GAAP; loan repayment was “highly improbable”; and the Telsim contract’? was 100% vendor-
financed and Motorola provided additional financing in the form of “working capital.” In addition,
Lead Plaintiff alleges that the July 10, 2000 press release and second quarter 2000 Form 10-Q
were false and misleading because Defendants’ failure to disclose the $1.333 billion financing to
Teisim “created the materially false and misleading impression that Nextel represented Motorola’s
largest concentration of vendor financing.” (Id. J 159.)

G. August 1, 2000 Press Release

On August 1, 2000, Motorola issued a press release describing the Motorola-Telsim
relationship in positive terms, stating that Telsim was “once again taking technology forward in
Turkey at internet speed” and that “Motorola has estimated that revenues from [Telsim] could be
at least $1.5 billion.” (/d. | 160.) Following this announcement on August 1, Motorola's common
stock closed at $35 per share, a 5% increase over the previous day’s closing value of $33.25 per
share. (/d. J 161.)

Lead Plaintiff claims that Motorola's August 1, 2000 press release was false and misleading
for some of the same reasons previously discussed: Telsim had inadequate cash flow and lack of
access to capital markets; loan repayment was “highly improbable”; and there was no $1.5 billion
agreement with Telsim. Lead Plaintiff alleges that the August 1, 2000 press release was false and
misleading for several additional reasons, as well: First, Motorola’s efforts to have third parties
assume Telsim's indebtedness had failed. Second, all of Telsim’s efforts to find a buyer for the
company, to conduct a public offering of its shares, or to receive a significant equity investment had
failed. Third, Telsim had denied Motorola representatives access to its books and records, so
Motorola could not assess the value of its purported collateral, ie., Telsim's stock. Fourth,

Defendants did not disclose that the sole remedy for a default was “to secure payment through

*° Again, it is not clear to what contract Lead Plaintiff is referring.

19


B. Materiality

Defendants contend that the investing public knew from the “total mix of information” before
the beginning of the Class Period that Motorola had provided loans to Telsim. (Def. Mem., at 23-
24.) The court interprets this contention as an argument that the statements Lead Plaintiff alleges
were misleading were not material. Under the securities laws, a statement is material if “there is
a substantial likelihood that disclosure of the information would have been viewed by the
reasonable investor to have significantly altered the total mix of information.” Searls v. Glasser,
64 F.3d 1061, 1066 (7th Cir. 1995) (citing Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).)
“(This determination is a highly fact-dependent analysis.” /d.; see also In re Cabletron Sys., Inc.,
311 F.3d 11, 34 (1st Cir, 2002) (“In general, the materiality of a statement or omission is a question
of fact that should normally be left to a jury rather than resolved by the court on a motion to
dismiss’) (citation omitted).

Defendants point out that during a May 14, 1998 news teleconference to announce the
sales agreement with Telsim, a reporter asked an unnamed Motorola official whether Motorola was
financing the project. The official responded that “{t]his is a commercial relationship that has a
broad range of features and capabilities, so there is an element of financing involved, yes.” (Craig
Menefee, Motorola[] Inks Largest GSM Deal Ever in Turkey, NEWSBYTES NEWS NETWORK, May 14,

1998, Ex. 2 to Def. Mem.)*” In Defendants’ view, the fact that this press release did not specifically

a Defendants claim this court may take judicial notice of newspaper articles for the fact

of their publication without transforming the motion into one for summary judgment. (Def. Mem.,
at 6n.6.) In support, they cite an opinion from a district court in another circuit, /n re Merrill Lynch
& Co., inc. Research Reports Sec. Litig., 289 F. Supp. 2d 416, 425 n.15 (S.D.N.Y. 2003). Lead
Plaintiff claims that the court may only consider documents that are referred to in the complaint and
are central to the claim, citing Albany Bank & Trust Co. v. Exxon Mobil Corp., 310 F.3d 969, 971
(7th Cir. 2002) (‘[D]ocuments that are neither included in the plaintiffs complaint nor central to the
claim should not be considered on a motion to dismiss’). (Lead Pl. Resp., at 13.n.12.) The
Seventh Circuit Court of Appeals has stated that courts may take judicial notice of matters in the
public record on a motion to dismiss. Palay v. United States, 349 F.3d 418, 425 n.5 (7th Cir. 2003)
(citations omitted). This court could find no cases in which our Court of Appeals has addressed

40


151-62, 170-72, 176-80, 186-90); the March 22, 2000 Form 10-K and Proxy Statement, (id. {If 124-
28, 219-38); Forms 10-Q for the first, second, and third quarters of 2000, (id. {If} 147-50, 155-57,
159, 175-76); Koenemann’s statement in the November 24, 2000 Wall Street Journal that in vendor
financing, Motorola should “act like a bank” (discussed below), (id. {{] 181-82); and improper
financial reporting in violation of GAAP, (id. Jf 219-38.) Lead Plaintiff claims that in these
statements, Defendants repeatedly issued only “selective disclosures,” in that they stated that
Motorola had reached multi-billion dollar sales pacts with Telsim, but failed to disclose that those
sales were 100% financed by Motorola. (Lead Pi. Resp., at 13.)°* Our Court of Appeals has
explained that Rule 10b-5 “only proscribes omissions that render affirmative statements misleading;
thus, incomplete disclosures, or ‘half-truths,’ implicate a duty to disclose whatever additional
information is necessary to rectify the misleading statements.” Schlifke v. Seafirst Corp., 866 F.2d
935, 944 (7th Cir. 1989) (citation omitted).

Ignoring Lead Plaintiff's repeated allegations that certain of Motorola’s disclosures were
misleading, Defendants suggest that the only “misstatement or omission” identified in the
Complaint was “the claim that Telsim’s loans should have been written off earlier than they were.”
(Def. Mem., at 22.)*° As this court reads the Complaint, Lead Plaintiff has not in fact alleged that
Motorola's failure to write the Telsim loan off earlier constitutes a “misstatement.” Instead, as
discussed below, Lead Plaintiff has identified several statements that arguably violated GAAP and
in any event might be found by a reasonable trier of fact to constitute misleading “half-truths.” The

court concludes that these allegations are sufficient to state a claim under the securities laws even

38 Lead Plaintiff's Memorandum of Law in Opposition to Defendants’ Motion to Dismiss
the Consolidated Class Action Complaint is cited as “Lead PI. Resp., at__.”

38 Defendants’ Memorandum of Law in Support of Motion to Dismiss the Consolidated

Class Action Complaint is cited as "Def. Mem., at__.”

36


untenable for two reasons. First, Defendants had conceded that the fees had been recognized as
1996 income, which plaintiffs alleged violated GAAP. Second, “even assuming that HTCC’s
disclosures were factually accurate, we cannot decide on the present record whether those
disclosures were conveyed with sufficient ‘intensity and credibility’ as to dispel the false impression
created by Citizens’ alleged misrepresentations.” /d. The court therefore rejected defendants
truth-on-the-market defense

Here, the court cannot find on the facts before it that the “element of financing” comment
or the general statements regarding vendor financing in Motorola’s SEC filings were conveyed with
sufficient “intensity and credibility” to dispel any false impressions, omissions, or “half-truths”
created by Defendants’ alleged misrepresentations. The court therefore turns to consider whether
Lead Plaintiff has adequately pleaded scienter as to each Defendant.

Cc. Scienter

To establish scienter, Lead Plaintiff must plead facts establishing that Defendants acted
with intent to deceive or manipulate. Reckless disregard of the truth is sufficient to establish intent
for this purpose. S.E.C. v. Jakubowski, 150 F.3d 675, 681 (7th Cir. 1998) (citations omitted). On
the other hand, “an unexpected turn of events cannot demonstrate a securities problem at all, as
there cannot be ‘fraud by hindsight." Asher v. Baxter Int’, Inc., — F.3d -, No. 03-3189, 2004 WL
1687885, at *3 (7th Cir. July 29, 2004) (quoting Denny v. Barber, 576 F.2d 465, 470 (2nd Cir. 1978)
(Friendly, J.)). Although our Court of Appeals has not addressed the requirement for pleading
scienter in light of the PSLRA, the majority of courts in this district have held that the PSLRA adopts
the standard enunciated by the Second Circuit in Press v. Chemical Investment Servs Corp., 166
F.3d 529, 538 (2d Cir. 1999), requiring a plaintiff to allege either (1) facts showing that defendants
had both motive and opportunity to commit fraud, or (2) facts constituting strong circumstantial

evidence of conscious misbehavior or recklessness. See Spiegel, 2004 WL 1535844, at *24

45


date, Motorola reported $30.93 billion in net sales, $817 million in net income, and earnings per
share of $1.31. (/d. 125.) The MD & A section of the Proxy Statement acknowledged Motorola's
involvement in vendor financing generally, but did not mention Telsim specifically:

Purchasers of the Company's infrastructure equipment continue to require suppliers

to provide long-term financing in connection with equipment purchases. Financing

may include all or a portion of the purchase price and working capital... . During

1999 the Company significantly increased the amount of customer financing

provided by its consolidated financing subsidiary... . The Company expects that

the need to provide this type of financing . . . will continue and may increase in the

future.

(Id. 1 126.) The Proxy Statement noted that MCC, Motorola's wholly-owned finance subsidiary,
was “engaged principally in financing long-term receivables arising out of equipment sales made
by the Company to customers throughout the United States and internationally.” The Proxy
Statement also reported that $1.7 billion of Motorola's $11.58 billion in “other assets” were “long-
term finance receivables.” (/d. 127.) Defendants “put additional pressure” on themselves by
predicting in the Form 10-K and Proxy Statement that “[sJales are expected to grow at a rate higher
than the 1999 growth rates due primarily to strong demand for wireless telephones.” (/d. If] 129-
130.)

Lead Plaintiff claims the statements in the March 22, 2000 Form 10-K and Proxy Statement
were false and misleading for two of the reasons identified regarding the February 3, 2000 press
release: Telsim had breached the Agreements; and Telsim had inadequate cash flow and lack of
access to capital markets. Lead Plaintiff further urges the Form 10-K and Proxy Statement were
false and misleading on several additional grounds, as well. First, for reasons that are unclear,
Motorola delayed finalizing its December 1999 commitment to provide Telsim with an additional
$450 million in vendor financing until February 1, 2000 to avoid having to disclose that financing
in the Form 10-K and Proxy Statement. Although Lead Plaintiff does not so state, the court
presumes Lead Plaintiff points to this delay as evidence that the March 22 filings were false

because, as noted, Motorola recognized $325 million for the December 22-23, 1999 credit increase

13


262 F. Supp. 2d 937, 957 (N.D. Ill. 2003); Chu //, 100 F. Supp. 2d at 837. Lead Plaintiff points to
Stavros, in which the court stated that allegations that key officials knew of facts critical to a
business's core operations or to an important transaction that would affect the company’s
performance imply that such officials knew a statement was false. 266 F. Supp. 2d at 850.

In Spiegel, plaintiffs alleged, inter alia, that defendant Spiegel, Inc. (“Spiegel”) and its
current or former officers and directors engaged in a fraudulent scheme to boost product sales that
allowed the company to understate its debt by more than $3 billion and overstate its earnings by
$240 million. 2004 WL 1535844, at*1. Individual defendants urged that plaintiffs had not identified
any false or misleading statements directly attributable to them during the Class Period, but that
plaintiffs had instead utilized the “group pleading doctrine.” /d. at*20. This court found there were
sufficient allegations that the individual defendants had access to information about the company’s
financial practices during the Class Period, and that they had specific knowledge of Spiegel’s
credit-related problems, to raise a strong inference that individual defendants were aware that the
company had recorded $240 million of phony gains and had understated its debt by some $3 billion
during the Class Period. /d. at*25. Although the evidence might ultimately show that the individual
defendants were not in a position to detect the errors notwithstanding their status as directors and
members of Spiegel’s Board and Audit Committees, and despite any information they received, this
court found that possibility was not a basis for dismissal. /d.

In this case, on the other hand, Lead Plaintiff has made no allegations that Individual
Defendants had specific knowledge of the details concerning Motorola's loan to Telsim. For
instance, Lead Plaintiff could have alleged that Individual Defendants’ access to financial data,
together with their oversight of lower-level officers and their monitoring of identified correspondence
with Telsim representatives, gave Individual Defendants a clear understanding of the risks
underlying the Telsim loan. The court finds that Lead Plaintiff has not pointed to any circumstantial
evidence giving rise to an inference that Individual Defendants knew of any facts critical to the

55


As noted earlier, as the court reads the Complaint, Lead Plaintiff has not in fact alleged that
Motorola's failure to write the Telsim loan off earlier constitutes a “misstatement.” Instead, Lead
Plaintiff here has alleged that the Company, through one or more of its representatives, knew facts
or had access to information, through various named and unnamed officials, suggesting that the
Company's public statements were not accurately forthcoming, and that Company officials failed
to check information they had a duty to monitor. See Novak, 216 F.3d at 308. Lead Plaintiff's
allegations regarding the huge size of the Telsim loan, misbehavior by the Uzans, other potential
lenders’ assessment of the Telsim risk, and Telsim’s pattern of default on loan payments and
refusal to provide access to its financial records, combined with the well-known economic
conditions and devastating earthquakes that occurred in Turkey prior to and during the Class
Period, raise a strong inference that Motorola was aware of the risks inherent in its extensions of
credit to Telsim. Motorola's numerous public statements touting the benefits of the Telsim
transaction, without disclosing the associated risks, and its practice of providing general information
regarding vendor financing and specific information regarding financing to Nextel, without
specifically mentioning Telsim, bolster the inference that Motorola, through its various officials,
sought to mislead the investing public,

As noted, Telsim's letter published in the May 29, 2003 edition of the Wall Street Journal,
stated that “[ajithough Motorola issued multiple press releases describing the potential billions of
dollars in revenues that would be generated as a result of its partnership with Telsim, shareholders
were not told that their own money was being used to finance the equipment sales.” Referring to
the September 29, 2000 agreement to loan Telsim an additional $450 million to purchase
infrastructure equipment, the letter added that Motorola had “persuaded Telsim to accept a
particularly large shipment of equipment, much of which was deficient. ... Motorola booked the

sales immediately, thereby inflating its sales figures for that quarter.” (Cmplt. ] 168.) For the

53


district have held that when a plaintiff fails to plead a primary violation under § 10(b) and Rule 10b-
5, § 20(a) claims against controlling persons also fail. Stavros, 266 F. Supp. 2d at 852 (citing
Geinko v. Padda, No. 00 C 5070, 2001 WL 1163728, at *9(N.D. Ill. Sept. 28, 2001)). Lead Plaintiff
responds that it has pleaded a violation of §10(b) and have alleged “in detail that the Individual
Defendants are ‘control persons’ of Motorola.” (Lead Pl. Resp., at 29.)

