RICHARD H. WALKER PAUL GONSON JACOB H. STILLMAN JOHN W. AVERY Attorneys for Amicus Curiae SECURITIES AND EXCHANGE COMMISSION 450 5th Street, N.W. (Stop 6-6) Washington, DC 20549 Telephone: (202) 942-0816 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA In re SILICON GRAPHICS, INC. | Lead Case No. C 96-0393 FMS SECURITIES LITIGATION | | Consolidated Cases: | C 96-0631 | C 96-1111 | C 96-1068 | | CLASS ACTION | | BRIEF OF THE SECURITIES AND | EXCHANGE COMMISSION, AMICUS | CURIAE, CONCERNING DEFENDANTS' This Document Relates To: | MOTION TO DISMISS THE AMENDED | COMPLAINT ALL ACTIONS | | DATE: March 21, 1997 | TIME: 10:00 a.m. ____________________| CTRM: Hon. Fern M. Smith ==========================================START OF PAGE====== TABLE OF CONTENTS PAGE INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION AND SUMMARY OF ITS POSITION . . . . . . . . . . . . . . . . . BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . THE NEW STANDARD IN THE REFORM ACT FOR PLEADING SCIENTER IS A PROCEDURAL PROVISION THAT DID NOT ALTER THE SUBSTANTIVE DEFINITION OF SCIENTER; RECKLESSNESS STILL SATISFIES THE SCIENTER ELEMENT UNDER SECTION 10(b) AND RULE 10b-5. . . . . . . . . . . . . . . . . . . . . . . . . A. Recklessness Is Sufficient To Satisfy the Scienter Element Under Section 10(b) and Rule 10b-5. . . . . . . . . . . . . . . . . . . . B. Contrary To the Court's View, the Legislative History Shows That the Reform Act Does Not Prohibit the Pleading of Recklessness. . . . . . . . . . . . . . . CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . TABLE OF AUTHORITIES CASES PAGE Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir.), cert. denied, 454 U.S. 965 (1981) . . . . . . . . . . . . . Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) . . . . . . . G.A. Thompson & Co. v. Partridge, 636 F.2d 945 (5th Cir. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . Hackbart v. Holmes, 675 F.2d 1114 (10th Cir. 1982) . . . . . . Herman & MacLean v. Huddleston, 459 U.S. 375 (1983) . . . . . . Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017 (6th ==========================================START OF PAGE====== Cir. 1979) . . . . . . . . . . . . . . . . . . . . . . . . . McLean v. Alexander, 599 F.2d 1190 (3d Cir. 1979) . . . . . . . Nelson v. Serwold, 576 F.2d 1332 (9th Cir.), cert. denied, 439 U.S. 970 (1978) . . . . . . . . . . . . . . . . Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir.), cert. denied, 439 U.S. 1039 (1978) . . . . . . . . . Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946 (1980) . . . . . . . . . . . . . SEC v. Carriba Air, Inc., 681 F.2d 1318 (11th Cir. 1982) . . . SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992) . . . . . . . . Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033 (7th Cir.), cert. denied, 434 U.S. 875 (1977) . . . . . . . . . . In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir.), cert. denied, 114 S. Ct. 1397 (1994) . . . . . . . . Van Dyke v. Coburn Enterprises, Inc., 873 F.2d 1094 (8th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . STATUTES AND RULES Securities Exchange Act of 1934, 15 U.S.C. 78a et seq. Section 10(b) . . . . . . . . . . . . . . . . . . . . . . . passim Section 20(f), 15 U.S.C. 78t(f) . . . . . . . . . . . . . . Section 20A, 15 U.S.C. 78t-1 . . . . . . . . . . . . . . . . Section 21D(b)(1), 15 U.S.C. 78u-4(b)(1). . . . . . . . . . Section 21D(b)(2), 15 U.S.C. 78u-4(b)(2) . . . . . . . . . . passim Section 21D(g), 15 U.S.C. 78u-4(g) . . . . . . . . . . . . . Section 21E, 15 U.S.C. 78u-5 . . . . . . . . . . . . . . . . Rule Under the Securities Exchange Act of 1934 Rule 10b-5, 17 C.F.R. 240.10b-5. . . . . . . . . . . . passim Fed. R. Civ. P. 9(b) . . . . . . . . . . . . . . . . . . . . . MISCELLANEOUS 141 Cong. Rec. H13702 (daily ed. Nov. 28, 1995) . . . . . . . . ==========================================START OF PAGE ====== 141 Cong. Rec. H13705 (daily ed. Nov. 28, 1995) . . . . . . . . 