Opinion
Case No. 2:03CV55K.
March 14, 2003
MEMORANDUM DECISION AND ORDER
This matter is before the court on Plaintiff Securities and Exchange Commission's ("SEC") Motion for Preliminary Injunction, Plaintiff's Motion for Preclusion Order, and Defendants' Motion to Strike. An evidentiary hearing on the motions was held on March 3, 4 and 5, 2003. At the hearing, Plaintiff was represented by Thomas M. Melton and Karen Martinez, Defendant ClearOne Communication was represented by Neil A. Kaplan, Defendant Frances Flood was represented by Max D. Wheeler, and Defendant Susie Strohm was represented by Milo Steven Marsden. Before the hearing, the court considered carefully the memoranda and other materials submitted by the parties. Since taking the matter under advisement, the court has further considered the memoranda, exhibits, and evidence submitted by the parties, and the law and facts relevant to the motions. Now being fully advised, the court renders the following Memorandum Decision and Order.
EVIDENTIARY MOTIONS
As an initial matter, both parties have filed motions to exclude evidence. Defendants' Motion to Strike seeks to strike several portions of the declarations submitted in support of the SEC's Motion for Preliminary Injunction on the grounds that they violate several rules of evidence, such as hearsay, foundation, and speculation. Defendants' motion, however, fails to consider the relaxed evidentiary standard applicable at the preliminary injunction stage. "At the preliminary injunction stage, a district court may rely on affidavits and hearsay materials which would not be admissible evidence for a permanent injunction." Levi Strauss Co. v. Sunrise Int'l Trading Inc., 51 F.3d 982, 985 (11th Cir. 1995); see also Asseo v. Pan American Grain Co., 805 F.2d 23, 26 (1st Cir. 1986). This type of evidence was appropriate given the expeditious character and objectives of the proceeding. Therefore, Defendants' Motion to Strike is denied.
Similarly, the SEC's Motion for Preclusion Order seeks an order precluding Defendants from offering certain exhibits identified in their proposed List of Preliminary Injunction Exhibits and Witnesses because the documents were not provided to the SEC. Defendants respond that the documents were produced timely or as soon as they were available to Defendants. Given the nature of the expedited discovery necessary for this hearing, the court finds the standard discovery rules relied upon by the SEC to be inapplicable. In addition, there is no evidence that any documents were deliberately withheld or that the SEC suffered any prejudice. Therefore, the SEC's Motion for Preclusion Order is denied.
MOTION FOR PRELIMINARY INJUNCTION
The SEC asks this court to enjoin allegedly ongoing violations of the anti-fraud provisions of the federal securities laws and to appoint a special monitor to ensure ongoing compliance. The SEC also requests that the Order Prohibiting the Destruction of Documents, entered on January 15, 2003, be continued.
The SEC alleges that Clear One improperly recognized revenue beginning in the fiscal quarter ending June 30, 2001. More specifically, the SEC alleges that ClearOne, through its officers, began a pattern of overstating revenues, income, and accounts receivable by recording certain transactions with its distributors and resellers as sales when in fact the transactions were contrary to the parties written agreements and/or did not meet the requirements of Generally Accepted Accounting Principles ("GAAP") for sales. The SEC argues that Frances Flood, the Chief Executive Officer, and Susie Strohm, the Chief Financial Officer and Vice President of Finance, are liable for ClearOne's false financial statements filed with the SEC and released to the public because they actively participated in the fraudulent scheme and knowingly filed the false statements.
The SEC seeks an injunction under the following statutes and regulations: Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"); Rule 10b-5 promulgated under Section 10(b) of the Exchange Act; Section 13(a) of the Exchange Act; and Rules 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 promulgated under the Exchange Act.
I. FINDINGS OF FACT
The findings of fact and conclusions of law made by a court in deciding a preliminary injunction motion are not binding at the trial on the merits. University of Texas v. Camenisch, 451 U.S. 390, 395 (1981); City of Chanute v. Williams Natural Gas Co., 955 F.2d 641, 649 (10th Cir. 1992), overruled on other grounds by Systemcare, Inc. v. Wang Labs Corp., 117 F.3d 1137 (10th Cir. 1997) (recognizing that "the district court is not bound by its prior factual findings determined in a preliminary injunction hearing.").