For the reasons explained earlier, the court concludes that Plaintiff has alleged a primary
securities violation against Motorola. Defendants have not directly challenged Plaintiffs allegations
concerning the Individual Defendants’ ability to control Motorola's conduct. In any event,
“[djetermination of whether an individual defendant is a ‘controlling person’ under § 20(a) is a
question of fact that cannot be determined at the pleading stage.” /n re Sears, Roebuck and Co.
Sec. Litig., 291 F. Supp. 2d 722, 727 (N.D. Ill. 2003) (quoting Lindefow, 2001 WL 830956, at *9).
As Lead Plaintiff has adequately pleaded a primary securities violation against Motorola, the court
declines to dismiss Lead Plaintiff's § 20(a) claims against Individual Defendants.

CONCLUSION

For the reasons stated above, Defendants’ motion to dismiss (Docket No. 69-1) is granted
in part and denied in part. Specifically, the § 10(b) claims against Individual Defendants are
dismissed without prejudice. The motion to dismiss as to the § 10(b) claim against Motorola and
the § 20(a) claims against Individual Defendants is denied. Plaintiffs have until September 17,
2004 to file an amended complaint consistent with this opinion, and Defendants have until
October 8, 2004 to answer or otherwise plead. Rule 16 conference is set for October 29, 2004,
at 9:30 a.m.

ENTER:

Dated: September 9, 2004
REBECCA R. PALL
United States Districtdudge

59


1184.) Mr. Uzan told Hughes and Keating during a January 9, 2001 meeting that he might not pay
the Turkish Football League amounts he owed. (/d. §j 185.) Lead Plaintiff claims that, despite
knowing these facts, Motorola did not inform investors in its January 10, 2001 press release of the
risks of the outstanding Telsim loan. (Lead PI. Resp., at 24.)

Lead Plaintiff also claims the court can infer Motorola's knowledge from the sheer size of
the Telsim loan. Although the mere fact that a company's financial reporting was inaccurate does
not establish scienter, the magnitude of reporting errors may lend weight to allegations that
Motorola was reckless in failing to detect the errors where they were in a position to do so. Rehm,
954 F. Supp. at 1256 (citations omitted). “The more serious the error, the less believable are
defendants[’] protests that they were completely unaware of [the company’s] true financial status
and the stronger is the inference that defendants must have known about the discrepancy.” /d.

In any event, Lead Plaintiff urges, Motorola was aware that investors would find the vendor-
financed nature of the Telsim relationship material in light of the approximately $4 billion Motorola
lost when Iridium, to which Motorola had provided “billions of dollars in equity, debt and vendor
financing,” declared bankruptcy on August 13, 1999. (Cmplt. 9] 87.) Lead Plaintiff contends that
the statement that “there is an element of financing” in the Telsim transaction misleadingly
minimized the scope of Motorola’s financial commitment and constitutes additional evidence of an
intent to defraud. (Lead Pl. Resp., at 25.) Further evidence of fraudulent intent, Lead Plaintiff
asserts, is found in the discrepancy between the December 1999 Memorandum of Understanding
to provide Telsim with an additional $450 million loan and the February 1, 2000 amendment to the
Equipment Financing Agreement to reflect the increase in Telsim’s total indebtedness, suggesting
that Motorola wished to delay reporting the loan amount until 2000 while reporting the revenue gain
in 1999. (Cmplt. 1] 104-07.)

Lead Plaintiff notes that in its second quarter 2000 Form 10-Q, Motorola disclosed that as
of July 1, 2000, it had provided a total of $457 million in vendor financing to Nextel

51


additional financing in the form of “working capital.” In addition, Lead Plaintiff asserts that the press
release misrepresented that Telsim was “one of the most successful [GSM] operators worldwide”
and that Telsim had more than 5 million customers; in fact, Lead Plaintiff notes, Motorola had been
denied access to Telsim’s records to verify these statements and Defendants knew that Telsim had
been unable to obtain third-party financing. (/d. J 180.)

K. November 24, 2000 Press Statement

In the November 24, 2000 edition of the Wall Street Journal, Koenemann stated that in
vendor financing, Motorola should “act like a bank” in determining to whom it should extend credit,
adding, “[a]s long as you're making sound judgments, you can grow with your customers.” (/d.
4] 181.) Lead Plaintiff claims this press release was false and misleading on the ground that “he
failed to disclose Motorola's $2 billion concentration of vendor financing to one uncreditworthy
Turkish customer,” and that “every bank that had been approached by Telsim or Motorola had flatly
rejected extending credit to Telsim.” (/d. | 182.)

L. Notice of Uzans’ Improper Use of Motorola Funds

Lead Plaintiff identifies several instances that should have put Defendants on notice of
Telsim's financial uncertainty: First, ina March 9, 2000 email to Hughes and Keating addressing
the concerns of Motorola's senior officers regarding repayment of the Telsim loans, Hakan Uzan
referred to such officers as “the guys with shaky hands.” (/d. | 123.) Several months later, ina
December 14, 2000 meeting with Motorola Vice Presidents Hughes and Keating, Hakan Uzan
acknowledged that he had improperly used the money that Motorola had provided Telsim in
September 1999 “to cover payments required during a run on one of the Uzan-controlled banks.”
(/d. 183.) Also in December 2000 (the Complaint does not state the precise date), Hakan Uzan
claimed Telsim urgently needed to borrow $35 million in cash from Motorola. On an unspecified

date, Hughes read an article in The Washington Post which reported that Hakan Uzan had

23


state that the Telsim sale was supported by vendor financing “is of no import" as this
teleconference informed the investing public that Motorola had provided loans to Telsim. (Def.
Mem., at 23-24.)

Defendants also claim that “Motorola repeatedly notified investors” throughout the alleged
class period that it had provided increased vendor financing and that such financing would continue
to increase. (Def. Mem., at 24.) In support, Defendants cite Motorola’s statements in its Form 10-
K for fiscal year 1998 and its March 22, 2000 Proxy Statement that the Company had “significantly
increased the amount of customer financing,” as well as a remark in its March 22, 2000 Proxy
Statement that MCC was “engaged principally in financing long-term receivables arising out of
equipment sales made by the Company to customers throughout the United States and
internationally.” (Ex. 5 to Def. Mem., at 15; Ex. 8 to Def. Mem., at F-20, F-35.) In addition,
Defendants point to statements in Motorola’s Forms 10-Q for the first, second, and third quarters
of 2000 that “[s]ome purchasers of Company’s infrastructure equipment continue to require
suppliers to provide long-term financing in connection with equipment purchases. Financing may
include all or a portion of the purchase price and working capital.” (Exs. 9-11 to Def. Mem.)**

Defendants deem immaterial Lead Plaintiff's allegation that Koenemann’s statement that
in vendor financing, Motorola should “act like a bank.” As the court understands the argument,
Lead Plaintiff claims this press release makes the implicit suggestion that Motorola's lending
decisions were akin to those of responsible bankers. Any such suggestion was false and
misleading, according to Lead Plaintiff, because Koenemann “failed to disclose Motorola's $2 billion

concentration of vendor financing to one uncreditworthy Turkish customer,” and because “every

whether newspaper articles are matters of public record, but the court need not decide the issue
for, as discussed below, the court finds that this article and Defendants’ statements regarding
vendor financing in its SEC filings do not warrant dismissal of the Complaint.

4a

9, at 14.)

The first quarter 2000 Form 10-Q does not include the initial word “Some.” (Def. Ex.

41


1996, Motorola’s market share in wireless infrastructure equipment also declined by an unspecified
amount due to faulty products and service. (/d. J 52.)

\n 1995, Motorola Board members declined to appoint Galvin as CEO® because “he lacked
a technical background and was too young (43).” (/d. 153.) For reasons not specified, on January
1, 1997, the Board did make Galvin CEO. (/d. 154.) Galvin knew his status was tenuous and that
some Board members did not believe he was the best possible candidate for CEO. (/d. 55.) In
an effort to disprove his detractors, on an unspecified date Galvin “set high goals for Motorola.”
(/d.) Galvin “knew that his performance would be judged by whether or not he could achieve those
goals.” (/d.) A May 4, 1999 Business Week article stated that Motorola officials indicated that
Galvin had “set a hurdle of 15% to 20% revenue growth,” which he expected to achieve within the
next one to two years. (/d. 7] 55.)

For 1998, Motorola reported a 1% decline in revenue from the previous year. (/d. {| 57.)
During 1998, “Motorola's management was the subject of repeated criticism for its lack of
leadership.” (/d. 58.) Between 1996 and 1998, Motorola “developed a reputation for missing
analysts’ earnings expectations.” (/d. J 59.) Specifically, on the September 12, 1997 episode of
the CNBC program “The Money Club,” correspondent Scott Cohn reported that Motorola’s quarterly
results had consistently missed Wall Street's expectations since 1989 by an average of 10 percent.
(Id.)

Lead Plaintiff alleges that Defendants were motivated to take steps that would boost
Motorola's share price, even by artificial or improper means. First, Defendants were aware that
failing to meet Wall Street’s expectations would have a “devastating effect” on Motorola’s stock

price and on their own careers. Second, Motorola stock had declined significantly when the

3 The Complaint does not state whether Galvin was seeking appointment as CEO,

or what position he held, at that time.


as Motorola expended “great effort” to recover the loan after Telsim defaulted, “including initiating
litigation in at least three international venues.”*” Third, Motorola under-reported $450 million in
financing in its March 22, 2000 Proxy Statement (for 1999) by waiting to formalize its December
1999 commitment to Telsim until February 1, 2000. Fourth, Telsim was located outside Motorola’s
home country and, therefore, it was reasonably possible that its operations would be disrupted in
the near term. (/d. J] 238.)

DISCUSSION

Lead Plaintiff claims that Defendants violated § 10(b) of the SEA and Rule 10b-5
promulgated thereunder by engaging in a “plan, scheme, and course of conduct” in which they
knowingly and/or recklessly took actions, made deceptive statements, and omitted to state material
facts in order to induce Lead Plaintiff and other Class members to purchase Motorola securities
at artificially inflated prices during the Class Period. (/d. [261.) Plaintiff also alleges that Individual
Defendants violated § 20(a) of the SEA in that they acted as controlling persons of Motorola and
had the power to control the company’s decisions, including “the conduct of Motorola’s business,
the information contained in its filings with the SEC and public statements about its business” that
were misleading. (/d. {| 272.)

Defendants have moved to dismiss Lead Plaintiff's § 10(b) and § 20(a) claims. The purpose
of a motion to dismiss is to test the sufficiency of the plaintiff's complaint, not to decide its merits.
Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). A motion to dismiss will ordinarily
be granted only “if it appears beyond doubt that the plaintiff can prove no set of facts in support of
his claim which entitles him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957). A plaintiff
alleging fraud must do so “with particularity,” Feo. R. Civ. P. 9(b), however, meaning that the

plaintiff must set forth “the who, what, when, where and how: the first paragraph of any newspaper

ae The Complaint does not identify these “international venues” other than the United

States District Court for the Southern District of New York

34


arbitration in Switzerland and by attaching shares of a closely-held Turkish corporation, [which] did
Not provide for reasonable expectations of collectibility.” Fifth, Lead Plaintiff alleges that “Telsim
was Claiming to experience severe technical problems with the Motorola equipment.” (/d. J 162.)

H. September 29, 2000 Vendor Financing Agreement

On or about August 2000, an unidentified Telsim representative told an unnamed individual
at Motorola that Telsim had failed to find an interested buyer and that it required an additional $700
Million in financing. (/d. § 163.) On or about September 15, 2000, Motorola had “a senior
executive meeting” to discuss lending additional funds to Telsim. (/d. | 164.) Based on Telsim’s
representations that it would “pursue all potential third-party sources of such funds, including,
without limitation, placement of equity and high-yield debt,” on September 29, 2000, Motorola
agreed to amend the Equipment Financing Agreement to provide Telsim with an additional $450
million for the purchase of infrastructure equipment and handsets and $250 million in financing for
“working capital.” (/d. {If] 165-66.) Motorola “immediately used” this $450 million “to report an
aggregate amount of $450 million in revenue from purported sales to Telsim in the third quarter of
2000”; the Complaint does not explain how or where Motorola reported this revenue. (/d. q 166.)
Lead Plaintiff claims that Motorola extended this additional loan in order (1) to prevent Telsim from
defaulting on its prior outstanding loans, which would lead to “full disclosure of all material facts,”
and (2) to provide an additional $450 million in reported revenues during the third quarter of 2000,
thereby enabling Motorola to meet Wall Street's expectations. (/d. {] 167.)

I October 10, 2000 Press Release and Third Quarter 2000 Form 10-Q

After the financial markets closed on October 10, 2000, Motorola issued a press release””

reporting $9.493 billion in net sales for the third quarter of 2000 (reflecting a 15% increase over the

70 See footnote 13.

20


oO. Disclosure of Motorola’s Increased Debt Load

Motorola's short-term borrowing increased from $2.5 billion in December 1999 to $6.4 billion
at the end of 2000, “resulting in a liquidity crisis that endangered the Company’s credit ratings.”
(id. 1 196.) The Complaint alleges that this increased debt load resulted from “the negative cash
flow effect of the vendor financing to Telsim.” (/d.) On an unspecified date, an unnamed Motorola
official stated that Motorola might report a first-quarter operating loss. (/d. {| 197.) In response to
this statement, on February 23, 2001, Moody’s Investor Service and Standard & Poor’s Corp.
placed Motorola’s debt ratings on review for possible downgrading. (/d.) The price of Motorola's
6.5% debentures due 2028 fell from $85.25 at the close of February 23, 2001 to $74.94 at the
close of February 27, 2001 (a 12% decline in value). (/d. J] 198.) Motorola's common stock
declined from a closing value of $17.29 on February 22, 2001 to close at $16.25 per share on
February 23, 2001 (a 6% decline in value). (/d.) On February 12, 2001, 11 days before Motorola's
debt ratings were placed on review for possible downgrading, Galvin sold 165,000 of his own
shares of Motorola common stock at $23.50 per share, thereby grossing $3.85 million. (/d. 257.)

P. Motorola’s March 2001 Attempts to Recover Loan

The Equipment and License Finance Agreements, as well as the agreement regarding
Motorola's loans to KaR-Tel, required Telsim to make two payments to Motorola during the spring
of 2001: (1) $12,698,115.20, due on March 30, 2001; and (2) $737,906,243.67, due on April 30,
2001. (/d. | 200.) In a March 19, 2001 letter to Hakan Uzan, with copies sent to Koenemann,
Bane, and Hughes, Keating acknowledged Telsim’s “impending default.” (/d. 1 199.) Keating also
proposed rescheduling Telsim’s debt: Telsim would make a $200,000,000 payment on April 20,
2001, and would pay the remaining balance by July 31, 2001. (/d. | 200.) In March 2001, Motorola

retained Goldman Sachs to make an independent valuation of Telsim. (/d. §] 202.) As they had

26


the Agreements; assets provided to Telsim through vendor financing were impaired; Defendants
failed to disclose the amount of, and the concentration and risks associated, the Telsim loan;
Defendants’ financial statements did not conform to GAAP, it was “highly improbable,” or in any
event not “reasonably assured,” that Telsim would be able to repay the loan; and the Telsim
contract** was 100% vendor-financed and Motorola provided additional financing in the form of
“working capital.” (/d. | 176.)

