. See id.  at 191. There is a significant difference, however, between  mere participation in a scheme to misrepresent and those  directly attesting to the truth of a statement by making (in the  ordinary sense) that very statement. By standing behind a  statement, the public assumes that they can trust the word of  the maker of that statement. See Great Sweet Grass Oils, Ltd.,  37 S.E.C. 683, 684 n.1 (1957) (finding that the requirement  that issuers file reports with the SEC "necessarily embodies  the requirement that such reports be true and correct"), aff'd,  256 F.2d 893 (D.C. Cir. 1958); see also SEC v. IMC Int'l,  Inc. , 384 F. Supp. 889, 893 (N.D. Tex.) ("The reporting provisions of the Exchange Act are clear and unequivocal, and they  are satisfied only by the filing of complete, accurate, and  timely reports."), aff'd, 505 F.2d 733 (5th Cir. 1974).

17
Key corporate officers should not be allowed to make  important false financial statements knowingly or recklessly,  yet still shield themselves from liability to investors simply by  failing to be involved in the preparation of those statements.  Otherwise, the securities laws would be significantly weakened, because corporate officers could stay out of the loop such that, under Central Bank, only the SEC could bring suit  against them in an individual capacity for their misrepresentations. See Bateman, Eichler, Hill Richards, Inc. v. Berner, 472  U.S. 299, 310 (1985) (quoting J.I. Case Co. v. Borak, 377  U.S. 426, 432 (1964)) (noting that private investors "provide `a most effective weapon in the enforcement' of the securities  laws and are `a necessary supplement to Commission  action' ").

18
Defendants' counter-arguments basically rely on the assertion that Hui lacked scienter, rather than directly disputing  plaintiff's and the SEC's contentions. First, in all of the cases  relied upon by defendants for the claim that a mere signature  is not sufficient for  10(b) liability, there was either no showing of scienter or the defendant was an outside director. See  Atlantis Group, Inc. v. Rospatch Corp. (In re Rospatch Sec.  Litig. ), 760 F. Supp. 1239, 1255, 1264 (W.D. Mich. 1991)  (finding that the plaintiff "simply has not adequately pleaded  that any or all of the Outside Directors knew or recklessly  failed to know of any ongoing fraud at Rospatch"); In re Ross  Sys. Sec. Litig., No. C-94-0017-DLJ, 1994 WL 583114, at *6  (N.D. Cal. 1994) (noting that the group pleading theory is not  applicable to outside directors who signed public documents);  In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217, 1241 (N.D.  Cal. 1994) (same); cf. In re Browning-Ferris Indus. Inc. Sec.  Litig. , 876 F. Supp. 870, 911 (S.D. Tex. 1995) (noting that  defendants' signing of document was not sufficient for liability but failing to comment on whether, by so signing, a statement had been made).

19
Second, defendants' assertion that In re JWP does not discuss the role that a signature alone should play under  10(b)  is far too narrow a reading. In assessing whether the audit  committee members could be liable as primary violators, the  In re JWP court noted:

20
The alleged misrepresentations that the audit committee defendants actually made include statements  made in JWP's annual Forms 10-K, which were  signed by the audit committee defendants. They also  include statements that were directly authorized by  the Board of Directors--for example, statements  found in the note agreements and in JWP's proxy  statements. They do not include press releases issued  by JWP's management or other statements that were  not expressly authorized by the Board of Directors.  Therefore, the audit committee defendants are entitled to summary judgment dismissing the plaintiffs'   10(b) claims to the extent that those claims are  based on alleged misrepresentations that the audit  committee defendants did not make.

21
928 F. Supp. at 1256 (citations omitted). Thus, the In re  JWP court stressed the signing and authorization of statements as critical in determining whether directors could be  liable as primary violators under  10(b).