ClearOne manufactures and sells end-to-end video and audio conferencing products. In 2002, ClearOne had over 300 employees and over 10,500 shareholders.
A. Revenue Recognition
From its inception fifteen years ago through June 2001, ClearOne sold its products through a nationwide network of manufacturer's representatives. On June 30, 2001, at the end of ClearOne's fiscal year 2001, ClearOne altered its sales model and began selling its product through a nationwide network of distributors with a direct sales force. At this time, ClearOne hired Tim Morrison as Vice President of Product Sales with the expectation that his sales background would be helpful in running the new distributor system. He was responsible for managing all aspects of the distribution model.
At the end of June 2001, ClearOne had recruited only one distributor, Starin Marketing, located in Chesterton, Indiana. Starin Marketing had previously been one of ClearOne's manufacturing representatives under its previous sales distribution model. ClearOne later added three other distributors, vSO Marketing, PTT, and NewComm Distributing. ClearOne also sold its products directly to resellers of video and audio conferencing products, like MCSi, Inc., through a direct sales force. ClearOne had a history of working with each of these companies before they were made distributors.
To implement proper accounting methods in conjunction with its new distribution model, ClearOne consulted with Ernst Young. ClearOne learned that in order to properly recognize revenue, GAAP requires three elements: (1) title must pass to the buyer of the product sold; (2) there can be no right of return on the part of the buyer; and (3) there must be fixed terms of payment.
Clear One entered into written Distributor Agreement with each of its distributors. The agreements provided specific payment terms requiring the distributor to pay ClearOne within 90 days of receiving ClearOne products. The Distributor Agreement also required the individual distributors to take title to ClearOne products at the time those products left ClearOne's Utah warehouse and stated that the individual distributors had no right to return the ClearOne products that they received. In addition, the distributor was required to purchase a minimum of $500,000 of product each quarter and maintain adequate inventory of ClearOne's products. The agreements also contain an integration clause and a clause requiring any amendment to be in writing. Based on these Distributor Agreements, ClearOne recognizes revenue upon shipment of merchandise.
There is conflicting evidence from the distributors and other witnesses as to whether, at the same time ClearOne was entering into the written distributor agreements, it was also entering into oral agreements with its distributors and resellers which contradicted the 90-day payment terms of the written agreements. Individual distributors contradict themselves as to the existence of the agreements. Nevertheless, the court finds that based on the record as a whole, there is evidence that these oral agreements to modify payment terms existed.
Under these oral arrangements, the distributors and resellers agreed to pay for the ClearOne merchandise as they sold and were paid for the merchandise rather than in accordance with the written agreements which called for payment to ClearOne within 60 or 90 days. There is also credible evidence that the distributors were told not to tell anyone that the payment terms were anything other than as set forth in the Distributor Agreement.
Based on these oral agreements, large sales to distributors and resellers were frequently made at the end of the fiscal quarter, at least in part, to meet sales goals. These large, end-of the quarter sales were the result of requests from ClearOne to distributors or resellers and resulted in some distributors having several years worth of products. There is evidence that distributors would be shipped more product than they agreed to take and that at least one distributor, Production Audio, provided a blank purchase order to ClearOne, allowing the quantity, product, and price to be determined by ClearOne. An email from Graeme Stevenson of Production Audio to Flood and Morrison stated the company accepted the shipment as an "accommodation to situation of friendship with ClearOne." The evidence also shows that ClearOne accepted a purchase order from a distributor with extended payment terms written on the purchase order. However, these orders were not accounted differently than a regular sale.
Because of the large shipments to distributors and resellers and the weak market for certain products, the distribution channel became clogged. ClearOne began taking additional measures to meet escalating revenue projections. At the end of the fiscal year 2002, ClearOne shipped 100 V-There video conferencing units to Scott Wysota at his residence in Long Island. Morrison introduced Wysota to Flood, and the parties agreed to send $500,000 worth of product to Wysota. Although there is evidence that Morrison and Flood thought Wysota would attempt to sell this product, ClearOne did not enter into any kind of agreement with Wysota about the sale of the product. ClearOne shipped the product pursuant to a purchase order that failed to contain any payment terms, pass title upon shipment, or address Wysota's right to return the product. However, the shipment to Wysota was recorded as a sale. On January 15, 2003, the product shipped to Wysota in June 2002 was returned to ClearOne.
