The opinion of the court was delivered by: Walls, Senior District Judge
Defendants in this civil enforcement action brought by the Securities and Exchange Commission ("SEC") are Lucent Technologies, Inc. ("Lucent") and its executives and employees. The SEC alleges that defendants violated the Exchange Act of 1934 by improperly recognizing revenue and pre-tax income in violation of generally accepted accounting principles ("GAAP"). Lucent and several of the individual defendants have reached out-of-court settlements with the SEC and have been dismissed from the case. Four defendants, all former senior executives and managers at Lucent, remain. Three defendants - Jay Carter, Michelle Hayes-Bullock, and Alice Leslie Dorn - now separately move for summary judgment on all counts. Nina Aversano moves for partial summary judgment on the primary liability claim in the first count only. Defendants Carter and Hayes-Bullock jointly move to strike the expert reports of Sally L. Hoffman, SEC's accounting expert. The Court heard oral arguments on March 31, 2009. Aversano's motion for partial summary judgment on the primary violation of Section 10(b) is granted. Dorn's motion for summary judgment is granted as to the primary violation claim in the first count only and denied as to the aiding and abetting claim in the same count and the remaining counts. The motions of Carter and Hayes-Bullock for summary judgment are granted as to first, third and fourth counts and denied as to the fifth count. The motion to strike the expert reports of Sally L. Hoffman is denied. Because the motions implicate similar factual and legal issues, they will be discussed together in this opinion.
This matter arises out of sales of telecommunications equipment by Lucent and its recognition of revenues from those sales in fiscal year 2000.*fn2 The principal allegations against all defendants are that defendants authorized or approved verbal side agreements, credits or other incentives in connection with those sales to induce Lucent's customers to purchase equipment. These extra-contractual commitments, according to the SEC, cast substantial doubt on Lucent's ability to collect payment on these sales and made recording of revenues improper under GAAP.*fn3
The improper revenue recognition caused Lucent to materially overstate pre-tax income in its financial statements filed with the SEC. The SEC's charges against Aversano and Dorn are based on their role in five transactions with two of Lucent's top distributors. The SEC's claims against Carter and Hayes-Bullock stem from their involvement in Lucent's sale of four wireless network switches to AT&T Wireless Services.
Distributor Transactions - Aversano and Dorn
During Lucent's fiscal year 2000, Aversano was President of Lucent's North American Regional sales division. (Aversano's Statement of Undisputed Facts ("Aversano Facts") ¶ 1.) Dorn was Vice President of Indirect Sales for North America and reported directly to Aversano. (SEC's Omnibus Statement of Facts in Opposition to Aversano's and Dorn's Mots. ("SEC Facts - Aversano/Dorn") ¶ 1.)
Aversano and Dorn, as sales executives, had limited responsibilities in preparing Lucent's financial statements: Neither was involved in the drafting and review of financial statements, but each was expected to fully disclose to Lucent's accounting department the terms of all sales contracts they entered into or authorized so that the transactions could be properly accounted for. (Aversano Facts ¶¶ 7-11; Dorn's Statement of Undisputed Facts ("Dorn Facts") ¶¶ 15-17, 21-24.) Neither Aversano nor Dorn had expertise in accounting but each had a general awareness of revenue recognition principles. (SEC Facts - Aversano/Dorn ¶¶ 15-17; Dorn Facts ¶¶ 15-17.)
The SEC alleges that Aversano and Dorn gave oral extra-contractual assurances to Anixter and Graybar, two distributors of Lucent, in connection with at least five transactions that made recognizing revenues from these sales improper. These transactions included:
(1) The sale to Anixter of approximately $335 million of product over the course of Lucent's fiscal years 1999 and 2000 for resale to MCI/Worldcom;
(2) The sale to Anixter of approximately $38 million of optical networking product at the end of Lucent's first quarter of fiscal year 2000;
(3) The sale to Anixter of $89 million of product over the course of Lucent's second and third quarters of fiscal year 2000 for resale to ICG Communications, Inc.;
(4) The sale to Graybar of approximately $250 million of product over the course of Lucent's first through third quarters of fiscal year 2000 for resale to U.S. West Communications;
(5) The sale to Graybar of approximately $61 million of optical networking product in Lucent's third quarter of fiscal year 2000 for resale to three local exchange carriers.