22
Third, defendants additionally misread Wolf for the proposition that a signature might be sufficient for the making of a  statement under  18(a) but not under  10(b).6 Wolf presented  the question of whether an outside director could be liable for  signing false statements under  18(a). See Wolf , 1991 WL  34186, at *8. The Wolf court reasoned that although an outside director might not be liable under  10(b), he might be  liable under  18(a). See id. The court made this distinction on  the ground that  10(b) includes a scienter element but  18(a)  does not. See id. Here, Hui was an inside director; thus,  Wolf 's distinction between  10(b) and  18(a) fades away.  Further,  18(a) is not a sufficient replacement for suits under   10(b) because courts have required a purchaser's actual reliance on the fraudulent statement under  18(a), as opposed to  the constructive reliance, or fraud-on-the-market, theory  available under  10(b). See Rudnick v. Franchard Corp., 237  F. Supp. 871, 872 (S.D.N.Y. 1965); see generally Harold S.  Bloomenthal, Securities and Federal Corporate Law  7.51  (1999) (listing cases).

23
Because Hui admittedly signed the statements alleged  to be false, the district court erred in making the blanket holding that Hui could not be a primary violator, regardless of his scienter.

24
B. The evidence is sufficient to support a verdict that  Hui acted with scienter under  10(b) regarding the  financial statements.

25
Knowledge or recklessness is required for a finding of  scienter under  10(b). See Nelson v. Serwold, 576 F.2d 1332,  1337 (9th Cir. 1978).

26
Reckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or  even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which  presents a danger of misleading buyers or sellers that  is either known to the defendant or is so obvious that  the actor must have been aware of it.

27
Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th  Cir. 1990) (en banc) (internal quotation marks and citations  omitted). In granting JMOL in Hui's favor, the district court found that:

28
[T]here [was] no evidence that Mr. Hui had anything  to do with the preparation of [the] financial statements or the creation of the actual numbers . . . .  [Others] prepared the statements and presented them to him . . . . [H]e signed the statements that were  presented to him and did so without making any corrections.

29
Viewing the evidence in the light most favorable to  plaintiff, we conclude that the district court erred in finding  that the evidence was not sufficient for a finding of scienter.  Plaintiff first contends that "by demonstrating a defendant's  motive and opportunity to engage in securities fraud," scienter  can be shown.7 Cf. Greenwald v. Wells Fargo & Co. (In re  Wells Fargo Sec. Litig.), 12 F.3d 922, 931 (9th Cir. 1993)  (holding that, at least at the pleading stage, "allegations of  motive and opportunity in the complaint are sufficient to  establish a basis for inferring . . . fraudulent intent"). In interpreting the heightened pleading standards under the Private  Securities Litigation Reform Act of 1995 ("PSLRA"), we  determined in Janas v. McCracken (In re Silicon Graphics  Inc. Sec. Litig. ), 183 F.3d 970, 978-79 (9th Cir.), reh'g and  reh'g en banc denied , 195 F.2d 521 (9th Cir. 1999), that a  mere showing of motive and opportunity would not suffice to  survive a motion to dismiss. In re Silicon Graphics erected a  more stringent pleading standard than previous Ninth Circuit  case law required. Compare id. at 974, 977-79, with In re  Wells Fargo Sec. Litig., 12 F.3d at 931. Because the PSLRA  did not alter the substantive requirements for scienter under   10(b), however, the standard on summary judgment or  JMOL remains unaltered by In Re Silicon Graphics . See In re  Silicon Graphics, 183 F.3d at 975-76.

30
We conclude that the demonstration of Hui's possible  motive, combined with the red flags of Everex's financial  condition, are sufficient to withstand a motion for JMOL. Cf.  id. at 977-79 (noting that while motive and opportunity alone  are insufficient to show scienter at the pleading stage, they  may still be considered as circumstantial evidence of such).  First, Hui potentially had a motive to inflate sales to raise  financing. Specifically, Everex had a motivation to overstate  its net value so as not to violate loan covenants with its principal lender CIT, as well as to improve the prospects of an  increased credit line with CIT to fund its FY1992 business  plan. CIT required Everex to maintain a net worth of $90 million and, at the end of the fourth quarter of FY1991, Everex  had a net worth i.e., shareholder equity, of $92.1 million.  Given that Everex projected possible first quarter FY1992  losses of $2.1 million, resulting in a net worth of exactly $90  million, Hui had the incentive to overstate Everex's value.8

31
Second, there is evidence indicating that Hui signed  the financial statements in the face of potentially alarming  information concerning Everex's financial condition. We  have held that an actor is reckless if he "had reasonable  grounds to believe material facts existed that were misstated  or omitted, but nonetheless failed to obtain and disclose such  facts although [he] could have done so without extraordinary  effort." Burgess v. Premier Corp., 727 F.2d 826, 832 (9th Cir.  1984) (internal quotation marks and citations omitted).