J. October 31, 2000 Press Release

Before the financial markets opened on October 31, 2000, Motorola issued a press
release* titled “Motorola in Third Generation Mobile Network Deal With Turkey's Telsim” which
touted the success of the Motorola-Telsim relationship and claimed that the two companies had
entered into a contract that could provide an additional $2 billion in telecommunications equipment.
(id. 1177.) The press release further represented that Telsim was “one of the most successful
[GSM] operators worldwide,” that Telsim had more than 5 million customers, and that Telsim was
projected to have 7.5 million customers by the end of 2000. (/d.) According to Lead Plaintiff,
Motorola’s common stock rose $2.44 to $24.98 “in response to” this press release. (/d. J] 179.)

Lead Plaintiff claims that Motorola had “no reasonable basis” to make the representations
in the October 31, 2000 press release. (/d. | 177.) The Complaint alleges that this press release
was false and misleading on several of the grounds previously identified: Telsim had breached the
Agreements; Defendants failed to disclose the amount of the Telsim loan; loan repayment was

“highly improbable”, the Telsim contract?” was 100% vendor-financed; and Motorola provided

2 As with several press releases and financial statements discussed above, it is not

clear to what contract Lead Plaintiff is referring.

28 See footnote 13.

26

The Complaint does not state when this increase occurred,

ar Again, it is not clear to what contract Lead Plaintiff is referring.

22


story.” DiLeo v. Ernst & Young, 901 F.2d 624, 628 (7th Cir. 1990). Lead Plaintiff must also meet
the strict pleading requirements of the PSLRA, which requires plaintiffs to “specify each statement
alleged to have been misleading, [and] the reason why the statement is misleading.” 15 U.S.C.
§ 78u-4(b)(1). In addition, Lead Plaintiff must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2).
I Section 10(b) Claim

SEC Rule 10b-5 prohibits the making of any untrue statement of material fact or the
omission of a material fact that would render statements misleading in connection with the
purchase or sale of any security. To state a claim under § 10(b) of the Securities Exchange Act
and SEC Rule 10b-5, a plaintiff must allege that each defendant “(1) made a misstatement or
omission, (2) of material fact, (3) with scienter, (4) in connection with the purchase or sale of
securities, (5) upon which the plaintiff relied, and (6) that reliance proximately caused plaintiff's
injuries.” In re HealthCare Compare Corp. Sec. Litig., 75 F.3d 276, 280 (7th Cir. 1996). According
to Defendants, the Complaint fails to satisfy the first, second, and third requirements: they argue
that the Complaint does not identify any misstatements or omissions attributable either to Motorola
or to Individual Defendants, that the statements complained of are immaterial in light of the “total
mix of information,” and that the Complaint fails to satisfy the PSLRA’s heightened pleading
requirements for scienter as to either Motorola or the Individual Defendants. The court considers
each argument as to both Motorola and Individual Defendants below.

A. False and Misleading Statements and Omissions

1. Motorola

Lead Plaintiff claims that several public statements by Motorola or its representatives during

the Class Period were false or misleading, including: press releases issued February 3, April 10,

July 12, August 1, October 10, and October 31, 2000, and January 10, 2001 (id. {If 118-22, 138-40,

35


no mention of its vendor financing to Telsim. (/d.) Motorola’s common stock closed on May 16,
2000 at $32.73 per share. (/d. ] 149.)

Lead Plaintiff claims that Motorola’s first quarter 2000 Form 10-Q was false and misleading
for many of the same reasons identified in relation to the Company’s March 22, 2000 Form 10-K
and Proxy Statement: Telsim had breached the Agreements; Telsim had inadequate cash flow and
lack of access to capital markets; the Telsim contract"® was 100% vendor-financed and Motorola
provided additional financing in the form of “working capital”; assets provided to Telsim through
vendor financing were “impaired”, Defendants failed to disclose the Telsim concentration and risks;
Defendants’ financial statements did not conform to GAAP; loan repayment was “highly
improbable”; and collection of Telsim loan was not “reasonably assured.” Lead Plaintiff further
asserts these filings were false and misleading on several additional grounds. First, there was no
signed agreement providing for Telsim to purchase $1.5 billion in equipment, service, and
infrastructure from Motorola. Second, the filing failed to disclose the $1.333 billion prior financing
provided to Telsim “for which collection was gravely in doubt.” Finally, the form did not reveal that
the sole collateral for Telsim's obligations was shares in Telsim itself, which were “both illiquid and
of uncertain value,” that any dispute between the parties had to be resolved through arbitration in
Switzerland, and that any arbitral award would have to be enforced in Turkey. (/d. 150.)

F. July 12, 2000 Press Release and Second Quarter 2000 Form 10-Q

After the financial markets closed on July 12, 2000, Motorola issued a press release”®

reporting $9.255 billion in net sales for the second quarter of 2000 (reflecting a 15% increase over

“4 The Complaint states that Motorola’s common stock closed at $32.73 per share on

May 16, 2001, but the court presumes this is merely a scrivener’s error.

8 Here, again, it is not clear to what contract Lead Plaintiff is referring

* See footnote 13

17



providing insurance, loan guarantees, and other assistance. (id. J 89.) In reliance on these
representations, on September 19, 1999, Motorola provided an additional $200 million loan to
Telsim pursuant to the Equipment Financing Agreement, including $35 million in working capital
and $165 million for unspecified equipment, bringing the total loan amount under the Agreements
to $883 million. (/d. 1] 90-91.) According to Lead Plaintiff, Motorola extended this additional loan
in order (1) “to secure the sale of an additional $165 million in Motorola equipment to Telsim,” and
(2) to prevent Telsim from defaulting on its prior outstanding debt. (/d. {] 92.)

In September 1999, unnamed Motorola employees introduced Hakan Uzan to Deutsche
Bank representatives. (/d. 194.) For several months afterward, however, when Deutsche Bank
representatives visited Telsim’s offices attempting to reviewits financial records, Telsim employees
denied the representatives access. (/d.) In one such incident in the fall of 1999, a Telsim
employee accused a Deutsche Bank analyst of taking a Telsim financial document without
permission. (/d.) That evening, Hakan Uzan presented Keating and Hughes with sworn
statements from Telsim employees documenting the alleged incident, Mr. Uzan refused to permit
Deutsche Bank officials any further access to Telsim’s offices. (/d.) Keating and Hughes
themselves did not find the allegations to be credible. (/d. 1 96.) The complaint alleges that Mr.
Uzan manufactured this incident as an excuse to keep Deutsche Bank from reviewing Telsim’s
financial records and to avert the heightened oversight of its financial dealings that financing from
ECGD would have entailed. (/d. 95.) Deutsche Bank and ECGD refused to provide financing
to Telsim. (/d. 96.) Lead Plaintiff alleges that on numerous occasions during an unspecified two-
year period during the course of Motorola’s relationship with Telsim, the Uzans similarly failed to
comply with requests by Keating and Hughes for financial statements and other records from
Telsim. (/d. 98.)

Beginning in October 1999, an unnamed individual from Telsim represented to an unnamed

Motorola employee that two European telecommunications companies had expressed interest in

9


Fifth, Telsim was in breach of the Agreements, as it had refused to provide Motorola with financial
statements or other records as required by those Agreements. Sixth, as Telsim denied Motorola
access to its books and records, Motorola could not “make a reasonable determination whether
collectibility was reasonably assured.” Seventh, Hakan Uzan told unnamed Motorola officials that
he had “converted loaned funds for unauthorized purposes.” Eighth, Hakan Uzan told unnamed
Motorola officials that “he intended to default on obligations to third parties." Ninth, Defendants
knew that Defendants knew that Telsim was unable to obtain financing from third parties.* Finally,
Defendants knew that collecting on the collateral would be “highly problematic” as Motorola would
have to undergo arbitration in Switzerland and to enforce any arbitral award in Turkish courts. (/d.
qi 227-28.)

Lead Plaintiff notes that a “loan is impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement.” ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, Statement
of Financial Accounting Standards No. 114, [ 8 (Fin. Accounting Standards Bd. 1993), available
at http:/Avww.fasb.org/pdf/fas114.pdf. Further, according to the American Institute of Certified
Public Accountants, factors indicating that a creditor should evaluate the collectibility of a loan

include, inter alia:

e [L]oan files lacking current financial data related to borrowers and guarantors;
° [BJorrowers experiencing problems such as operating losses, marginal working
capital, inadequate cash flow, or business interruptions;
e [Loans secured by collateral that is not readily marketable or that is susceptible to
deterioration in realizable value; [and]
° [L]oans to borrowers in industries or countries experiencing economic instability.
fd. 97 &n.1.

36 Although the Complaint merely states that “Telsim was unable to secure third party

financing,” (Cmplt. {| 227(i)), the court presumes that Lead Plaintiff believes that Defendants were
aware of this fact at the time they recognized revenue from the Telsim sales

32


refus[ed] to attend or participate in the trial” that commenced on February 19, 2003. /d. at 492
Although the court observed that plaintiffs were arguably entitled to a default judgment, he
nevertheless proceeded with a trial, hearing only plaintiffs’ testimony, but also taking into account
the proof developed at an earlier six-day evidentiary hearing and a two-day contempt hearing that
the defendants had contested. /d. at 493. Concluding that the Uzans and the other defendants
had “perpetrated a huge fraud” on MCC and Nokia, the court awarded MCC more than $2 billion
in compensatory damages and an equal amount in punitive damages on July 31, 2003. /d. at
490.

In the May 29, 2003 edition of the Wail Street Journal, Telsim published a full-page open
letter to Motorola's shareholders, stating in relevant part

Although Motorola issued multiple press releases describing the potential billions

of dollars in revenues that would be generated as a result of its partnership with

Telsim, shareholders were not told that their own money was being used to finance

the equipment sales — so-called “vendor financing.” In September 2000, Motorola

persuaded Telsim to accept a particularly large shipment of equipment, much of

which was deficient.** While this contract enabled Telsim to meet its needs through

2003, Motorola booked the sales immediately, thereby inflating its sales figures for

that quarter.

(Id. | 168.)*°

8 Nokia did not seek compensatory or punitive damages. Instead, Nokia, along with

MCC, sought to impose a constructive trust on Telsim stock. Uzan, 274 F. Supp. 2d at 501. The
court entered a constructive trust in plaintiffs’ favor over Telsim shares held by any of the entities
controlled by the Uzans that collectively constitute 73.5% of the ownership, control, and share value
of Telsim. /d. at 579-80. (As noted, as of March 2000, Telsim had pledged 73.5% of its equity as
collateral to Motorola and Nokia. (Cmplt. {| 132.))

4 The Complaint does not explain in what way this shipment was deficient.

8 In addition, Lead Plaintiff points to a comment in a book by Arthur Levitt, chairman
of the SEC from July 1993 to February 2001:

Acompany spokesman says that because telecom companies use vendor financing
as a competitive tool, it was not in Motorola’s interest to reveal how much it had lent
to finance its customer equipment purchases. Perhaps Motorola should ask itself:
why is it in shareholders’ interest to invest in a company that fails to disclose an
enormous risk taken with their money?

29


a license from the Turkish government to provide cellular telephone service in Turkey. (/d. 63.)
In 1994, the Uzans launched Telsim’s operations. (/d.)

On November 29, 1994, Motorola Limited, Motorola’s British subsidiary, entered into an
agreement to provide cellular infrastructure equipment to Telsim, which paid for the equipment in
part with a series of promissory notes in the amount of $52.5 million. (/d. 65.) On April 24, 1998,
Defendant Motorola, Inc. and Telsim entered into two agreements (collectively, the “Agreements’).
The first was an Equipment Financing and Security Agreement (the “Equipment Financing
Agreement"), in which Motorola expanded the amount of credit available to Telsim to $360 million
for the purchase of Motorola equipment (the outstanding $52.5 million promissory notes were rolled
into this agreement), The second was a License Financing Agreement, in which Motorola agreed
to loan Telsim $200 million to purchase cellular licenses from the Turkish government. (/d. | 66.)
These Agreements were intended to enable Telsim “to build-out a Turkish cellular network utilizing
state of the art Global System for Mobile Telephony 900 technology.” (/d. 67.) The Agreements
required the parties to arbitrate any disputes in Switzerland. (/d. 71.)

Also on April 24, 1998, MCC entered into a Share Pledge Agreement with Telsim in which
Telsim granted Motorola a security interest in 51% of Telsim's total outstanding capital stock. (/d.
11131, 76.) Telsim’s stock was neither publicly-traded nor marketable, however, and thus the value
of Telsim stock depended upon Telsim’s cash flow and profits. (/d. | 76.) Further, the Share
Pledge Agreement required Motorola to wait one year after obtaining judgment from a Swiss
arbitrator before liquidating such shares. (/d. 1/77.)

On May 14, 1998, Motorola's stock was trading at approximately $19 per share. On that
date, Motorola issued a press release announcing that it had reached a $500 million sales

H
agreement to supply Telsim with Global System for Mobile communications (“GSM”) equipment

4

technology.”

The Complaint does not define the term “Global System for Mobile Telephony 900



company had missed earnings expectations. Third, Defendants knew that Motorola would lose
reported revenue if it ceased extending credit and doing business with Telsim, as explained below.

The Complaint also alleges that Individual Defendants were motivated to engage in fraud
by the prospect of receiving large bonuses. Prior to and during the Class Period, Motorola
maintained a “very generous incentive-based compensation program” for Individual Defendants
based on Motorola's achieving certain operating and stock performance objectives. (/d. ] 248.)
In early 2000, Motorola provided Individual Defendants with the following compensation in addition
to their base salaries. Motorola granted Galvin a $1.9 million cash bonus, 900,000 stock options,
and $13,153,000 in restricted stock awards. (/d. 249.) For Growney, the Company provided a
$1.2 million cash bonus, 825,000 stock options, and $11,837,000 in restricted stock awards. (/d.
250.) Motorola gave Koenemann a $500,000 cash bonus and 330,000 stock options. (/d. [ 251.)
Motorola’s March 22, 2000 Proxy Statement (for 1999) indicated that these stock options and
restricted stock awards were granted “in recognition of their successful efforts to significantly
improve the Company's performance during 1999 and to provide them with strong incentive to
increase the value of the Company during their employment.” (/d. | 254.) Based on Motorola’s
2000 operating and stock performance, in early 2001, Motorola provided Individual Defendants with
cash bonuses in the following amounts: $1.25 million to Galvin, $875,000 for Growney, and
$450,000 to Koenemann. (/d. {] 256.)
I Motorola Relationship with Telsim Prior to Class Period

In 1993, Turkish businessman Kemal Uzan, his sons Hakan and Cem, and various
members of his immediate family (collectively, the “Uzans”) formed Telsim. (Cmplt. {1 5, 62.) The
Uzans structured Telsim so that another of their companies, Rumeli Telefon Sistemleri A.S.