(SEC Opp'n Br. to Aversano's Mot. at 11; SEC Opp'n Br. to Dorn's Mot. at 7.) While the details of the oral assurances varied from transaction to transaction, their general nature was that if the distributors took the product offered by Lucent they would not get "hurt" in a given transaction. (SEC Facts - Aversano/Dorn ¶¶ 65, 68, 103, 114, 125.) Specifically, Aversano and Dorn promised that Lucent would assist them in moving the product to end-customers, (id. ¶¶ 23, 27, 114), and accept a return of the product if sales to the end-customers did not materialize. (Id. ¶¶ 23, 25, 27, 35, 37, 47, 52, 55, 57, 60, 64, 69, 77.)
According to the SEC, Aversano and Dorn kept these oral assurances secret from Lucent's accounting personnel. In addition, on October 12, 2000, Aversano executed a management representation letter for the fourth quarter of fiscal year 2000 which stated:
"We acknowledge our fiduciary responsibilities to ensure that the highest degree of integrity is inherent in the preparation of financial statements for Lucent and its core business units. We are responsible for the fair presentation in the financial statements of the [North American region's] financial position and results of operations in conformity with generally accepted accounting principles."
(SEC Facts - Aversano/Dorn ¶ 143.) This letter also falsely stated that Aversano had made no: "(1) agreements to repurchase or accept returns of inventory sold to customers, including distributors, other than for restocking as provided in distributorship agreements or (2) future obligations, other than normal warranty obligations, with respect to inventory sold to customers, including distributors." (Id.) The SEC alleges that these false representations or failures to inform caused Lucent to materially overstate its revenues and income.
AWS Transaction - Carter and Hayes-Bullock
From July 1997 to September 2000, defendant Jay Carter was president of Lucent's AT&T Customer Business Unit ("ACBU") with global responsibility for sales and marketing of Lucent's products to AT&T. (Carter's Statement of Undisputed Facts ("Carter Facts") ¶¶ 1-2.) Defendant Michelle Hayes-Bullock was a finance manager assigned to support ACBU.*fn4 (Hayes-Bullock's Statement of Undisputed Facts ("Hayes-Bullock Facts") ¶ 2.)
Like Aversano and Dorn, Carter had limited responsibilities in preparing Lucent's financial statements but was expected to fully disclose all terms of sales contracts to the accounting department. (SEC's Omnibus Statement of Facts in Opposition to Carter's and Hayes-Bullock's Mots. ("SEC Facts - Carter/Hayes-Bullock") ¶¶ 5-9; SEC Omnibus Opp'n Br. to Carter's and Hayes-Bullock's Mot. at 25.) Carter also signed management representation letters regarding ACBU's financial results. (SEC Facts - Carter/Hayes-Bullock ¶¶ 9, 100-101.) In contrast, Hayes-Bullock, as the most senior finance manager assigned to support ACBU, had direct responsibility for ensuring accuracy of ACBU financial statements. (Id. ¶ 19.)
Starting in the summer of 1999, Lucent and AT&T Wireless Services, Inc. ("AWS"), a division of AT&T, began negotiating a new business model known as Voice Path Pricing ("VPP"). (SEC Facts - Carter/Hayes-Bullock ¶¶ 28-29; Carter Facts ¶ 50.) Under VPP, AWS would no longer pay Lucent for each individual piece of equipment that makes up a telecommunications network as they had done previously under the General Purchase Agreement ("GPA"). (SEC Facts - Carter/Hayes-Bullock ¶ 30.) Instead, AWS would pay for each "voice path" -- in essence, pay for each data/voice connection that could be handled on the finished network. (Id.)