32
Even though the Everex "Strategic Plan" for FY1992 stated  that "Everex's management [was] optimistic about the  future," it also noted that Everex was "facing a crisis." Furthermore, the "Strategic Plan" listed various weaknesses of  the company, including "lack of vertical accountability  amongst staff" and "no internal audits." The lack of accountability is highlighted by Everex's outside auditor's report on  Everex's internal financial controls. Even though the auditor  did not conclude that Everex's financial statements were generated on the basis of faulty accounting practices, it found  irregularities in customer credits, that sales projections were  overly optimistic, and that there was no appropriate system  for dealing with obsolete inventory and reserves.

33
We find the evidence sufficient for a jury to conclude  that Hui "had reasonable grounds to believe material facts  existed that were misstated or omitted . . . ." Id. In particular,  the potential alarm signals in the face of Everex's possible  financial crisis could cast doubt on Everex's optimistic outlook and support a finding of scienter. Cf. In re Silicon  Graphics , 183 F.3d at 985 (holding that, at the pleading stage,  allegations must show that "officers had actual or constructive  knowledge of . . . problems that would cause their optimistic  representations to the contrary to be consciously misleading").  Finally, Hui cannot simply argue that he looked the other  way. See In re Software Toolworks, 50 F.3d at 624-25 (indicating that where reports raised legitimate red flag, defendants  were required to take further steps to ensure the accuracy of  the disputed data to negate intent). For the foregoing reasons,  the district court erred in granting JMOL to Hui on the  10(b)  claim.

34
C. The district court erred by granting JMOL on the   20(a) claim against Hui.

35
In order to prove a prima facie case under  20(a),  plaintiff must prove: (1) a primary violation of federal securities laws (not at issue here); and (2) that the defendant exercised actual power or control over the primary violator (here,  Everex). See Hollinger, 914 F.2d at 1575.9 "Whether [the  defendant] is a controlling person is an intensely factual question, involving scrutiny of the defendant's participation in the  day-to-day affairs of the corporation and the defendant's  power to control corporate actions." Kaplan v. Rose, 49 F.3d  1363, 1382 (9th Cir. 1994) (internal quotation marks and citations omitted).

36
Plaintiff need not show that the defendant was a culpable participant in the violation, but defendant may assert a  "good faith" defense. Hollinger, 914 F.2d at 1575; see Paracor Fin., Inc. v. General Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996). Thus, "[t]o establish the liability of a  controlling person, the plaintiff does not have the burden of  establishing that person's scienter distinct from the controlled  corporation's scienter." Arthur Children's Trust v. Keim, 994  F.2d 1390, 1398 (9th Cir. 1993). "But a defendant who is a controlling person of an issuer with scienter" may assert a  good faith defense by "proving the absence of scienter" and  a failure to directly or indirectly induce the violations at issue.  Id.

37
The parties dispute whether "actual power or influence" needs to be exercised to render a defendant a control  person. Prior to Hollinger, it was clear that a plaintiff needed  to show actual participation to make out a prima facie  20(a)  case in this circuit. See Buhler v. Audio Leasing Corp., 807  F.2d 833, 835-36 (9th Cir. 1987). Hollinger, although not  entirely abandoning the participation element, shifted the burden to the defendant to show that "she acted in good faith and  did not directly or indirectly induce the violations." 914 F.2d  at 1575. Thus, in order to make out a prima facie case, it is  not necessary to show actual participation or the exercise of  actual power; however, a defendant is entitled to a good faith  defense if he can show no scienter and an effective lack of  participation.