After the SEC's investigation began, ClearOne approached its distributors about signing Distributor Certifications that stated, in essence, that the distributors were bound by the Distribution Agreements and there were no verbal "pay-as-you-go" arrangements. The distributors testimony is also conflicting as to whether they were forced to sign these certifications and whether these certifications are truthful. However, Dave Francis, President of NewComm added an addendum to his Distributor Certification that provides: "However, Products were shipped to Distributor under terms of the "pay-as-you-go" program, which required Distributor to pay for the Products as and when it sold. This program was established due to the newness of the distribution channel. The "pay-as-you-go" program was an express oral understanding between ClearOne and Distributor." Based on this addition, there is evidence that the Distributor Certifications and written Distributor Agreements do not represent the full agreement between the parties.
Because Distributors were not paying for the product within the 90-day payment period, it resulted in substantial increases in ClearOne's accounts receivable. ClearOne's independent auditors, Ernst Young, knew about the large, end-of the quarter shipments to distributors and resellers. Ernst Young also knew that distributors were not consistently paying for products within the 90-day terms of the contracts. However, there is no evidence that Ernst Young knew of the distributors' alleged pay-as-you-sell agreements with ClearOne which contradicted the written agreements between the parties.
As a result of these practices, ClearOne overstated revenue, accounts receivable, and income in its financial statements filed with the SEC. These statements have not been withdrawn or restated.
2. Financial Disclosures Scienter
As with most public companies, ClearOne was concerned about maintaining its historical growth in sales and revenue. ClearOne also benefitted from maintaining its stock price during its private offering that closed December 11, 2001. That private placement raised $25.5 million. Flood expressed her concern to Morrison and other ClearOne employees that ClearOne's stock price remain high in order for ClearOne to close on important acquisitions or to close the private placement. Flood also apparently communicated the same message to the distributors.
On July 18, 2001, ClearOne issued a press release on the fiscal year ending June 30, 2001, in which Flood indicated "regular checks with [ClearOne's] distribution channels indicate . . . orders continue at a healthy rate." Large sales at the end of quarters was not unusual in the industry and Flood told analysts during a year-end conference call that "we are tending to see that more dealers are buying protectively looking at the latter part of the quarter because then they're looking at what jobs they have coming up."
On April 23, 2002, ClearOne announced its financial results for the third quarter of fiscal year 2002 in a press release. Flood noted ClearOne's forty-six percent increase in product sales. Also in the April 23, 2002, press release, Flood noted the "significant increase" in ClearOne's accounts receivable balance and attributed it in part to the addition of fifteen new dealers. Flood disclosed to analysts that most sales occur at the end of quarters and that it would always work that way.
On August 13, 2002, ClearOne issued a press release reporting its financial results for the fourth quarter and the fiscal year ended June 30, 2002, indicating that "[p]roduct sales for the fourth quarter were up 52% to $10.9 million." The August 13, 2002 press release also states that product sales grew thirty-two percent in fiscal year 2002.
However, none of these press releases disclosed ClearOne's oral agreements with distributors and resellers extending the payment terms in the written agreements. Although Flood openly discussed the end-of-the-quarter sales and the fact that ClearOne was working with distributors regarding payment, she did not disclose that ClearOne had oral "pay-as-you-sell" agreements.
ClearOne's financial statements also reflected the improper revenue recognition and accounts receivable figures resulting from the oral agreements, while not disclosing the existence of the agreements. ClearOne's financial statements were materially overstated in the Forms 10-Q filed with the SEC for the quarters ended March 31, 2001, September 30, 2001, December 31, 2001, March 21, 2002, and September 30, 2002, and in Forms 10-K for the fiscal year ended June 30, 2001, and June 30, 2002. The materially misstated financial statements were also incorporated by reference in a Form S-3 registration statement filed with the Commission.
In addition to her involvement in issuing the press releases and submitting financial statements to the SEC, as CEO, Flood implemented the distributor program and worked to get at least the first distributor in place. Three of the four distributors state that Flood talked directly to them about the oral agreements and told them not to tell auditors. Flood was also involved in the questionable shipments to Wysota and Production Audio. Furthermore, there is evidence that Flood also pressured distributors into signing Distributor Certifications once this enforcement proceeding was instituted.
