Securities and Exchange Commission v. Prakash

Background

View manufactures smart windows. Its standard warranty covered the cost of manufacturing replacement units but did not require View to pay shipping and installation costs. The opinion states that View nevertheless paid those installation costs for customers with a manufacturing defect known as the Type II defect, doing so 100% of the time.

View’s reported warranty liabilities initially excluded those installation costs. View later investigated its warranty accounting, Prakash resigned effective November 8, 2021, and View issued filings restating its warranty liabilities for 2019, 2020, and March 31, 2021. The opinion states that View described the previously reported warranty liability values as a material misstatement.

The SEC brought claims against Prakash under Section 17(a)(3) of the Securities Act of 1933, Section 14(a) of the Securities Exchange Act and Rule 14a-9, and Exchange Act Rule 13b2-1. The SEC seeks injunctive relief, civil penalties, and an order barring Prakash from serving as an officer or director. The opinion states that all of the claims are based on the alleged material misstatement of the warranty accrual and Prakash’s alleged negligence.

Prakash’s Motion for Summary Judgment

Prakash moved for summary judgment on all claims. Summary judgment is granted when the evidence shows no genuine dispute about a fact that could affect the result and the moving party is entitled to judgment as a matter of law. Prakash argued that the SEC could not prove that he acted negligently, that his conduct proximately caused the alleged misstatements, or that the misstatements were material.

The court held that the SEC presented evidence creating factual disputes about whether View decided to continue paying all installation costs and whether Prakash knew or should have known about that decision. The evidence included View’s practice of paying the costs, internal communications and budgeting information, testimony about discussions involving Prakash, and evidence that Prakash was told View would continue servicing all claims for a period of time.

The court also rejected Prakash’s argument that he could not have breached his duty of care because internal accountants and outside consultants did not accrue installation costs. The court explained that following an accounting practice does not by itself establish reasonable care. The SEC identified evidence that the accounting personnel and consultants lacked relevant information or expertise, were not directly asked to resolve the accrual question, or were not told that View intended to continue paying the costs. The court found that a reasonable jury could conclude that Prakash acted unreasonably by failing to investigate further or provide additional information.

The court further found a factual dispute about proximate cause, meaning whether Prakash’s alleged conduct was a substantial factor in producing the alleged misstatements. The SEC presented evidence that the accounting teams might have reached a different conclusion if they had known View intended to pay all installation costs. The court described that evidence as sparse but sufficient to create a material factual dispute.

Finally, the court found a factual dispute about materiality, meaning whether a reasonable investor would have viewed disclosure of the omitted information as significantly changing the overall information available. Prakash relied on expert evidence that the installation costs were a small percentage of View’s operating costs and were not significant to investors. The SEC relied on an event study and other evidence linking warranty-related disclosures to statistically significant stock-price declines. The court ruled that a reasonable jury could find the alleged misstatements material.

SEC’s Partial Motion for Summary Judgment

The SEC sought summary judgment on three specific issues. First, it argued that Prakash solicited or permitted the use of his name to solicit proxies in connection with the proposed merger between View and CF Finance Acquisition Corp. II. Second, it argued that the interstate-commerce-or-mails element of its Section 14(a) and Section 17(a)(3) claims was undisputed. Third, it argued that View’s books, records, and accounts were subject to Section 13(b)(2)(A) of the Exchange Act, as required for the Rule 13b2-1 claim.

For the proxy issue, the court applied an objective test asking whether there was a substantial connection between the person’s name and the solicitation effort. The court rejected Prakash’s argument that the SEC had to prove that his name actually induced shareholders to grant their proxies. The court found a substantial connection because Prakash reviewed drafts of the proxy materials, his name appeared 23 times, the materials included his professional biography and compensation information, and they stated that he would continue as View’s chief financial officer after the merger. The court concluded that no reasonable jury could find that Prakash did not permit his name to be used in the solicitation effort.

For the interstate-commerce-or-mails issue, the court took judicial notice of online filings containing the financial information underlying the SEC’s claims. It granted partial summary judgment on that issue, and the opinion states that Prakash did not oppose summary judgment on it.

For the books-and-records issue, the court noted that View registered its stock under Section 12(b) of the Exchange Act after the merger and began trading on the Nasdaq Stock Market. It concluded that no reasonable jury could find that View was not subject to Section 13(b)(2)(A) and granted partial summary judgment on that issue. Prakash did not oppose summary judgment on this issue.

Disposition

The court ordered that Prakash’s motion for summary judgment as to all claims was denied. The SEC’s partial motion for summary judgment was granted as to whether Prakash permitted the use of his name to solicit proxies in connection with the Section 14(a) claim; whether Prakash used interstate commerce or the mails in connection with the Section 17(a)(3) and Section 14(a) claims; and whether View’s books, records, and accounts were subject to Section 13(b)(2)(A) in connection with the Rule 13b2-1 claim.