Mr. Koenig has also asserted that he exercised his duties as Chief Financial Officer in
good faith (see Koenig’s Eleventh Aff. Def.), and in order to carry out those duties effectively,
he necessarily relied in good faith on others to provide accurate information. For instance, he
was entitled to rely in good faith on the financial and accounting information submitted to the
Company by its subsidiaries. See Chill v. General Elec. Co., 101 F.3d 263, 269-70 (2d Cir.
1996) (concluding that company was not reckless in relying on financial reporting of third-tier
subsidiary); see also Glickman v. Alexander & Alexander Servs. Inc., No. 93 CIV. 7594 (LAP),
1996 WL 88570, at *15 (S.D.N.Y. Feb. 29, 1996) (concluding that reliance on subsidiary’s
income statements, which forced a subsequent restatement, was at most evidence of negligence
or mismanagement and insufficient to show fraud). Likewise, he was entitled to rely in good
faith upon others within the Company to ensure that the information upon which he relied in
signing the Company’s financial disclosures was accurate.

Whereas a motion to strike may serve a useful purpose “in saving the time and expense
that otherwise would be spent litigating issues that will not affect the outcome of the case,” that
is not the case here. Northwestern Corp., 1996 WL 732519, at *14. Whether presented as
affirmative defenses or denials of the SEC’s allegations, answers to the questions of fact raised in
affirmative defenses Eleven, Twelve and Fourteen are part of Mr. Koenig’s defense to the SEC’s

allegations. The Eleventh, Twelfth and Fourteenth affirmative defenses should not be stricken.

B. The Alleged Misstatements Are Not Material
(Koenig’s Thirteenth Affirmative Defense)

As his Thirteenth Affirmative Defense, Mr. Koenig asserts that the price of Waste
Management stock rose upon the issuance of the Restatement of Waste Management’s financial

statements on February 24, 1998, and therefore none of the alleged misstatements by its officers

plaintiff presented no evidence to counter defense of good faith reliance on accountant), aff'd, 967 F.2d
340 (9th Cir. 1992).


Digi Int'l, Inc., Sec. Litig., No. 00-3162, 00-3227, 2001 WL 753869, at *2 (8th Cir. July 5, 2001)
(unpublished opinion, attached as Exhibit A); see also In re MicroStrategy, Inc. Sec. Litig., 148
F. Supp. 2d 654 (E.D. Va. 2001). The fact that independent auditors reviewed the company’s
filings and conferred with the CFO about transactions in question negates a finding that the CFO
acted with scienter. In re Digi Int’l, Inc. Sec. Litig., No. 97-5, slip. op. at 15 n.7 (D. Minn. Aug.
17, 2000) (“Digi IT’)(attached hereto as Exhibit B).

The nature and extent of the accounting issues involved in preparing Waste
Management’s consolidated financial statements was extremely complicated, involving
numerous issues of judgment subject to differing interpretations among accountants. Under
these circumstances, a defendant can show good faith reliance through consultation with, and
reliance upon, others even where the accounting issues are hotly contested, both
contemporaneously and in hindsight. See id., No. 97-5, slip op. at 14-15 (holding the CFO did
not have the requisite intent for securities fraud in light of the fact that he had reviewed the
accounting literature and consulted with outside auditors, even though other accounting experts
might have disagreed with their conclusions). Mr. Koenig was entitled to rely upon the
conclusions reached by Arthur Andersen in issuing “clean opinions” on the financial statements.
See Stavroff v. Meyo, No. 95-4118, 1997 WL 720475, at *6, 129 F.3d 1265 (6th Cir. Nov. 12,
1997) (affirming dismissal of securities fraud claims against company, CEO and CFO because “a
company’s reliance on the guidance of outside auditors is inconsistent with the intent to

defraud”) (unpublished opinion, attached as Exhibit C).?

?See also SEC v. Wills, 472 F. Supp. 1250, 1262 (D.D.C. 1978) (dismissing fraud claim because reliance
on outside auditors “in determining the structure and accounting treatment of [the] transaction” negates
inference of fraudulent intent or recklessness); Mathews v. Centex Telemanagement, Inc., No. C-92-1837-
CAL, 1994 WL 269734, at *7 (N.D. Cal. June 8, 1994) (rejecting scienter allegations because
“{dJefendants also conferred with and relied in good faith on their outside auditor”); Newton v. Uniwest
Fin. Corp., 802 F. Supp. 361, 367-68 (D. Nev. 1990)(granting summary judgment for defendant because


and directors were material. Mr. Koenig previously raised failure of materiality in his motion to
dismiss, and this Court ruled that issues of fact with respect to materiality prevented dismissal.
SEC v. Buntrock, No. 02 C 2180, 2004 WL 1179423, *5 (N.D. Ill. May 25, 2004). The Court
did not hold, as the SEC now asserts, that the immateriality defense is “legally insufficient.”
Because a finding of immateriality would defeat the SEC’s claims under Section 17(a) of the
Securities Act, Sections 10(b) and 13(a) of the Exchange Act, and Exchange Act Rules 10b-5,
12b-20, 13a-1, 13a-13 and 13b2-2, Mr. Koenig should be allowed to introduce affirmative
evidence of such at trial, and the SEC’s motion to strike Mr. Koenig’s Thirteenth Affirmative
Defense should be denied.
CONCLUSION

For the reasons set forth in the Defendants’ Joint Memorandum, as well as those reasons
set forth above, the SEC’s Motion to Strike Defendants’ Affirmative Defenses and Other Matter
in Answer should be denied.

