Securities And Exchange Commission v. Sells et al

Filing 58

ORDER by Judge Claudia Wilken DENYING DEFENDANTS' 25 MOTION TO DISMISS AND SELLS' 27 MOTION TO STRIKE. (ndr, COURT STAFF) (Filed on 8/10/2012)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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SECURITIES AND EXCHANGE
COMMISSION,

v.

7

CHRISTOPHER SELLS and TIMOTHY
MURAWSKI,

9

United States District Court
For the Northern District of California

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ORDER DENYING
DEFENDANTS' MOTION
TO DISMISS AND
SELLS' MOTION TO
STRIKE

Plaintiff,

6

8

No. C 11-4941 CW

Defendants.
________________________________/

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Plaintiff Securities and Exchange Commission (SEC) alleges

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that Defendants Christopher Sells and Timothy Murawski violated

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the Securities Act of 1933 (Securities Act) and the Securities

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Exchange Act of 1934 (Exchange Act), and the Rules promulgated

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thereunder.1

Defendant Sells files a motion to dismiss all the

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18

claims against him and a separate motion to strike the SEC's

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request for a director and officer bar.

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in Sells' motion to dismiss.

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Defendants file a joint reply.

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2012.

Defendant Murawski joins

The SEC opposes the motions.
The motions were heard on May 3,

Having heard oral argument on the motions and considered

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24
25
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27
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1

In Curry v. Hansen Medical Inc., et al., C 09-5094 CW, a
related case, Hansen Medical, Inc. shareholders bring a putative
class action against several Hansen former officers, including
Sells, for violating various sections of the Securities Exchange
Act. Defendants in that case move to dismiss the complaint. The
Court addresses that motion in a separate order.

1

the papers filed by the parties, the Court denies Defendants'

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motion to dismiss and Sells' motion to strike.

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BACKGROUND

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The following are allegations taken from the SEC's complaint.

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Defendant Christopher Sells is the former Senior Vice

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President (SVP) of Commercial Operations and Defendant Timothy

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Murawski is the former Vice President (VP) of Sales at Hansen
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9

Medical, Inc.

Hansen's primary product is the Sensei Robotic

United States District Court
For the Northern District of California

10

Catheter System (Sensei unit) which it sells to hospitals for use

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in cardiac surgical procedures.

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was approved by the Federal Drug Administration.

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14

In May 2007, sale of this product

In April 2008, Hansen hired Sells to lead the sales
organization.

In addition, Sells was in charge of a wide array of

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key operations, including clinical training, field services,
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installations, and customer service.

Sells was a member of

17
18

Hansen's disclosure committee, which reviewed and provided

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comments on Hansen's press releases and SEC quarterly filings,

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including Hansen's annual forms that included its financial

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statements.

22
23

In about July 2008, Sells hired Murawski as Director of
National Accounts, responsible for sales to large, national

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hospital chains.

In January 2009, Murawski assumed responsibility

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26
27

for all sales in the Midwest and Northeast, and was promoted to
Vice President of Sales.

He reported directly to Sells.

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2

1

From November 2007 through November 2009, Hansen maintained a

2

policy, described to the public, for determining when revenue from

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the sales of Sensei units could properly be recognized, based on

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American Institute of Certified Public Accountants, Statement of

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Position 97-2 (SOP 97-2), Software Revenue Recognition.

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Under

Hansen's announced policy, revenue could be recognized for a sale

7
only after the Sensei unit was installed at the customer's
8
9

location and training of the customer end-user on the unit was

United States District Court
For the Northern District of California

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complete.

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of the criteria that had to be met before Hansen could properly

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record revenue from a completed sale of a Sensei unit.

13
14

Upon joining Hansen, Sells and Murawski were informed

Due to the complexity of the Sensei unit, Hansen personnel
spent one to two days at the purchasing hospital to install it

15
properly.

When installation was complete, the field services

16
group submitted to Hansen's finance department an installation
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18

completion form, signed by the Hansen installer and by a

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representative from the customer, which Hansen's customer service

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manager reviewed to ensure that it was completed properly.

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facilities in California or Ohio, Hansen trained physicians from

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the purchasing hospitals on the proper use of the Sensei unit.

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At its

representative of Hansen's clinical group, which was responsible

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for observational and hands-on clinical training, signed an
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26

A

acknowledgement form at the conclusion of the training, and

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obtained the trained physician's signature on the form.