As CFO and Vice President of Finance, Strohm had the responsibility of preparing ClearOne's financial statements. Strohm has an M.B.A. in accounting, but is not a C.P.A. Strohm testified that she was familiar with GAAP revenue recognition policies and consulted with Ernst Young to learn the requirements for revenue recognition applicable to the distribution model ClearOne adopted in June 2001. Strohm was the head of the company's finance team, but the company's sales staff reported to Morrison, who was head of the sales team.
Morrison testified that Strohm knew about the pay-as-you-sell agreements with the distributors, and one distributor has also stated that Strohm knew about the pay-as-you sell agreements. However, the court finds the evidence regarding Strohm's knowledge to be very weak. None of the distributors testified that they talked to Strohm specifically about the "pay-as-you-sell" terms. Also, Strohm attempted collections with MCSi, a reseller who also had a pay-as-you-sell agreement. Although Strohm noted at the time the MCSi had such an agreement, she still carried out her collection attempts and ClearOne soon received payment from MCSi bringing its account current. Strohms actions with MCSi are not consistent with a knowledge or acquiescence in the pay-as-you-go agreements. Furthermore, the evidence surrounding the return of the Production Audio equipment does not demonstrate that she had knowledge of the oral agreements.
3. Remedial Actions
Before the SEC began to investigate, ClearOne made management changes and had taken meaningful steps to address the problems with its distribution channels. Morrison was replaced as Vice President of Product Sales, and the company brought in Mike Keogh to run the division. Keogh has an extensive background in sales. ClearOne also made significant changes to its distribution model, revised its product forecasting methods, and went to sixty-day payment terms with no exceptions for all distributors.
Since the SEC investigation began, ClearOne also has begun its own internal investigation and hired independent counsel and auditors to oversee the process. Frances Flood and Susie Strohm have also been temporarily replaced by competent, experienced individuals. On January 20, 2003, after this action was filed, ClearOne issued a press release advising caution regarding reliance on the company's financial statements pending the outcome of full investigations into the matters at issue in this lawsuit. The NASDAQ stock exchange suspended public trading of ClearOne common stock on January 21, 2003, and has since de-listed ClearOne's stock.
II. CONCLUSIONS OF LAW
A. Legal Standard for SEC's Preliminary Injunction
Section 20(b) of the Securities Act of 1933, and Section 21(d) of the Securities Exchange Act of 1934, empower the court, upon a proper showing by the SEC, to grant injunctive relief where it appears that a person is engaged in or about to engage in violations of the federal securities laws. "The purpose of injunctive relief is not to punish the violator, but to deter him from committing future infractions of securities laws." SEC v. Bonastia, 614 F.2d 908, 911 (3d Cir. 1980).
The SEC faces a lower burden than a private litigant when seeking a preliminary injunction. Hecht Co. v. Bowles, 321 U.S. 321, 331 (1994); Atchison, Topeka and Santa Fe Rwy. Co. v. Lennen, 640 F.2d 255, 259-60 (10th Cir. 1981). In order to obtain preliminary relief, the SEC must make a proper showing by proving: (1) a prima facie case of previous or ongoing violations; and (2) a reasonable likelihood that the wrong will be repeated. SEC v. Pros Int'l Inc., 994 F.2d 767, 769 (10th Cir. 1993); SEC v. Unifund Sal, 910 F.2d 1028, 1036-37 (2d Cir. 1990).
Defendants' attempt to place a higher burden on the SEC confuses the standards applicable to private litigants and the standards applicable to the SEC. In addition, there is no basis for finding that the preliminary injunction sought by the SEC is mandatory rather than prohibitory.
II. Elements for Injunctive Relief
1. Prima Facie Case of Violations
Section 17(a) of the Securities Act of 1933 prohibits persons, in the offer or sale of a security, from employing any device, scheme or artifice to defraud; obtaining money or property through materially false or misleading statements or omitting to state material facts; or engaging in any transaction, practice, or course of business which operates as a fraud or deceit. United States v. Naftalin, 441 U.S. 768, 773 (1979). Section 10(b) of the Exchange Act and Rule 10b-5, promulgated thereunder, prohibit similar conduct in connection with the purchase or sale of a security. Chiarella v. United States, 445 U.S. 222, 226 (1980). Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13, promulgated thereunder, require issuers of registered securities to file factually accurate annual and quarterly reports with the SEC.