("Rumeli Telefon”), held the majority of Telsim’s stock. (/d. 62.) Also in 1993, Telsim obtained



the second quarter of 1999" and a 5.5% increase over the first quarter of 2000), net income of
$204 million, and earnings per share of $0.09. (/d. J] 151-52.) Motorola reported in its
consolidated balance sheet that it held $4.293 billion in “other assets,” (id. {| 151); although the
Complaint is not explicit, the court presumes that Motorola did not disclose the amount of those
assets attributable to vendor financing."® According to Lead Plaintiff, investors perceived the
second quarter as “an excellent quarter for Motorola, beating the (reduced) consensus estimates
and showing improvement in revenue and income.” (/d. | 152.) Motorola’s common stock closed
on July 13, 2000 at $39.1875 per share. (/d. | 154.)

Motorola's Form 10-Q for the second quarter of 2000, which Motorola filed with the SEC
on July 31, 2000, repeated and affirmed the financial! results published in the July 12, 2000 press
release, and included the same language regarding conformity with GAAP as appeared in its
May 16, 2000 Form 10-Q. (/d. [ 155.) The Form 10-Q also noted that as of July 1, 2000, Motorola
had provided a total of $457 million in vendor financing to Nextel Communications, Inc. (/d. 156.)
Defendants did not mention its vendor financing to Telsim or any customer other than Nextel. (/d.
{1 157.) Motorola's common stock closed on July 31, 2000 at $33.25 per share. (/d. {] 158.)

Lead Plaintiff claims that Motorola's July 10, 2000 press release and second quarter 2000
Form 10-Q were false and misleading on several of the same grounds previously identified: Telsim
had breached the Agreements; Telsim had inadequate cash flow and lack of access to capital
markets; assets provided to Telsim through vendor financing were impaired; Defendants failed to

disclose the Telsim concentration and risks; Defendants’ financial statements did not conform to

" Lead Plaintiff claims that Motorola's reported sales figure for the second quarter of

2000 ($9.255 billion) reflects a 23% increase over the second quarter of 1999. (Cmplt. J 151.)
Lead Plaintiff also indicates that Motorola reported sales of $8.03 billion for the second quarter of
1999. (/d. | 152.) The court calculates, then, Motorola's reported sales increased 15%, rather than
23% as Lead Plaintiff contends

® For reasons it does not explain, Lead Plaintiff does not specifically allege that
Koenemann was responsible for the financial data reported in the July 12, 2000 press release.

18


ceased financing Telsim the $560 million in previous loans would go into default,” and were
“anxious to avoid public disclosure” of any such default due to their nearly contemporaneous
difficulties with Iridium, (/d. {] 87.)

In August and November 1999, Turkey suffered two devastating earthquakes that killed
more than 17,000 people and decimated the Marmara area, which accounted for one-third of the
Turkish economy. (/d. 83.) On an unspecified date, an unnamed individual or entity estimated
that repairs would cost between $5 billion and $7 billion. (/d.) These earthquakes “compounded
an already deepening economic crisis in Turkey.” (/d.) On an unspecified date following the
earthquakes, an unnamed governmental body levied an additional 25% tax on cell phone usage
(Id. J 84.) On an unspecified date, an unnamed individual or entity predicted that the Turkish
population would make 30% fewer cell phone calls as a result of that tax increase. (/d.) This tax
had “a negative effect on Telsim’s ability to generate cash flow.” (/d.) Following the August 1999
earthquake, Mark Atkins, a Motorola executive (the Complaint does not identify his position) who
“worked closely on the Telsim relationship,” and other unidentified Motorola executives,
“acknowledged Telsim’s inability to pay.” (/d. ]85.)” At unspecified dates, Telsim lodged “ongoing
complaints and reported problems with equipment provided by Motorola.” (/d.) According to Lead
Plaintiff, such complaints created “a situation where Telsim would refuse to pay on the grounds the
receivables related to defective equipment.” (/d.) The court infers that such complaints were a
sham, lodged to create an excuse for nonpayment.

In meetings held September 1, 3, and 7-10, 1999, Hakan Uzan represented to Motorola
officers, including Vice Presidents Ed Hughes and Walter Keating, that Telsim would cooperate in
seeking from Deutsche Bank financing that would be guaranteed by the United Kingdom’s Export

Guarantee Credit Department ("ECGD”), which promotes exports to developing countries by

7 The Complaint does not state to whom or in what context these executives

acknowledged this.



acquired a $38 million apartment in New York. When Hughes questioned Hakan Uzan about the
article during a December 2000 meeting in Istanbul (again, the Complaint does not specify the
date), Mr. Uzan smiled sheepishly and said, “[wle were hoping you guys didn’t find that out.”
Motorola denied Hakan Uzan’s request for additional funds. (/d. 184.) Hakan Uzan told Hughes
and Keating during a January 9, 2001 meeting that he was seeking a twelve-month extension on
a contract with the Turkish Football League and that, if he could not renegotiate Telsim’s contract
with the League, he would not pay the League the amounts he owed. (/d. § 185.)

M. January 10, 2001 Press Release

After the financial markets closed on January 10, 2001, Motorola issued a press release””
reporting $10.1 billion in net sales for the fourth quarter of 2000 (reflecting an 11% increase over
the fourth quarter of 1999 and a 6% increase over the third quarter of 2000), net income of $135
million, and earnings per share of $0.06. (/d. {| 186.) For fiscal year 2000, Motorola reported $37.6
billion in net sales for the fourth quarter of 2000 (reflecting a 14% increase over fiscal year 1999),
net income of $1.3 billion, and earnings per share of $0.58. Motorola reported in its consolidated
balance sheet that it held $5.375 billion in “other assets” (id.); again, the Complaint does not state
whether Motorola disclosed what portion of those assets was attributable to vendor financing. Lead
Plaintiff alleges that Motorola's common stock “rose $0.94 on January 11, 2001 to close at $22.125
per share.” (/d. J 188.)

Lead Plaintiff claims that Motorola's January 10, 2001 press release was false and
misleading in several of the ways previously identified: Telsim had breached the Agreements;
assets provided to Telsim through vendor financing were impaired; Defendants failed to disclose

the amount of, and the concentration and risks associated with, the Telsim loan; Telsim’s ability to

2 The Complaint does not explain the nature of this contract, or why Uzan owed the

League money under it.

2 See footnote 13.

24


Minute Order For (06/97)

United States District Court, Northern District of IMinois

Name of A: dge itt ei
ancelenmnd ite | __ Rebecca RPgiever | Ste Jerome
Vv
CASE NUMBER 03 C 287 DATE 9/9/2004
CASE In re Motorola Securities Litigation
TITLE

[In the following box (a) indicate the party filing the motion, ¢.g,, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented]

MOTION:

DOCKET ENTRY:

qd) Qo Filed motion of [ use listing in “Motion” box above.]

(2) im Brief in support of motion due

(3) Oo Answer brief to motion due____. Reply to answer brief due

(4) Qo Ruling/Hearing on setfor at

(5) o Status hearing[held/continued to] [set for/re-set for]on___——s set for__—_at

(6) Qo Pretrial conference{held/continued to] [set for/re-set for]on___ssetfor__—sat__.
(7) a Trial[set for/re-set for}on_ at

(8) ao [Bench/Jury trial] [Hearing] held/continued to_ at

(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

QFRCP4(m) Local Rule 41.1 CIFRCP41(a)\(1) 0 FRCP41(a)(2).

(10) MA [Other docket entry] The court regrets its error and apologizes to counsel. Enter attached Amended
Memorandum Opinion and Order.

dl) [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

\2

No notices required,
4 umber of notices

Uv | Notices mailed by judge’s staff, * * A ahh

Notified counsel by telephone, dale docketed

Docketing to mail notices.

Mail AO 450 form.

Copy to judge/magistrate judge.

snsr2004
date mailed notice
courtroom
ETV deputy’s ev
initiats

mailing deputy initials



circumstantial evidence that Motorola knew or was reckless in not knowing that its various public
statements were false or misleading, and therefore need not consider the Company's motives for
defrauding the Class. On the other hand, the court finds insufficient evidence of knowledge or
recklessness on the part of Individual Defendants, so the court considers Lead Plaintiff's motive
allegations with regard to Individual Defendants.
4. Motorola

Recklessness requires “conduct which is highly unreasonable and which represents an
extreme departure from the standards of ordinary care . . . to the extent that the danger was either
known to the defendant or so obvious that the defendant must have been aware of it.” Rehm v.
Eagle Finance Corp., 954 F. Supp. 1246, 1255 (N.D. Ill, 1997). “[S]ecurities fraud claims typically
have sufficed to state a claim based on recklessness when they have specifically alleged
defendants’ knowledge of facts or access to information contradicting their public statements.
Under such circumstances, defendants knew or, more importantly, should have known that they
were misrepresenting material facts related to the corporation.” Novak, 216 F.3d at 308. One of
the “classic fact patterns” that gives rise to a strong inference of scienter is where “defendants
published statements when they knew facts or had access to information suggesting that their
public statements were materially inaccurate.” Florida State Bd. of Admin. v. Green Tree Fin.
Corp., 270 F.3d 645, 665-66 (8th Cir. 2001) (citing City of Philadelphia v. Fleming Cos., 264 F.3d
1245, 1260-61 (10th Cir. 2001); Hollin v. Scholastic Corp. (in re Scholastic Corp. Sec. Litig.), 252
F.3d 63, 76 (2d Cir. 2001); Howard v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir. 2000);
Novak, 216 F.3d at 311).

As noted, Plaintiff essentially claims that Motorola knew or was reckless in not knowing that
it had violated GAAP by recognizing revenue from vendor-financed sales to Telsim and interest on

the loans to Telsim, even though collection of the Telsim receivables was not reasonably assured,

47


In December 1999, Telsim retained Merrill Lynch to pursue an equity investment or sale of
its business. (/d. | 112.) As part of this effort, dubbed “Project Skyy,” Merrill Lynch prepared a
prospectus that was reviewed by six European telecommunications companies: Deutsche Telekom,
Mannesmann Eurokom (both of which are German companies), Vodafone (British), Telia A.B.
(Swedish), Orange (British), and Telecom Italia (Italian). (/d.) Based on their review of the
prospectus and “recognizing the inherent problems with the Uzans, the Turkish economy and
Telsim's cash flow, none of the six companies pursued further financing or investment transactions
involving Telsim.” (/d.)

At an unspecified time, Telsim undertook “Project Storm,” in which it worked with Chase
Securities to evaluate the possibility of a public offering of Telsim debt in Turkey. (id. 115.) As
with Project Skyy, Telsim received no financing as a result of Project Storm. (/d.) Lead Plaintiff
urges that, had Defendants inquired about the status of Project Storm, “they would have learned
that these financing efforts were illusory.” (/d. 116.)

Mh. Motorola Relationship with Telsim and Public Statements During Class Period

A. February 3, 2000 Press Release

On February 3, 2000, Motorola issued a press release stating that Motorola and Telsim
“have today announced the signing of a contract worth $1.5 billion to provide infrastructure,
handsets and associated services in order to expand the countrywide [GSM] network.” (/d. 118.)
Motorola’s shares closed on that date at $50.92 per share, up from $48.21 the day before. (/d.
{1 119.) According to Lead Plaintiff, “Individual Defendants were responsible for the content and
publication of the February 3, 2000 press release in that they reviewed and approved it.” (/d.
120.) This press release was “archived and maintained on Motorola’s web site.” (/d.) A March 4,
2000 article in The Times of London pointed to this announcement as evidence of “the turnaround

in Motorola's cellular infrastructure business.” (/d. | 121.)

11



acquiring or making minority investments in Telsim, and that these investments would enable
Telsim to repay its loans from Motorola in full. (/d. | 101.) In December 1999, an unidentified
Telsim employee represented to an unnamed individual at Motorola that an additional $450 million
loan from Motorola would better position Telsim to sell a minority interest in itself. (/d.) Without
conducting any due diligence, Motorola entered into a Memorandum of Understanding with Telsim
on December 22 and 23, 1999 in which it agreed to provide Telsim with an additional $125 million
in financing for “working capital’ and $325 million for the purchase of infrastructure equipment and
handsets. (/d. ff] 102-04.) Telsim and Rumeli Telefon (which, as noted, was controlled by the
Uzans and which owned the majority of Telsim’s stock) agreed to increase MCC’s security interest
in Telsim’s total outstanding capital stock from 51% to 66%. (/d. | 105.) As with the
September 19, 1999 loan increase, Lead Plaintiff claims that Motorola extended this additional loan
in order (1) “to secure an additional $325 million in reported revenues during the fourth quarter of
1999,” and (2) to prevent Telsim from defaulting on its prior outstanding debt. (/d. J 108.)

For fiscal year 1999,° Motorola recognized a total of $613 million in revenue on sales of
goods and services to Telsim. (/d. 109.) The court presumes this $613 million in revenue is
precisely equal to the amounts Motorola loaned to Telsim: $123 million for the August 19, 1999
equipment financing extension; $165 million for the September 19, 1999 loan; and $325 million for
the December 22-23, 1999 credit increase. Motorola and Telsim did not amend the Equipment
Financing Agreement to reflect that Telsim’s total indebtedness to Motorola had increased to
$1.333 billion, however, until February 1, 2000. (/d. ff] 106-07.) Following this December 1999
loan increase, “in recognition of the grave risks continued financing to Telsim presented,” an
unidentified Motorola official or officials “strongly encouraged Telsim to seek additional and

alternate sources of both equity and debt financing.” (/d. {[ 110.)

The court presumes Motorola observes a January through December fiscal year.

10



figures are vital aspects of the “total mix of information” that investors would consult when
evaluating the company’s stock. /d. In addition, the court noted that the nature of the alleged
inaccuracy in earnings derived from systematic fraud, including fictitious sales. /d. The court found
that plaintiff had adequately pleaded that the fraudulent revenue recognition had rendered the
company’s SEC filings misleading. /d. Similarly, Lead Plaintiff contends that the revenue reported
on Motorola’s earnings statements was fraudulently inflated by hundreds of millions of dollars per
quarter, several times greater than plaintiff in Cab/etron alleged, by the inclusion of “sales” that in
fact amounted to loans.