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clinical group submitted the signed training form to Hansen's
3

The

1

finance department, where it was reviewed by Hansen's customer

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service manager to make sure it was completed properly.

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To document that all steps for recording revenue from a sale

4

had been completed, a Hansen senior accountant placed the

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installation and training forms in a revenue recognition file

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which included all of the documentation for the transaction.

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After completing review of the file, the senior accountant
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9

provided the file to Hansen's controller, who also reviewed the

United States District Court
For the Northern District of California

10

file to confirm that it was proper for Hansen to record revenue

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from the sale.

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recognition files were provided to Hansen's independent audit

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firm.

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with Hansen's decision to record revenue from the sales.

At the end of each quarter, the revenue

This firm reviewed the files to determine whether it agreed
Each of

15
the steps in Hansen's internal control process depended upon the
16
truthful presentation of the evidence documenting all the terms of
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18

a transaction and the completion of installation of the Sensei

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unit and of the training of a physician at Hansen's facilities.

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I. Transaction with Hospital A

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22
23

It was important to Hansen to have a certain number of sales
recognized in each quarter.

In September 2008, Hansen sales staff

was negotiating with Hospital A for the potential sale of a Sensei

24
unit.

Because Hospital A was in the midst of constructing a new

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26

lab where the Sensei unit would be installed, it asked to delay

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installation of the Sensei unit for six to nine months.

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direction of Sells and Murawski, a Hansen sales representative
4

At the

1

proposed to Hospital A that the Sensei system be installed in a

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temporary location at the hospital.

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the sales representative promised that Hansen would absorb and pay

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for the reinstallation of the Sensei unit in the new lab when

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construction was completed.

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In an email to Hospital A,

Sells reprimanded the sales

representative for putting in writing Hansen's commitment to pay

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for reinstallation, because he understood that revenue could not
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be recognized when Hansen had an outstanding obligation to return

United States District Court
For the Northern District of California

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to the hospital to reinstall the equipment.

In a conference call

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to Hospital A, Sells and Murawski agreed that Hansen would install

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the Sensei unit temporarily before September 30, 2008, but would

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then dismantle it and place it in storage at Hospital A.

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would later install the unit permanently when the hospital's lab

Hansen

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was ready, with Hansen paying all the additional costs.

Hospital

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A accepted this offer.

On September 26, 2008, Hansen personnel

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installed the Sensei unit and then took it apart and placed it

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into storage.

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necessary signatures from Hospital A on the installation

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completion form.

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the Sensei unit had been properly and timely installed at Hospital

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The Hansen installation personnel obtained the

The signed installation form, indicating that

A, was provided to Hansen's customer service department, where it

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was reviewed and passed to a senior accountant for review and then
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26

to the controller for review.

Neither Sells nor Murawski informed

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Hansen's finance personnel that the Sensei unit had been

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immediately dismantled and placed into storage and that Hansen was
5

1

obliged to perform another installation at Hospital A in the

2

future.

3

documenting the Sensei unit sale to Hospital A, Hansen recorded

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approximately $700,000 in revenue for the third quarter 2008.

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installation completion form was also reviewed by Hansen's

6

Following the finance department's review of the forms

independent auditor.

The

On or about October 23, 2008, Hansen

7
publicly announced its results for 3Q08, in which it stated that
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9

it had recorded revenue for fourteen Sensei units and had

United States District Court
For the Northern District of California

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generated revenues of $20.9 million, a 21.4% year-over-year

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increase.

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conference call with company investors and market analysts in

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which they repeated this information.

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personnel returned to Hospital A and installed the Sensei system

On October 23, 2008, Hansen management conducted a

In March 2009, Hansen

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in Hospital A's new lab, at Hansen's expense.
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II. Transaction with Hospital B
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In December 2008, Hansen was attempting to raise operating

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capital.

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raise funds and believed that Hansen needed to show strong Sensei

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unit sales to help attract potential investors.

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23

Sells and Murawski were aware that Hansen needed to

On December 19, 2008, less than two weeks before the last day
of Hansen's 2008 fiscal year, Sells chastised Hansen's sales staff

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in an email for weak sales.

Focusing on the number of Sensei

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26
27

units sold, Sells stated that "finishing below 12 systems would
jeopardize Hansen's current funding efforts and require layoffs."

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6

1

Sells signed the email, "Grumpy Santa."

2

said!"