38
First, viewed in the light most favorable to plaintiff,  the evidence shows that Hui had authority over the process of  preparing and releasing the financial statements. The facts of  the instant case fall between several cases discussing the  authority prong of control person liability. In Wool v. Tandem  Computers, Inc. , 818 F.2d 1433, 1441 (9th Cir. 1987), we  found that a group of directors had "the power to control or  influence" their corporation.10 We noted that although the  directors' status as such was insufficient for a finding of control, their day-to-day oversight of company operations and  involvement in the financial statements at issue were sufficient to presume control over the "transactions giving rise to  the alleged securities violation." Id. Hui was in a similar position through his participation in the day-to-day management of Everex and his review and signature of the financial statements.

39
In Paracor Finance, we held that a CEO of a company was  not a control person with respect to the projections made in  a private placement memorandum. See Paracor Fin., 96 F.3d  at 1161-64. In that case, the CEO had worked on the projections, but only before he knew they would be used in the private placement memorandum. See id. Additionally, the CEO  was not authorized by his company to work on the private  offering and did not even read the memorandum. See id.  Although Hui did not work on the projections and did not  make much of a review of the financial statements, unlike the  Paracor CEO, Hui was authorized to participate in the release  of the financial statements and signed off on the statements as  correct. Indeed, in Paracor Finance, we found that the company's president was not entitled to summary judgment where he signed a purportedly false statement. See id.

40
Burgess is also distinguishable. There, a director of a corporation was held not to be a control person, in part because he did not prepare the prospecti at issue. See Burgess, 727 F.2d at 832. In Burgess, however, the director was not involved in the corporation's day-to-day business. See id.  More importantly, Burgess was decided before Hollinger; thus, in order to be a control person under Burgess, participation -in addition to actual authority -was required to be shown. See id. Here, we find that Hui's actual authority over the preparation and presentation to the public of the financial  statements is sufficient to make out a prima facie case.

41
Furthermore, Hui is not entitled to a good faith defense, because he cannot show that he "acted in good faith and did not directly or indirectly induce the violations." Hollinger, 914 F.2d at 1575 (citing 15 U.S.C.  78t(a)); Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1434 (9th Cir.  1995) (noting that the good faith "defense is unavailable even  when the defendants who induced the fraud believed in good  faith that they were not perpetrating a fraud").11 Without commenting on whether Hui induced the alleged violations,  because Hui cannot show an undisputed lack of scienter, we  conclude that Hui cannot show that he acted in good faith. See Arthur Children's Trust, 994 F.2d at 1398 (noting that defendant has burden of proving absence of scienter).

42
Thus, we conclude that plaintiff has made out a prima facie case of a  20(a) violation and that the district court erred in granting JMOL in favor of Hui on this claim.

43
D. The district court did not abuse its discretion in  granting Hui's motion in limine regarding his sales  of Everex stock.

44
Plaintiff argues, without citing any authority, that Hui's sales were suspicious in time and amount and should have  been admitted. Defendant Hui correctly notes, however, that  under our case law, the sales could not support a finding of  scienter as a matter of law because they were made pursuant  to a divestiture program whereby Hui sold the same amount  of stock every quarter starting well before the class period.12  See Schneider v. Vennard (In re Apple Computer Sec. Litig.),  886 F.2d 1109, 1117 (9th Cir. 1989) (holding that when sales  are "consistent in timing and amount with a past pattern of  sales" there can be no inference of scienter); In re Silicon  Graphics , 183 F.3d at 986 ("Although unusual or suspicious  stock sales by corporate insiders may constitute circumstantial  evidence of scienter, insider trading is suspicious only when  it is dramatically out of line with prior trading practices at  times calculated to maximize the personal benefit from undisclosed inside information.") (internal quotation marks and  citations omitted). Thus, the district court did not abuse its  discretion in precluding introduction of this evidence.

45
E. The district court did not abuse its discretion in  prohibiting Howard from impeaching Hui's brother  with his deposition testimony.

46
The district court excluded evidence from a deposition of  John Hui, defendant's brother, because of plaintiff's failure to  give proper notice of the deposition. After defendants' counsel informed plaintiff's counsel that she would have to postpone the deposition to appear at a hearing on January 24,  1996, plaintiff's counsel continued to insist on going forward  with the deposition, despite defendants' counsel's clear indication of her understanding that the deposition had been continued.