Based on the above facts, the court concludes that the SEC has made out a prima facie case that ClearOne's revenue recognition policies violate the federal securities laws. Although ClearOne auditors were told that ClearOne applied GAAP in the context of revenue recognition, ClearOne did not properly apply these principles as a result of the oral agreements that allowed payment to occur when the distributor or reseller sold and was paid for the product. The SEC's expert testified that under GAAP contingent sales cannot properly be recognized as revenue at the time of shipment.
The Preliminary Report of Defendants' experts, Martin G. Laffer and Barbara J. Gottlieb did not consider the existence of oral agreements altering the written agreements' payment terms. Defendants' expert testified that ClearOne was working with the distributors and that revenue could be recognized on shipment of product to distributors because title passed, there was no right of return, and the distributors had a history of and intention of paying for the product eventually.
However, Laffer and Gottlieb's analysis was not and cannot be applied to the transaction with Scott Wysota at the end of ClearOne's 2002 fiscal year. Wysota had no history selling electronic equipment of any kind, no previous history working with ClearOne, no distributor agreement, and the purchase order used for the shipment contained no terms of any kind. Therefore, even if ClearOne's recognition of revenue upon shipment for sales to distributors may eventually be shown to be legitimate, the Wysota transaction alone demonstrates a prima facie case of improper revenue recognition.
Furthermore, to the extent Defendants' experts acknowledge the issue with respect to oral agreements modifying payment terms, they state only that there is a factual dispute regarding the nature, timing and effect, if any, of oral discussions between ClearOne and certain distributors concerning payment of some product. The recognition of factual disputes does not diminish the SEC's presentation of a prima facie case.
ClearOne also argues that there is no basis for distributors to claim that they were released from the terms of their Distributor Agreements. The agreements have an integration clause and a requirement that any amendment be in writing. However, under Utah law, parties to a written agreement may modify a written agreement by oral agreement "even if the agreement being modified unambiguously indicates that any modification must be in writing." R. T. Nielson Co. v. Cook, 40 P.2d 1119, 1124 (Utah 2002). Moreover, Defendants' arguments do not defeat the SEC's prima facie showing that the oral agreements occurred, the distributors and ClearOne were operating under these terms, and the agreements resulted in misrepresentations regarding revenue.
The SEC has also demonstrated that ClearOne's misrepresentations were material because there was a substantial likelihood that the facts would have been significant in a reasonable investor's investment deliberations. See Basic Inc. v. Levinson, 485 U.S. 224 (1988). Revenue from ClearOne's product sales is the very foundation of ClearOne's business. See ABC Arbitrage v. Tchuruk, 291 F.3d 336, 360 (5th Cir. 2002) (finding that information regarding a company's income and revenue is material). However, ClearOne's description of its business, that revenue is recognized from sales at the time products left ClearOne's warehouse, is inappropriate. In the event that a misstatement masks a change in earnings or a failure to meet projections, courts have concluded the size of the overstatement is less important than the qualitative impact on a company's financials. Castellano v. Young Rubican, 257 F.3d 171, 180 (2d Cir. 2001).
Scienter is an element that the SEC must establish as to some of its causes of action but not for others. Scienter is an element of violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, but is not a required element under Sections 17(a)(2) or 17(a)(3) of the Securities Act. Aaron v. SEC, 466 U.S. 680, 696-97 (1980). Also, no showing of scienter is necessary to establish a violation of Section 13(a), Section 13(b)(2), Rules 13a-1, 13a-13, 13b2-1, 13b2-2, or 12b-20 under the Exchange Act. SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979).
The Supreme Court has defined scienter as "a mental state embracing intent to deceive, manipulate or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). The state of mind of Flood, Strohm, Morrison, and persons exercising control over ClearOne can be imputed to the company. Knox v. First Security Bank of Utah, N.A., 206 F.2d 823, 826 (10th Cir. 1953). Accordingly, ClearOne can be held liable for these violations on the same basis as the individual defendants.
As detailed in the findings of fact above, there is at least prima facie evidence that Flood had the requisite scienter. Distributors testified that Flood implemented oral agreements with respect to the channel stuffing, and spoke to them about payment arrangements that were at odds with the written distributor agreements. There is evidence that Flood knowingly filed false or misleading financial statements with the SEC and that Flood made false and misleading statements to analysts and the public. It is clear that the actions of Flood and ClearOne were the result of more than mere negligence. SEC v. Haswell, 654 F.2d 698, 700 (10th Cir. 1981). Therefore, the SEC has made a prima facie showing of scienter on the part of Flood and ClearOne.