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Murawski responded, "Well

Hospital B had signed a purchase order agreeing to purchase a

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Sensei unit for $660,000, conditioned upon approval of the state

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in which Hospital B was located.

6

On December 24, 2008, one week

before the last day of Hansen's fiscal year, Sells sent an email

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to Hospital B saying that there would be a price increase if the
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transaction did not close in 2008.

On December 27, 2008, Hospital

United States District Court
For the Northern District of California

10

B informed Sells that the state had approved the purchase of the

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Sensei unit.

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no doctors from Hospital B had been trained to use the Sensei unit

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and, thus, Hansen could not record revenue from the sale until

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2009.

However, Sells knew that, as of December 28, 2008,

Sells and Murawski were aware of the practical

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impossibility of completing the full-day physician training at
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Hansen's facility several states away by December 31, 2008, in the
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middle of the holiday season and with no advance notice.

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instructed the Hansen clinical training representative assigned to

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Hospital B to obtain the Hospital B doctor's signature on the

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physician training form, no later than December 31, 2008.

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Murawski indicated to the Hansen training representative that a

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forgery of the physician's signature would be acceptable.

They

The

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Hansen training representative forged the signature of one of
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26

Hospital B's doctors and sent the forged form to the Hansen

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customer service manager who reviewed it for completeness and then

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sent it to the finance department.
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Hansen recorded the sale to

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Hospital B during the fourth quarter of 2008, recognized revenue

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of $660,000 for the sale and included this revenue in its 2008

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year-end financials.

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completed the training of a Hospital B physician on proper usage

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of the Sensei unit.

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In June 2009, Hansen training personnel

III. Transaction with Hospital C

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In December 2008, Hospital C expressed interest in buying a
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9

Sensei unit, but did not have sufficient funds to buy it at that

United States District Court
For the Northern District of California

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time.

To complete the sale in 2008, Sells created a three-way

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transaction involving a leasing company with which Sells had a

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prior business relationship.

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company entered into a leasing agreement with Hospital C.

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lease gave Hospital C the right to return the Sensei unit to the

In December 2008, the leasing
The

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leasing company in six months by paying a minimal fee.

Sells

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verbally agreed that, if Hospital C returned the Sensei unit to
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18

the leasing company, Hansen would help market it and would make

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the leasing company whole.

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into on behalf of Hansen with the leasing company ran counter to

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Hansen's policy for sales and recording of revenues, which did not

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allow for contingencies.

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The separate agreement Sells entered

On December 22, 2008, the leasing

company sent a purchase order to Hansen agreeing to purchase a

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Sensei unit for $650,000.

The purchase order did not mention the

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separate agreement Sells had made with the leasing company in the

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event Hospital C returned the unit.

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purchase order by Hansen's senior accountant and controller,
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Following review of the

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Hansen recorded $650,000 in revenue for 4Q08.

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Sells signed a letter, in connection with the independent

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accounting firm's audit of Hansen's 2008 year-end financial

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statements, that all oral or written side agreements for the year

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had been disclosed to the auditors.

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On March 3, 2009,

IV. Transaction with Hospital D

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In March 2009, Sells sent Hansen sales staff an email stating
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9

the importance of the first quarter 2009 sales results to Hansen's

United States District Court
For the Northern District of California

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prospects for raising capital.

He stated that he expected sales

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staff to complete the sales of at least ten Sensei units by March

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31, 2009.

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was not prepared to accommodate the installation of the Sensei

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unit.

Murawski was negotiating a sale to Hospital D, but it

To get around the installation requirement, Sells and

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Murawski arranged for Hansen personnel to install the Sensei unit
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at Hospital D but immediately to dismantle it and place it in
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storage until a later date when Hansen personnel would return to

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reinstall it at Hansen's expense.

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installation, Hansen personnel obtained the signatures from

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Hospital D personnel on the installation completion form.

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form was provided to Hansen's customer service department, which

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Based on the temporary

This

then passed it to the senior accountant and the controller.

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Hansen recorded the sale and recognized approximately $550,000 in
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27
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revenue during 1Q09.
In April 2009, Hansen filed a prospectus supplement as part
of an offer to sell Hansen common stock to the public.
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The

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prospectus incorporated the sales to Hospitals A through D and

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revenue from those sales.

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than 11.5 million shares of common stock to the public, resulting

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in approximately $35 million in net proceeds.