47
Although there is some dispute over whether or not plaintiff's counsel thought the deposition had been continued, the  record amply supports that the district court did not abuse its  discretion in excluding the evidence pursuant to the"reasonable notice" requirement of Fed. R. Civ. P. 30(b)(1). See  Okubo v. Reynolds (In re Letters Rogatory from the Tokyo  Dist. Prosecutor's Office), 16 F.3d 1016, 1019-20 (9th Cir.  1994)(examining the reasonable notice requirement of Rule  30(b)(1)).

48
F. The district court did not err in granting summary  judgment on Howard's  20(a) claim against Wong  on the ground that Wong was not a control person of  Everex.

49
Wong served as a director for less than three months during  the class period. Plaintiff simply points to Wong's general  level of control but provides no specific indication that Wong  supervised or had any responsibility for the preparation of the  financial statements.13 Thus, plaintiff has not shown that  Wong had the requisite actual authority over the preparation  of the financial statements necessary to find him a control person. See Hollinger , 914 F.2d at 1575 (noting this requirement). The district court did not err in granting summary  judgment in favor of Wong.

50
G. The district court did not err in not granting leave to  amend the complaint.

51
Plaintiff contends that the district court improperly dismissed her  10(b) claims pertaining to Hui's statements  regarding the development of new computer systems. As  defendants correctly note, however, there is no indication that  (1) plaintiff ever made such claims; (2) the district court dismissed any such claims;14 or (3) plaintiff requested leave to  add such claims. Thus, there was no error because no such  claims were ever asserted and there is no indication that plaintiff requested to leave to amend her complaint to assert them.  See Westlands Water Dist. v. Firebaugh Canal, 10 F.3d 667,  677 (9th Cir. 1993) (holding that district court did not abuse  its discretion in not granting leave to amend where party  failed to indicate its desire to amend the complaint to allege  new theories prior to the district court's final decision).

52
H. The district court did not err in permitting new  affirmative defenses to be asserted after the discovery  "cut-off" date.

53
Initially, it should be noted that although the affirmative  defenses were asserted after the discovery "cut-off" date, by  stipulation of the parties, discovery was still underway at the  time the defenses were asserted. The district court noted that  the late-pleaded defenses were partly its fault, because after  dismissing claims from the first amended complaint in  response to defendants' motion to dismiss the amended complaint, it did not set a deadline for plaintiff to amend its complaint again.15 Because plaintiff decided not to amend her  complaint and gave no notice of such, defendant was simply  waiting to respond to the amended claims. After defendant  finally responded, the district court struck several of the affirmative defenses as prejudicial. Plaintiff has not made any specific arguments as to why the remaining affirmative defenses  were prejudicial. When there is no prejudice from the delay  in asserting affirmative defenses, we have held that it is  proper for the district court to allow them. See Ledo Fin.  Corp. v. Summers , 122 F.3d 825, 827 (9th Cir. 1997) (finding  that defendant was properly permitted to raise defense for first  time in summary judgment motion where plaintiff was not  prejudiced). Thus, the district court did not err in striking only  the prejudicial newly-raised defenses.

54
I. The district court erred in dismissing Howard's claims  against Wong's International and Gatcombe for lack  of personal jurisdiction.

55
Plaintiff sued Wong's International and Gatcombe under  '  10(b) and 20(a) on the basis that they sold Everex stock  after Hui allegedly tipped Wong, who was a director of  Wong's International and Gatcombe.16 The district court dismissed the claims against these defendants for lack of personal jurisdiction.

56
Plaintiff correctly argues, however, that the trading of stock  on a United States exchange by an actor who knowingly has  inside information is "fair warning" to be subjected to United  States jurisdiction. In SEC v. Euro Sec. Fund, COIM, SA, No.  98 CIV. 7347(DLC), 1999 WL 76801 (S.D.N.Y. 1999), for  example, the plaintiff alleged that corporate officers of a foreign corporation traded on the basis of material, nonpublic  information. See id. at *2. On this basis, the court found that  "there is little question that it is proper for this Court to exercise personal jurisdiction over them for claims arising out of  those trades." Id.