In Searls, 64 F.3d at 1066, plaintiffs alleged that during the class period, Defendant
company CEO repeatedly characterized the company as “recession-resistant,” despite his
knowledge that the company was not in fact resisting the recession. Additionally, plaintiffs urged
that the CEO consistently represented that the company would maintain a high level of disposition
gains although he knew that statement was false. /d. The court found that the phrase “recession-
resistant” was too vague to constitute a material statement of fact, and indeed was true at the time
it was uttered. /d. Similarly, the court determined that the CEO's predictions of “high” disposition
gains were not sufficiently definite to constitute material misstatements of fact, and in any event
that disposition gains were difficult to predict. /d. at 1066-67. Here, Lead Plaintiff has alleged more
than merely vague characterizations or indefinite and uncertain predictions of growth. Instead,
Lead Plaintiff contends, Motorola recognized loans to Telsim as revenue in violation of GAAP and
made public statements touting supposed sales contracts with Telsim while failing to disclose that
those sales were entirely vendor-financed.

Lead Plaintiff also cites Ganino v. Citizens Utilities Co., 228 F.3d 154 (2d Cir. 2000) to
support its assertion that the May 1998 teleconference and statements regarding vendor financing
in its SEC filings do not suffice to neutralize Motorola’s false or misleading disclosures. The facts
of Ganino bear a striking similarity to the circumstances of this case. In Ganino, Citizens Utilities

43


“only through the artifice of increased Telsim indebtedness.” (/d. J 193.) As collection of that
interest was not reasonably assured, Lead Plaintiff maintains that Motorola’s recognition of that
interest violated GAAP. (/d.)

Lead Plaintiff also claims that Motorola's recognition of revenue from Telsim violated
Securities and Exchange Commission Staff Accounting Bulletin 101, which states that revenue is

generally realized or realizable and earned only when all of the following criteria are met:

e Persuasive evidence of an arrangement exists,
e Delivery has occurred or services have been rendered,
e The seller's price to the buyer is fixed or determinable, and
e Collectibility is reasonably assured.
(id. 1 224.)

Lead Plaintiff urges that collection of payments from Telsim was not reasonably assured,
as Motorola's extension of credit “was premised on speculation that if Telsim were successful at
some future point Motorola would be paid for the goods and services sold to Telsim.“ (id. J 226.)

Lead Plaintiff further alleges that Defendants either knew that Telsim would not or had no
reasonable basis to believe that Telsim would repay the loans, and therefore that collection of the
loan amounts was not “reasonably assured,” on several grounds. First, Telsim was not required
to repay the finance receivables “for over one year, forcing Motorola to project payments into future
periods, which placed the burden on Motorola to bear the risk of future uncertainties.” Second,
“Telsim was a start-up venture in a developing country with a troubled economy.” Third,
Defendants knew that Telsim lacked sufficient cash flows to repay the loan, as Telsim required
substantial working capital as well as equipment financing from Motorola. Fourth, Lead Plaintiff
essentially contends that Telsim's only source of cash flows was financing from Motorola: “Since
any hope Motorola had to be paid was based on Telsim’s future cash-flows, which cash flows were
dependent on Motorola’s continuing supply and support of Telsim's GSM network, the collectibility

of the revenue was contingent on Motorola’s future financing, sales and cooperation with Telsim.”

31


the loan was impaired, and it was reasonably possible that operations in Turkey would be disrupted
in the near term. (Cmplt. If] 192-93, 223-38.) Defendants urge that such allegations cannot
establish scienter. (Def. Mem., at 18.) They note, correctly, that a violation of GAAP, standing
alone, is not sufficient to raise an inference of scienter. Stavros v. Exelon Corp., 266 F. Supp. 2d
833, 850 (N.D. Ill. 2003) (citing Chu v. Sabratek Corp. (“Chu I’), 100 F. Supp. 2d 827, 838 (N.D.
Ill, 2000)). Instead, a plaintiff must also plead facts supporting an inference of the defendant’s
reckless disregard or gross indifference to alleged misrepresentations in the financial statements,
such as those pointing to the magnitude of the accounting error, the defendant’s prior notice of the
error, or the defendant's responsibility for calculating and disseminating financial information. /d.

Defendants also urge that allegations of GAAP violations are only relevant to establishing
scienter when accompanied by “red flags,” citing in support Riggs Partners, LLC v. Hub Group,
Inc., No. 02 C 1188, 2002 WL 31415721, at*9(N.D. Ill. Oct. 25, 2002), and /n re System Software
Associates, Inc., No. 97 C 177, 2000 WL 283099, at *14 (N.D. Ill. Mar. 8, 2000). (Def. Mem., at
18.) According to Defendants, Lead Plaintiff has not alleged any such red flags. (/d.)“* Lead
Plaintiff insists it has identified the “red flags,” including Telsim’s refusal to provide financial
statements or to assist in efforts to attract other lenders or equity investors. (Lead PI. Resp., at 23
n.22.) Defendants point to the New York district court’s conclusion that MCC thought it was
protected by “substantial collateral.” Motorola Credit Corp. v. Uzan, 274 F. Supp. 2d 481, 491
(S.D.N.Y. 2003). In Uzan, the court determined that MCC was justified in relying on Hakan and
Cem Uzan’s false statements of material fact regarding Telsim’s business practices and finances,

the value and security of the collateral, Telsim’s use of prior loan proceeds, the status of other

44 Defendants claim that Motorola's independent auditor, KPMG, L.L.P. (which is not

named in this suit) signed off on Motorola’s financial statements, implying that this fact rebuts any
inference of fraudulent intent. (Def. Mem., at 18-19.) Lead Plaintiff responds that there are no
facts in its Complaint to indicate that KPMG was not also deceived. (Lead PI. Resp., at 24.) In the
court’s view, neither the scope of KPMG's scrutiny nor the information available to it are issues
relevant to the adequacy of Lead Plaintiff's allegations against these Defendants.

48


V. Comparison with Other Telecommunications Manufacturers

According to Lead Plaintiff, as of December 31, 2000, Motorola had a market capitalization
of $44.4 billion, of which $3.8 billion (or 8.6%) consisted of vendor financing for outstanding loans
By comparison, in 2000, Nortel’s vendor financing constituted only 1.4% of total market
capitalization, while vendor financing comprised only 0.2% of Cisco’s total market capitalization
(id. ] 215.) Lead Plaintiff claims, further, that the vendor financing Motorola provided to Telsim
($2.033 billion) constituted 28% of the total vendor financing provided by all telecommunications
manufacturers to their customers (including Nokia, Lucent, Nortel, Cisco, and Motorola’s remaining
customers). The court notes, further, that, according to Lead Plaintiff's data, the next highest
amount of vendor financing was provided by Nokia to Telsim ($700 million). (/o. | 216.) Lead
Plaintiff concludes that Motorola's vendor financing to Telsim “was entirely out of character with the
vendor financing provided by any of its peers to a single customer." (/d. 217.)
Vi. Alleged Accounting Violations

Lead Plaintiff notes that under GAAP, revenues and gains are not to be recognized until
realized or realizable. ACCOUNTING FOR CONTINGENCIES, Statement of Financial Accounting
Standards No. 5, | 83(a) (Fin. Accounting Standards Bd. 1975), available at http://www.fasb.org/
pdf/fas5.pdf. Revenues are realized when goods, services, or other assets are exchanged for cash
or claims to cash. /d. Revenues are realizable “when related assets received or held are readily
convertible to known amounts of cash or claims to cash.” /d. As collection of the Telsim
teceivables “was not reasonably assured,” Lead Plaintiff urges that Motorola violated GAAP by
recognizing the Telsim receivables as revenue. (Cmplt. 223.) Lead Plaintiff further alleges that

Motorola recognized revenue and income on accrued interest on the Telsim debt that was paid

ARTHUR LEVITT, TAKE ON THE STREET: WHAT WALL STREET AND CORPORATE AMERICAN DON'T WANT
You To KNow 167 (2002).

30


to enhance Telsim’s network in Turkey. The press release also stated that, on April 27, 1998,
Telsim paid a $500 million license fee to the Turkish government for the right to operate a GSM
network for 25 years. The press release did not mention that Motorola had loaned Telsim $560
million pursuant to the Agreements. (/d. ] 78.)

On August 19, 1998, Motorola agreed to loan $77,331,369.00 to L.L.P. KaR-Tel (“KaR-
Tel’), a telecommunications company in Kazakhstan affiliated with the Uzans, to enable the
company to develop a cellular system in Kazakhstan. (/d. | 80.) Telsim guaranteed KaR-Tel's
obligations under the loan agreement. (/d. 181.) Lead Plaintiff claims the repayment date for that
loan was extended several times, ultimately to April 30, 2001. (/d. § 82.)

On an unspecified date, Motorola provided “billions of dollars in equity, debt and vendor
financing” to Iridium LLC, a provider of satellite mobile telecommunications service.® On August 13,
1999, Iridium declared bankruptcy. Lead Plaintiff alleges that “Motorola’s dealings with Iridium cost
Motorola approximately $4 billion.” As a result of the Iridium collapse, in and around August 1999
Defendants were subjected to “much criticism from the media and investment community.” (Id. J]
87.)

On August 19, 1999, Motorola loaned Telsim an additional $123 million under the
Equipment Financing Agreement to enable Telsim to buy additional equipment and services from
Motorola, thereby increasing the total loan amount under the two Agreements to $683 million. (Id.

{1 86-87.) Defendants® “knew, by virtue of their relationship with the Uzans, that if Motorola

5 The Complaint does not state whether Iridium, LLC operated internationally. The

court notes that Motorola formed Iridium, Inc., as a wholly owned subsidiary in 1991, and that in
1996, after others invested, Iridium, Inc. was merged into a newly created Delaware limited liability
company, Iridium LLC. in December 1997, Iridium LLC's assets were transferred to Iridium
Operating LLC, a Delaware limited liability company wholly owned by Iridium LLC. Chase
Manhattan Bank v. Motorola, Inc., 136 F. Supp. 2d 265, 266 (S.D.N.Y. 2001).

6 The Complaint does not specify which Defendants allegedly knew this. The court
presumes throughout this opinion that the term “Defendants” in the Complaint refers collectively
to all Defendants.


third quarter of 19997' and a 3% increase over the second quarter of 2000), net income of $531
million, and earnings per share of $0.23. (/d. 170.) Motorola reported in its consolidated balance
sheet that it held $5.058 billion in “other assets” (id.); the Complaint does not state whether
Motorola disclosed the proportion of those assets attributable to vendor financing. As with the April
10, 2000 press release, Lead Plaintiff claims that Galvin and Growney were quoted “throughout the
[October] 10, 2000 press release," although, as before, the Complaint does not identify the
specific statements attributed to Galvin and Growney. (/d. | 172.) Koenemann was responsible
for the financial data reported in the press release. (/d.) According to Lead Plaintiff, Motorola's
reported revenues were approximately $500 million below expectations, which caused Motorola's
shares “to decline $4.937 per share from $26.375 to $21.438.” (Id. | 173.)* Lead Plaintiff claims,
however, that this decline would have been significantly worse if not for the $450 million in revenue
from Telsim that Motorola “fraudulently reported” on its third quarter balance sheet. (/d. {| 174.)

Motorola’s Form 10-Q for the third quarter of 2000, which Motorola filed with the SEC on
November 7, 2000, reiterated and affirmed the financial results published in the October 10, 2000
press release, and included the same language regarding conformity with GAAP that appeared in
its May 16, 2000 and July 30, 2000 Form 10-Q. (/d. 4 175.)

Lead Plaintiff claims that Motorola’s October 10, 2000 press release and third quarter 2000

Form 10-Q were false and misleading in all of the ways previously identified: Telsim had breached

a Lead Plaintiff claims that Motorola’s reported sales figure for the third quarter of

2000 ($9.493 billion) reflects a 23% increase over the second quarter of 1999. (Cmplt. {| 170.) The
court presumes the reference to the second quarter of 1999 is a scrivener’s error. Further, as Lead
Plaintiff indicates that Motorola reported sales of $8.223 billion for the second quarter of 1999, (id.
1171), the court calculates that Motorola's reported sales increased 15%, rather than 23% as Lead
Plaintiff alleges.

22 Lead Plaintiff alleges that "Galvin and Growney were quoted throughout the April
10, 2000 press release,” but the court presumes this is a scrivener’s error.

2 The Complaint does not state when this decline in the value of Motorola shares
occurred.

21


prior trading practices and that the sale was timed to maximize personal benefit from undisclosed
inside information.” No. 97 C 177, 2000 WL 283099, at *13 (N.D. Ill. Mar. 8, 2000) (citing Freeman
v. Decio, 584 F.2d 186, 197 n. 44 (7th Cir. 1978); Rehm, 954 F. Supp. at 1254; see also Johnson,
262 F. Supp. 2d at 955-56 (“the insider trading must be dramatically out of line with prior trading
practices at times calculated to maximize the personal benefit from undisclosed inside information’)
{internal quotation marks and citation omitted). Defendants point out, moreover, that Lead Plaintiff
does not allege that Koenemann or Growney sold any Motorola stock during the Class Period.
(Def. Mem., at 22.) Defendants note that several district courts in other circuits have concluded
that the absence of insider trading actually negates an inference of scienter. See D.E. & J. Ltd.
P’ship v. Conaway, 284 F. Supp. 2d 719, 743 n.22 (E.D. Mich. 2003) (collecting cases). In any
event, the court concludes that Lead Plaintiff's implicit allegation that Galvin engaged in insider
trading by pointing to a single sale of stock, without more, cannot establish motive.

The court concludes that Lead Plaintiff has not stated with particularity facts giving rise to
a strong inference that Individual Defendants acted with scienter. The court therefore dismisses
Lead Plaintiff's §10(b) claims against Individual Defendants without prejudice.
U, Section 20(a) Claims

To state a claim under § 20(a) of the Act, Lead Plaintiff must allege “(1) a primary securities
violation; (2) [that] each of the Individual Defendants exercised general control over the operations
of [Motorola]; and (3) [that] each of the Individual Defendants ‘possessed the power or ability to
control the specific transaction or activity upon which the primary violation was predicated, whether
or not that power was exercised.” Johnson, 303 F. Supp. 2d at 969 (quoting Harrison v. Dean
Witter Reynolds, inc., 974 F.2d 873, 881 (7th Cir. 1992)). Defendant argues that the § 20(a) claims
against Individual Defendants should be dismissed on the ground that Lead Plaintiff fails to plead

a primary cause of action under § 10(b) and Rule 10b-5. (Def. Mem., at 29-30.) Courts in this

58


at 28 (citing Cmplt. f] 153).) Defendants further point out that, although Lead Plaintiff states that
Galvin and Growney were quoted throughout the April 10, 2000 press release, it neglects to identify
any false statements attributable to them. (/d. (citing Cmplt.  140).) Although Defendants do not
so state, the court notes that Lead Plaintiff's allegation that Galvin and Growney were quoted
throughout the October 10, 2000 press release, as well as the allegations that Koenemann was
responsible for the financial data in both press releases, arguably also fail to point to any false
statements made by Individual Defendants as well.