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6

On April 22, 2009, Hansen sold more

On November 16, 2009, Hansen filed restated financial
statements for fiscal years 2007 and 2008 and for the first two

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quarters of 2009 (the Restatement).

The Restatement disclosed

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9

that revenue from more than twenty sales transactions had been

United States District Court
For the Northern District of California

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improperly reported, including the transactions involving

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Hospitals A, B, C and D.

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The SEC brings the following claims for relief against both

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Sells and Murawski: (1) violations of § 10(b) of the Exchange Act

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and Rule 10b-5(a) for employing devices, schemes or artifices to

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defraud in connection with the purchase or sale of securities and
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of Rule 10b-5(c) for engaging in acts, practices or courses of
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18

business which operated as a fraud or deceit upon other persons in

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connection with the purchase or sale of securities;

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(2) violations of § 17(a)(1) and (3) of the Securities Act by

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engaging in transactions, practices or courses of business which

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operated or would operate as a fraud or deceit upon the purchaser

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of a security; (3) violations of § 13(a) of the Exchange Act and

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Rules 12b-20, 13a-1 and 13a-13 for aiding and abetting Hansen in
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the making of untrue statements of material fact and omitting to

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state material information; (4) violations of § 13(b)(5) of the

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Exchange Act and Rule 13b2-1 for knowingly circumventing a system
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1

of internal accounting controls and knowingly falsifying a book,

2

record or account; (5) violating § 13(b)(2)(A) of the Exchange Act

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by aiding and abetting Hansen's failure to make or to keep books,

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records or accounts which accurately and fairly reflected its

5

transactions and the disposition of its assets; and (6) violations

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of § 13(b)(2)(B) of the Exchange Act by aiding and abetting

7
Hansen's failure to devise and maintain a sufficient system of
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9

internal accounting controls.

In addition, the SEC brings the

United States District Court
For the Northern District of California

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following claims against Sells alone: (1) violations of § 10(b) of

11

the Exchange Act and Rule 10b-5(b) for aiding and abetting Hansen,

12

with scienter, in making untrue statements of material fact or

13

omitting to state a material fact in connection with the purchase

14

or sale of securities; and (2) violations of Rule 13b2-2 under the

15
Exchange Act for making or causing to be made, while an officer of
16
an issuer, a materially false or misleading statement or material
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18

omission to an accountant in connection with an audit, review or

19

examination of the issuer's financial statements required to be

20

made or the preparation of any document or report required to be

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filed with the SEC.

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LEGAL STANDARD
A complaint must contain a “short and plain statement of the

24
claim showing that the pleader is entitled to relief.”

Fed. R.

25
26

Civ. P. 8(a).

On a motion under Rule 12(b)(6) for failure to

27

state a claim, dismissal is appropriate only when the complaint

28

does not give the defendant fair notice of a legally cognizable
11

1

claim and the grounds on which it rests.

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Twombly, 550 U.S. 544, 555 (2007).

3

complaint is sufficient to state a claim, the court will take all

4

material allegations as true and construe them in the light most

5

favorable to the plaintiff.

6

896, 898 (9th Cir. 1986).

Bell Atl. Corp. v.

In considering whether the

NL Indus., Inc. v. Kaplan, 792 F.2d

However, this principle is inapplicable

7
to legal conclusions; “threadbare recitals of the elements of a
8
9

cause of action, supported by mere conclusory statements,” are not

United States District Court
For the Northern District of California

10

taken as true.

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

11

(citing Twombly, 550 U.S. at 555).

12

When granting a motion to dismiss, the court is generally

13

required to grant the plaintiff leave to amend, even if no request

14

to amend the pleading was made, unless amendment would be futile.

15
Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911
16
F.2d 242, 246-47 (9th Cir. 1990).

In determining whether

17
18

amendment would be futile, the court examines whether the

19

complaint could be amended to cure the defect requiring dismissal

20

"without contradicting any of the allegations of [the] original

21

complaint."

22

Cir. 1990).

23

Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th

DISCUSSION

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Defendants move to dismiss the first and third claims for
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26

relief under § 10(b) of the Exchange Act and § 17(A) of the

27

Securities Act on the ground that the Supreme Court's decision in

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Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct.
12

1

2296 (2011), establishes that Defendants did not "make" a

2

statement.

3

that the allegations of fraud do not meet the particularity

4

requirements of Rule 9(b) of the Federal Rules of Civil Procedure.