While negotiations on the VPP agreement were continuing, the SEC contends that Carter authorized his subordinates to orally propose, and that AWS agreed, that VPP would retroactively apply to products purchased by AWS between April 1, 2000 and the date the VPP agreement was finally reached. (SEC Facts - Carter/Hayes-Bullock ¶ 39.) Under this oral agreement, the parties would order and ship equipment as usual with the understanding that any differential between the VPP and conventional price for products purchased during this interim period would be credited back to AWS via a "true-up" process once the VPP agreement was finalized. (Id. ¶ 43.) In effect, the SEC claims, the parties agreed to have VPP commence on April 1, 2000. (Id.)
During the third quarter, Lucent provided four switches to AWS without a purchase order and invoice. (SEC Facts - Carter/Hayes-Bullock ¶ 72.) In order to recognize the revenue, Carter instructed his subordinates to obtain a purchase order from AWS for the switches. (Id. ¶ 76.) AWS provided a purchase order with the express understanding that -- in conformity with the original oral promise -- Lucent would provide a credit for that invoiced amount and that AWS would ultimately pay the VPP price for the switches. (Id. ¶ 77.) On June 30, 2000, at the end of Lucent's third quarter of fiscal year 2000, the switches were invoiced under the GPA and recognized as revenue. (Id. ¶ 80.) This, the SEC alleges, was improper under GAAP because the revenue from the switches, as a result of the verbal agreement to make VPP retroactive to April 1, 2000, was not fixed and realizable. According to the SEC, Hayes-Bullock knew of these improprieties and failed to object despite her duty to do so.
Defendants dispute the SEC's version of events but also argue that these fact disputes are immaterial and do not preclude summary judgment in their favor. The various counts of securities violations alleged against each defendant are:
Count 1: Primary violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder against all defendants and aiding and abetting violations against the same provisions against all defendants;
Count 3: Aiding and abetting violations of Section 13(a) of the Exchange Act, Rules 12b-20, 13a-11 and 13a-13 against all defendants;
Count 4: Aiding and abetting violations of Section 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act against all defendants;
Count 5: Violation of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 against all defendants
Count 6: Violation of Rule 13b2-2 promulgated under the Exchange Act against Aversano.
In 2005, Hayes-Bullock successfully moved to dismiss the primary violation claim under the first count. See S.E.C. v. Lucent Technologies, Inc., 363 F. Supp. 2d 708, 719-24 (D.N.J. 2005) ("Lucent I"). All defendants, except Aversano, now move for summary judgment on all counts. Aversano moves for partial summary judgment on the primary violation claim in the first count only. The Court heard oral arguments on these motions on March 31, 2009.
SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate where the moving party establishes that "there is no genuine issue as to any material fact and that [it] is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). A factual dispute between the parties will not defeat a motion for summary judgment unless it is both genuine and material. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2510 (1986). A factual dispute is material if, under the substantive law, it would affect the outcome of the suit and it is genuine if a reasonable jury could return a verdict for the non-moving party. See id. at 248. The moving party "always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553 (1986).
Once the moving party has carried its burden under Rule 56, "its opponent must do more than simply show that there is some metaphysical doubt as to the material facts" in question. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356 (1986). To survive a motion for summary judgment, the non-moving party must present "more than a scintilla of evidence showing that there is a genuine issue for trial." Woloszyn v. County of Lawrence, 396 F.3d 314, 319 (3d Cir. 2005). The non-moving party must go beyond the pleadings and, by affidavits or other evidence, designate specific facts showing that there is a genuine issue for trial. See Fed. R. Civ. P. 56(e); Celotex, 477 U.S. at 323-24. "Conclusory statements, general denials, and factual allegations not based on personal knowledge [are] insufficient to avoid summary judgment." Olympic Junior, Inc. v. David Crystal, Inc., 463 F.2d 1141, 1146 (3d Cir. 1972).
At the summary judgment stage, the court's function is not to weigh the evidence and determine the truth of the matter, but rather to determine whether there is a genuine issue for trial. See Anderson, 477 U.S. at 249. In doing so, the court must construe the facts and inferences in the light most favorable to the non-moving party. See id. at 255; Curley v. Klem, 298 F.3d 271, 276-77 (3d Cir. 2002).
I. Primary Liability under ...