Lead Plaintiff contends that all allegedly false or misleading statements made in Motorola’s
press releases can be attributed to Individual Defendants. (Lead Pl. Resp., at 17.) Lead Plaintiff
cites just one case in support, an unpublished decision in Lindelow v. Hill, No. 00 C 3727, 2001 WL
830956, at *6 (N_D. Ill. July 20, 2001).*° There, Judge Holderman of this court found that plaintiffs
had adequately alleged that the company president was responsible for a press release, in part
because an employee who was directly quoted in the press release and allegedly had knowledge
of the alleged fraud reported directly to the president. Lindelowis distinguishable, however, in that
Lead Plaintiff has not identified any company officials who were directly quoted in the press
releases. Lead Plaintiff does not specify the statements Galvin and Growney allegedly made in
the press releases, or identify any statements by Koenemann in those documents. Unlike the
pleadings in Lindelow, Lead Plaintiff's Complaint arguably fails to specify each statement in the

press releases alleged to have been misleading as to Individual Defendants.*'

“ Lead Plaintiff also notes that allegations that key officials knew of facts critical to a

business's core operations or to an important transaction that would affect the company’s
performance imply that such officials knew a statement was false. In re Sears, Roebuck and Co.
Sec. Litig., 291 F. Supp. 2d 722, 727 (N.D. Ill. 2003) (citing Stavros v. Exelon Corp., 266 F. Supp.
2d 833, 850 (N.D. Ill. 2003)). This argument, which deals with an individual defendant's scienter,
is discussed below.

“ As noted, Lead Plaintiff does point to a statement by Koenemann in a November
24, 2000 Wall Street Journal article that Motorola should “act like a bank” when determining to
whom it should extend credit. (Cmplt. | 181.) Defendants essentially argue this statement did not

38


Lead Plaintiff does allege that Individual Defendants made false and misleading statements
in Motorola's SEC filings. (Lead Pl. Resp., at 16.) Specifically, Lead Plaintiff alleges that Galvin,
Growney, and Koenemann signed Motorola's 1999 Form 10-K, which Lead Plaintiff alleges was
flawed for several reasons. (Cmplt. ff] 124, 128.) Although it has not adopted the group pleading
doctrine, the Fifth Circuit Court of Appeals has explained that corporate documents with no stated
author or statements in a document not attributed to an individual may be charged to any corporate
Officials who signed the document for pleading purposes under the PSLRA. Southland Sec. Corp.
v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 365 (5th Cir. 2004). Several district courts have found
that corporate officers who sign fraudulent SEC filings with the requisite level of scienter can be
liable as violators of section 10(b) for making false statements. /n re Syncor Int'l Corp. Sec. Litig.,
— F. Supp. 2d -, Nos. CV 02-8560 LGB, CV 02-8972, CV 02-9248, CV 02-8575, CV 02-8841,
CV 02-9583, CV 02-8687, CV 02-9076, CV 02-9621, CV 02-9640, CV 03-52, 2004 WL 1700940,
at “17 (C.D. Cal. July 6, 2004); In re Enron Corp. Securities, Derivative & ERISA Litig., 258 F.
Supp. 2d 576, 587 (S.D. Tex. 2003) (collecting cases). In this case, Lead Plaintiff has arguably
satisfied the PSLRA's pleading requirements by alleging that all three Individual Defendants signed
Motorola's 1989 Form 10-K, that Galvin and Koenemann signed Motorola’s 2000 Proxy Statement,
and that Koenemann stated that Motorola should “act like a bank” in determining to whom it should
extend credit, all of which assertedly contained false or misleading statements. The court need not
decide this issue, however, for, as discussed below, the court finds that Lead Plaintiff has not

adequately pleaded scienter for Individual Defendants.

alter the “total mix of information” available to investors regarding Motorola's vendor financing
arrangements. (Def. Mem., at 29.) As this assertion relates to materiality, it is discussed below.

39


foregoing reasons, the court declines to dismiss Lead Plaintiff's complaint as to Defendant
Motorola.
2. Individual Defendants
a Circumstantial Evidence of Knowledge or Recklessness

Although the Complaint identifies circumstances that were known to Motorola officials
generally, it does not allege facts that would give rise to a strong inference that Defendants Galvin,
Growney, or Koenemann themselves knew or were reckless in not knowing that the company’s
public statements were not accurate, or that they failed to check information they had a duty to
monitor. As Defendants point out, Lead Plaintiff fails to allege that Individual Defendants were
themselves aware of any of the communications between the Uzans and various Motorola
employees. (Def. Mem., at 17.) In fact, the court can find only two allegations regarding Individual
Defendants’ knowledge or reckless behavior. The first is the contention that “Individual Defendants
were . . . actually aware of and received reports about the financing provided to Telsim and the
potential problems associated with Telsim’s inability to pay Motorola back.” (Cmplt. § 241.) Such
generalized allegations do not constitute concrete circumstantial evidence of knowledge or
recklessness.

The second is Lead Plaintiff's assertion that “[t]he extent of the Telsim indebtedness was
so significant to Motorola’s operations that the individual Defendants are presumed to have actual
knowledge.” (/d.) Several courts have concluded that allegations that corporate officials, because
of their positions within the company, must have known a statement was false or misleading do not
suffice under the PSLRA, regardless of the defendants’ positions within the company. See, e.g.,
Abrams v. Baker Hughes, Inc., 292 F.3d 424, 432 (5th Cir. 2002); City of Philadelphia v. Fleming
Cos., 264 F.3d 1245, 1263-64 (10th Cir. 2001); In re Advanta Corp. Sec. Litig., 180 F.3d 525, 539

(3d Cir. 1999); Maldonado v. Dominguez, 137 F.3d 1, 10 (1st Cir. 1998); Johnson v. Tellabs, Inc.,

54


done with other bankers, unnamed Telsim representatives denied Goldman Sachs access to
Telsim’s financial information. (/d.)

Q. March 30, 2001 Proxy Statement

In its Proxy Statement filed with the SEC on March 30, 2001, signed by Galvin and
Koenemann, Motorola disclosed that out of a total of $2.8 billion in gross long-term finance
receivables as of December 31, 2000, “approximately $1.7 billion . . . related to one customer in
Turkey.” (/d. | 203.) Lead Plaintiff claims this Proxy Statement was false and misleading on the
grounds that it (1) omitted any risk of default by Telsim and (2) understated the amount of financing
provided to Telsim by $300 million. (/d. J] 204.)

R. April 6, 2001 Analysis

On April 6, 2001, a Bloomberg News columnist published an analysis of Motorola's loan to
Telsim and the related disclosures in the March 31, 2001 Proxy Statement. (/d. 205.) The
analysis underscored the significance of the loan to Telsim, noting that the company was owed “a
staggering $1.7 billion by a single customer in an emerging market country.” (/d.) That day,
Motorola shares declined by 23% from the previous day’s close of $14.95 per share to $11.50 per
share. (/d.)

Ss. First Quarter 2001 Form 10-Q

Motorola’s Form 10-Q for the quarter ended March 31, 2001, which Motorola filed with the
SEC on May 14, 2001, reported that Telsim's vendor-financing debt to Motorola totaled $2 billion
($300 million more than Motorola had disclosed in its March 31, 2001 Proxy Statement) of its total
$2.9 billion in gross long-term finance receivables. In addition, the Form 10-Q stated that “[oJn April
30, 2001, $728 million of the Telsim Loan became due, but was not paid,” and noted that if Telsim

did not pay within 30 business days, it would be in default. (/d. {| 207.)

27


to earn production bonuses are insufficient facts from which to infer scienter, as this is a goal of
any corporate executive. Defendants also point to Weiner v. Quaker Oats Co., No. 98 C 3123,
2000 WL 1700136, at *13 (N.D. Ill. Nov. 13, 2000), in which this court found that allegations that
defendants’ desire to inflate the price of company common stock or to preserve management jobs
are insufficient to satisfy scienter.

In response, Lead Plaintiff points to Cabletron, in which the court found that plaintiff had
adequately pleaded scienter where “the executives’ careers and the very survival of the company
were on the line.” 311 F.3d at 39; see also Aldridge v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir.
2002) (inferring motive where “success of the new products, and of taking the old line company into
a new world, was important to [corporate officers’] own survival and that of the company”). The
court finds Cabletron distinguishable, however. Lead Plaintiff's Complaint contains only one vague
assertion that an Individual Defendant was motivated by fear of losing his job: Galvin set very high
internal targets for revenue growth at some point prior to 1998 because he knew his position was
“tenuous.” (/d. {| 55.) Lead Plaintiff does not specifically allege that Galvin (or Growney or
Koenemann) ever directed Motorola employees to provide vendor financing to Telsim based on
their fears that they would lose their positions or that Motorola’s survival was at stake. Indeed,
Lead Plaintiff does not allege that Individual Defendants made any decisions whatsoever with
regard to the Telsim deal.

Lead Plaintiff also implicitly alleges that Galvin engaged in insider trading in that he sold
165,000 shares of common stock 11 days before Motorola’s debt ratings were placed on review
for possible downgrading. (Cmplt. 257.) Defendants argue this allegation is insufficient to raise
an inference of motive, as Lead Plaintiff neglects to show how this sale compares with Galvin’s
prior trading history. In support, Defendants cite /n re System Software Associates, Inc., in which

this court concluded that a plaintiff must show that a sale of stock “was drastically out of line with

57


Motorola managed the Telsim relationship “through its most senior corporate officers.”
These officers included: Keith Bane (“Bane”), Executive Vice President and President for Global
Strategy and Corporate Development; Merle Gilmore (“Gilmore”), Executive Vice President and
President for Communications Enterprise; Ed Hughes ("Hughes’), Motorola's Senior Vice President
and Director of Finance for Motorola’s Global Customer Solutions; and Walter Keating (“Keating”),
Vice President and a Director of Motorola Credit Corporation (“MCC”), a wholly-owned credit
subsidiary of Motorola. Both Bane and Gilmore reported directly to Galvin and Growney during the
Class Period. Hughes, who reported directly to Bane during the Class Period, “was intimately
involved on a daily basis with the Telsim financing.” Keating “was the primary person at MCC
responsible for the Telsim relationship.” (/d. | 39.) The Complaint further alleges that Individual
Defendants were “actually aware of and received reports about the financing provided to Telsim
and the potential problems associated with Telsim’s inability to pay Motorola back.” (/d. J 241.)

\n 1994, Motorola’s share of the United States market for cellular telephones was 60%. (/d.
4151.) As competition in the cellular telephone increased, however, at an unspecified time Motorola
“made a serious miscalculation” by investing in a new line of phones that used analog technology,”
while its competitors offered phones employing the more popular digital technology. (/d.) By 1998,
Motorola's market share in cellular phones (presumably also in the United States) had dropped to

34%; by the end of the Class Period, that market share was only 13%. (/d.) Between 1994 and

2 Although the Complaint does not define the term “analog technology,” the court

understands that analog technology involves transmission of voice data via radio waves to a
receiving antenna, usually mounted on a tower, pole, or other high structure. With digital
technology, on the other hand, the caller’s voice is broken up into binary digits that correspond with
various sounds at different points in time. By avoiding the amplification process, digital
telecommunications avoid problems with background noise, resulting in a much clearer signal.
Digital technology also reduces the strain on the cellular infrastructure by compressing voice
signals, thereby eliminating natural pauses and increasing calling capacity. See Stephanie E.
Niehaus, Note, Bridging the (Significant) Gap: To What Extent Does the Telecommunications Act
of 1996 Contemplate Seamless Service?, 77 NOTRE DAME L. REV. 641, 648-649 (2002).

3


(collecting cases). Whether defendant acted with intent is ordinarily an issue “appropriate for
resolution by the trier of fact.” Press, 166 F.3d at 538. The Second Circuit has instructed litigants
and lower courts not to rely on “magic words such as 'motive and opportunity.” Novak v. Kasaks,
216 F.3d 300, 311 (2d Cir. 2000). Nevertheless, the court has explained that a strong inference
of scienter may arise where the complaint sufficiently alleges that defendants: “(1) benefitted in a
concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior;
(3) knew facts or had access to information suggesting that their public statements were not
accurate; or (4) failed to check information they had a duty to monitor.” /d.

Lead Plaintiff claims that its various allegations give rise to a strong inference that all
Defendants knew or recklessly disregarded the facts that (1) their statements regarding the Telsim
relationship were materially false or misleading when made, (2) Motorola increased the amount
loaned to Telsim in order to recognize additional revenue and to avoid having to place the
outstanding loans in default, and (3) Motorola misrepresented the “known and material risk of
uncollectibility of the outstanding loans” to investors. (Lead PI. Resp., at 22.) Defendants do not
directly address the first contention, and the second goes to motive, which the court addresses
below as to Individual Defendants. Nevertheless, Lead Plaintiff's argument that Defendants knew
the identified statements were misleading is premised on the third assertion: that the Telsim loan
had a high risk of uncollectibility, and therefore that the terms of the Telsim financing should have
been disclosed in Motorola’s various public statements. Thus, the court must first determine
whether Lead Plaintiff has alleged facts constituting strong circumstantial evidence that Defendants
knew or were reckless in not knowing that Motorola's various public statements should have
disclosed or reflected the financing terms of Motorola’s sales to Telsim.

Lead Plaintiff urges that its claims that Defendants knew or were reckless in not knowing
that Motorola's statements were misleading is bolstered by its allegations concerning Defendants’
motive. (/d., at 27.) As discussed below the court concludes that Lead Plaintiff has alleged strong

46


( Citizens") gave loans and loan guarantees to Hungarian Telephone & Cable Corporation
("HTCC’), a U.S. company that provided telephone services in Hungary. /d. at 158. In
consideration for the loans and guarantees, Citizens primarily received HTCC stock and options.
/d. Although Citizens earned and received approximately $10.1 million in stock, options, and other
fees from HTCC in 1995, Citizens’s 1995 Form 10-K stated that Citizens “ha[d] been compensated
for... guarantees and financial support [to HTCC].” /d. Investors were therefore allegedly misled
into believing that the $10.1 million booked in 1996 was new income, unrelated to the 1995 HTCC.
loan and guarantee transactions. /d.