5

Sells also moves for dismissal of the aiding and abetting claim

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Defendants move to dismiss all claims on the ground

against him on the grounds that it fails to allege a primary

7
violation by Hansen.
8
9

I. First Claim for Relief

United States District Court
For the Northern District of California

10

Section 10(b) of the Securities Exchange Act makes it

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"unlawful for any person . . . to use or employ, in connection

12

with the purchase or sale of any security . . ., any manipulative

13

or deceptive device or contrivance in contravention of such rules

14

and regulations the SEC may prescribe."

SEC v. Zandfor, 535 U.S.

15
813, 819 (2002) (quoting 15 U.S.C. § 78j).

The congressional

16
intent in passing this legislation was to inculcate a policy of
17
18

full disclosure instead of the philosophy of caveat emptor and

19

thus to achieve a high standard of business ethics in the

20

securities industry.

21

flexibly to effectuate its remedial purpose.

22

for a scheme to defraud, a defendant must have engaged in conduct

23

Id.

The statute should be interpreted
Id.

To be liable

that had the principal purpose and effect of creating a false

24
appearance of fact in furtherance of the scheme.

Simpson v. AOL

25
26

Time Warner, Inc., 452 F.3d 1040, 1048 (9th Cir. 2006), vacated on

27

other grounds sub nom. Avis Budget Gp. Inc. v. Cal. State

28

Teachers' Ret. Sys., 552 U.S. 1162 (2008).
13

1

Rule 10b-5(a) and (c) implements the statute.

Id.

Rule 10b-

2

5(a) forbids any person "to employ any device, scheme, or artifice

3

to defraud."

4

person "to engage in any act, practice, or course of business

5

which operates or would operate as a fraud or deceit upon any

6

person."

17 C.F.R. § 240.10b-5(a).

17 C.F.R. § 240.10b-5(c).

Rule 10b-5(c) forbids any

Rule 10b-5(b), which will be

7
discussed more fully below, prohibits a person "to make any untrue
8
9

statement of a material fact or to omit to state a material fact

United States District Court
For the Northern District of California

10

necessary in order to make the statements made, in the light of

11

the circumstances under which they were made, not misleading."

12

Conduct itself can be deceptive, such that liability under

13

Rule 10(b)-5(a) or (c) could be sustained without a specific oral

14

or written statement.

Stoneridge Inv. Partners, LLC v.

15
Scientific-Atlanta, 552 U.S. 148, 158 (2008); SEC v. Lucent
16
Technologies, Inc., 610 F. Supp. 2d 342, 358 (D.N.J. 2009).
17
18

Generally a Rule 10b-5(a) and (c) claim cannot be premised on the

19

alleged misrepresentations or omissions that form the basis of a

20

Rule 10b-5(b) claim.

21

Runner, Inc., 655 F.3d 1039, 1057 (9th Cir. 2011).

22

may only be liable as part of a fraudulent scheme based upon

23

WPP Luxembourg Gamma Three Sari v. Spot
"A defendant

misrepresentations and omission under Rules 10b-5(a) or (c) when

24
the scheme also encompasses conduct beyond those
25
26
27
28

misrepresentations or omissions."

Id.

Defendants argue that, although Janus addressed a claim under
Rule 10b-5(b), it also forecloses liability under Rule 10b-5(a)
14

1

and (c).

2

5(b), "the maker of a statement is the person or entity with

3

ultimate authority over the statement, including its content and

4

whether and how to communicate it."

5

explained that, without control, a person can only suggest what to

6

In Janus, the Court held that, for purposes of Rule 10b-

Id. at 2302.

say, not make a statement in his or her own right.

The Court

Id.

The Court

7
noted that this was exemplified by the relationship between a
8
9

speechwriter and speaker; the speechwriter drafts the speech, but

United States District Court
For the Northern District of California

10

the speaker is responsible for its content and is the person who

11

takes the credit or the blame for what is said.

Id.

12

Defendants argue that the SEC's claim is really based on

13

nothing more than misstatements or omissions of material facts and

14

that, by failing to allege that they made material misstatements

15
or omissions, the SEC is attempting to plead around Janus, casting
16
Defendants' conduct as a "scheme" rather than a misstatement under
17
18

Rule 10b-5(b).