141 Cong. Rec. S9222 (daily ed. June 28, 1995) . . . . . . . . H.R. Rep. 369, 104th Cong. 1st Sess. (1995) . . . . . . . . . . Statement of Managers -- The "Private Securities Litigation Reform Act of 1995," 141 Cong. Rec. H13699 (daily ed. Nov. 28, 1995) . . . . . . . . . . . . . . . . . Securities Litigation Reform Proposals -- S. 240, S. 667, and H.R. 1058: Hearings Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs, 104th Cong., 1st Sess. (1995) . . . . . . ==========================================START OF PAGE====== INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION AND SUMMARY OF ITS POSITION On September 25, 1996, this Court granted the defendants' first motion to dismiss this securities fraud case. The Court's order was one of the first judicial decisions to interpret a significant provision of the Private Securities Litigation Reform Act of 1995 ("Reform Act"), and the Securities and Exchange Commission, as the agency principally responsible for the administration and enforcement of the federal securities laws, submits this brief as amicus curiae to address an important issue raised by that order. That issue is whether Congress, in adopting a strict procedural standard governing the method of pleading scienter in private securities law cases, intended to alter the substantive scope of the securities laws in such cases by changing what scienter means. Specifically, the issue is whether the new pleading standard eliminates recklessness as satisfying the scienter requirement in private actions under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5. The Ninth Circuit, and every other court of appeals that has considered the question of the required degree of scienter, has held that recklessness is sufficient to establish liability under Section 10(b) and Rule 10b-5. The new pleading standard does not, in the Commission's view, alter those holdings. ==========================================START OF PAGE====== This Court's decision turned on its interpretation of Section 21D(b)(2) of the Exchange Act, 15 U.S.C 78u-4(b)(2), which was added by the Reform Act to codify the standard for pleading scienter in certain securities law cases. Section 21D(b)(2) provides: In any private action arising under this title in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this title, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. In considering the defendants' first motion to dismiss, the Court concluded that Section 21D(b)(2) required the plaintiffs to allege specific facts that constitute circumstantial evidence of "conscious behavior" by defendants and that the plaintiffs must create a strong inference of "knowing" misrepresentation on the part of the defendants. Allegations of reckless behavior, the Court held, would not suffice. The Reform Act, however, made no change in the definition of scienter under the federal securities laws (except in the case of certain forward-looking statements entitled to the protection of a "safe harbor", as discussed below). The Commission submits that recklessness continues to satisfy the scienter requirement for a private action brought under Section 10(b) and Rule 10b-5; and that, as a necessary result, it is sufficient under Section 21D(b)(2) to state with particularity facts giving rise to a ==========================================START OF PAGE====== strong inference that the defendant acted recklessly. This issue is again before the Court in connection with the defendants' motion to dismiss the plaintiffs' amended complaint. -[1]- The Commission has consistently supported a recklessness standard for Section 10(b) liability in both Commission and private actions under the federal securities laws because such a standard is needed to protect investors and the securities markets from fraudulent conduct and to protect the integrity of the disclosure process. A higher scienter standard would lessen the incentives for corporations to conduct a full inquiry into potentially troublesome or embarrassing areas, and thus would threaten the process that has made our markets a model for nations around the world. -[2]- ---------FOOTNOTES---------- -[1]- The defendants have not grounded their motion to dismiss the amended complaint on this aspect of the Court's decision. While they refer to the Court's holding on this issue, the gravamen of their motion is that the amended complaint is, in material respects, pled on information and belief, but that the complaint does not "state with particularity all facts on which that belief is formed," as required by Section 21D(b)(1) of the Exchange Act. The plaintiffs dispute the contention that their pleadings are made on information and belief. The Commission does not express a view on this question, limiting its argument solely to the issue of recklessness. The Commission does not address any other issue. -[2]- See Securities Litigation Reform Proposals -- S. 240, S. 667, and H.R. 1058: Hearings Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs, 104th