57
We agree. A defendant who is alleged to have knowingly traded on an American exchange on the basis of inside  information has purposefully availed himself of the instrumentalities of United States commerce and can reasonably  expect to be haled into an American court. See Burger King  Corp. v. Rudzewicz , 471 U.S. 462, 474 (1985) (adopting purposeful availment requirement); World-Wide Volkswagen  Corp. v. Woodson , 444 U.S. 286, 297 (1980) (noting that  jurisdiction is appropriate when defendant reasonably expects  being haled into court).

58
Defendants' reliance on AT&T Co. v. Compagnie Bruxelles Lambert , 94 F.3d 586 (9th Cir. 1996), is misplaced.  There, we held only that mere ownership of shares of a  domestic corporation is insufficient to establish personal jurisdiction. See id. at 589-91. Second, defendants' argument that  all shareholders in a public company would be subjected to  jurisdiction on the theory presented here is simply wrong.  Rather, only stockholders who traded on the basis of material,  non-public information would have the necessary contacts for  personal jurisdiction. Thus, the district court erred in dismissing Wong's International and Gatcombe for lack of personal  jurisdiction.17

IV. Conclusion

59
The district court erred in concluding that Hui did not make  a statement within the scope of  10(b). Additionally, it erred  in concluding that the evidence would not support that Hui  acted with scienter and was a control person. Finally, the district court erred in dismissing Wong's International and Gatcombe for lack of personal jurisdiction. The district court did  not err or abuse its discretion with respect to any of the other  issues presented.18 Each party shall bear her, his, or its own  costs on appeal. We this affirm in part, reverse in part, and  remand for further proceedings consistent with this opinion.

60
AFFIRMED in part, and REVERSED and REMANDED in part.

Notes:

1
 The "Class Period" covers purchases of Everex common stock between  November 21, 1991, and July 28, 1992.

2
 The class of Everex stock purchasers during the class period was eventually certified by the district court.

3
 Section 10(b) states:
It shall be unlawful for any person, directly or indirectly, by  the use of any means or instrumentality of interstate commerce  or of the mails, or of any facility of any national securities  exchange
. . . .
(b) To use or employ, in connection with the purchase or sale  of any security registered on a national securities exchange or any  security not so registered, any manipulative or deceptive device  or contrivance in contravention of such rules and regulations as  the [SEC] may prescribe.
15 U.S.C.  78j.
Section 20(a) states:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter . . . shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
15 U.S.C.  78t(a).

4
 Additionally, plaintiff contends that the district court dismissed  10(b) claims against Hui not related to Everex's financial statements. As discussed below, we find that plaintiff never asserted such claims. See Part  III. G, infra.

5
 Conversely, we have held that substantial participation or intricate  involvement in the preparation of fraudulent statements is grounds for primary liability even though that participation might not lead to the actor's  actual making of the statements. See Dannenberg v. PaineWebber Inc. ( In  re Software Toolworks Inc. Sec. Litig. ), 50 F.3d 615, 628-29 & n.3 (9th  Cir. 1994).

6
 Section 18(a) states:
(a) Any person who shall make or cause to be made any  statement in any application, report, or document filed pursuant  to this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 78o of this title, which statement was at the  time and in the light of the circumstances under which it was  made false or misleading with respect to any material fact, shall  be liable to any person (not knowing that such statement was  false or misleading) who, in reliance upon such statement, shall  have purchased or sold a security at a price which was affected  by such statement, for damages caused by such reliance, unless  the person sued shall prove that he acted in good faith and had  no knowledge that such statement was false or misleading. A person seeking to enforce such liability may sue at law or in equity  in any court of competent jurisdiction. In any such suit the court  may, in its discretion, require an undertaking for the payment of  the costs of such suit, and assess reasonable costs, including reasonable attorneys' fees, against either party litigant.  15 U.S.C.  78r(a).