Although there is some weak evidence that Strohm knew of the "pay-as-you-go" terms with distributors and customers, the court cannot conclude on the evidence before it that there is a prima facie case that Strohm had an intent to manipulate, deceive, or defraud. The evidence with respect to Strohm's knowledge is conclusory and too speculative to reach the requisite level of scienter. Her actions are more consistent with mere negligence. Therefore, the court concludes that the SEC has not made out the necessary elements of a prima facie case against Strohm on the claims requiring scienter.
Furthermore, instrumentalities of interstate commerce were used to effect the fraud. If a defendant knows that the use of mail or of wire services are a reasonably foreseeable consequence of a scheme it is sufficient to satisfy the jurisdictional means element. Pereira v. United States, 347 U.S. 1, 8-9 (1954). The court, therefore, concludes that the SEC has made a prima facie case against ClearOne and Flood for violations of all the federal securities laws alleged and a prima facie case against Strohm with respect to violations that do not require scienter.
2. Reasonable Likelihood of Repeated Violations
The second inquiry for the court to undertake in determining whether a preliminary injunction should issue is the likelihood that violations will recur. The SEC argues that unless enjoined, Defendants will continue to mislead the investing public regarding ClearOne's true financial status. The SEC claims that ClearOne's actions since the filing of this action also demonstrate that it intends to conduct business as usual, arguing that the replacement of Flood and Strohm with new interim management was simply a stalling tactic to avoid oversight of ClearOne's financial operations and that if Flood and Strohm return to their positions there will be no oversight.
In predicting the likelihood of future violations, a court should evaluate the totality of the circumstances. SEC v. Murphy, 626 F.2d at 655. Although the court may look to past illegal conduct and infer the likelihood of future violations, it is not dispositive of the issue. In SEC v. Pearson, 426 F.2d 1339 (10th Cir. 1970), the Tenth Circuit upheld the denial of a preliminary injunction, stating that "where the likelihood of any continuing menace to the public does not in reason exist it has been recognized that the extraordinary measure of a preliminary injunction is not justified." Id. at 1343.
In this case, ClearOne has implemented significant changes to its distribution model, forecasting methods, and management. ClearOne also has also advised distributors that they are on strict "net 60 day" terms with no exceptions. Furthermore, ClearOne is conducting an internal investigation and the company has brought in independent counsel and auditors. ClearOne is also under a significant amount of scrutiny by the SEC, NASDAQ, and the investing public. ClearOne's stock has been suspended from trading by NASDAQ, and ClearOne has issued a press release to investors not to rely on the past financial statements at issue in this case. ClearOne has also recognized this lawsuit and informed investors to be cautious in its Form 8K.
As evidence of an ongoing violation, the SEC cites to ClearOne's failure to formally withdraw or restate its misleading financials, despite a legal requirement to do so. However, ClearOne has not foreclosed the possibility of doing so. ClearOne is currently conducting an investigation of the issue, and the court is reluctant to require such action at this time based only on a prima facie showing of violations by the SEC.
Based on the totality of the circumstances, the court concludes that there is not a substantial and reasonable likelihood of future securities laws violations. Therefore, a preliminary injunction is not justified.
3. Special Monitor
The SEC seeks ancillary relief in the form of a special monitor to preserve defendants' assets, to effectuate the purposes of the federal securities laws, and to ensure that ClearOne does not profit from their conduct. Because this court concludes that a preliminary injunction is not appropriate, it declines to exercise its equitable powers in this regard. Reebok Int'l v. Marnatech Enterprises, 970 F.2d 552, 559 (9th Cir. 1992).
CONCLUSION
Based on the above Findings of Fact and Conclusions of Law, the Court DENIES the SEC's Motion for Preliminary Injunction on the ground that there is not a substantial and reasonable likelihood of future violations. Plaintiffs Motion for Preclusion Order is DENIED, and Defendants' Motion to Strike is DENIED. However, the Order Prohibiting Destruction of Documents, entered on January 15, 2003, remains in effect.