Defendants in Ganino defended under the “truth on the market” doctrine, under which a
misrepresentation is immaterial if the information is already known to the market. /d. at 167
(citations omitted). Specifically, they asserted that Citizens’ unspecified disclosures before the
class period had already made ail relevant information about the HTCC deal available to the
market. /d. To prevail on a “truth on the market” theory, the Second Circuit observed, a defendant
must show that any corrective information was conveyed to the public “with a degree of intensity
and credibility sufficient to counter-balance effectively any misleading information created by” the
alleged misstatements. /d. (quoting /n re Apple Computer Sec. Litig., 886 F.2d 1109, 1116 (9th Cir.
1989)). The truth-on-the-market defense “is intensely fact-specific and is rarely an appropriate
basis for dismissing a § 10(b) complaint for failure to plead materiality.” /d. Reversing the district
court’s order dismissing the complaint, the Court of Appeals concluded that “it cannot be said that
no reasonable investor could have been misled by Citizens’ statement in its 1995 Form 10-Q that
it 'ha[d] been compensated for its loans and guarantees to HTCC, into believing that Citizens’ 1996
First and Second Quarter Form 10-Qs included no HTCC Fees.” /d. at 168.

The Ganino Defendants also argued that a disclosure by HTCC in an undisclosed format
one month before the Class Period that it had paid the fees to Citizens in 1995 negated any
misleading appearances created by Citizens’ 1996 financial reports. The court found this argument

44


for fiscal year 1999. Second, the $450 million increased vendor financing commitment to Telsim
meant that Motorola failed to disclose that $1.333 billion of its $2.153 billion in total vendor
financing, or 62%, as of December 31, 1999 was concentrated in a single customer, i.e., Telsim.
Third, Defendants’ reported “other assets” were “artificially inflated” by the inclusion of the $833
million in assets provided to Telsim through vendor financing, as those assets were assertedly
“impaired.” Fourth, Defendants “failed to disclose the concentration of and risks associated with
the vendor financing to Telsim.” Fifth, Defendants’ financial statements did not conform to GAAP
(discussed below). Sixth, Defendants did not disclose that Telsim had not repaid any of the
financing Motorola had provided and “it was highly improbable that Telsim would be able to pay
Motorola back for the amounts already borrowed.” Finally, Motorola's reported overall net sales,
and sales for two of its business segments, for fiscal year 1999 were “artificially inflated” as that
figure included the $613 million in revenue on 100% vendor-financed sales of goods and services
to Telsim for which collection “was not reasonably assured” and, in any event, payment for these
goods and services was not required for one year after shipment. (/d. J 128.)

Cc. Nokia Vendor Financing

In March 2000, Finnish telecommunications manufacturer Nokia Oyj (“Nokia”) provided
Telsim with $800 million worth of vendor-financed switching equipment. (/d. 131.) As collateral,
Nokia received a stock pledge for 7.5% of the outstanding shares of Telsim. (/d. 132.) At this
point, then, 73.5% of Telsim’s equity was pledged as collateral to Motorola and Nokia. (/d.) During
the summer of 2000, unnamed Nokia officials contemplated “buying out Telsim’s debt to Motorola
and becoming Telsim's sole partner.” (/d. | 134.) Nokia never consummated this transaction,
however, because it recognized “the enormous economic risks” inherent in Telsim’s $1.33 billion

debt to Motorola. (/d.)

14


Telsim loan. The court turns to consider whether Lead Plaintiff alleges facts raising an inference
that Individual Defendants had both motive and opportunity to commit fraud.
b, Motive and Opportunity to Commit Fraud

As discussed above, under the Second Circuit test set forth in Press, a plaintiff may raise
a strong inference of scienter by alleging either (1) facts showing that defendant had motive and
opportunity to commit fraud, or (2) facts constituting strong circumstantial evidence of deceitful
intent or recklessness. 166 F.3d at 538. To establish motive, Lead Plaintiff must show “concrete
benefits that could be realized by one or more of the false statements and wrongful nondisclosures
alleged.” Tricontinental Indus. Ltd. v. Anixter, 215 F. Supp. 2d 942, 949 (N.D. Ill. 2002) (internal
quotation marks and citations omitted). Lead Plaintiff alleges that Defendants were motivated to
engage in fraud because they knew the following asserted facts: (1) missing Wall Street's
expectations would have a “devastating effect” on Motorola’s stock price and on their own careers;
(2) failure to provide continued financing to Telsim would result in the loss of significant reported
revenue and would lead to, and necessitate disclosure of, Telsim’s default; (3) losing Telsim
business would prevent Motorola from making its third quarter 2000 numbers; and (4) loss of
credibility if Telsim financing were revealed, in light of Motorola's failed investment in Iridium. (Id.
| 245.) Lead Plaintiff also alleges that Individual Defendants were motivated to engage in a
scheme to defraud investors in order to enhance their the performance-based bonuses, stock
options, and restricted stock awards. (/d. {] 247-256.) The Complaint also claims that Galvin “set
very high internal targets for revenue growth” as he believed his status as CEO was tenuous. (/d.
155.)

Defendants contend that these allegations are insufficient to plead scienter on the ground
that they apply to any corporate officer. (Def. Mem., at 21.) In support, Defendants cite Chu //, 100

F. Supp. 2d at 841, in which the court stated that allegations regarding corporate officers’ desire

56


of 2000. (/d. 141.) After the markets closed on April 10, 2000, “Motorola made public statements
guiding analysts’ [earnings per share] expectations for the second quarter of 2000 down three
cents a share, from 70 cents to 67 cents a share.” (/d. § 144.) This three cent differential was
“largely the result of [DJefendants’ undisclosed knowledge concerning Telsim.” (/d.) The Complaint
does not explain how Motorola made statements that “guided” analysts’ expectations downward,
nor does it say whether they did so by disclosing aspects of the relationship between Motorola and
Telsim. On April 11 and 12, 2000, the price of Motorola's common stock plunged from $50.33 per
share to $38.625 per share at the close of April 12, 2000, due to Defendants’ revised guidance as
to Motorola’s second quarter profitability. (/d. | 145.)

Motorola’s Form 10-Q"* for the first quarter of 2000, which it filed with the SEC on May 16,
2000, reiterated and affirmed the financial results published in the April 10, 2000 press release.
(Id. J 147.) The Form 10-Q also stated that:

The preparation of financial statements in conformity with generally accepted

accounting principles requires management to make certain estimates and

assumptions that affect the reported amounts of assets and liabilities and disclosure

of contingent assets and liabilities at the date of financial statements and the

reported amounts of revenues and expenses during the reporting period. Actual

results could differ from those estimates.
(/d.) The Form 10-Q added that Motorola had “signed an agreement with Telsim, which is
estimated to have a sales potential of at least $1.5 billion over three years. Under this agreement,

the Company expects to provide infrastructure equipment, wireless phones and associated

services to expand the countrywide GSM network in Turkey.” (/d. J 148.) Motorola again made

% The purpose of a Form 10-Q, which includes unaudited financial statements, is to

provide investors with a continuing view of a company’s financial condition during the year. See
http:/Awww.sec.gov/answers/form10q.htm.

16



FACTUAL BACKGROUND
iF Defendants

According to Lead Plaintiff's Complaint, approximately 2.3 billion shares of Motorola
common stock, traded on the New York Stock Exchange, were outstanding as of September 28,
2002. (Cmpit. | 26.)' Defendant Christopher Galvin (“Galvin”) became Motorola's Chief Executive
Officer on January 1, 1997, and was named Chairman of the company’s Board of Directors in June
1999. (/d. 132.) On September 19, 2003, Motorola announced that Galvin had resigned, primarily
because he had lost the confidence of Motorola’s Board. (/d.) Defendant Carl Koenemann
(“Koenemann’), who served as Motorola’s Executive Vice President-Finance and Chief Financial
Officer from 1991 until his retirement on April 17, 2002, was responsible for the company’s financial
reporting during the Class Period. (/d. J 34.) Defendant Robert Growney (“Growney”) was
Motorola’s Chief Operating Officer from January 1, 1997 until his retirement on March 31, 2002.
(id. 935.)

By virtue of their positions as officers of Motorola, Individual Defendants controlled the
contents of the Company's annual and quarterly reports fled with the SEC, proxy statements, and
press releases. (/d. {| 37.) During the Class Period, Individual Defendants allegedly “caused the
material misstatement of the Company’s financial condition.” (/d.) Individual Defendants were
aware of the contents of the Company's press releases and SEC filings alleged to be misleading

and could have, but failed to, prevent their issuance. (/d.)

' The factual assertions in Lead Plaintiff's Complaint are drawn from “an extensive

investigation of counsel,” including a review of Defendants’ public filings to the Securities and
Exchange Commission, press releases issued by Motorola, media reports, news articles, academic
studies and reports, securities and debt analysts’ reports, internet postings concerning Motorola,
transcripts and recordings of conference calis between Motorola representatives and “the
investment community,” price and volume data concerning Motorola securities, and documents filed
with the United States District Court for the Southern District of New York in Motorola Credit
Corp. v. Uzan, 02 Civ. 666(JSR) (discussed below). (Cmplt. | 3.)

2


in light of the “total mix of information” on which Defendants rely in arguing that the disclosures
challenged here were not material.

Before addressing materiality, however, the court pauses to address the argument that
Lead Plaintiff has not alleged any misstatement or omission by Individual Defendants.

2. Individual Defendants

Defendants claim that Lead Plaintiff has failed to allege any misstatement or omission by
Individual Defendants. (Def. Mem., at 26.) Instead, Defendants urge, Lead Plaintiff has engaged
in impermissible “group pleading” by attributing all of the alleged misrepresentations to all
Defendants. (/d.) The “group pleading doctrine,” where courts recognize it, “allows plaintiffs to rely
on the presumption that certain statements of a company, such as financial reports, prospectuses,
Tegistration statements, and press releases, are the collective work of those high-level individuals
with direct involvement in the everyday business of the company.” Johnson v. Tellabs, Inc., 262
F. Supp. 2d 937, 946 (N.D. Ill. 2003) (quoting Sutton v. Bernard, No. 00 C 6676, 2001 WL 897593,
at*5n.5(N.D. Ill. Aug. 9, 2001)). The Seventh Circuit has not yet addressed whether plaintiffs may
rely on group pleading in light of the PSLRA, although well prior to the PSLRA it observed that “[a]
complaint that attributes misrepresentations to all defendants, lumped together for pleading
purposes, generally is insufficient.” Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990). Courts in
this district disagree as to whether group pleading survives the PSLRA. See /n re Spiegel, Inc.
Sec. Litig., No. 02 C 8946, 2004 WL 1535844, at *21-23 (N.D. Ill. July 8, 2004) (collecting cases)
This court concluded in Spiege/ that group pleading may be appropriate in certain circumstances,
as long as the complaint sets forth facts demonstrating that each defendant may be responsible
for the fraudulent statements. /d. at *23.

Defendants urge that Lead Plaintiff only specifically attriputes one statement (in the July 12,

2000 press release) to Galvin, but does not allege that the statement was false or misleading. (/d.

37


repay the loan was not reasonably assured; the Telsim contract®® was 100% vendor-financed; and
Motorola provided additional financing in the form of “working capital.” Lead Plaintiff further claims
the January 10, 2001 press release was false and misleading on several additional grounds. First,
there were “technical and operational limitations” apparent in Telsim’s implementation of the
systems it purchased from Motorola. Second, there were “[n]umerous warning signs” that the
Uzans had defrauded other unspecified business partners. Third, Motorola had “[c]oncerns that
the Uzans were failing to ensure that the Telsim financing would be repaid.” Finally, the Uzans had
made several complaints about the performance of the Motorola equipment. (/d. | 189.) Lead
Plaintiff also claims that “Defendants’ failure to disclose the information about the Telsim financing,
the likelihood of default on the Telsim financing and the deterioration of the Company's relationship
with Telsim and the Uzans, as these things occurred or became apparent constituted a
knowing and willful fraud upon the Class.” (/d. {| 190.)

N. The Uzans’ False Claims

On January 22, 2001, Hakan Uzan sent an e-mail message to Hughes and Keating, falsely
claiming that 16 separate major faults in Motorola equipment had seriously affected call traffic or
the performance of Telsim’s cellular system. (/d. | 194.) (Lead Plaintiff does not explain how or
when Keating and Hughes discovered that the complaints were false.) At a February 8, 2001
meeting in London, Hakan Uzan told Motorola Executive Vice President Keith Bane that Telsim’s
audited financial statements would be made available to Motorola by February 23, 2001. (/d.
{1 39(a), 195.) The Uzans never provided the financial statements to Motorola, however. (/d.

1195.)

30 As with several press releases and financial statements discussed above, it is not

clear to what contract Lead Plaintiff is referring

25



UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS SEp
EASTERN DIVISION é © 2n

IN RE MOTOROLA SECURITIES
LITIGATION

No. 03 C 287
Judge Rebecca R. Pallmeyer

AMENDED MEMORANDUM OPINION AND ORDER

The Investment Division of the New Jersey Department of Treasury, Lead Plaintiff in this
consolidated action (“Lead Plaintiff’), has filed this federal securities class action lawsuit on behalf
of all “persons and entities that purchased” Motorola, Inc. (“Motorola”) common stock and debt
securities between February 3, 2000 and May 14, 2001 (the “Class Period”). Defendant Motorola
has substantial national and international operations in the telecommunications, electronics,
computer, and satellite communications industries. Defendants Christopher Galvin, Robert
Growney, and Carl Koenemann (the “Individual Defendants”) are former officers of Motorola. Lead
Plaintiff alleges that Defendants engaged in a fraudulent scheme to inflate the price of Motorola
securities by recognizing over $1 billion in revenue on 100% vendor-financed sales of equipment,
services, and infrastructure to Telsim Mobil Telekomunikayson HizmetieriA.S. (“Telsim’), a Turkish
mobile telecommunications company, in violation of generally accepted accounting principles
(‘GAAP"). Plaintiff claims that these actions violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (“SEA” or the “Act”), 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5.

Defendants move to dismiss the complaint for failure to comply with the pleading
requirements of FED. R. Civ. P. 9(b) and 11 and the Private Securities Litigation Reform Act of 1995
(‘PSLRA’), 15 U.S.C. § 78u-4 et seg. For the reasons set forth here, Defendants’ motion to

dismiss is granted in part and denied in part.


sources of financing, the existence and value of offers to purchase an interest in Telsim, and the
status of negotiations with third parties. /d. at 577. In addition, the court concluded that “MCC did
not know and could not through reasonable diligence have discovered the falsity of defendants’
representations (which, indeed, [the Uzans] went to great lengths to conceal), and that MCC would
not have extended the loans if it had known the truth.” /d, The court determined that the Uzans
had “hugely and fraudulently heightened the risk borne by MCC in making its loans, by such means
as vastly impairing the value of [MCC’s] security and diverting enormous sums from Telsim’s
coffers to other Uzan entities and to their own pockets.” /d. at 580.