DATED: September 2, 2004

Respectfully submitted,

Batah R. Wolff {
Jonathan S. Quinn
Matthew J. O’Hara
Lisa A. Kistler
SACHNOFF & WEAVER, LTD.
30 South Wacker Drive, Suite 2900
Chicago, linois 60606
(312) 207-1000

Attorneys for Defendant James E. Koenig
687700


DECLARATION OF
ROBERT W. POMMER III

EXHIBIT 12.


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
)
SECURITIES AND EXCHANGE COMMISSION, )
)
Plaintiff, )
)
vs. ) No. 02 C 2180

)

DEAN L. BUNTROCK, PHILLIP B. ROONEY, ) Hon. Wayne R. Andersen
JAMES E. KOENIG, THOMAS C. HAU, )
HERBERT A. GETZ, and BRUCE D. )
TOBECKSEN, )
)
Defendants. )
)

DEFENDANT JAMES E. KOENIG’S
MEMORANDUM IN OPPOSITION
TO PLAINTIFF’S MOTION TO STRIKE DEFENDANTS’ AFFIRMATIVE DEFENSES

Defendants Buntrock, Rooney and Koenig have filed a Joint Memorandum of Defendants
Buntrock, Rooney and Koenig in Opposition to Plaintiff’s Motion to Strike Defendants’
Affirmative Defenses (the “Joint Memorandum”) setting forth the reasons why Rooney,
Buntrock and Koenig should be allowed to present those defenses which they have in common.
Mr. Koenig also submits this Memorandum in Opposition to address several additional
affirmative defenses which he has asserted (Affirmative Defenses 11-14).! The SEC’s motion to
strike should be denied in all respects, and the Defendants should be allowed to defend this case

on the merits.

' The SEC also moved to strike Koenig’s Fifth Affirmative Defense. Koenig does not respond to
the SEC’s motion with respect to his Fifth Affirmative Defense, as he hereby withdraws that
defense.


A. Koenig’s Good Faith Reliance On Outside Auditors And Others
(Koenig’s Eleventh, Twelfth and Fourteenth Affirmative Defenses)

The benefit of any doubt as to whether something constitutes an affirmative defense
should be given the pleader. See Bobbitt v. Victorian House, Inc., 532 F. Supp. 734, 737 (N.D.
Ill. 1982). The “cautious pleader is fully justified in setting up as affirmative defenses anything
that might possibly fall into that category. . . .” Id. at 736. This is especially true where, as here,
Mr. Koenig has pleaded as affirmative defenses matters that present questions of fact regarding
disclosure to auditors and good faith reliance. See SEC v. Randy, No. 94 C 5902, 1995 WL
616788, at *3 (N.D. Ill. Oct. 17, 1995) (“[A]n affirmative defense will not be stricken if it is
sufficient as a matter of law or if it presents questions of law or fact.”). If there exists any real
doubt about Mr. Koenig’s right, under his denial, to offer proof of these matters, affirmative
defenses Eleven, Twelve and Fourteen should not be stricken. See Tome Engenharia E.
Transporrtes, Ltd. v. Malki, No. 94 C 7427, 1996 WL 172286, at *10 (N.D. Ill. Apr. 11, 1996),
citing Instituto Nacional de Comercializacion Agricola (Indeca) v. Continental Illinois Nat’l
Bank & Trust Co., 576 F. Supp. 985, 988 (N.D. Ill. 1983); Bobbitt, 532 F. Supp. at 736-37.

There is a second reason why the SEC’s motion should be denied as to these affirmative
defenses. Dismissal of these defenses will not promote the disposition of the case on the merits.
Mr. Koenig wishes to preserve the right to argue the substantive merits of the defenses later in
his case, whether they are deemed affirmative defenses or denials of the SEC’s allegations. See
Northwestern Corp. v. Gabriel Mfg. Co., No. 95 C 2004, 1996 WL 732519, at *14 (N_D. Ill.
Dec. 18, 1996) (“striking an affirmative defense on technical grounds does not necessarily
preclude the party from asserting or arguing its substantive merits later in the case”). Reliance
on auditors and others is a well-established defense. That an officer of a company consulted

with independent auditors is evidence that weighs heavily against a finding of scienter. In re