Cong., 1st Sess. 247 at 251-52 (1995) (testimony of Arthur Levitt, Chairman, Securities and Exchange Commission). ==========================================START OF PAGE====== The recklessness standard discourages deliberate ignorance and also prevents defendants from escaping liability simply because of the difficulty of proving knowledge or conscious intent on the basis of the circumstantial evidence frequently used in securities fraud cases. A retreat from the recklessness standard would greatly erode the deterrent effect of Section 10(b) actions. The Commission, therefore, urges the Court to reconsider its earlier decision in this case and to hold that recklessness is sufficient to satisfy the scienter requirement. BACKGROUND This case was brought as a class action on behalf of purchasers of shares of Silicon Graphics, Inc., during a class period in which, it is alleged, the price of the shares was artificially inflated because of false and misleading statements about the company's business and future prospects made by the defendants. Relief is sought under Section 10(b) and Rule 10b-5, as well as under Section 20A of the Exchange Act (with respect to insider trading). The defendants moved to dismiss the original complaint largely on the grounds that it did not meet the requirements of the Reform Act for pleading scienter. The Court granted the motion in its order of September 25, 1996, based in part on its holding that "plaintiff must allege specific facts that constitute circumstantial evidence of conscious behavior by defendants." Order at 12-13. This standard, the Court held, applied "whether the statements in question are forward-looking or not." Order at ==========================================START OF PAGE====== 16. With respect to some of the allegations, the Court gave leave to the plaintiffs to amend the complaint. The amended complaint is now the subject of a new motion to dismiss. ARGUMENT THE NEW STANDARD IN THE REFORM ACT FOR PLEADING SCIENTER IS A PROCEDURAL PROVISION THAT DID NOT ALTER THE SUBSTANTIVE DEFINITION OF SCIENTER; RECKLESSNESS STILL SATISFIES THE SCIENTER ELEMENT UNDER SECTION 10(b) AND RULE 10b-5. A. Recklessness Is Sufficient To Satisfy the Scienter Element Under Section 10(b) and Rule 10b-5. Recklessness has long been recognized as sufficient for liability under Section 10(b) and Rule 10b-5. In Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), although the Supreme Court left open the question of whether recklessness could satisfy the scienter requirement of Section 10(b) and Rule 10b-5, the Court explicitly recognized that "in certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act." -[3]- In the 21 years since the Supreme Court's decision in Hochfelder, all of the courts of appeals that have considered the question, including the Ninth Circuit, have held that recklessness is sufficient to establish liability under Section 10(b) and Rule 10b-5. -[4]- ---------FOOTNOTES---------- -[3]- 425 U.S. at 193-94 n.12. -[4]- See, e.g., Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990)(en banc); Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir.), cert. denied, 439 U.S. 970 (1978); Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 46-47 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); McLean (continued...) ==========================================START OF PAGE====== It is important to recognize that the threshold for a finding of recklessness is quite high. Although the definition of recklessness varies somewhat in different courts, most of the federal courts of appeals, including the Ninth Circuit, follow the standard enunciated by the Seventh Circuit in Sundstrand Corporation v. Sun Chemical Corporation, -[5]- or some variant thereof. -[6]- In Sundstrand, the court defined a reckless omission 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. 553 F.2d at 1045 (citation omitted). In short, the recklessness standard requires a high level of culpability -- a standard clearly distinguishable from negligence. ---------FOOTNOTES---------- -[4]-(...continued) v. Alexander, 599 F.2d 1190, 1197 (3d Cir. 1979); Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961- 962 (5th Cir.) (en banc), cert. denied, 454 U.S. 965 (1981); Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1024 (6th Cir. 1979); Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044 (7th Cir.), cert. denied, 434 U.S. 875 (1977); Van Dyke v. Coburn Enterprises, Inc., 873 F.2d 1094, 1100 (8th Cir. 1989); Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982); SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982); SEC v.Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992). -[5]- 553 F.2d 1033 (7th Cir.), cert. denied, 434 U.S. 875 (1977). -[6]- See discussion in Hollinger, 914 F.2d 1564, 1569 & n.8 (citing cases). ==========================================START OF PAGE====== Practical necessities require a recklessness standard. Proving a defendant's actual knowledge of fraud in a securities case can be a daunting task, particularly when (as is frequently the case) the evidence is entirely circumstantial. As the Second Circuit stated in deciding that recklessness was the appropriate standard: "To require in all types of 10b-5 cases that a factfinder must find a specific intent to deceive or defraud would for all intents and purposes disembowel the private cause of action under  10(b)." -[7]- The Commission itself often relies on the recklessness standard in its own law enforcement cases. The recklessness standard was not eliminated by the Reform Act. The only provision of the Reform Act that purported to alter the scienter standard in private actions under the Exchange Act was Section 21E of the Exchange Act, which provides a safe harbor from liability for certain persons on account of forward- ---------FOOTNOTES---------- -[7]- Rolf, 570 F.2d at 47. See also Mansbach, 598 F.2d at 1025 ("Requiring a plaintiff to show that the defendant acted with actual subjective intent to defraud could impose a great burden upon recovery, greatly limiting the  10(b)/Rule 10b-5 claim"); Hackbart, 675 F.2d at 1118 ("requiring the plaintiff to show [conscious] intent would be unduly burdensome"); G. A. Thompson & Co. v. Partridge, 636 F.2d 945, 961 n.32 (5th Cir. 1981); cf. Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91 n.30 (1983)("If anything, the difficulty of proving the defendant's state of mind supports a lower standard of proof" [i.e., a preponderance of the evidence rather than clear and convincing evidence].). ==========================================START OF PAGE====== looking statements (subject to certain exclusions). -[8]- Under the safe harbor, a person entitled to its protection cannot be liable in a private action for any forward-looking statement if, among other things, the plaintiff fails to prove that the statement was made with actual knowledge that it was false or misleading. -[9]- Since plaintiffs must prove actual knowledge in the case of allegedly misleading forward-looking statements that are covered by the safe harbor, it follows that plaintiffs are now required by Section 21D(b)(2) to plead with particularity facts giving rise to a strong inference that the defendant acted with actual knowledge in such cases. With respect to other allegedly misleading statements, however, the Reform Act makes no attempt to prescribe a new and stricter standard for liability. -[10]- ---------FOOTNOTES---------- -[8]- In addition, the Reform Act authorizes the Commission to sue aiders and abetters, but only where such persons "knowingly" provide substantial assistance to another person in violation of the Exchange Act or the rules thereunder. Section 20(f) of the Exchange Act, 15 U.S.C. 78t(f). -[9]- In its order, the Court did not limit to forward- looking statements its requirement that plaintiffs must allege specific facts that constitute circumstantial evidence of conscious behavior or create a strong inference of knowing misrepresentation on the part of the defendants. Rather, the Court found that the "standard applies whether the statements in question are forward- looking or not." Order at 16. -[10]- The Reform Act did change certain of the consequences of liability, as opposed to the standards for liability, on the basis of the defendant's state of mind. Under new Section 21D(g) of the Exchange Act a person is jointly and (continued...) ==========================================START OF PAGE====== Moreover, Section 21D(b)(2) itself, by its express terms, only purports to establish a standard for pleading -- it does not in any way address, much less alter, the substantive elements of a violation. With respect to the meaning of scienter, in contrast to the method of pleading it, the language of the section is entirely neutral, referring only to the "required state of mind." In determining that Section 21D(b)(2) required the pleading of conscious behavior, the Court drew from a purely procedural