19

343 (S.D.N.Y. 2011), for the proposition that "where the primary

20

purpose and effect of a purported scheme is to make a public

21

misrepresentation or omission, courts have routinely rejected the

22

SEC's attempt to bypass the elements necessary to impose

23

Defendants cite SEC v. Kelly, 817 F. Supp. 2d 340,

'misstatement' liability under subsection (b) by labeling the

24
alleged misconduct a 'scheme' rather than a 'misstatement.'"

The

25
26
27

court reasoned that permitting the SEC to impose liability under
subsections (a) and (c) for a scheme based upon an alleged false

28
15

1

statement, when the defendant did not "make" the statement, would

2

render the rule announced in Janus meaningless.

3

Id. at 344.

In Lucent Technologies, the court rejected a similar argument

4

by the defendant there.

5

noted that, if the sole basis for a claim of scheme liability was

6

610 F. Supp. 2d at 359-60.

The court

alleged misrepresentations or omissions, then it could be said

7
that the SEC was recasting its misrepresentation claim as a scheme
8
9

claim to avoid the limitations on liability imposed in Janus.

Id.

United States District Court
For the Northern District of California

10

at 359.

However, there is no support for rejecting a claim

11

against the architects of a fraudulent scheme, whose deception is

12

communicated to the public.

13

the notion that only deceptive conduct that was not communicated

14

to the public is reachable under Rule 10b-5(a) and (c).

Id. at 359-60.

The court rejected

Id. at

15
360.
16
Here, the deceptive conduct alleged by the SEC goes beyond
17
18

the making of material misstatements or omissions.

19

purpose of Defendants' improper actions may have been to increase

20

Hansen's sales and income figures, which they knew would be

21

reported to the public, their allegedly deceptive acts amount to

22

more than making a false statement.

23

Although the

Allowing liability for

Defendants' alleged conduct under Rule 10b-5(a) and (c) would not

24
make Janus meaningless because Janus did not address these
25
26
27

sections, nor are these sections concerned with material
misstatements or omissions, the subject addressed in Janus.

28
16

1

Therefore, Defendants' motion to dismiss on the ground that

2

Janus forecloses the Rule 10-b5(a) and (c) claims is denied.

3

II. Third Claim for Relief

4
5
6
7
8
9

Section 17(a)(1) and (3) of the Securities Act provides, in
relevant part:
It shall be unlawful for any person in the offer or sale
of any securities . . . by the use of any means or
instruments of transportation or communication in
interstate commerce or by use of the mails . . .

United States District Court
For the Northern District of California

10

(1) to employ any device, scheme, or artifice to
defraud, or

11

. . .

12

(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or
deceit upon the purchaser.

13
14

15 U.S.C. § 77q(a)(1) and (3).

15
Defendants make the same argument as they did in regard to
16
the claims under Rule 10(b)5(a) and (c), that Janus forecloses
17
18

liability against them under this section of the Securities Act.

19

In SEC v. Daifotis, 2011 WL 3295139, *5-6 (N.D. Cal.), the court

20

rejected this argument, noting that Janus only addressed alleged

21

violations of Rule 10b-5(b), and the word, "make," on which Janus

22

focused, is absent from the operative language of § 17(a).

23

See

also SEC v. Mercury Interactive, LLC, 2011 WL 5871020, *3 (N.D.

24
Cal.) (agreeing with Daifotis and disagreeing with Kelly).

This

25
26
27

Court agrees with Daifotis and Mercury Interactive and holds that
Janus does not apply to claims premised on § 17(a).

28
17

Defendants'

1

motion to dismiss the § 17(a) claim on the ground that it is

2

precluded by Janus is denied.

3

III. Sells' Motion to Dismiss Second Claim for Aiding and Abetting

4
5
6

The SEC alleges that Hansen violated § 10(b) of the Exchange
Act and Rule 10b-5(b) by making untrue statements of material fact
or by omitting to state a material fact, with scienter.

The SEC

7
claims that Sells, by means of the conduct set forth in the
8
9

United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17
18
19

complaint, knowingly provided substantial assistance to Hansen's
Rule 10b-5(b) violations.
Section 20(a) of the Exchange Act provides,
Any person that knowingly provides substantial
assistance to another person in violation of a provision
of this title, or of any rule or regulation issued under
this title, shall be deemed to be in violation of such
provision to the same extent as the person to whom such
assistance is provided.
15 U.S.C. § 78t(e).
Sells argues that he cannot be liable for aiding and abetting
Hansen's violations of § 10(b) and Rule 10b-5(b) because the SEC
has not alleged a primary violation by Hansen.