7
 Plaintiff also asserts that Hui's statements in the press releases are  actionable. Because the press release statements were derived from the  financial statements, the arguments presented here are equally applicable  to the press release statements.

8
 Additionally, Everex executives recognized that the Company's cash  flow and existing lines of credit were potentially inadequate to fund  Everex's fiscal 1992 business plan. In order for Everex to meet its optimistic projections, additional funding needed to be raised. This represents  further motivation for Hui to inflate the figures on the financial statements.

9
 The SEC has defined "control" to mean: "[T]he possession, direct or  indirect, of the power to direct or cause the direction of the management  and policies of a person, whether through ownership of voting securities,  by contract, or otherwise." 17 C.F.R.  230.405.

10
 Although Wool was effectively overruled by Hollinger to the extent  that Wool required a showing of "[c]ulpable [p]articipation" to make out  a prima facie case under  20(a), the "[p]ower to [c]ontrol or [i]nfluence"  prong of Wool still remains intact. Wool, 818 F.2d at 1441-42; see Hollinger , 914 F.2d at 1575.

11
 In Kaplan we stated that absence of scienter precludes a finding of   20(a) liability. See 49 F.3d at 1382-83. If that statement were a holding,  it would contradict the wording of the statute and our subsequent holding  in Nordstrom. That statement in Kaplan, however, can be regarded as  dicta because the CEO-defendant in that case did not direct the making of  the public statements. See id.

12
 Thus, plaintiff's statement that Hui had sold a greater percentage of  his holdings than ever before during the class period is immaterial given  that the only reason for this was that Hui's overall holdings were decreasing due to his continued selling of shares.

13
 Although plaintiff notes that Wong "reviewed and approved" the first  quarter fiscal 1992 financial statements as a member of the Board, such  activity does not rise to a level of supervision or participation sufficient  for a  20(a) violation. Although ownership of stock and a position as a  Board member are relevant to ascertaining control, here, there is no showing that Wong was active in the day-to-day affairs of Everex or that he  exercised any specific control over the preparation and release of the  financial statements. See Paracor Fin. , 96 F.3d at 1163 (finding no control  on the part of CEO where plaintiffs introduced "no evidence that [the  CEO] exercised direct or indirect control over " the transaction at issue "in  any way"); cf. Wool , 818 F.2d at 1441-42 (finding control where directors  were involved in day-to-day activities and had direct involvement with  alleged false statements).

14
 Rather, the district court, after dismissing claims for aiding and abetting and the  10(b) claim against Wong, merely mentioned that among  the remaining claims were those against Hui for statements with respect  to the financial statements.

15
 Plaintiff correctly notes, however, that the district court provided from the bench "thirty days leave to amend against Mr. Wong." Apparently, the  court and defendants overlooked this deadline; thus, given this understanding, the excuse for filing the answer "late" is still tenable.

16
 Gatcombe is the wholly-owned subsidiary of Wong's International.

17
 Although Wong's International did not itself trade in Everex stock  during the class period, its wholly-owned subsidiary, Gatcombe, did.  Although jurisdiction over a subsidiary does not automatically provide  jurisdiction over a parent, see Kremer Motors, Inc. v. British Leyland, Ltd.,  628 F.2d 1175, 1177-78 (9th Cir. 1980), where the parent totally controls  the actions of the subsidiary so that the subsidiary is the mere alter ego of  the parent, jurisdiction is appropriate over the parent as well, see Flynt  Distrib. Co. v. Harvey, 734 F.2d 1389, 1393 (9th Cir. 1984). Because it  appears, at the pleading stage, that Gatcombe is merely a shell that is  entirely controlled by Wong's International, we disregard Gatcombe's  separate identity for personal jurisdiction purposes. See id.

18
 Plaintiff asserts in several footnotes in her brief that the district court erred in excluding alleged evidence of tipping. She has, however, presented no legal argument to support this assertion. We thus conclude that  plaintiff has waived any such contention. See Miller v. Fairchild Indus.,  Inc. , 797 F.2d 727, 738 (9th Cir. 1986) (holding that this court "will not  ordinarily consider matters on appeal that are not specifically and distinctly argued in appellant's opening brief").