provision the incorrect conclusion that Congress had eliminated a well established substantive standard. B. Contrary To the Court's View, the Legislative History Shows That the Reform Act Does Not Prohibit the Pleading of Recklessness. The Court based its holding that the Reform Act required the plaintiffs to allege conscious behavior on its interpretation of the legislative history of the Reform Act. In fact, it is clear from the legislative history that Congress only sought to strengthen pleading standards, not to change the substantive standard for scienter. The Statement of Managers that accompanied the Conference Committee Report of the final bill explains Congress' concern that the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure had "not prevented abuse of the securities laws by private litigants" and that the ---------FOOTNOTES---------- -[10]-(...continued) severally liable for damages in a private action only if the trier of fact specifically determines that such person "knowingly" committed a violation of the securities laws. ==========================================START OF PAGE====== courts of appeals had "interpreted Rule 9(b)'s requirement in conflicting ways." -[11]- The Statement of Managers also notes that Congressional hearings had "included testimony on the need to establish uniform and more stringent pleading requirements." -[12]- In response to these concerns, the Conference Committee adopted language which, according to the Statement of Managers, is based in part on the pleading standard of the Second Circuit, then "[r]egarded as the most stringent pleading standard." -[13]- The Second Circuit standard was first announced in Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir. 1979), cert. denied, 446 U.S. 946 (1980). There the court of appeals said, at 558: It is reasonable to require that the plaintiffs specifically plead those events which they assert give rise to a strong inference that the defendants had knowledge of the [true facts] or recklessly disregarded their existence. The language of Section 21D(b)(2) clearly reflects this standard, although, as noted in the Statement of Managers which accompanied the Conference Committee Report, the provision was also ---------FOOTNOTES---------- -[11]- Statement of Managers -- The "Private Securities Litigation Reform Act of 1995," 141 Cong. Rec. H13699 at H13702 (daily ed. Nov. 28, 1995); H.R. Rep. 104-369, 104th Cong. 1st Sess. at 41). -[12]- Id. -[13]- Id. ==========================================START OF PAGE====== "specifically written to conform the language to Rule 9(b)'s notion of pleading with `particularity.'" -[14]- Reviewing the legislative history of the Reform Act, however, this Court found it particularly significant that the Conference Committee had eliminated an amendment to the pleading provision that had been included in the Senate version of the bill and that would have tracked some Second Circuit case law that explained more specific ways in which the strong inference could be established. -[15]- This amendment, which would have come immediately after the language ultimately adopted in Section 21D(b)(2), provided clarification that a strong inference that the defendant acted with the required state of mind may be established either (1) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness by the defendant, or (2) by alleging facts to show that the defendant had both motive and opportunity to commit fraud. -[16]- ---------FOOTNOTES---------- -[14]- Id. -[15]- See In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 268-69 (2d. Cir.), cert. denied, 114 S. Ct. 1397 (1994). -[16]- The language, offered as an amendment to the Senate version of the bill by Senator Arlen Specter, added a provision immediately following the general requirement that the complaint allege facts giving rise to a strong inference that the defendant acted with the required state of mind (contained in paragraph 1 of the section), stating: (continued...) ==========================================START OF PAGE====== The Conference Committee explained the deletion of this language as follows: Because the Conference Committee intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit's case law interpreting this pleading standard. -[17]- This explanation by the Conference Committee was accompanied by a footnote, footnote 23, that further explained: For this reason, the Conference Report chose not to include in the pleading standard certain language relating to motive, opportunity, or recklessness. -[18]- Since footnote 23 specifically referred to motive, opportunity, and recklessness, but not to conscious behavior, the ---------FOOTNOTES---------- -[16]-(...continued) (2) Strong Inference of Fraudulent Intent. -- For purposes of paragraph (1), a strong inference that the defendant acted with the required state of mind may be established either -- (A) by alleging facts to show that the defendant had both motive and opportunity to commit fraud; or (B) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness by the defendant. 