SECURITIES AND EXCHANGE COMMISSION, Appellant, v. Virgil A. KLUESNER, Appellee, 834 F.2d 1438

LAY, Chief Judge. The Securities and Exchange Commission (SEC) appeals the district court’s award of Kluesner’s attorney’s fees under the Equal Access to Justice Act, 28 U.S.C. § 2412 (EAJA). For reversal, the SEC asserts: (1) that the district court’s decision was an abuse of discretion and should be reviewed de novo; (2) that the district court erred in awarding attorney’s fees because the SEC had substantial justification to bring suit; and (3) that the district court erred in awarding attorney’s fees because of the existence of special circumstances.

Kluesner was president of Wordtronix, a start-up company involved in developing and marketing word processing systems. The company’s stock was sold publicly in the local over-the-counter market. The SEC brought suit against both Kluesner and Wordtronix for violations of

section 10(

b) and rule 10b-5 based on two press releases issued by the company concerning certain sales arrangements Wordtronix made with two other companies. Wordtro-nix consented to a permanent injunction against further violations, but Kluesner maintained his innocence and proceeded to trial. It is now well established that in order for the SEC to prove a

section 10b-5 violation, it must show a misrepresentation or omission, which is material, and done in connection with the sale or purchase of a security. The SEC must also prove that the misrepresentation or omission was done with scienter. The press releases described certain multi-million dollar “sales agreements” between Wordtronix and two other companies, BMC and EMC. The SEC characterized these agreements as distributorship agreements rather than sales agreements and pointed to conditions which had to be met before any obligation arose.

The SEC also claimed that BMC’s failure to pay $10,000 placed it in default of the contract. Within 45 days of the press release, Wordtronix’s stock had more than doubled in price to $7.50 per share. However, when the two deals fell through, the value of the stock dropped. After a seven day trial to the court, Chief Judge Alsop held that there was no violation of either

section 10(

b) or rule 10b-5 by Kluesner. Specifically, the district court found: (1) that Kluesner had no intent to deceive, nor was he reckless in disseminating the press releases; (2) that Kluesner did not believe that the releases contained false or misleading information; and (3) that Kluesner should not reasonably have believed that the press releases were misleading. The district court set forth 32 detailed findings of fact which inter alia reflected the following: 31. Viewed in the light of subsequent events, Kluesner was overly optimistic about the significance of the BMC and EMC contracts.

But he did not intentionally or recklessly disregard a substantial risk that the information contained in the press releases was false. Instead, Kluesner reasonably believed at the time of the releases that the information they contained was accurate. He also reasonably believed that the information omitted from the press releases was immaterial to the purposes for which the releases would be used by their recipients. 32.

Kluesner did not form the belief that either the BMC or EMC press releases contained false or misleading information, or omitted information necessary to make them not misleading, nor should he reasonably have done so, at any time when traders in the market would reasonably rely on the press releases. Thus, Kluesner did not intentionally or recklessly fail to correct a misleading impression left by the press releases. Slip op. at 7-8. The SEC did not appeal that decision. Kluesner then filed for and was awarded over $59,000 in attorney’s fees under the EAJA.

The EAJA provides that “a court shall award to a prevailing party other than the United States fees and other expenses, * * * unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.” 28 U.S.C. § 2412(d)(1)(A). The guidelines for review of such an award are clearly set forth in this circuit: On appeal, the district court’s decision on an application for fees under the EAJA is not to be disturbed unless it constitutes an abuse of discretion.

Under this standard, the district court’s conclusions of law are reviewable on a de novo basis, and its findings of fact are reviewable under the clearly erroneous standard. Brouwers v. Bowen, 823 F.2d 273, 275 (8th Cir.1987) (per curiam) (citations omitted). Substantial Justification for Suit The government bears the burden of proving that its position is substantially justified. Foley Constr. Co. v. U.S. Army Corps of Eng’rs, 716 F.2d 1202, 1204 (8th Cir.1983), cert. denied, 466 U.S. 936, 104 S.Ct. 1908, 80 L.Ed.2d 457 (1984).

The basic test has been described as a test of the reasonableness of the government’s position. Id. However, after the 1985 amendments to the EAJA, this court has held “that the Government now must show not merely that its position was marginally reasonable [, but that] its position must be clearly reasonable, well founded in law and fact, solid though not necessarily correct.” United States v. 1,378.65 Acres of Land, 794 F.2d 1313, 1318 (8th Cir.1986) (emphasis added and footnote omitted). The government asserts that the primary issue at trial was whether Kluesner acted with scienter.

However, the district court found that Kluesner acted with “reasonable belief” and did not recklessly or intentionally act to deceive others through the two press releases. Significant here is the fact that the government does not challenge any of the district court’s findings as clearly erroneous. It did not file an appeal on the merits and as such this court must accept Chief Judge Alsop’s findings as not clearly erroneous. The district court construed these agreements as sales agreements. The court also found that the press releases did not mislead any investors.

Based upon these detailed findings of fact we find no abuse of the district court's discretion in holding that the government's suit was not substantially justified under the EAJA. Special Circumstances The government also asserts that special circumstances existed which support a denial of attorney's fees under the EAJA. As special circumstances, the government asserts changes in the testimony of Kluesner and Roy Zabierek at trial as compared to their statements made during the government’s investigation.

The SEC asserts that Kluesner testified at trial that the BMC agreement was in fact a firm sale, whereas he had stated earlier that it was a dealer or quota arrangement. Kluesner responds by stating that the SEC is incorrect because Kluesner never used the words “firm sale,” “firm contract” or “firm agreement” at trial. Kluesner said merely that a past due $10,-000 payment from BMC was insignificant: “[c]ompared to the fact that 3,000 units were to be delivered over a three and a half year period, BMC being a large company, Serif units, 50,000 trading companies, that kind of thing.” Joint Appendix at 892.

This statement illustrates Kluesner’s belief that the $10,000 was not material to the contract, and, thus, BMC’s failure to pay that sum did not constitute either a breach of the contract or a failed condition precedent. Roy Zabierek was a Wordtronix marketing executive. The SEC asserts that during its investigation Zabierek initially denied having anything to do with the BMC press release, but recanted that during trial.

Kluesner responds that although that is technically correct, the SEC failed to mention that Zabierek first recanted his earlier statement when he was deposed, on May 10,1984, some two years prior to trial. Thus, Kluesner asserts that there were no special circumstances such as to warrant disallowance of attorney’s fees. Based on these facts, the district court found that this asserted discrepancy did not constitute special circumstances. We hold that his finding of fact is not clearly erroneous and it was not an abuse of discretion to find no special circumstances under the EAJA.

We affirm the district court’s findings that the SEG’s action was not substantially justified and that special circumstances did not exist to make the award of the attorney’s fees unjust. Judgment affirmed. . The Honorable Donald D. Alsop, Chief United States District Judge for the District of Minnesota.