Sells points out

20
that, for Hansen to be liable for Rule 10b-5(b) violations, it
21
22

must have acted with scienter in disseminating false information

23

and, here, Hansen allegedly did not know the falsity of the

24

financial statements that it issued.

25

cannot be imputed to Hansen, citing In re Apple Computer, Inc.,

26

Securities Litig., 243 F. Supp. 2d 1012, 2023, 1026 (N.D. Cal.

27

He argues that his scienter

2003), and Glazer Capital Mgmt. v. Magistri, 549 F.3d 736, 745

28
18

1

(9th Cir. 2010), for the proposition that only the knowledge of

2

the corporate officer who makes the alleged false and misleading

3

statement can be imputed to the corporation.

4

that, because he is not alleged to have made the misleading

5

statements, his scienter cannot be imputed to Hansen.

6

Sells concludes

As pointed out by the SEC, the cases upon which Sells relies

7
are not applicable here because they addressed, under the
8
9

heightened pleading standard for fraud required by the Private

United States District Court
For the Northern District of California

10

Securities Litigation Reform Act of 1995 (PSLRA), the issue of

11

whether a "collective scienter" theory could apply to establish

12

that a company had scienter without specifically imputing any

13

particular individual's scienter to it.

14

744; In re Apple Computer, 243 F. Supp. 2d at 1023.

See Glazer, 549 F.3d at
Although, in

15
Glazer, the Ninth Circuit did not foreclose the possibility of
16
imputing collective scienter to a corporation, it limited that
17
18

theory to "circumstances in which a company's public statements

19

were so important and so dramatically false that they would create

20

a strong inference that at least some corporate officials knew of

21

the falsity upon publication."

22

Louis v. Intuitive Surgical, Inc., 2011 WL 3501733, at *12-13

23

Police Retirement Systs. of St.

(N.D. Cal.); In re Nvidia Corp. Securs. Litig., 2010 WL 4117561,

24
at *10 n.10 (N.D. Cal.) (citing Glazer, 549 F.3d at 744).
25
26

Here, the theory of collective scienter is not at issue, nor

27

is the SEC subject to the heightened pleading standard required by

28

the PSLRA.

Sells' knowledge may be imputed to Hansen by
19

1

application of the doctrine of respondeat superior under which

2

wrongful acts of an employee undertaken within the scope of

3

employment can be imputed to the employer.

4

Titan Capital Corp., 914 F.2d 1564, 1578 (9th Cir. 1990) (holding

5

respondeat superior is a basis for vicarious liability in

6

See e.g., Hollinger v.

securities cases); Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d

7
1424, 1434 (9th Cir. 1995) (same); see also In re Cylink Securs.
8
9

Litig., 178 F. Supp. 2d 1077, 1088 (N.D. Cal. 2001) (Ninth Circuit

United States District Court
For the Northern District of California

10

authority holds that corporate entity can be vicariously liable

11

under § 10(b) for fraud of its officers).

12

Further, the Supreme Court, in Janus Capital, distinguished

13

aiding and abetting claims under 15 U.S.C. § 78(e), from claims

14

under Rule 10b-5, on the grounds that aiding and abetting suits

15
could be brought "against entities that contribute substantial
16
assistance to the making of a statement but do not actually make
17
18
19

it."

131 S. Ct. at 2302.
Therefore, the SEC's allegations are sufficient to show that

20

Sells' scienter may be imputed to Hansen and, thus, the SEC has

21

alleged a primary Rule 10b-5(b) violation against Hansen.

22

Sells' motion to dismiss the second claim against him for aiding

23

and abetting Hansen in making a material false statement or

24
omission is denied.
25
26
27
28

IV. Particularity Under Rule 9(b)
Plaintiffs must plead any allegations of fraud with
particularity, pursuant to Rule 9(b) of the Federal Rules of Civil
20

1

Procedure.

2

(9th Cir. 1994) (en banc).

3

course of fraudulent conduct and relies entirely on that course of

4

conduct as the basis of a claim . . . the claim is said to be

5

'grounded in fraud' or to 'sound in fraud,' and the pleading of

6

In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1543
If a plaintiff alleges "a unified

that claim as a whole must satisfy the particularity requirement

7
of Rule 9(b)."

Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-

8
9

United States District Court
For the Northern District of California

10
11

04 (9th Cir. 2003).

Here, all of the SEC's claims against

Defendants sound in fraud and so must be plead with particularity.
The allegations must be "specific enough to give defendants

12

notice of the particular misconduct which is alleged to constitute

13

the fraud charged so that they can defend against the charge and

14

not just deny that they have done anything wrong."

Semegen v.

15
Weidner, 780 F.2d 727, 731 (9th Cir. 1985).

Statements of the

16
time, place and nature of the alleged fraudulent activities are
17
18

sufficient, Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439

19

(9th Cir. 1987), provided the plaintiff sets forth "what is false

20

or misleading about a statement, and why it is false."

21

42 F.3d at 1548.

22

saying that it existed.

23

GlenFed,

Scienter may be averred generally, simply by
See id. at 1547; see Fed. R. Civ. P. 9(b)

("Malice, intent, knowledge, and other condition of mind of a

24
person may be averred generally").

As to matters peculiarly

25
26

within the opposing party's knowledge, pleadings based on

27

information and belief may satisfy Rule 9(b) if they also state

28

the facts on which the belief is founded.
21

Wool, 818 F.2d at 1439.

1

Rule 9(b) does not allow allegations about multiple defendants to

2

be lumped together; when suing more than one defendant the

3

allegations must inform each defendant separately of the

4

allegations that surround his or her alleged participation in the

5

fraud.

6

Swartz v. KPMG LLP, 476 F.3d 756, 764-65 (9th Cir. 2007).

"As with 12(b)(6) dismissals, dismissals for failure to comply

7
with Rule 9(b) should ordinarily be without prejudice."

Vess, 317

8
9

United States District Court
For the Northern District of California

10

F.3d at 1107-08.
The Court finds that the allegations about the four sales of

11

Sensei units to hospitals, as summarized above, meet Rule 9(b)'s

12

particularity requirements.

13

the fraudulent conduct, the nature of the fraudulent conduct, why

14

it was fraudulent and the individual conduct on the part of Sells

The allegations include the date of

15
and Murawski.

Although Sells and Murawski argue that these

16
allegations are insufficient to implicate them in a fraudulent
17
18

scheme because it was the forged or inaccurate forms themselves

19

and not their alleged actions that caused Hansen's accountants to

20

recognize revenue prematurely, they ignore the allegations that

21

they engaged in activities and directed others to act.

22

their activities or the concealment of their actions resulted in

23

In turn,

the misrepresentations to the market by others.

24
Therefore, Defendants' motion to dismiss based on Rule 9(b)
25
26

is denied.

27
28
22

1
2

V. Sells' Motion to Strike
Sells moves to strike from the SEC's prayer for relief the

3

request to prohibit him from acting as an officer or director of

4

any issuer that has a class of securities registered pursuant to

5

§ 12 of the Exchange Act, 15 U.S.C. § 78l, or that is required to

6

file reports pursuant to § 15(d) of the Exchange Act, 15 U.S.C.

7
§ 78o(d).

Sells argues that, because the first, second and third

8
9

claims for relief against him must be dismissed, there is no basis

United States District Court
For the Northern District of California

10

for the SEC's request for such a Director and Officer (D & O) bar.

11

The SEC responds that Sells is sufficiently alleged to be liable

12

under the first three claims and, therefore, the D & O bar is

13

properly requested.

14
15

Pursuant to Federal Rule of Civil Procedure 12(f), a court
may strike from a pleading Aany redundant, immaterial, impertinent

16
or scandalous matter.@

Fed. R. Civ. P. 12(f).

The purpose of a

17
18

Rule 12(f) motion is to avoid spending time and money litigating

19

spurious issues.

20

(9th Cir. 1993), reversed on other grounds, 510 U.S. 517 (1994).

21
22
23

Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527

None of the claims against Sells has been dismissed and it is
premature at this time to strike any prayer for relief.
Therefore, Sells' motion to strike the request for a D & O bar

24
from the prayer for relief is denied.
25
26
27
28
23

CONCLUSION

1
2
3

Based on the foregoing, Defendants' motion to dismiss (Docket
No. 25) and Sells' motion to strike (Docket No. 27) are denied.

4
5

IT IS SO ORDERED.

6
7
8

Dated:

8/10/2012

CLAUDIA WILKEN
United States District Judge

9

United States District Court
For the Northern District of California

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