141 Cong. Rec. S9222 (daily ed. June 28, 1995). -[17]- 141 Cong. Rec. H13702 (daily ed. Nov. 28, 1995); H.R. Rep. 104-369, 104th Cong. 1st Sess. at 41). -[18]- 141 Cong. Rec. H13705 n. 23 (daily ed. Nov. 28, 1995); H.R. Rep. 104-369, 104th Cong. 1st Sess. at 48 n. 23). ==========================================START OF PAGE====== Court appears to have determined that Congress must have intended that only evidence of conscious behavior would suffice to meet the strong inference test. This conclusion was reached in spite of the fact that in deleting the clarifying amendment, the Conference Committee deleted not only the language regarding motive, opportunity, and recklessness, but also the language regarding conscious misbehavior. As stated by the Court: "Because Congress chose not to include that language from the Second Circuit standard relating to motive, opportunity, and recklessness, Congress must have adopted the Conference Committee view and intended that a narrower first prong apply." Order at 12. The "narrower first prong" to which the Court referred was the language contained in the clarifying amendment that was not specifically mentioned in footnote 23, i.e., conscious behavior. Accordingly, the Court held that "plaintiff must allege specific facts that constitute circumstantial evidence of conscious behavior by defendants," [Order at 12-13] and directed the plaintiffs to "create a strong inference of knowing misrepresentation on the part of the defendants." Order at 16. The Court's apparent reliance on footnote 23 in the Statement of Managers to support its holding that Congress intended to eliminate recklessness is misplaced. Footnote 23 merely explains the result of the Conference Committee's decision not to codify the Second Circuit's case law interpreting the pleading standard, i.e., that it dropped the clarifying amendment that had been ==========================================START OF PAGE====== included in the Senate bill. Nowhere did the Conference Committee suggest that it was eliminating recklessness as satisfying the scienter requirement, or, indeed, that it was eliminating evidence of motive and opportunity or circumstantial evidence of fraudulent intent (be it conscious or reckless) as factors that the courts might consider in determining whether the strong inference had been established. Instead, Congress simply elected not to attempt to codify the guidance provided in Second Circuit case law, preferring to leave to the courts the discretion to create their own standards for determining whether a plaintiff has established the required strong inference. While codifying a uniform and strict standard for the pleading of scienter, the Reform Act in general (except in the case of the safe harbor), and Section 21D(b)(2) in particular, leave unchanged the degree of scienter required for private liability under Section 10(b) and Rule 10b-5. Whatever criteria the Court employs to determine whether the allegations of the amended complaint meet the pleading requirements of Section 21D(b)(2), it cannot follow that the plaintiffs must be precluded from pleading that the defendants acted recklessly. If plaintiffs can state with particularity facts giving rise to a strong inference that defendants acted recklessly, their complaint is sufficient under Section 21D(b)(2). ==========================================START OF PAGE====== CONCLUSION For the foregoing reasons, the Commission urges the Court to reconsider its earlier decision in this case and to hold that recklessness is sufficient to satisfy the scienter requirement. Respectfully submitted, RICHARD H. WALKER General Counsel JACOB H. STILLMAN Associate General Counsel JOHN W. AVERY Of Counsel Attorney Fellow PAUL GONSON Solicitor Attorneys for the Securities and Exchange Commission 450 5th Street, N.W. (Stop 6-6) Washington, D.C. 20549 (202) 942-0816 January 31, 1997