In this court’s view, the New York court's findings that MCC could not have known of the
Uzans’ fraudulent conduct do not preclude a finding in this case that Motorola knowingly or
recklessly concealed risks associated with the Telsim loan from the investing public. As noted, the
Uzans failed to attend or participate in the trial in the New York action, and waived their right to
further litigate any factual disputes or waivable legal issues they could reasonably have raised at
trial or earlier. fd. at 492-93. Thus, defendants in that action did not argue that MCC did or should
have known of their actions. Indeed, the MCC v. Uzan court recognized that investigations by
Turkish regulators might have provided some notice to MCC and Nokia officials concerning the
Uzans’ fraudulent behavior prior to Telsim’s default; but, as the court observed,

Turkey was a tempting market for cellular communications expansion, and the

Uzans lulled the plaintiffs into complacency by making timely payment on small

initial transactions by which plaintiffs ‘tested the waters.” Once, moreover, plaintiffs

had committed very large sums in reliance on defendants’ false representations

regarding the transactions here in issue, they were psychologically predisposed to

credit defendants’ further lies rather than admit that they had been swindled and
faced huge losses.

49


According to Lead Plaintiff, the Telsim loan ran afoul of each of these four factors and was
therefore impaired. First, Telsim breached the Agreements beginning in January 2000 by refusing
to provide Motorola with its financial statements or other records as required by those Agreements.
Second, Telsim was a start-up venture that had “experienced operating losses, had marginal
working capital and lacked adequate cash flows.” Third, shares of Telsim stock, which served as
Collateral for the loan, "were not marketable, were not saleable and would be extremely difficult to
obtain possession of even in the event of a default.” Finally, following the 1999 earthquakes,
“Turkey experienced tremendous economic difficulty, including hyperinflation of the Turkish Lira,
a recession, and increased usage taxes on cellular telephone service.” (Cmplt. WT 234-35.)

Lead Plaintiff further urges that Motorola was required to disclose the fact that its long-term
finance receivables were concentrated in Telsim. (/d. §] 238.) The AICPA Accounting Standards
Executive Committee’s Statement of Position 94-6, which is considered part of GAAP, see S.E.C
v. Spiegel, Inc., No. 03 C 1685, 2003 WL 22176223, at *69 (N.D. Il, Sept. 15, 2003), requires
disclosure of certain concentrations when all of the following exist and are known to management

prior to the issuance of the financial statements:

e The concentration exists at the date of the financial statements.

e The concentration makes the enterprise vulnerable to the risk of a near-term severe
impact.

e Itis at least reasonably possible that the events that could cause the severe impact

will occur in the near term.
SOP 94-6 notes that “it is always considered at least reasonably possible that operations located
outside an entity’s home country will be disrupted in the near term.”

According to Lead Plaintiff, Motorola was required to disclose its concentration of long-term
finance receivables in Telsim for several reasons. First, Motorola management knew of the 62%
concentration of Motorola long-term finance receivables in Telsim before Motorola issued its
March 22, 2000 Proxy Statement. Second, because of the sizeable amount of the loan ($1.333
billion), a default by Telsim would have had a “severe impact,” and did in fact have such an impact,

33


bank that had been approached by Telsim or Motorola had flatly rejected extending credit to
Telsim.” (/d. {| 182.) Defendants respond, first, by asserting that the article addresses vendor
financing generally and discusses several companies. Second, according to Defendants, “no
reasonable investor would find such a statement material because it does not even state what
Motorola does in practice, but what Motorola should do in practice.” Third, Defendants note that
approximately two weeks prior to publication of Koenemann’s statement, Motorola stated in its
Form 10-Q for the third quarter of 2000 that “[a]s of September 30, 2000, the Company's aggregate
commitment to provide financing to third party vendors was $3.8 billion, of which $2.8 billion had
been utilized.” (Ex. 11 to Def. Mem., at 38.) Defendants therefore urge that Koenemann’s
statement regarding vendor financing did not alter the “total mix of information” available to
investors regarding Motorola's vendor financing arrangements. (Def. Mem., at 29.)

Lead Plaintiff urges that Motorola's May 1998 statement disclosing that an “element of
financing” was involved in the Telsim relationship is “at best, [an] ambiguous, general references
to the Telsim debt,” and in any event did not impact the total mix of information available as of
February 3, 2000 (the beginning of the Class Period), when Motorola announced a $1.5 billion
contract with Telsim. (Lead PI. Resp., at 13-14.) Indeed, the expression “an element of financing”
was itself misleading, as the deal was 100% financed by Motorola. (/d.) In any event, Lead Plaintiff
contends, this single teleconference did not disclose all of the material facts concerning the
Motorola-Telsim deal, namely the high concentration of financing in a single start-up venture that
had been denied access to capital markets or other sources of financing in an emerging market.
(Lead Pl. Resp., at 15.)

The court concludes that Lead Plaintiff has adequately pleaded that Defendants’ alleged
misleading or false statements are material notwithstanding the additional information Defendants
cite. In Cabletron, 311 F.3d at 35, plaintiff alleged that defendant company’s revenue had been
fraudulently inflated by tens of millions of dollars per quarter. The court explained that earnings

42


WV. Motorola’s Disclosures and Relationship with Telsim Subsequent to Class Period

On May 15, 2001, Motorola stock closed at $14.96 per share, a 5% decrease from the
previous day’s closing value of $15.74. (/d. 208.) On October 9, 2001, Motorola announced its
results for the third quarter of 2001," and disclosed that it had recorded a $1.3 billion charge
against earnings in that quarter for the purpose of taking a reserve against the outstanding balance
Telsim owed. (/d. | 209.) At an unspecified time after October 9, 2001, Motorola sent financial
investigators to Turkey to assess the collectibility of the Telsim loan. (/d. {| 211.) From this
investigation, unnamed Motorola officials learned that the Uzans had diverted at least $1 billion of
Motorola’s financing for purposes other than the development of Telsim’s telecommunications
business. (/d. 212.) Lead Plaintiff urges that “[t]hese same facts would have been evident to
Motorola during the Class Period if not for its reckless indifference to the truth.” (id.)

On January 2, 2002, MCC and Nokia filed suit in the United States District Court for the
Southern District of New York against five members of the Uzan family, one of their associates, and
three Uzan-controlled companies, charging defendants with federal acts of racketeering, state
claims of fraud, and other serious misconduct. See Motorola Credit Corp. v. Uzan, 274 F. Supp.
2d 481, 491 (S.D.N.Y. 2003) (Rakoff, J.). Early in the case, the court entered an injunction to
maintain the status quo, including the preservation of the portion of Telsim’s outstanding shares
that functioned as collateral. /d. Defendants, however, refused to obey the court's orders,
including breaking their sworn promise not to further eviscerate the collateral. /d.°? The defendants
also repeatedly reneged on promises to provide ordered discovery, and instructed their counsel not
to reveal to the court or the Court of Appeals steps they were secretly taking in Turkey to obtain

ex parte orders undercutting the prior orders of the New York court. id. Defendants “expressly

» The Complaint does not state where or to whom Motorola announced these results.

2 The court did not indicate when or where defendants made this “sworn promise.”

28


Lead Plaintiff claims the February 3, 2000 press release was false and misleading on
several grounds. First, no agreement was entered into on or about February 3, 2000 providing for
Telsim to purchase $1.5 billion in equipment, service, and infrastructure from Motorola. Second,
the press release failed to disclose the $1.333 billion prior financing provided to Telsim “for which
collection was gravely in doubt.” Third, no mention was made that Telsim was at that point “in
breach of the [Agreements] by refusing to provide Motorola with Telsim’s financial statements or
other records.” Fourth, the press release did not disclose that “Telsim had inadequate cash flow
and no access to capital markets to be able to purchase additional equipment, services, or
infrastructure from Motorola, and that any such purchases would have to be made through
additional, risky vendor financing provided by Motorola.” Fifth, the press release did not mention

that “the entire amount of the contract”®

was contingent upon Motorola’s providing 100% financing
for the equipment purchased and additional financing for Telsim in the form of “working capital.”
Finally, the press release did not reveal that the sole collateral for Telsim’s obligations was shares
in Telsim itself, which were “both illiquid and of uncertain value,” that any dispute between the
parties would have to be resolved through arbitration in Switzerland, and that any arbitral award
would have to be enforced in Turkey. (/d. ff 122.)

B. March 22, 2000 Proxy Statement and 1999 Form 10-K

On March 22, 2000, Motorola filed with the SEC its 1999 Form 10-K,’° which was signed
by Individual Defendants and incorporated by reference the Company's audited financial

statements and notes and the “Management Discussion and Analysis” ("MD & A”) section of the

Company's Proxy Statement. (/d. 9124.) In its Proxy Statement, filed with the SEC on the same

It is not clear to which of the Motorola-Telsim contracts Lead Plaintiff is referring
here.

0 The purpose of a Form 10-K is to provide investors with a comprehensive overview

of a company’s business and financial condition. See http:/Awww.sec.gov/answers/form10k.htm

12


Id. at 558.”° It is conceivable, in any event, that Lead Plaintiff can demonstrate that even if they
could not have known about the Uzans’ misconduct, Motorola officials knew or were recklessly
unaware of the risks associated with the Telsim loan.

Lead Plaintiff identifies numerous circumstances that raise an inference that Motorola
officials should have been aware of the risks associated with the Telsim loan. As noted, the
Complaint alleges that on or about August 2000, an unidentified Telsim representative told an
unnamed individual at Motorola that Telsim had failed to find an interested buyer; nevertheless, on
September 29, 2000, Motorola agreed to extend an additional $600 million loan to Telsim. (Cmplt.
{1 163-66.) “An egregious refusal to see the obvious, or to investigate the doubtful, may in some
cases give rise to an inference of . . . recklessness.” Rehm, 954 F. Supp. at 1255 (citing
Goldman v. McMahan, Brafman, Morgan & Co., 706 F. Supp. 256, 259 (S.D.N.Y. 1989)). In
addition, according to Lead Plaintiff, on numerous occasions during an unspecified two-year period,
the Uzans failed to comply with requests by Motorola Vice Presidents Hughes and Keating for
financial statements and other records from Telsim. (Cmplt. 98.) Lead Plaintiff further claims that
in a March 9, 2000 email to Hughes and Keating, Hakan Uzan referred to Motorola’s senior officers
as “the guys with shaky hands,” suggesting that Uzan himself was aware that Motorola officials had
lost confidence in Telsim's financial soundness. (/d. | 123.)

In a December 14, 2000 meeting with Hughes and Keating, Hakan Uzan allegedly
acknowledged that he had improperly used funds from Motorola's September 1999 loan “to cover
payments required during a run on one of the Uzan-controlled banks.” (/d. 4] 183.) On an
unspecified date, Hughes confronted Hakan Uzan about a $38 million apartment he had acquired

in New York, to which Mr. Uzan replied, “[wle were hoping you guys didn’t find that out.” (/d.

20 The court notes that although Judge Rakoff noted the Uzans’ “making timely

payment on small initial transactions,” Lead Plaintiff's Complaint does not indicate that Telsim
repaid any portion of the amounts Motorola loaned to Telsim between November 29, 1994 and
September 29, 2000, nor do Defendants claim that Telsim has repaid any portion of that debt.

50


Communications, but did not mention Motorola's vendor financing to Telsim or any other customer.
(id. {| 156-57.) According to Lead Plaintiff, this discrepancy implies that Motorola intended to
deceive investors regarding the large concentration of vendor financing in Telsim which, at that
time, totaled $1.3 billion. (Lead Pl. Resp., at 26.)

Lead Plaintiff's claims regarding Motorola’s scienter can be summarized as follows:
Motorola officials knew or were reckless in not knowing that Motorola had concentrated a significant
amount of its vendor financing in a single customer in an emerging market that had recently
experienced substantial economic disruption and multiple natural disasters in exchange for stock
of uncertain value. These officials also knew or were recklessly unaware that Motorola continued
to extend vendor financing even after Telsim denied Motorola’s requests to review its books and
other potential investors had declined to extend loans to the company.

As explained above, Defendants argue that the thrust of Lead Plaintiff's accounting
allegations is that Motorola should have taken a charge to increase Motorola's allowance for the
loan to Telsim earlier than it did," because they knew the Telsim loan was “bad” when it was made.
(Def. Mem., at 19.) Our Circuit Court of Appeals has explained that allegations that a company
should have written a bad loan off sooner because it was likely to be uncollectible, without more,
does not constitute fraud. DiLeo, 901 F.2d at 627. On the other hand, the Second Circuit has
observed that the write-off of a $73.8 million loan, together with allegations of poor sales, rendered
less credible the proposition that during the class period, the company believed it likely that it could
recover the amount of the loan through future sales. Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir.

2000).

a On its Form 10-Q for the third quarter of 2001, filed with the SEC on November 9,
2001, Motorola recorded a $1.5 billion pre-tax charge in connection with the Telsim loans. (Ex. 15
to Def. Mem., at 18.)

52


D. March 24, 2000 Press Statement

On March 24, 2000, Motorola denied a report in the Turkish newspaper Hurriyet on an
unspecified date that Telsim was having difficulty paying Motorola. (/d. §135.)'’ According to Lead
Plaintiff, ‘Defendants’ reported denial was materially false and misleading in that Telsim was in fact
unable to repay Motorola and continually had to increase its indebtedness to Motorola, and
subsequently incur debt to Nokia, to support its operations.” (/d. | 136.) On March 24, 2000,
Motorola’s common stock closed at $54.52 per share. (/d. J] 137.)

E. April 10, 2000 Press Releases and First Quarter 2000 Form 10-Q

On April 10, 2000, Motorola issued a press release”? announcing $8.77 billion in net sales
for the first quarter of 2000 (reflecting a 19% increase over the first quarter of 1999), net income
of $448 million, and earnings per share of $0.59. (/d. §] 138.) Although Motorola stated in its
consolidated balance sheet that it held $3.624 billion in “other assets,” it did not disclose the
amount of those assets attributable to vendor financing. (/d.) The press release stated that
“[u]nder an agreement with Telsim, estimated to have a sales potential of at least $1.5 billion over
three years, Motorola will provide infrastructure, handsets and associated services to expand the
countrywide GSM network in Turkey.” (/d. 139.) The complaint alleges that Galvin and Growney
were quoted “throughout the. . . press release,” although it does not identify the specific
statements attributed to Galvin and Growney. (/d. | 140.) Koenemann was responsible for the
financial data reported in the press release. (/d.)

At an unspecified time, unidentified analysts projected, based on Motorola's February 3,

2000 press release, that Motorola would report earnings of $.70 per share for the second quarter

" The Complaint does not specify in what forum Motorola denied the report.

2 Lead Plaintiff alleges that Defendants “caused Motorola” to issue this press release
As Defendants consist of three individuals and the corporation itself, the court understands Plaintiff

to mean that the three individual Defendants caused Motorola to issue the press release.

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